Black Hills Corporation — 2013 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2013; the filing also provides fourth-quarter results. 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 businesses. It served approximately 203,500 electric customers and 538,000 gas utility customers.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $1,275.9 million | $1,173.9 million | Up 8.7% |
| Operating income | $255.6 million | $243.7 million | Up 4.9% |
| Income from continuing operations | $115.8 million; $2.61 diluted EPS | $88.5 million; $2.01 diluted EPS | Up 30.9% |
| Net income available to common stock | $115.0 million; $2.59 diluted EPS | $81.5 million; $1.85 diluted EPS | Up 41.0% |
| Cash from operating activities | $324.6 million | $317.0 million | Up $7.7 million |
| Capital expenditures (reported) | $379.5 million | $348.0 million | Up $31.6 million |
Fourth quarter: Revenue was $355.4 million, operating income $71.1 million, income from continuing operations $19.0 million, and net income $18.1 million. Diluted EPS was $0.41, including a $0.02 loss per share from discontinued operations.
Segments: Utilities generated $84.8 million of net income, versus $79.6 million in 2012. Non-regulated Energy generated $18.4 million, down from $24.7 million; Power Generation income declined to $16.3 million from $21.3 million, while Oil and Gas reported a $4.2 million loss. Gas and Electric utility gross margins, a non-GAAP measure, were $229.2 million and $371.3 million, respectively.
Debt and liquidity: At year-end, cash was $7.8 million; notes payable were $82.5 million and long-term debt was $1.397 billion. The company reported a 53% total-debt capitalization ratio and a 52% long-term-debt ratio. Its $500 million revolving facility had $82.5 million drawn, $22 million in letters of credit, and $395 million of available capacity. Total assets were $3.875 billion and stockholders’ equity was $1.308 billion. The company paid $67.6 million in common dividends; the declared annualized 2014 dividend was $1.56 per share.
Material changes versus the prior period
- Higher utility earnings reflected rate and rider recoveries, customer growth, and colder weather. Gas Utilities’ heating degree days were 25% above 2012; the company noted that weather materially affects utility results.
- Reported 2013 earnings included a $30.2 million pre-tax non-cash gain on interest-rate swaps. They also included after-tax costs of $7.6 million for early redemption of $250 million of 9% notes and $6.6 million for settling swaps and writing off financing costs related to Black Hills Wyoming project debt. These items make year-over-year earnings less directly comparable.
- In November 2013, the company issued $525 million of 4.25% notes due 2023. Proceeds refinanced higher-cost debt, repaid project financing, settled swaps, and reduced revolving-credit borrowings. Management expects lower interest expense in 2014.
- Oil and Gas revenue fell to $54.9 million from $79.1 million, principally due to lower production following the 2012 sale of most Williston Basin assets and lower natural gas prices received. Production declined to 9.5 Bcfe from 12.5 Bcfe. Proved reserves increased to 86.7 Bcfe from 80.7 Bcfe.
- Coal Mining income rose to $6.3 million from $5.6 million as reduced overburden and operating costs offset lower revenue. Coal sales were 4.3 million tons, broadly level with 2012.
- Enserco, the Energy Marketing business, was sold in February 2012 and is reported as discontinued operations. The 2013 discontinued-operations loss was $0.9 million, including resolution of sale-related purchase-price adjustments.
Outlook, risks, contingencies, and unusual items
- Management forecast 2014 capital expenditures of approximately $449.3 million, including $250.7 million for Electric Utilities and $117.8 million for Oil and Gas. Cheyenne Prairie, a 132-MW gas-fired facility estimated to cost $222 million, was under construction and expected to enter commercial operation in the fourth quarter of 2014; approximately $156 million had been spent by year-end.
- Management estimated coal production of approximately 4.2 million tons in 2014. Oil and Gas plans emphasized evaluating Mancos shale assets and disciplined investment; spending and drilling depend on commodity prices and results.
- Black Hills reported investment-grade ratings and stated that operating cash flow, borrowing capacity, and access to debt markets should support operations, planned investment, debt service, and dividends. No specific earnings or EPS guidance was provided.
- Environmental regulation may require substantial compliance spending or plant changes. The EPA’s final Wyoming Regional Haze plan requires NOx controls at Wyodak within five years; the company estimated its share at $20 million and expected to litigate. Estimated environmental capital spending for 2014–2016 was $15.3 million, excluding plant closures and new generation.
- Thirty-five parties’ claims related to the 2012 Oil Creek fire totaled approximately $15 million, with additional claims possible. The company said a loss was reasonably possible but could not be estimated; management did not expect an adverse outcome to materially affect financial condition, results, or cash flows.
- The IRS challenged the company’s tax treatment of a like-kind exchange associated with earlier transactions. The company identified up to approximately $125 million of deferred tax as potentially accelerated, plus estimated interest of about $23 million before tax, while disputing the IRS position.
- Other notable risks include utility rate recovery and regulatory lag, weather, commodity prices, environmental compliance, operational interruptions, cyber and physical security, reserve-estimation uncertainty, and access to capital. The company reported effective internal control over financial reporting and received unqualified audit opinions.
Important facts for investors to verify
- How much of 2013’s earnings growth is recurring after separating swap mark-to-market gains, refinancing costs, weather effects, and rate adjustments.
- Cheyenne Prairie’s final cost, schedule, regulatory recovery, and contribution to earnings and cash flow after completion.
- The outcome and potential financial exposure from the IRS tax dispute and Oil Creek fire claims.
- Whether projected capital spending, commodity prices, reserve additions, and production support the company’s liquidity and dividend policy.
- Progress and final cost of Wyodak emissions controls, and any additional obligations arising from environmental rules or plant retirements.