Black Hills Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 2, 2014. Black Hills operates regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas businesses. Results are unaudited and subject to seasonal variation.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $460.2 million | $380.7 million |
| Operating income | $89.6 million | $79.8 million |
| Net income | $48.1 million | $43.2 million |
| Diluted EPS | $1.08 | $0.97 |
| Operating cash flow | $98.1 million | $109.2 million |
| Capital expenditures, cash-flow statement | $83.6 million | $63.9 million |
| Cash and cash equivalents, March 31 | $17.6 million | $12.4 million |
| Common dividends paid | $17.4 million; $0.39 per share | $16.9 million; $0.38 per share |
Revenue rose 20.9%, while net income increased 11.4%. Revenue growth included higher utility fuel and gas costs, which are substantially recovered from customers; it should not be read as equivalent growth in retained margin. Operating cash flow declined 10.2%, principally because of working-capital outflows, including higher gas volumes and prices and regulatory gas-cost balances.
Utilities reported $39.3 million of net income versus $30.8 million. Gas Utilities income increased to $24.7 million from $18.5 million, helped by colder weather: combined heating degree days were 14% above normal, compared with 6% above normal a year earlier. Electric Utilities income rose to $14.6 million from $12.4 million. Non-regulated Energy income increased to $8.5 million from $6.7 million, while Oil and Gas recorded a $2.0 million loss versus a $0.1 million loss.
Utility gross margin, a non-GAAP measure defined in the filing, increased to $180.3 million from $166.2 million: Electric Utilities $95.4 million versus $90.5 million; Gas Utilities $84.8 million versus $75.7 million. The filing does not present a consolidated GAAP gross-margin percentage.
At March 31, total assets were $4.0 billion and stockholders’ equity was $1.34 billion. Notes payable were $100 million and long-term debt was $1.397 billion; the filing reports no current maturities of long-term debt. Cash was $17.6 million and current liabilities were $399.7 million. The $500 million revolving facility had $100 million drawn, $28 million of letters of credit, and $372 million of available capacity. The company reported compliance with its leverage covenant.
Material changes versus Q1 2013
- Net income increased by $4.9 million. The comparison was affected by a $7.5 million unrealized, non-cash interest-rate-swap gain included in Q1 2013 corporate results; those de-designated swaps were settled in 2013.
- Interest expense fell approximately $5.8 million, mainly following 2013 refinancing activity. In November 2013, the company issued $525 million of 4.25% senior unsecured notes due 2023 and used proceeds in part to redeem higher-cost debt and repay project financing.
- Utilities benefited from colder weather and higher margins. Oil and Gas production-equivalent sales fell 3%; higher realized hedged prices did not offset increased operating and depletion costs.
- Cash capital spending increased, mainly for the Cheyenne Prairie generating project and Oil and Gas. Investing cash outflow rose to $86.8 million from $62.9 million.
Outlook, management commentary, and risks
- Management stated that cash on hand, operating cash flows, borrowing capacity, and potential debt and equity financing were expected to provide sufficient resources for operating needs, debt obligations, dividends, and planned capital expenditures. This is forward-looking and subject to risks.
- Planned 2014 capital expenditures were $449.3 million, including $250.7 million for Electric Utilities, $117.8 million for Oil and Gas, and $63.0 million for Gas Utilities. The company noted that actual spending could vary with opportunities and conditions.
- Cheyenne Prairie, a jointly owned 132 MW gas-fired facility, was expected to cost approximately $222 million. About $183 million had been spent by the quarter-end; equipment contracts were 100% committed and construction contracts 83% committed. Completion was expected around September/October 2014. The filing says construction-financing rider margins contributed approximately $3.3 million to Electric Utilities gross margin in Q1.
- Several utility rate requests were pending, including Black Hills Power requests for $2.8 million in Wyoming and $14.6 million in South Dakota, plus requests filed after quarter-end by Kansas Gas for $7.3 million and Colorado Electric for $8.0 million. Approval and timing were uncertain. Iowa Gas received approval after quarter-end for a $0.5 million surcharge increase.
- Black Hills Power retired three coal-fired plants totaling 81 MW in March 2014, citing federal environmental regulations; the company expected Cheyenne Prairie to largely replace their capacity. An unplanned turbine-related outage reduced Electric Utilities availability for non-coal plants.
- A 10-year Piceance Basin gas gathering and processing agreement became effective in Q1 and requires minimum deliveries of 20,000 Mcf per day. Management said dedicated reserves and projected volumes were adequate to meet the commitment.
- Oil Creek Fire litigation and related claims sought approximately $16 million in compensatory damages, plus punitive damages. The company considered a loss probable and recorded a liability and an insurance recovery receivable, but did not disclose their amounts. Additional loss above the recorded estimate was reasonably possible but not reasonably estimable; management did not expect a material adverse effect based on information then available.
- Key exposures include seasonal utility demand, commodity prices, interest rates, capital-project execution, regulatory outcomes, and litigation. Moody’s upgraded the corporate rating to Baa1 with a stable outlook in January; S&P rated it BBB stable and Fitch BBB positive.
- The board declared a $0.39-per-share quarterly dividend payable June 1, 2014, equivalent to an annual rate of $1.56 per share. The filing cautions that future dividends depend on financial condition, cash generation, capital needs, covenants, and business prospects.
Investor verification priorities
- Track utility rate-case decisions and whether requested revenue increases and cost-recovery mechanisms are approved and implemented.
- Verify Cheyenne Prairie’s final cost, completion and in-service date, financing, and recovery through customer rates.
- Review operating cash flow and working-capital trends alongside the substantial planned capital program and available revolving-credit capacity.
- Monitor Oil Creek Fire claim developments, recorded liability and insurance recovery amounts, and any exposure beyond the recorded estimate.
- Assess whether weather-normalized utility performance and Oil and Gas production and costs support earnings beyond this seasonally favorable quarter.