Black Hills Corporation — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Black Hills is a diversified U.S. energy company with regulated electric and gas utilities and non-regulated oil and gas, power generation, coal mining, and energy marketing businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $256.5 | $249.5 | $932.9 | $932.3 |
| Operating income | $41.4 | $47.9 | $139.8 | $148.5 |
| Net income (loss) | $(10.5) | $12.4 | $24.1 | $35.2 |
| Diluted earnings (loss) per share | $(0.27) | $0.32 | $0.61 | $0.90 |
- Consolidated operating margin was 16.2% in Q3 versus 19.2% a year earlier, and 15.0% for the first nine months versus 15.9%. Nine-month revenue was nearly flat; utility revenue rose while non-regulated energy revenue declined.
- Q3 results included a $38.2 million pre-tax ($24.9 million after-tax) non-cash unrealized loss on de-designated interest-rate swaps. For the first nine months, the corresponding loss was $40.6 million pre-tax ($26.4 million after-tax). These losses materially affected reported earnings.
- Cash from operations was $206.5 million for the first nine months, compared with $125.8 million in 2010. Capital spending was $328.5 million, compared with $323.9 million; operating cash flow did not cover capital additions. Dividends paid were $43.2 million, or $1.095 per share.
- At September 30, cash and cash equivalents were $74.8 million. Current assets were $666.1 million and current liabilities $889.4 million. The company reported $359.0 million of notes payable and $1,282.2 million of long-term debt, net of current maturities.
- Revolving-credit borrowings were $209 million, with $42 million of letters of credit and approximately $249 million of remaining capacity. Management reported compliance with debt covenants; recourse leverage was 61.3% against a 65.0% maximum. The company’s separate total-debt leverage ratio was 60.2%.
- Total assets were $3.95 billion and stockholders’ equity was $1.09 billion at quarter-end. The quarterly dividend was $0.365 per share; the board declared the same amount for payment in December 2011.
Changes and operating performance
- Q3 shifted from a $12.4 million profit to a $10.5 million loss, largely reflecting the larger swap mark-to-market loss and lower operating income. Nine-month net income fell 31% to $24.1 million.
- Utilities’ nine-month net income increased to $58.9 million from $53.6 million, supported by rate changes and improved Gas Utilities results. Non-regulated Energy net income fell to $1.7 million from $15.6 million; Oil and Gas and Coal Mining reported nine-month losses, and Energy Marketing earnings declined.
- Coal Mining faced higher stripping, haulage, drilling, equipment, and other operating costs; management said contract price escalators had not kept pace with actual cost increases and expected continued pressure on 2011 results.
- The filing restated 2010 revenue and fuel-cost presentation to correct intercompany transactions not eliminated in consolidation: revenue and fuel costs had been overstated by $14.8 million for Q3 and $45.6 million for the first nine months. The correction did not affect gross margin, net income, assets, cash flows, or EPS.
Outlook, commitments, and risks
- Management expected 2011 capital expenditures of approximately $441.2 million and forecast $427.6 million in 2012 and $524.5 million in 2013. Funding was expected from operating cash flows, borrowings, term loans, and longer-term financing; management stated existing cash and credit capacity should cover working capital and maintenance needs.
- Two gas-fired projects were nearing completion: a 180 MW Colorado Electric facility, expected to cost about $227 million, and a 200 MW Power Generation facility, expected to cost about $260 million. Both were expected to be completed by December 31, 2011 and serve customers under a 20-year power purchase arrangement. Construction was reported 99% and 97% complete, respectively.
- Colorado Electric had requested a $40.2 million annual revenue increase, with a rate-case hearing beginning November 1, 2011. Further proposed generation and transmission projects remained subject to regulatory approvals, permits, and other conditions.
- On November 1, 2011, after quarter-end, the company settled its equity forward by issuing 4,413,519 shares for approximately $120 million in proceeds, which it said would be used to reduce revolving-credit borrowings. Management also discussed possible additional long-term financing in 2012; no specific financing transaction was assured.
- Key exposures include commodity-price and interest-rate changes, derivative valuation and collateral demands, counterparty default, seasonal gas demand, access to capital markets, regulatory decisions, construction execution and costs, and possible new hydraulic-fracturing requirements. The filing notes that derivative accounting can create earnings volatility even when positions are economically hedged.
- The company reported no material new legal proceedings or developments. It disclosed one pending mine-safety legal action and $32,096 in proposed MSHA assessments for the quarter; no mine fatalities were reported.
Important facts for investors to verify
- How much of reported earnings volatility is attributable to non-cash swap remeasurement, and what cash settlement could be required when the $250 million de-designated swaps reach their scheduled early termination dates in December 2011.
- Whether the two generation projects reach completion and begin service on schedule and within budget, and whether related regulatory rate recovery is approved.
- How the planned capital program and debt maturities will be financed, including the effect of the equity-forward share issuance and the company’s leverage and covenant headroom.
- Whether coal-mining cost inflation, oil and gas prices and production, and energy-marketing realized versus unrealized margins improve or further pressure non-regulated earnings.
- Seasonal gas-utility performance: the filing cautions that the nine-month and Q3 results are not necessarily indicative of full-year results, with more than 70% of Gas Utilities revenue and margins expected in the first and fourth quarters.