Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2004
Business Overview: A diversified energy holding company operating in the United States through two major groups: Wholesale Energy (Power Generation, Oil & Gas, Coal Mining, Energy Marketing) and Retail Services (Electric Utility, Communications).
Key Financial Metrics (Six Months Ended June 30, 2004)
| Metric | 2004 (in thousands) | 2003 (in thousands) |
|---|---|---|
| Operating Revenues | $554,683 | $580,688 |
| Operating Income | $54,572 | $70,698 |
| Income from Continuing Operations | $19,546 | $29,203 |
| Net Income Available for Common Stock | $21,135 | $30,723 |
| Diluted EPS (Total) | $0.65 | $1.05 |
| Cash Flow from Operating Activities | $62,817 | $85,507 |
| Cash and Cash Equivalents (End of Period) | $104,235 | $69,494 |
| Long-Term Debt (Net of Current) | $791,184 | $752,155 |
| Total Stockholders' Equity | $714,968 | $678,397 |
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased 4.5% year-over-year to $554.7 million, driven by lower revenues in Power Generation and Energy Marketing segments.
- Profitability Decrease: Net income available for common stock fell 31% to $21.1 million. Diluted EPS dropped from $1.05 to $0.65.
- Segment Performance:
- Power Generation: Earnings decreased $9.4 million due to the termination of the Allegheny contract at the Las Vegas II facility and lower earnings from unconsolidated subsidiaries.
- Electric Utility: Earnings decreased $4.6 million due to higher purchased power costs and maintenance expenses from plant outages.
- Oil & Gas: Earnings remained relatively flat despite a 26% revenue increase, offset by higher operating expenses and a revenue accrual correction.
- Energy Marketing: Earnings increased $2.8 million, primarily due to higher pipeline revenues and margins, offset by a decrease in unrealized mark-to-market gains compared to 2003.
- Discontinued Operations: The company sold Landrica Development Corp. in May 2004, resulting in a $2.1 million after-tax gain. The Pepperell plant remains held for sale.
- Debt Reduction: The company repaid $45 million of project-level debt and repurchased $25 million of senior unsecured notes during the period.
Guidance, Outlook, and Risks
- 2004 Guidance: Management estimates full-year 2004 income from continuing operations to be between $1.70 and $1.85 per share. This revision reflects lower-than-expected oil and gas production, declined electric utility earnings due to outages and fuel costs, and lower energy marketing margins.
- 2005 Outlook: Anticipated income from continuing operations is approximately $1.85 to $2.00 per share, driven by increased oil and gas operations and the pending acquisition of Cheyenne Light, Fuel & Power Company.
- Pending Acquisition: The company entered an agreement to acquire Cheyenne Light, Fuel & Power Company from Xcel Energy Inc., expected to close before December 31, 2004.
- Risks and Contingencies:
- Guarantees: Total outstanding guarantees were $186.7 million as of June 30, 2004, including a significant $111.0 million obligation related to the Wygen Plant lease.
- Market Volatility: Earnings in the Energy Marketing segment are subject to volatility due to accounting rules (SFAS 133/EITF 02-3) that require marking derivatives to market while precluding marking inventory and storage positions.
- Regulatory: The company filed a Form U-1 to become a registered holding company under the Public Utilities Holding Company Act of 1935.
Investor Verification Checklist
- Oil & Gas Production Delays: Verify the status of drilling permits and compression station construction cited as causes for lower production.
- Plant Outages: Confirm the resolution of scheduled and unscheduled outages at the electric utility's coal-fired plants and the impact on future fuel costs.
- Cheyenne Acquisition: Monitor regulatory approval status and closing timeline for the Cheyenne Light, Fuel & Power Company acquisition.
- Wygen Plant Guarantee: Review the terms of the $111 million guarantee associated with the Wygen Plant lease and potential exposure.
- Energy Marketing Margins: Assess the sustainability of energy marketing margins given the volatility in commodity prices and accounting treatment of derivatives.