Business context and reporting period
Black Hills Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The diversified U.S. energy company operates regulated electric and gas utilities and non-regulated oil and gas, power generation, coal mining, and energy marketing businesses. Utility and gas demand is seasonal, so interim results may not indicate full-year performance.
Key financial metrics
| Metric | Three months ended June 30, 2011 | Six months ended June 30, 2011 |
|---|---|---|
| Operating revenue | $273.1 million | $676.4 million |
| Operating income | $42.6 million | $98.3 million |
| Net income | $7.8 million | $34.7 million |
| Diluted earnings per share | $0.19 | $0.87 |
| Cash from operating activities | $182.0 million for the six months | |
| Capital expenditures | $225.9 million for the six months |
- Six-month cash used in investing was $225.1 million; cash provided by financing was $98.7 million. Cash rose to $88.1 million from $32.4 million at December 31, 2010.
- At June 30, total debt was approximately $1.57 billion, including $380.0 million of notes payable, $3.6 million of current long-term debt, and $1.18 billion of long-term debt. Current assets were $616.9 million and current liabilities $852.6 million.
- The $500 million revolving facility had $130 million borrowed, $43 million of letters of credit, and approximately $327 million of available capacity. The company reported compliance with debt covenants.
- Dividends paid were $0.73 per share for the six months. The board declared a further $0.365-per-share quarterly dividend, payable September 1, 2011.
Material changes versus the prior comparable period
- Second-quarter net income improved from a loss of $8.7 million in 2010 to income of $7.8 million in 2011; six-month net income rose from $22.8 million to $34.7 million. Revenue increased 6.6% for the quarter but decreased 0.9% for the six months.
- Utility segment earnings improved, supported by rate increases and, for gas utilities, cooler weather and lower operating and maintenance costs. The six-month Utilities Group net income rose to $42.6 million from $35.7 million.
- Non-regulated Energy Group six-month net income fell to $0.3 million from $11.2 million. Oil and Gas reported a loss, reflecting lower realized commodity prices and higher depletion; Coal Mining also recorded a loss as mining costs outpaced contract price escalators. Energy Marketing earnings declined year over year for the six months, despite a stronger second quarter, partly because of lower realized margins.
- Corporate results benefited from lower non-cash mark-to-market losses on de-designated interest-rate swaps: $2.4 million pre-tax for the six months versus $28.0 million in 2010. These fair-value changes can still cause significant earnings volatility.
- The 2010 comparative revenue and fuel-cost figures were restated to correct uneliminated intercompany transactions: revenue and fuel costs had been overstated by $15.0 million for the quarter and $30.8 million for the six months. The correction did not affect gross margin, net income, assets, cash flows, or EPS.
Outlook, commentary, risks and unusual items
- Management planned approximately $441.2 million of capital expenditures in 2011 and expected to fund investment through operating cash flow, borrowings, and long-term financing. It aimed to maintain consolidated debt-to-capitalization of 50%–55%, while noting this could be temporarily exceeded during construction.
- Two gas-fired generation projects—180 MW for Colorado Electric and 200 MW for the non-regulated Power Generation segment—were under construction, with combined estimated costs of approximately $487 million and expected completion by year-end 2011. Colorado Electric’s requested $40.2 million annual revenue increase remained pending, with a hearing scheduled for October 2011.
- Cheyenne Light filed for approval to build a proposed 120 MW generation facility estimated at $158 million. Approval was pending. A proposed Colorado Electric wind project was also subject to regulatory approval.
- Management said coal mining cost pressures not fully recovered through contract escalators were expected to continue to weigh on 2011 results. Energy Marketing results are exposed to commodity-price, valuation, collateral, and counterparty risks; reported derivative gains and losses may not reflect the economics of the entire portfolio.
- Other key risks include refinancing and capital-market access, covenant compliance, construction execution and regulatory approvals, commodity and interest-rate movements, pension funding, and possible effects of environmental and derivatives regulation. Fitch downgraded the company’s corporate rating from BBB to BBB- in May 2011; Fitch, Moody’s, and S&P ratings were all investment grade with stable outlooks at quarter-end.
- Guarantees included $10.0 million to Colorado Interstate Gas and $7.5 million for natural-gas purchases; a subsequent July 2011 guarantee of $33.3 million covered Colorado Electric wind-turbine obligations. Management reported no material new legal proceedings or material changes to previously disclosed risk factors.
- The filing gives no specific earnings-per-share guidance. Management’s capital-spending, project-completion, and financing expectations are forward-looking and subject to stated risks.
Important facts for investors to verify
- Progress, final cost, timing, and regulatory recovery for the Colorado generation projects and pending rate cases.
- How the company funds planned capital spending and addresses $250 million of short-term term loans due in 2011 and 2012, as well as future debt maturities.
- Coal mining cost trends and whether contract escalators recover actual costs; oil and gas production, realized prices, and hedge impacts.
- Cash requirements or earnings effects from interest-rate swaps, derivative collateral, and Energy Marketing counterparties.
- Potential limits on parent-company cash distributions: restricted net assets included approximately $207.3 million at Utilities and $153.1 million at Enserco.