Black Hills Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing was signed February 24, 2016. Annual results are emphasized; fourth-quarter figures are identified separately. SourceGas closed after year-end and is not included in 2015 results.
Business context
Black Hills is a vertically integrated U.S. energy company with regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas businesses. At year-end, its utilities served approximately 207,200 electric customers and 591,500 gas customers, including Cheyenne Light’s gas customers.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Operating revenue | $1.305 billion | $1.394 billion |
| Operating income | $29.8 million | $263.9 million |
| Net income (loss) available to common shareholders | $(32.1) million | $130.9 million |
| Diluted earnings (loss) per share | $(0.71) | $2.93 |
| Cash from operating activities | $428.0 million | $323.5 million |
| Cash used in investing activities | $(476.4) million | $(401.1) million |
| Cash from financing activities | $483.7 million | $91.1 million |
| Capital expenditures | $458.8 million | $391.3 million |
| Cash and cash equivalents at year-end | $456.5 million | $21.2 million |
| Long-term debt, net of current maturities | $1.867 billion | $1.268 billion |
| Stockholders’ equity | $1.466 billion | $1.354 billion |
Revenue fell 6.4%. The reported loss primarily reflects a $249.6 million pre-tax, non-cash oil and gas property impairment and a $4.4 million pre-tax equity-investment impairment. The oil and gas ceiling-test charge was approximately $158 million after tax. The filing reports no impairment in 2014. Fourth-quarter 2015 revenue was $318.3 million and net loss was $14.2 million, compared with revenue of $378.1 million and net income of $34.5 million in fourth-quarter 2014.
Utilities remained profitable: segment income was $117.1 million, up from $101.4 million. Electric Utilities income rose to $79.3 million, while Gas Utilities income declined to $37.8 million. Non-regulated Energy reported a $135.4 million loss, driven chiefly by Oil and Gas, which reported a $180.0 million loss; Power Generation and Coal Mining earned $32.7 million and $11.9 million, respectively.
Liquidity, debt and distributions
- At year-end, the company had $76.8 million drawn on its $500 million revolving credit facility, $33 million of letters of credit, and reported $390 million of available capacity. It was in compliance with debt covenants.
- Total reported debt comprised $1.867 billion of long-term debt and $76.8 million of notes payable. The long-term debt ratio was 56%, versus 48% in 2014.
- Cash from operations increased by $104.5 million, reflecting working-capital improvements, including lower customer receivables and lower gas-related working-capital needs. Cash-flow funding was supplemented by equity-unit and common-stock offerings.
- Cash dividends paid were $72.6 million, or $1.62 per share. The board declared a 2016 quarterly dividend of $0.42 per share, equivalent to $1.68 annually.
Material changes and outlook
- Regulated electric and gas utility earnings increased overall, though milder winter weather reduced Gas Utilities gross margin by $10.8 million; heating degree days were 14% below 2014 and 8% below normal. Electric retail sales grew, supported by industrial and commercial load growth and a hotter summer.
- Oil and Gas production rose 29%, but lower realized prices—down 39% for natural gas and 24% for oil, including hedges—combined with the impairment drove the segment loss. Management reduced planned oil and gas capital spending and is shifting the business toward a proposed Cost of Service Gas Program.
- The company forecasts capital expenditures of $571 million in 2016, $451 million in 2017, and $431 million in 2018. The 2016 plan includes the Peak View wind project and completion of a 40 MW gas-fired turbine.
- State approval of the Cost of Service Gas Program remained pending. If approved, the program could supply up to 50% of normalized annual utility gas demand; management described it as a source of price stability and potential earnings, not a guaranteed outcome.
- SourceGas was acquired on February 12, 2016 for approximately $1.89 billion, including assumed debt of about $760 million. It adds approximately 429,000 gas customers. Management expects the acquisition to be accretive to EPS beginning in 2017; purchase accounting and pro forma results were not yet provided.
- Management agreed to sell a 49.9% non-controlling interest in Black Hills Colorado IPP for $215 million, subject to FERC approval, with proceeds intended to reduce short-term debt.
Risks, contingencies and unusual items
- Management said another oil and gas ceiling-test impairment was probable in 2016 if prices remained near late-2015 and early-2016 lows. Oil and gas reserves’ standardized discounted future net cash flows fell to $79.0 million from $183.0 million in 2014.
- Environmental rules, including emissions limits and coal-ash requirements, may increase costs or affect generation economics. The filing notes the Clean Power Plan was stayed by the U.S. Supreme Court in February 2016 pending litigation; ultimate requirements and costs remained uncertain.
- The IRS had challenged tax treatment of a prior like-kind exchange. The company disclosed a worst-case accelerated tax liability of approximately $88 million plus estimated interest of $21 million before tax effects; it later reported an agreement in principle with IRS Appeals expected to reduce unrecognized tax benefits by about $21 million.
- Environmental and legal matters include manufactured-gas-site remediation estimates of $2.9 million to $6.1 million, with $2.6 million accrued, and the Oil Creek Fire litigation, which was settled and dismissed in January 2016 without a material financial effect, according to the company.
- SourceGas integration, acquisition-related leverage, refinancing assumed debt, regulatory approvals, commodity-price volatility, weather, operational reliability, cybersecurity, and pension and environmental obligations are identified risks. Moody’s and Fitch affirmed ratings with negative outlooks after the acquisition; S&P affirmed its rating with a stable outlook.
- The company reported effective internal control over financial reporting and an unqualified audit opinion. It also said it remediated a previously reported material weakness in controls over the oil and gas ceiling-test impairment calculation.
Investor verification priorities
- Reconcile the $249.6 million pre-tax impairment to the approximately $158 million after-tax charge and assess sensitivity to oil and gas prices.
- Track SourceGas purchase-price allocation, acquired debt, integration costs, realized savings, and whether the projected 2017 EPS accretion is achieved.
- Verify the timing, regulatory treatment, funding, and returns of the Cost of Service Gas Program and major capital projects.
- Monitor post-acquisition leverage, debt refinancing, credit outlooks, revolver availability, and capacity to sustain dividends alongside capital spending.
- Follow the Colorado IPP minority-interest sale, CPP litigation and compliance outcomes, and material tax, environmental, and legal contingencies.