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BKH > SEC Filings for BKH > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for BLACK HILLS CORP /SD/

Form 10-Q for BLACK HILLS CORP /SD/


6-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We are a growth-oriented, vertically-integrated energy company operating principally in the United States with two major business groups - Utilities and Non-regulated Energy. We report our business groups in the following financial segments:

Business Group       Financial Segment

Utilities            Electric Utilities
                     Gas Utilities

Non-regulated Energy Power Generation
Coal Mining
Oil and Gas

Our Utilities Group consists of our Electric and Gas Utilities segments. Our Electric Utilities segment generates, transmits and distributes electricity to approximately 203,500 customers in South Dakota, Wyoming, Colorado and Montana; and also distributes natural gas to approximately 35,500 Cheyenne Light customers in Wyoming. Our Gas Utilities serve approximately 538,000 natural gas customers in Colorado, Iowa, Kansas and Nebraska. Our Non-regulated Energy Group consists of our Power Generation, Coal Mining and Oil and Gas segments. Our Power Generation segment produces electric power from our generating plants and sells the electric capacity and energy principally to our utilities under long-term contracts. Our Coal Mining segment produces coal at our coal mine near Gillette, Wyoming and sells the coal primarily to on-site, mine-mouth power generation facilities. Our Oil and Gas segment engages in exploration, development and production of crude oil and natural gas, primarily in the Rocky Mountain region.

Certain industries in which we operate are highly seasonal, and revenue from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Demand for electricity and natural gas is sensitive to seasonal cooling, heating and industrial load requirements, as well as changes in market prices. In particular, the normal peak usage season for electric utilities is June through August while the normal peak usage season for gas utilities is November through March. Significant earnings variances can be expected between the Gas Utilities segment's peak and off-peak seasons. Due to this seasonal nature, our results of operations for the three and six months ended June 30, 2014 and 2013, and our financial condition as of June 30, 2014, December 31, 2013 and June 30, 2013, are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period or for the entire year.
See Forward-Looking Information in the Liquidity and Capital Resources section of this Item 2, beginning on Page 59 .

The following business group and segment information does not include inter-company eliminations. Minor differences in amounts may result due to rounding. All amounts are presented on a pre-tax basis unless otherwise indicated.


Results of Operations

Executive Summary, Significant Events and Overview

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013. Net income (loss) for the three months ended June 30, 2014 was $20 million, or $0.44 per share, compared to Net income (loss) of $31 million, or $0.69 per share, reported for the same period in 2013.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013. Net income (loss) for the six months ended June 30, 2014 was $68 million, or $1.52 per share, compared to Net income (loss) of $74 million, or $1.66 per share, reported for the same period in 2013.

The following table summarizes select financial results by operating segment and details significant items (in thousands):

                                Three Months Ended June 30,          Six Months Ended June 30,
                               2014        2013      Variance      2014        2013      Variance
Revenue
Utilities                   $ 264,383   $ 263,868   $     515   $ 705,822   $ 626,310   $  79,512
Non-regulated Energy           51,779      46,257       5,522     104,475      95,544       8,931
Inter-company eliminations    (32,925 )   (30,299 )    (2,626 )   (66,891 )   (61,357 )    (5,534 )
                            $ 283,237   $ 279,826   $   3,411   $ 743,406   $ 660,497   $  82,909

Net income (loss)
Electric Utilities          $  11,427   $  10,610   $     817   $  26,002   $  22,966   $   3,036
Gas Utilities                   1,994       3,192      (1,198 )    26,692      21,675       5,017
Utilities                      13,421      13,802        (381 )    52,694      44,641       8,053

Power Generation                7,194       5,031       2,163      15,267      10,675       4,592
Coal Mining                     2,016       1,973          43       4,480       3,038       1,442
Oil and Gas                    (1,660 )    (1,964 )       304      (3,682 )    (2,017 )    (1,665 )
Non-regulated Energy            7,550       5,040       2,510      16,065      11,696       4,369

Corporate activities and
eliminations (a)               (1,151 )    11,676     (12,827 )      (821 )    17,378     (18,199 )

Net income (loss)           $  19,820   $  30,518   $ (10,698 ) $  67,938   $  73,715   $  (5,777 )


__________


(a) Corporate activities for the three and six months ended June 30, 2013 include a $12 million and a $17 million net after-tax non-cash mark-to-market gain on certain interest rate swaps. These same interest rate swaps were settled in November 2013.


Overview of Business Segments and Corporate Activity

Utilities Group

Gas Utilities experienced milder weather during the three months ended June 30, 2014 resulting in a 16% decrease in heating degree days compared to the same period in 2013. Year-to-date results were favorably impacted by colder weather during the first quarter of 2014. Heating degree days were 2% higher for the six months ended June 30, 2014, compared to the same period in 2013. Heating degree days for the three and six months ended June 30, 2014 were 5% and 12% higher than normal, respectively, compared to 24% and 9% higher than normal for the same periods in 2013.

