Black Hills Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; filed August 6, 2010. Black Hills is a diversified U.S. energy company with regulated electric and gas utilities and non-regulated oil and gas, power generation, coal mining, and energy marketing businesses. Results are seasonal, particularly for gas utilities.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $271.3 million | $257.3 million | $713.6 million | $695.3 million |
| Operating income | $30.8 million | $25.8 million | $100.5 million | $59.3 million |
| Operating margin | 11.4% | 10.0% | 14.1% | 8.5% |
| Net income (loss) | $(8.7) million | $24.6 million | $22.8 million | $51.0 million |
| Diluted EPS | $(0.22) | $0.64 | $0.58 | $1.32 |
| Dividends per share | $0.360 | $0.355 | $0.720 | $0.710 |
- Cash flow: Six-month operating cash flow was $144.0 million, down from $246.2 million. Capital spending was $171.1 million; investing cash outflow was $163.0 million. Cash declined by $48.9 million to $64.0 million.
- Balance sheet and debt: June 30 assets were $3.37 billion and stockholders’ equity was $1.08 billion. Notes payable were $225.0 million and long-term debt, including current maturities, totaled $994.7 million. Reported long-term debt ratio was 47.8%, total debt leverage ratio 53.0%, and recourse leverage ratio 54.6%.
- Liquidity: The $500 million revolving facility had $225.0 million borrowed, $36.5 million in letters of credit, and about $238.5 million available. The company reported covenant compliance and $246.1 million of net-worth covenant headroom. Enserco had no cash borrowings but $141.4 million of letters of credit outstanding under its $250 million facility.
Material changes and drivers
- Q2 net loss principally reflected a $24.9 million pre-tax non-cash unrealized loss on de-designated interest-rate swaps; the comparable 2009 quarter included a $31.7 million gain. Six-month results included an $18.2 million after-tax swap loss versus a $30.2 million after-tax gain in 2009.
- For the first half, Utilities Group income rose to $35.7 million from $31.6 million, and Non-regulated Energy returned to $11.2 million income from a $3.7 million loss. Corporate results swung to a $24.1 million loss from $22.3 million income, primarily due to swap mark-to-market changes.
- Comparisons also reflect significant 2009 items: a $43.3 million pre-tax oil-and-gas impairment, a $26.0 million pre-tax gain on the sale of a Wygen I interest, and $0.8 million of discontinued-operations income. In 2010, Nebraska Gas recorded a $2.7 million pre-tax asset-sale gain.
- Wygen III began commercial operation April 1, 2010. In June, Enserco acquired a coal-marketing business for $2.25 million; its newly acquired positions produced substantial unrealized coal-marketing margin in June.
Outlook, risks, and unusual items
- Management planned approximately $477.4 million of 2010 capital expenditures, including two gas-fired generation projects expected to cost $250–$260 million for Colorado Electric and $240–$265 million for Power Generation, with completion targeted by the end of 2011. Funding was expected from operating cash flow, credit facilities, and long-term financing; management also contemplated possible equity issuance and targeted debt-to-capitalization of 50%–55%.
- After quarter-end, the company issued $200 million of 5.875% senior notes due 2020, using proceeds to reduce revolver borrowings and letters of credit. It also sold a 23% Wygen III interest for $62 million, with an estimated $5–$6 million gain.
- Regulatory developments included final Black Hills Power rate increases in South Dakota ($15.2 million annually, effective retroactively from April 1) and Wyoming ($3.1 million annually, effective June 1); Colorado Electric’s $17.9 million annual increase was approved after quarter-end. Interim gas utility rate increases remained subject to refund where applicable.
- The $250 million de-designated swaps had a $66.7 million liability at quarter-end and mandatory early termination dates in December 2010 unless extended; absent extension, cash settlement at fair value would be required. The filing notes that swap valuation changes can materially affect reported earnings.
- Risks include energy commodity, interest-rate, foreign-exchange and counterparty exposure; seasonal demand; financing access and covenant compliance; cost and timely completion of generation projects; potential future oil-and-gas impairments; and regulatory or climate/emissions changes. New derivatives rules under Dodd-Frank could increase collateral needs and pressure liquidity. Enserco’s coal-volume covenant breach at quarter-end was waived in July, with revised permitted limits.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. The filing describes ordinary-course legal proceedings and says actual costs could exceed recorded estimates, potentially materially.
Key facts for investors to verify
- How much of reported earnings volatility and future cash settlement exposure remains tied to the de-designated interest-rate swaps and their December 2010 termination dates.
- Whether planned generation projects remain on schedule and within the stated budgets, and how their funding affects leverage and any potential equity issuance.
- Actual cash generation and working-capital trends, given the year-over-year decline in operating cash flow and substantial capital spending.
- Final outcomes and refund obligations for pending or interim utility rate cases, including the post-quarter rate approvals.
- Enserco’s compliance with amended coal-volume covenant limits and the liquidity or collateral impact of derivatives regulation and counterparty requirements.