Black Hills Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2012. Black Hills operates regulated electric and gas utilities and non-regulated oil and gas, power generation, and coal businesses. Enserco, its Energy Marketing segment, was sold February 29, 2012 and reported as discontinued operations; comparative periods were reclassified accordingly. Utility demand and results are seasonal, particularly gas usage in winter.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $365.9 million | $400.8 million |
| Operating income | $70.0 million | $58.4 million |
| Income from continuing operations | $35.3 million; diluted EPS $0.80 | $29.1 million; diluted EPS $0.73 |
| Net income | $29.8 million; diluted EPS $0.68 | $26.9 million; diluted EPS $0.68 |
| Operating cash flow | $96.1 million | $111.3 million |
| Capital additions | $67.7 million | $121.6 million |
Operating margin was approximately 19.1%, compared with 14.6% a year earlier. Revenue declined by $35.0 million, mainly reflecting lower gas utility revenue and the presentation of Enserco as discontinued; revenue from continuing operations is the relevant basis for comparisons. Utilities contributed $24.0 million of continuing income, down from $29.5 million. Non-regulated Energy income improved to $7.9 million from a loss of $0.8 million, led by Power Generation.
Gas Utilities income fell to $15.2 million from $19.3 million as warmer weather reduced heating demand; heating degree days were 19% below normal and 24% below the prior-year period. Electric Utilities income fell to $8.7 million from $10.2 million, despite higher margins from rate adjustments and the new Pueblo plant, as depreciation, maintenance, and interest costs increased. Power Generation income rose to $6.9 million from $1.2 million after its new 200 MW plant began serving Colorado Electric customers under a 20-year power purchase agreement.
Cash and cash equivalents were $56.1 million at quarter-end. Total debt, including notes payable and current maturities, was approximately $1.51 billion, down from $1.63 billion at December 31, 2011. The $500 million revolving credit facility had $75 million drawn, $41 million of letters of credit outstanding, and approximately $384 million available. The company reported covenant compliance; its recourse leverage ratio was 56.4% against a 65.0% limit. Current assets of $407.1 million and current liabilities of $556.7 million indicate current liabilities exceeded current assets.
Material changes, outlook, and risks
- Enserco sale proceeds were approximately $166.3 million, subject to post-closing adjustments; $108.8 million was received from the buyer and $57.5 million was cash retained from Enserco before closing. The sale resulted in a $1.6 million after-tax loss. Q1 discontinued operations recorded a $5.5 million net loss.
- Continuing income included a $7.8 million after-tax non-cash gain on interest rate swaps and an approximately $1.0 million after-tax write-off of prior credit-facility financing costs. The comparable prior-year period included a $3.6 million after-tax swap gain. Swap mark-to-market changes can materially affect reported earnings.
- The company forecast capital expenditures of $386.1 million in 2012, $461.2 million in 2013, and $375.6 million in 2014, funded through operating cash flow and financing, including potential debt and equity issuance. Management targeted debt-to-capitalization of 50%–55% and said existing cash and credit capacity were expected to cover working capital and maintenance needs.
- On April 24, the board declared a $0.37 quarterly dividend, payable June 1, 2012, equivalent to an annual rate of $1.48 per share. Future dividends remain subject to financial condition, capital needs, and debt and subsidiary distribution restrictions.
- Colorado regulators denied the requested certificate for a proposed 88 MW gas turbine; the company expected to file an alternative resource plan by July 30, 2012. A separate $237 million Cheyenne generation and transmission proposal was awaiting Wyoming regulatory approval, with a hearing scheduled for July 2012.
- Key risks include weather and commodity-price volatility, regulatory approvals, construction and environmental requirements, access to capital, counterparty performance, and potential impairment of oil and gas assets. Lower natural gas prices prompted a delay in gas drilling plans.
- Management reported disclosure controls were not effective at March 31 because of a previously disclosed material weakness in income-tax accounting controls. A remediation plan was being implemented; management nevertheless stated the interim financial statements fairly presented the periods shown. The filing reported no material changes to previously disclosed risk factors or contingencies.
Important facts for investors to verify
- Final Enserco sale adjustments and the realized cash available after the transaction.
- Whether swap valuation gains and losses, including potential cash settlement of the $250 million notional de-designated swaps, continue to cause material earnings or liquidity volatility.
- Progress on remediation of the income-tax control weakness and any subsequent disclosure-control assessments.
- Regulatory outcomes and updated costs or timing for generation, transmission, and replacement-resource projects.
- Whether forecast capital spending, debt refinancing needs, covenant headroom, and the dividend remain supportable as operating cash flow and funding conditions evolve.