Black Hills Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Black Hills is a U.S. energy company with regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas operations. Results are seasonal, especially in gas utilities.
Financial results and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $442.0 million | $460.2 million |
| Operating income | $92.0 million | $89.6 million |
| Net income | $47.9 million | $48.1 million |
| Diluted EPS | $1.07 | $1.08 |
| Dividends declared per share | $0.405 | $0.390 |
| Cash from operations | $151.5 million | $98.1 million |
| Capital expenditures | $117.5 million | $83.6 million |
- Operating margin was approximately 20.8%, up from 19.5%; net margin was approximately 10.8%, versus 10.5%.
- At March 31, cash and cash equivalents were $63.4 million; current assets were $438.7 million and current liabilities $379.1 million. The $500 million revolving facility had $375 million available after $102.6 million of borrowings and $22.3 million of letters of credit.
- Long-term debt was $1.543 billion and notes payable were $102.6 million. Total reported debt was approximately $1.645 billion. The company was in compliance with its recourse leverage covenant: 55% versus a maximum 65%.
- Operating cash flow less property additions was approximately $34.0 million, compared with $14.5 million in Q1 2014. Cash increased to $63.4 million from $21.2 million at year-end 2014.
Material changes and segment performance
- Revenue declined $18.2 million, while operating income increased $2.4 million; net income was nearly flat. Lower natural gas costs and sales contributed to lower reported revenue, while utility fuel and gas costs are generally passed through to customers.
- Utilities net income increased to $41.1 million from $39.3 million. Electric Utilities income rose $4.4 million, supported by improved margins from new generation investment, stronger retail demand, and a renewable-energy settlement. Gas Utilities income fell $2.5 million, primarily due to milder weather; heating degree days were 9% below the prior year.
- Non-regulated Energy income declined to $6.1 million from $8.5 million. Oil and Gas reported a $5.1 million loss versus a $2.0 million loss, as lower realized commodity prices outweighed 23% production growth. Coal Mining income improved to $3.0 million from $2.5 million; Power Generation income was essentially unchanged at $8.1 million.
- Operating cash flow improved mainly because working-capital movements were more favorable than in Q1 2014. Investing outflows rose with higher Oil and Gas drilling expenditures.
Outlook, management commentary, risks and contingencies
- Management stated that cash, operating cash flows, borrowing capacity, and access to financing were expected to be sufficient for operating needs, debt maturities, dividends, and planned capital spending. The company cautioned that quarterly results are not necessarily indicative of the full year.
- Planned 2015 capital expenditures were approximately $501 million, including $167 million for Oil and Gas, increased from $123 million due to carried-over drilling work and an added well. Management warned that sustained low oil and gas prices could trigger a ceiling-test impairment in 2015; none was recorded in Q1.
- On April 13, 2015, the company entered a $300 million term loan maturing in April 2017, replacing a $275 million loan due in June 2015. The additional borrowing was intended for general corporate purposes. A $70 million corporate headquarters project was planned, with construction expected to begin in Q2 2015 and completion in 2017.
- Regulatory developments included approval of a $6.9 million annual electric revenue increase for Black Hills Power, effective retroactively from October 1, 2014; prior approvals also included annual increases of $3.1 million for Colorado Electric and $5.2 million for Kansas Gas. The proposed $17 million Energy West Wyoming acquisition remained subject to regulatory approval.
- Oil Creek Fire litigation: landowners and Wyoming assert claims against Black Hills Power. The company recorded a loss contingency and an insurance receivable, but the filing does not state their amounts. Current claims were estimated at approximately $55 million; additional losses were reasonably possible but not estimable. Management did not expect the matter to materially adversely affect consolidated results or financial condition.
- Key risks include weather and seasonality, commodity-price exposure, possible oil and gas impairment, interest-rate exposure, financing access, regulatory outcomes, and the uncertain fire litigation. The company reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track Oil and Gas realized prices, production, drilling spending, and whether low commodity prices lead to a ceiling-test impairment.
- Review subsequent updates on the Oil Creek Fire accrual, insurance recovery, claims, and litigation outcome.
- Confirm execution and financing of the $501 million 2015 capital plan, including the increased Oil and Gas program and headquarters project.
- Monitor utility rate recovery, pending regulatory matters, and the Energy West acquisition approval.
- Assess debt, liquidity, covenant headroom, and subsidiary dividend restrictions; approximately $338 million of utility-group net assets were restricted from distribution.