Black Hills Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparison is Q1 2012 unless noted. Black Hills operates regulated electric and gas utilities and non-regulated power generation, coal mining, and oil and gas businesses. Enserco, sold in February 2012, is reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $380.7 million | $365.9 million |
| Operating income | $79.8 million | $70.0 million |
| Income from continuing operations | $43.2 million; $0.97 diluted EPS | $35.3 million; $0.80 diluted EPS |
| Net income available to common shareholders | $43.2 million | $29.8 million, including $5.5 million after-tax discontinued-operations loss |
| Operating cash flow | $109.2 million | $96.1 million |
| Capital expenditures | $63.9 million | $67.7 million |
| Dividends per share | $0.38 | $0.37 |
- Revenue rose 4.1% and operating income rose 14.0%. Calculated operating margin was 21.0%, versus 19.1%; continuing-operations net margin was 11.3%, versus 9.6%.
- Cash used in investing was $62.9 million, compared with $41.5 million of cash provided in Q1 2012, which included $108.8 million of Enserco sale proceeds. Cash used in financing was $49.4 million, versus $140.2 million in Q1 2012.
- At March 31, 2013, cash and cash equivalents were $12.4 million; restricted cash was $6.8 million. Current assets were $343.7 million and current liabilities $681.6 million.
- Debt comprised $245.0 million of notes payable, $104.6 million of current long-term debt, and $936.5 million of long-term debt, totaling approximately $1.286 billion. The $500 million revolving facility had $95.0 million drawn and $36.5 million of letters of credit, leaving $368.5 million available. The $150 million term loan was due June 2013.
- Debt covenants were met: recourse leverage was 52.2% against a 65% maximum; consolidated net worth was $1.261 billion against a $946.5 million minimum.
Material changes and operating drivers
- Utilities income increased to $30.8 million from $24.0 million. Utility results benefited from colder weather: heating degree days were 30% above Q1 2012 and 6% above normal. Gas Utilities income rose to $18.5 million from $15.2 million; Electric Utilities income rose to $12.4 million from $8.7 million.
- Non-regulated Energy income fell to $6.7 million from $7.9 million. Power Generation income declined to $5.6 million from $6.9 million; Coal Mining income was $1.1 million versus $1.0 million; Oil and Gas recorded a $0.1 million loss versus near break-even income.
- Oil and Gas sales volumes fell 27%, primarily following the 2012 Williston Basin asset sale and natural production declines. Crude oil average realized price, net of hedges, increased 15%; natural gas price declined 18%.
- Consolidated interest expense decreased approximately $6.2 million, primarily due to debt repaid in 2012. Q1 2013 continuing income included a $4.8 million after-tax non-cash unrealized interest-rate-swap gain, compared with a $7.8 million gain in Q1 2012.
Outlook, risks, and unusual items
- No consolidated earnings guidance is provided in the supplied filing text. Management stated that cash on hand, operating cash flows, borrowing capacity, and access to financing were expected to fund operations, debt maturities, dividends, and planned capital spending.
- Planned 2013 capital expenditures were $460.1 million; estimates were $390.1 million for 2014 and $292.9 million for 2015. These estimates may change, including with potential acquisitions or other growth opportunities.
- The 132-MW Cheyenne Prairie gas-fired facility was expected to cost approximately $222 million plus up to $15 million in financing costs, with completion expected by September 30, 2014. The project had spent $52.7 million through March 31 and was reported on schedule.
- Management planned to consider extending $150 million and $100 million term loans, evaluating early refinancing of $250 million of 9% senior unsecured bonds due May 2014, and assessing long-term financing for Cheyenne Prairie.
- Interest-rate swaps create earnings and liquidity exposure. The $250 million notional de-designated swaps had an $80.7 million mark-to-market liability; their unrealized fair-value changes affect earnings. Management noted a one-basis-point rate-curve move divided by swap term could affect pre-tax earnings by approximately $0.3 million. Early termination dates fell in December 2013; absent extensions, cash settlement would be required.
- Thirty-four landowners sued over the 2012 Oil Creek fire, seeking actual and exemplary damages in an unspecified amount; an earlier state and landowner claim was approximately $8.0 million. The company said a loss was reasonably possible, but it could not estimate the amount while its investigation continued. Management believed an adverse outcome would not materially affect results or financial condition.
- The buyer of Enserco sought a court order compelling arbitration over disputed sale-related claims. Black Hills asked the court to deny the petition; the filing said this did not change its evaluation of the original claim.
- Additional risks include utility seasonality, commodity and interest-rate movements, regulatory approvals, capital-market access, and restrictions on subsidiary distributions. Restricted net assets at the utilities were approximately $205.9 million. The company reported no material change in its previously disclosed risk factors.
Investor verification points
- Assess how much of the earnings increase reflects colder weather and the non-cash swap gain, and how sustainable utility earnings are outside the winter season.
- Verify the June 2013 term-loan maturity, planned debt refinancing, and the funding plan for Cheyenne Prairie and 2013 capital expenditures.
- Track interest-rate swap termination or extension decisions, potential cash settlements, and the effects of further fair-value changes.
- Monitor the Oil Creek fire investigation and litigation, and the outcome of the Enserco arbitration petition.
- Check progress and regulatory decisions on rate cases, construction-financing riders, and planned generation changes; interim rates were subject to refund.
- Note that the board declared a $0.38-per-share dividend payable June 1, 2013; future dividends remain subject to financial condition, financing covenants, and subsidiary distribution restrictions.