Black Hills Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; filed August 6, 2013. Black Hills is an integrated U.S. energy company with regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas operations. Energy Marketing was sold in February 2012 and is reported as discontinued operations.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $279.8 million | $242.4 million | $660.5 million | $608.2 million |
| Operating income | $49.0 million | $20.6 million | $128.9 million | $90.6 million |
| Net income (loss) available to common | $30.5 million | $(13.5) million | $73.7 million | $16.3 million |
| Diluted EPS | $0.69 | $(0.31) | $1.66 | $0.37 |
| Cash from operating activities | Not separately stated for Q2 | $197.4 million | $176.7 million |
For the first half, property, plant and equipment additions were $147.2 million, dividends paid were $33.8 million ($0.76 per share), and cash and cash equivalents ended at $30.6 million. At June 30, current assets were $338.1 million and current liabilities were $669.2 million.
Debt comprised $100.0 million of notes payable, $255.5 million of current maturities of long-term debt, and $958.6 million of long-term debt, totaling approximately $1.314 billion. The company had a $500 million revolving facility, with $100 million borrowed, $43.2 million of letters of credit, and $356.8 million of available capacity. It reported compliance with debt covenants; recourse leverage was 51.5% versus a 65% maximum.
Changes versus prior comparable periods
- Q2 net income improved by $44.0 million from a prior-year loss; first-half net income rose by $57.4 million.
- Revenue rose $37.5 million in Q2 and $52.3 million in the first half. Gas Utilities revenue and earnings benefited from colder weather: heating degree days were 72% higher in Q2 and 37% higher in the first half than in 2012.
- Q2 Electric Utilities earnings declined to $10.6 million from $14.2 million, while first-half earnings were nearly flat at $23.0 million. Gas Utilities earnings increased to $3.2 million from $1.2 million in Q2 and to $21.7 million from $16.4 million year to date.
- Oil and Gas reported lower revenue following the 2012 Williston Basin asset sale, but its loss narrowed substantially: $2.0 million in Q2 versus $19.6 million, and $2.0 million for the first half versus $19.6 million. The 2012 comparisons included a $26.9 million pre-tax non-cash impairment.
- Net income comparisons were significantly affected by non-cash mark-to-market gains on de-designated interest rate swaps: $18.8 million pre-tax in Q2 2013 versus a $15.6 million loss in Q2 2012; $26.2 million gain for first-half 2013 versus a $3.5 million loss. These gains are volatile and do not represent operating cash earnings.
Outlook, financing, and notable items
- No consolidated earnings or EPS guidance is provided. Planned 2013 capital expenditures were $468 million; plans were $390.1 million for 2014 and $292.9 million for 2015.
- The 132-MW Cheyenne Prairie gas-fired facility was under construction, with expected total cost of approximately $237 million including financing costs and scheduled completion by September 30, 2014. Approximately $87.6 million had been spent through June 30.
- Management said cash on hand, operating cash flow, borrowing capacity, and access to financing were expected to fund operations, debt maturities, dividends, and planned capital spending. It was considering early refinancing of $250 million of 9% bonds due May 2014 and long-term financing for Cheyenne Prairie.
- The board declared a $0.38 quarterly dividend payable September 1, 2013, equivalent to $1.52 annually. Future dividends remain subject to financial condition, cash flow, capital needs, covenants, and business prospects.
- On June 21, the company entered a $275 million term loan due June 2015, replacing prior term loans and $25 million of revolver borrowings; its reported borrowing cost at quarter-end was 1.375%. S&P upgraded the company to BBB with a stable outlook on July 24, after quarter-end; Fitch had upgraded it to BBB in May.
- Black Hills Wyoming agreed to sell its 40-MW CTII generating unit for approximately $22 million, subject to adjustments and approvals; closing was expected in August 2014.
- Thirty-four landowners sued over the 2012 Oil Creek fire, seeking actual and exemplary damages in an unspecified amount. Separate written claims totaled approximately $8 million. The company said loss was reasonably possible, could not be estimated while its investigation continued, and management did not expect an adverse outcome to materially affect financial condition or results.
- Interest-rate and commodity exposures, seasonal utility demand, capital-project execution, regulatory approvals, and limits on subsidiary distributions are material risks. Utility subsidiaries had approximately $187.4 million of restricted net assets. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess earnings excluding non-cash swap mark-to-market gains and the prior-year oil-and-gas impairment; compare underlying segment performance and cash generation.
- Check the timing, final cost, regulatory recovery, and financing of Cheyenne Prairie, and progress on the proposed bond refinancing.
- Monitor the Oil Creek fire investigation and litigation, including whether claims expand or a loss estimate becomes available.
- Verify rate-case outcomes and interim rates subject to refund, including Black Hills Power’s requested annual revenue increase of $13.7 million.
- Track debt maturities, revolver availability, covenant headroom, restricted subsidiary cash flows, and the sustainability of dividends alongside planned capital spending.