Black Hills Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Black Hills is a U.S. electric and gas utility with power generation, coal mining, and oil and gas operations. The quarter includes SourceGas results only from its February 12, 2016 acquisition date, so reported year-over-year comparisons are not fully comparable.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $450.0 million | $442.0 million |
| Operating income | $73.6 million | $70.5 million |
| Net income available to common shareholders | $40.0 million | $33.9 million |
| Diluted EPS | $0.77 | $0.76 |
| Operating cash flow | $138.3 million | $151.5 million |
| Capital expenditures | $83.9 million | $117.5 million |
- Revenue increased 1.8%; net income rose about 18%. Operating margin was approximately 16.4%, versus 15.9% in Q1 2015, calculated from reported revenue and operating income.
- Cash used in investing was $1.217 billion, principally including $1.132 billion for SourceGas acquisition consideration, net of cash acquired and long-term debt assumed. Financing provided $668.6 million. Cash and equivalents ended the quarter at $47.0 million, down from $456.5 million at year-end 2015.
- At March 31, total long-term debt was $3.159 billion net of financing costs; short-term notes payable were $215.6 million. Current assets were $423.1 million and current liabilities $660.3 million. The $500 million revolving facility had $260 million available after $216 million borrowings and $24 million letters of credit.
- The recourse leverage ratio was 71%, below the 75% covenant limit; the company reported covenant compliance. Common dividends declared were $0.42 per share, up from $0.405.
Material changes and operating drivers
- SourceGas added approximately 429,000 gas customers, four regulated gas utilities, and a 512-mile Colorado transmission pipeline. It contributed $76 million revenue and $7.6 million net income for the post-acquisition period in Q1. Preliminary acquisition goodwill was $946 million; the purchase-price allocation remained subject to change.
- Gas Utilities net income increased to $32.0 million from $23.6 million, reflecting acquired operations, partly offset by milder weather. Combined heating degree days were 23% lower year over year and 11% below normal. Electric Utilities net income was $19.2 million versus $17.6 million; Power Generation earned $8.6 million versus $8.1 million.
- Oil and Gas reported a $7.0 million loss, improved from a $19.1 million loss, but recorded a $14.5 million pre-tax non-cash impairment. Lower commodity prices reduced average hedged prices received for oil and gas; production volumes increased 6%.
- Q1 earnings included approximately $11 million of tax benefits, including benefits related to percentage depletion and an IRS Appeals agreement. Acquisition and transition costs included approximately $25 million pre-tax; management cited approximately $15 million after tax plus $3.8 million after-tax internal labor costs.
Outlook, risks and unusual items
- Management said cash on hand, operating cash flow, borrowing capacity, and access to debt and equity markets were expected to support operations, debt maturities, dividends, and planned capital spending. Planned 2016 capital expenditures were $521 million, including major electric and gas utility projects; estimates may change.
- The company was evaluating refinancing more than $1 billion of near-term maturities and planned to continue its ATM equity program, which permits up to $200 million of common stock sales through 2017. Approximately $965 million of long-term debt maturities were scheduled for 2017.
- Moody’s affirmed Baa1 with a negative outlook and Fitch affirmed BBB+ with a negative outlook after the acquisition; S&P affirmed BBB with a stable outlook. Ratings commentary cited integration, leverage, and consolidated metrics.
- Oil and Gas could incur additional ceiling-test impairment in Q2 if commodity prices remained at then-current levels. Other key exposures include commodity and interest-rate volatility, acquisition integration and goodwill impairment, refinancing needs, seasonal utility demand, and regulatory approvals.
- Regulators approved SourceGas acquisition subject to conditions, including base-rate moratoria in several states and disallowance of goodwill and transaction-cost recovery. After quarter-end, the company settled a gas supply contract for $40 million; regulators allowed most net buyout costs to be recovered from customers over five years. Also after quarter-end, it sold a 49.9% interest in Colorado IPP for $215 million, with proceeds used to reduce short-term debt and for general corporate purposes.
- The Cost of Service Gas Program remained subject to state proceedings; Colorado’s application was dismissed in April pending further information. Colorado Electric filed a request after quarter-end for an $8.9 million annual revenue increase related to a generating unit under construction.
Important facts for investors to verify
- How the final SourceGas purchase-price allocation changes goodwill and acquired asset values, and whether integration delivers expected benefits.
- Progress on refinancing the 2017 maturities, leverage and credit outlooks, and any further use of the ATM equity program.
- Whether low commodity prices trigger additional Oil and Gas impairments and how commodity exposure affects cash flow.
- Regulatory recovery and customer impacts of the gas-contract settlement, SourceGas acquisition conditions, and Cost of Service Gas proposals.
- Execution, cost, and regulatory recovery for planned capital projects; the filing does not provide earnings guidance.