Black Hills Corporation — Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2015. Black Hills is a U.S. energy company with regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas operations. Results are seasonal, particularly for gas utilities.
Financial performance and liquidity
- Revenue: Q3 revenue was $272.1 million, essentially unchanged from $272.1 million in Q3 2014. Nine-month revenue was $986.3 million, down 2.9% from $1,015.5 million.
- Earnings: Q3 net loss was $9.9 million, or $0.22 per diluted share, versus net income of $27.4 million, or $0.61 per share, a year earlier. Nine-month net loss was $17.9 million, or $0.40 per share, versus income of $96.4 million, or $2.16 per share.
- Operating results and margins: Q3 operating loss was $2.0 million versus operating income of $55.2 million in 2014; nine-month operating income fell to $29.6 million from $193.1 million. The principal cause was oil-and-gas asset impairment. Utility gross margin, a company-defined non-GAAP measure, increased $14.1 million in Q3 and $39.8 million for the first nine months, led by electric utilities.
- Cash flow: Nine-month operating cash flow was $365.9 million, up from $239.2 million. Investing cash outflow was $356.7 million, including $349.5 million of property and equipment additions. Financing provided $8.4 million. Cash ended the period at $38.8 million.
- Debt and liquidity: At September 30, short-term notes payable were $117.9 million and long-term debt was $1.568 billion; the company also had $30.6 million of revolver letters of credit. The $500 million revolving facility had $352 million available and matures in 2020. The recourse leverage ratio was 58%, within the 65% covenant limit; the company reported compliance with debt covenants.
- Dividends: Nine-month dividends paid were $54.5 million, or $1.215 per share. The board declared a $0.405 quarterly dividend payable December 1, 2015.
Material changes versus the prior comparable period
- Oil and Gas reported a $39.8 million Q3 net loss versus a $2.6 million loss in 2014, and a $130.1 million nine-month loss versus a $5.2 million loss. Lower commodity prices led to $61.9 million of Q3 and $178.4 million of nine-month pre-tax non-cash oil-and-gas impairments; a separate $5.2 million pre-tax equity-investment impairment was recorded in the first half.
- Electric Utilities’ net income rose to $22.0 million in Q3 from $18.2 million and to $58.6 million for nine months from $44.2 million, supported by returns on new generating assets, weather and load. Gas Utilities’ nine-month net income declined to $27.0 million from $28.3 million, primarily reflecting milder weather.
- Power Generation and Coal Mining improved nine-month net income to $24.8 million from $23.1 million and $9.1 million from $7.1 million, respectively. Oil and gas production volumes increased, but lower realized prices more than offset the volume growth.
- Management corrected previously issued, immaterial oil-and-gas ceiling-test and depletion errors. The filing reports no change to 2014 nine-month operating cash flow from the revisions.
Outlook, significant events, risks and contingencies
- SourceGas acquisition: Black Hills agreed to acquire SourceGas for approximately $1.89 billion, including projected capital spending and assumed debt; estimated effective purchase price after stated tax benefits is $1.74 billion. Regulatory review was ongoing, with closing expected in the first half of 2016. Planned funding includes $450–$600 million of equity and equity-linked securities, $450–$550 million of new long-term debt, approximately $700 million of continuing SourceGas debt, and other available funds. A $1.17 billion bridge facility is committed. Moody’s and Fitch maintained ratings but moved outlooks to negative; S&P maintained a stable outlook.
- Management says the acquisition is expected to be adjusted-EPS accretive beginning in the first calendar year after closing, but calls this a preliminary estimate. Approval conditions, integration, financing cost and availability, increased leverage, possible equity dilution, and failure to realize expected savings are material uncertainties.
- Oil and gas: Management warned that further ceiling-test impairments could occur in Q4 if commodity prices remain near current levels. Planned Oil and Gas capital expenditures were sharply reduced for 2016 and 2017; total planned company capital expenditures were $478.3 million for 2015 and $450.8 million for 2016, with the 2016 estimate excluding SourceGas. No consolidated earnings guidance is provided in the supplied filing text.
- Other investment plans: A $109 million, 60-MW Peak View wind project was approved by the Colorado commission after quarter-end, with construction expected in 2016. The company also continued construction of a $65 million combustion turbine and planned a $70 million headquarters project.
- Oil Creek fire litigation: The company settled the State of Wyoming’s claims on terms described as not material. Private landowner claims were estimated at approximately $55 million; the company recorded a liability and an insurance-recovery receivable, but stated that additional losses were reasonably possible and could not yet be estimated. Trial was scheduled for February 2016. Management did not expect the claims to materially adversely affect consolidated results, condition or cash flows.
- Controls: Disclosure controls were deemed ineffective at September 30 because of a material weakness in the oil-and-gas ceiling-test impairment calculation, including tax treatment. Management described remediation steps but said effectiveness over time and year-end assessment were needed to confirm remediation.
- Key ongoing exposures include commodity prices, interest rates, seasonal cash needs, regulatory approvals, capital-market access and potential collateral requirements if credit quality deteriorates. Utility subsidiaries had approximately $334 million of restricted net assets.
Most important facts for investors to verify
- Whether SourceGas receives all required regulatory approvals, closes on schedule, and can be financed on acceptable terms without materially weakening credit quality or diluting shareholders.
- Whether low oil and gas prices trigger further impairments, and how production, hedges and reduced drilling plans affect segment cash generation.
- The actual exposure, insurance recoveries and ultimate resolution of the private Oil Creek fire claims.
- Whether remediation of the ceiling-test control weakness is confirmed in the year-end assessment, and whether the prior-period corrections remain immaterial.
- Whether planned capital spending, dividends and liquidity remain supportable after acquisition financing and other major projects.