Black Hills Corporation — 2011 Form 10-K Summary
Business context and reporting period
Black Hills Corporation is a diversified U.S. energy company reporting for the year ended December 31, 2011. Its continuing businesses comprise regulated electric and gas utilities and non-regulated oil and gas, power generation, and coal mining. Enserco, its energy-marketing segment, was classified as discontinued operations following a January 2012 agreement to sell it; the sale was expected to close in the first quarter of 2012. The filing also provides unaudited fourth-quarter results.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total operating revenue | $1.272 billion | $1.220 billion |
| Operating income | $186.2 million | $183.4 million |
| Income from continuing operations | $40.4 million; $1.01 diluted EPS | $63.1 million; $1.62 diluted EPS |
| Net income | $49.7 million; $1.24 diluted EPS | $68.7 million; $1.76 diluted EPS |
| Cash provided by operating activities | $223.7 million | $147.8 million |
| Cash used in investing activities | $447.0 million | $389.2 million |
| Cash provided by financing activities | $249.6 million | $161.0 million |
| Year-end assets / stockholders’ equity | $4.127 billion / $1.209 billion | $3.712 billion / $1.100 billion |
Revenue grew about 4%, while net income fell about 28% and continuing-operations income fell about 36%. Results were affected by a $42.0 million pre-tax non-cash loss on de-designated interest-rate swaps (a $27.3 million after-tax loss). Fourth-quarter 2011 net income was $25.6 million, including $18.8 million from continuing operations; diluted EPS was $0.60.
- Utilities: Segment income rose to $81.9 million from $74.6 million. Electric Utilities income was $47.7 million, nearly flat year over year; Gas Utilities income increased to $34.2 million from $27.1 million. Utilities’ combined 2011 gross margin was $526.6 million, up from $494.2 million.
- Non-regulated energy: Segment income was $0.9 million, down from $10.2 million. Oil and Gas reported a $1.7 million loss, Power Generation earned $3.0 million, and Coal Mining reported a $0.4 million loss.
- Cash, debt and liquidity: Balance-sheet cash was $21.6 million and restricted cash was $9.3 million at year-end. The cash-flow statement’s $58.8 million ending cash includes cash of discontinued operations. Notes payable were $345.0 million and long-term debt, net of current maturities, was $1.280 billion. Year-end total debt was approximately $1.63 billion; the reported total debt ratio was 57.4%. The existing $500 million revolver had $261.3 million available after borrowings and letters of credit. A replacement $500 million, five-year revolver was entered into in February 2012.
- Margins and capital: Operating income was $186.2 million on $1.272 billion revenue (about 14.6%). Capital expenditures for continuing operations were $429.3 million. Dividends paid were $59.2 million, or $1.46 per share; the payout ratio was 118%.
Material changes and unusual items
- Utilities benefited from rate increases implemented in five jurisdictions during 2010, totaling $47.9 million in annual approved revenue increases. Colorado Electric’s new $28.0 million annual rate increase became effective January 1, 2012, including $10.5 million in base rates and approximately $17.5 million through cost-adjustment mechanisms.
- Colorado Electric’s 180 MW utility generation facility entered service in January 2012; the related non-regulated 200 MW plant also began operations under a 20-year power agreement. The 200 MW project cost approximately $261 million.
- Coal Mining earnings declined as higher stripping, haulage, maintenance and other operating costs outpaced price increases. The Dave Johnston supply contract, representing 29% of 2011 tons sold, ended December 31, 2011; management expected this to benefit earnings, and forecast approximately 4.8 million tons of coal production in 2012.
- Oil and gas proved reserves increased to 133.2 Bcfe from 131.1 Bcfe. Additions were 35.2 Bcfe, offset by production and negative revisions, including 23.6 Bcfe removed because undeveloped locations exceeded the five-year development limit.
- The company issued 4.4 million shares in November 2011, receiving approximately $119.6 million. Management said the expected Enserco sale proceeds of $160–$170 million would primarily support future growth projects.
- The 2010 comparative statements were restated to correct intercompany revenue and cost eliminations; the correction did not affect gross margin, net income, assets or cash flows.
Outlook, risks and contingencies
- Management said cash on hand, operating cash flow, borrowing capacity and access to financing should fund operations, debt maturities, dividends and planned capital spending for the next 12 months. Forecast capital expenditures were $437.2 million in 2012, $580.7 million in 2013 and $405.8 million in 2014.
- Management planned a four-well San Juan Basin Mancos shale drilling program beginning in mid-2012. It also described planned utility generation and transmission investment, including a proposed $237 million Cheyenne gas-fired facility subject to regulatory approval.
- Environmental rules pose material execution and cost risks. The filing estimated $64 million of environmental compliance expenditures for 2012–2014, including preliminary $30–$50 million estimates for compliance at affected generating units. Several older coal units were expected to close before March 2014; recovery of compliance costs through customer rates is not assured.
- Other significant risks include utility rate recovery and approval delays, commodity and interest-rate volatility, oil and gas reserve and impairment uncertainty, weather, counterparty credit, collateral requirements under derivatives rules, access to capital, pension funding and potential litigation or environmental liabilities. The filing cites approximately $125 million of deferred taxes associated with past transactions that remain subject to IRS review.
- At December 31, 2011, the company reported a material weakness in income-tax accounting controls, and management concluded internal control over financial reporting and disclosure controls were not effective. The independent auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Management described remediation plans involving added tax resources and formal coordination among finance and tax leaders.
- Senior unsecured ratings were Baa3 from Moody’s and BBB- from S&P and Fitch, all with stable outlooks. The Board declared a $0.37 quarterly dividend in January 2012, equivalent to $1.48 annually; future dividends remain subject to financial condition, capital needs and restrictions.
Investor verification priorities
- Track remediation of the income-tax material weakness and whether subsequent filings report effective controls.
- Verify completion and final proceeds of the Enserco sale, including working-capital adjustments and any change in expected gain or loss.
- Monitor financing and refinancing of near-term maturities, covenant headroom, credit ratings and any liquidity or collateral needs.
- Assess the cost, regulatory approval and rate recovery of planned generation, transmission and emissions-compliance investments.
- Reconcile continuing-operations earnings with the non-cash swap losses, and evaluate the future cash settlement and earnings volatility from the swaps.
- Review oil and gas reserve revisions and development results, coal operating costs and the sustainability of the dividend relative to cash flow and capital spending.