Construction continued on Cheyenne Prairie, a natural gas-fired electric generating facility to serve Cheyenne Light and Black Hills Power customers. The 132 MW generation project is expected to cost approximately $222 million, exclusive of construction financing costs which are being recovered through construction financing riders. The Electric Utilities recorded additional gross margins of approximately $3.7 million and $7.8 million, respectively, for the three and six months ended June 30, 2014, related to these riders. To date, we have expended approximately $196 million. The project is expected to be completed at or less than budget and is on schedule to be placed into service in October 2014.

On July 31, 2014, the WPSC approved rate case settlement agreements authorizing an increase for Cheyenne Light of $8.4 million and $0.8 million for annual electric and natural gas revenue, respectively, effective October 1, 2014. The settlement also included a return on equity of 9.9%, and a capital structure of 54% equity and 46% debt.

On July 22, 2014, Black Hills Power filed a CPCN with the WPSC to construct the Wyoming portion of a $54 million, 230-kV, 144 mile-long transmission line that would connect the Teckla Substation in northeast Wyoming, to the Lange Substation near Rapid City, South Dakota. On June 30, 2014, Black Hills Power filed an application with the SDPUC, for a permit to construct the South Dakota portion of this line. Approval by the WPSC and SDPUC is anticipated in the fourth quarter of 2014.

On June 30, 2014, Black Hills Power and Cheyenne Light entered into agreements to issue $160 million of first mortgage bonds to finance Cheyenne Prairie. Black Hills Power will issue $85 million of 4.43% coupon first mortgage bonds due October 20, 2044, and Cheyenne Light will issue $75 million of 4.53% coupon first mortgage bonds due October 20, 2044. The closing for the sale of the first mortgage bonds for both utilities is anticipated to be October 1, 2014, subject to satisfaction of customary closing conditions.

On May 5, 2014, Colorado Electric issued an all-source generation request for approximately 42 MW of summer seasonal firm capacity in 2017, 2018, and 2019, and up to 60 MW of eligible renewable energy resources to serve its customers in southern Colorado. Colorado IPP submitted solar and wind bids in response to this request. Proposed bids were due by July 31, 2014, and pending Colorado Electric's review of the bids and other regulatory proceedings, a CPUC decision on Colorado Electric's portfolio of generation resources is expected by the end of February 2015.

On April 30, 2014, Colorado Electric filed a rate request with the CPUC for an annual revenue increase of $8.0 million to recover operating expenses and infrastructure investments, including those for the Busch Ranch Wind Farm. Colorado Electric seeks approval of a new rider pursuant to the Clean Air-Clean Jobs Act Adjustment, to recover a return on the expenditures associated with the construction of a $65 million natural gas-fired combustion turbine unit, previously approved by the CPUC to replace the W.N. Clark retirement. The filing seeks a return on equity of 10.3% and a capital structure of approximately 50.5% equity and 49.5% debt. A subsequent filing on June 27, 2014 reduced our request to $7.2 million to reflect updated cost information.

On April 29, 2014, Kansas Gas filed a rate request with the KCC to increase annual revenue by $7.3 million primarily to recover infrastructure and increased operating costs. The filing seeks a return on equity of 10.6%, and a capital structure of approximately 50.3% equity and 49.7% debt.

On April 25, 2014 Cheyenne Light received FERC approval to establish rates for transmission services under their Open Access Transmission Tariff, effective May 3, 2014. The approval includes a return on equity of 10.6% and a capital structure of 54% equity and 46% debt.

On March 31, 2014, Black Hills Power filed a rate request with the SDPUC to increase annual revenue by $14.6 million to recover operating expenses and infrastructure investments, primarily for Cheyenne Prairie. The filing seeks a return on equity of 10.25%, and a capital structure of approximately 53.3% equity and 46.7% debt.


On March 21, 2014, Black Hills Power retired the Ben French, Neil Simpson I, and Osage coal-fired power plants. These three plants totaling 81 MW were closed because of federal environmental regulations. These plants will largely be replaced by Black Hills Power's share of Cheyenne Prairie.

On February 25, 2014, the CPUC issued a final order after rehearing, approving a CPCN for the retirement of Pueblo Unit #5 and #6, effective December 31, 2013.

On January 17, 2014, Black Hills Power filed a rate request with the WPSC for an annual revenue increase of $2.8 million to recover investments made in electric infrastructure, primarily for Cheyenne Prairie. The filing seeks a return on equity of 10.25% and a capital structure of approximately 53.3% equity and 46.7% debt.

Our Utilities Group continued its efforts to acquire small municipal gas distribution systems adjacent to our existing service territories. During the first quarter of 2014, we acquired an additional gas system, adding approximately 70 customers, and we announced the pending acquisition of assets serving approximately 400 customers.

Non-regulated Energy Group

Oil and Gas production volumes increased 15% and 5%, respectively, for the three and six months ended June 30, 2014. The average hedged price received increased for natural gas by 35% and 24% and decreased for oil by 18% and 8%, respectively for the three and six months ended June 30, 2014 compared to the same periods in 2013.

On July 14, 2014, Black Hills Wyoming received FERC approval for the sale of its 40 MW CTII natural gas-fired unit to the City of Gillette, Wyoming for approximately $22 million. The sale is expected to close on August 31, 2014 upon expiration of the PPA with Cheyenne Light.

