Black Hills Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Black Hills operates regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas businesses. Energy Marketing was sold in February 2012 and is reported as discontinued operations.
Financial results and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $246.8 million | $249.5 million | $855.0 million | $911.0 million |
| Operating income | $77.8 million | $39.6 million | $168.4 million | $134.1 million |
| Income from continuing operations | $34.6 million | Loss of $11.2 million | $57.6 million | $21.6 million |
| Net income (loss) | $34.5 million | Loss of $10.5 million | $50.8 million | $24.1 million |
| Diluted EPS | $0.78 | Loss of $0.27 | $1.15 | $0.61 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $269.7 million | $206.5 million |
- Reported operating margin was approximately 31.5% in Q3 and 19.7% year to date, versus 15.9% and 14.7%, respectively, in 2011. The 2012 figures include the Williston Basin asset-sale gain.
- Continuing-operations operating cash flow was $248.5 million for the first nine months, compared with $193.2 million in 2011. Property, plant and equipment additions were $261.4 million; total cash flow also benefited from asset-sale proceeds.
- Cash and cash equivalents were $247.2 million at September 30, versus $21.6 million at December 31, 2011. Current assets were $570.9 million and current liabilities $898.9 million.
- Balance-sheet debt was approximately $1.50 billion: $225.0 million notes payable, $328.3 million current maturities of long-term debt, and $943.0 million long-term debt. Long-term debt’s disclosed fair value was $1.47 billion.
- The $500 million revolving facility had $75 million drawn and $36.3 million in letters of credit, leaving about $389 million available. The company reported covenant compliance; its recourse leverage ratio was 56.3%, below the 65% limit.
- Dividends paid were $1.11 per share year to date. A $0.37-per-share quarterly dividend was declared for payment December 1, 2012.
Changes versus the prior comparable periods
- Q3 revenue declined 1.1%; nine-month revenue declined 6.1%. Utility revenue fell, principally reflecting lower gas revenue and volumes, while non-regulated energy revenue increased.
- Q3 continuing results improved by $45.8 million, from a loss to income. The 2011 quarter included a $24.9 million after-tax non-cash interest-rate-swap mark-to-market loss; Q3 2012 included a $17.7 million after-tax Williston sale gain and a $0.4 million after-tax swap mark-to-market gain.
- Nine-month continuing income increased $36.0 million. The comparison reflects lower swap mark-to-market losses than in 2011 and the Williston gain, partly offset by a $17.3 million after-tax oil-and-gas ceiling-test impairment, a $1.9 million after-tax swap loss, and a $1.0 million after-tax financing-cost write-off.
- Gas Utilities’ nine-month income fell to $16.4 million from $24.3 million; management cited milder weather, including heating degree days 21% below normal. Electric Utilities’ income rose to $37.5 million from $34.7 million, supported by rate adjustments, including returns on new capital investment.
- Power Generation’s nine-month income increased to $16.0 million from $2.1 million following the start of the new Pueblo generating facility. Coal Mining returned to income of $3.9 million from a $1.1 million loss, while lower sales volumes reflected expiration of an unprofitable train-load-out contract.
Outlook, commentary, risks and unusual items
- Management forecast capital expenditures of $349.3 million in 2012, $460.9 million in 2013, and $375.4 million in 2014, subject to project timing, regulatory approvals, commodity economics, permits, and other factors. The company expected available cash, operating cash flow, and credit capacity to cover working capital and maintenance needs.
- Management intends to maintain debt-to-capitalization of 50%–55%, though capital projects may cause temporary deviations. At September 30, term loans of $250 million were due in 2013 and $250 million of debt was due in 2014. On October 31, the company redeemed $225 million of 6.5% notes for $238.8 million, including accrued interest and a make-whole payment.
- The company sold 85% of its Williston Basin assets for net proceeds of approximately $226.6 million and recorded a $27.3 million pre-tax gain. The filing says the gain depended on allocating capitalized costs based on relative fair values; an alternative allocation method could have produced a substantially different gain.
- A $26.9 million pre-tax non-cash oil-and-gas impairment was recorded in Q2 amid low commodity prices. Management warned that future commodity-price changes could trigger additional ceiling-test impairments.
- Colorado Gas’s proposed rate settlement, including a $0.2 million annual revenue increase, was awaiting a decision expected in Q1 2013. The Cheyenne Prairie generating station received permits and approval; construction was expected to begin in spring 2013, with estimated total project cost of $237 million.
- Older generating units face suspensions or planned retirements in 2012–2014, in part due to environmental requirements. Colorado Electric was directed to refile its resource plan by January 18, 2013, addressing replacement capacity and specified plant retirements.
- The Enserco buyer sought $7.2 million in purchase-price adjustments; Black Hills disputed the request and accrued an estimated $1.4 million. Dispute resolution may be required.
- The company disclosed that its disclosure controls were not effective at September 30 because of a material weakness in income-tax accounting controls. Management described remediation steps and stated that additional review supported the fairness of the filed financial statements.
- Key risks include weather and seasonal demand, commodity and interest-rate volatility, counterparty performance, access to financing and covenant compliance, regulatory decisions, environmental requirements, and execution and cost of planned capital projects. The filing gave no earnings guidance.
Important facts for investors to verify
- How much of reported earnings growth is recurring, given the Williston sale gain, impairment, swap valuation changes, and discontinued-operation costs?
- What is the final Enserco purchase-price adjustment, and how will the dispute be resolved?
- What financing will be used for 2013–2014 maturities and the stated capital program, and what will be the effect of redeeming the 6.5% notes?
- Will the tax-accounting control weakness be remediated, and when will management conclude disclosure controls are effective?
- How will weather, utility rate decisions, plant retirements, environmental compliance, and oil and gas prices affect future margins, capital needs, and impairment risk?