Drilling commenced in June 2014 in the southern Piceance Basin on two of the six horizontal Mancos Shale wells planned for 2014.

Production continued from the two horizontal Mancos Shale wells placed on production during the first quarter of 2014. On March 6, 2014, the Summit Midstream cryogenic gas processing plant with a capacity of 20,000 Mcf per day started serving the company's gas production in the southern Piceance Basin, including the two Mancos Shale wells placed on production during the first quarter.

Corporate Activities

On June 13, 2014, Fitch upgraded the BHC credit rating to BBB+ with a stable outlook.

On May 29, 2014, we amended our $500 million corporate Revolving Credit Facility agreement to extend the term through May 29, 2019. This facility is substantially similar to the former agreement, which includes an accordion feature that allows us, with the consent of the administrative agent and issuing agents, to increase the capacity of the facility to $750 million. Borrowings continue to be available under a base rate or various Eurodollar rate options for which the borrowing rates were reduced under the amended agreement.

On January 30, 2014, Moody's upgraded our corporate credit rating to Baa1 from Baa2 with continued stable outlook.

Consolidated interest expense decreased by approximately $5.5 million and $11 million for the three and six months ended June 30, 2014, respectively, compared to the three and six months ended June 30, 2013, due primarily to the refinancing activities occurring during the fourth quarter of 2013.

Operating Results

A discussion of operating results from our segments and Corporate activities follows.


Utilities Group

We report two segments within the Utilities Group: Electric Utilities and Gas Utilities. The Electric Utilities segment includes the electric operations of Black Hills Power, Colorado Electric and the electric and natural gas operations of Cheyenne Light. The Gas Utilities segment includes the regulated natural gas utility operations of Black Hills Energy in Colorado, Iowa, Kansas and Nebraska.

Non-GAAP Financial Measure
The following discussion includes financial information prepared in accordance with GAAP, as well as another financial measure, gross margin, that is considered a "non-GAAP financial measure." Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Gross margin (revenue less cost of sales) is a non-GAAP financial measure due to the exclusion of depreciation from the measure. The presentation of gross margin is intended to supplement investors' understanding of our operating performance.

Gross margin for our Electric Utilities is calculated as operating revenue less cost of fuel, purchased power and cost of natural gas sold. Gross margin for our Gas Utilities is calculated as operating revenues less cost of natural gas sold. Our gross margin is impacted by the fluctuations in power purchases and natural gas and other fuel supply costs. However, while these fluctuating costs impact gross margin as a percentage of revenue, they only impact total gross margin if the costs cannot be passed through to our customers.

Our gross margin measure may not be comparable to other companies' gross margin measure. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.

Electric Utilities
                                      Three Months Ended June 30,          Six Months Ended June 30,
                                     2014         2013      Variance      2014        2013      Variance
                                                              (in thousands)
Revenue - electric               $   154,544   $ 151,775   $   2,769   $ 322,909   $ 302,148   $ 20,761
Revenue - gas                          7,340       6,257       1,083      21,077      18,514      2,563
Total revenue                        161,884     158,032       3,852     343,986     320,662     23,324

Fuel, purchased power and cost
of gas - electric                     69,723      67,349       2,374     148,142     133,038     15,104
Purchased gas - gas                    4,051       2,515       1,536      12,325       8,953      3,372
Total fuel, purchased power and
cost of gas                           73,774      69,864       3,910     160,467     141,991     18,476

Gross margin - electric               84,821      84,426         395     174,767     169,110      5,657
Gross margin - gas                     3,289       3,742        (453 )     8,752       9,561       (809 )
Total gross margin                    88,110      88,168         (58 )   183,519     178,671      4,848

Operations and maintenance            40,272      39,383         889      82,872      78,218      4,654
Depreciation and amortization         19,274      19,665        (391 )    38,361      38,826       (465 )
Total operating expenses              59,546      59,048         498     121,233     117,044      4,189

Operating income                      28,564      29,120        (556 )    62,286      61,627        659

Interest expense, net                (11,829 )   (13,810 )     1,981     (23,841 )   (28,207 )    4,366
Other income (expense), net              352         173         179         608         458        150
Income tax benefit (expense)          (5,660 )    (4,873 )      (787 )   (13,051 )   (10,912 )   (2,139 )
Net income (loss)                $    11,427   $  10,610   $     817   $  26,002   $  22,966   $  3,036


                                    Three Months Ended June 30,         Six Months Ended June 30,
Revenue - Electric (in
thousands)                             2014              2013              2014             2013
Residential:
Black Hills Power                $        14,332     $    13,535     $       34,392     $    29,977
Cheyenne Light                             8,167           8,307             17,840          17,637
Colorado Electric                         21,316          21,829             45,995          45,950
Total Residential                         43,815          43,671             98,227          93,564

Commercial:
Black Hills Power                         21,200          18,913             42,728          36,397
Cheyenne Light                            15,238          14,476             29,631          27,243
Colorado Electric                         23,101          21,663             44,991          42,814
Total Commercial                          59,539          55,052            117,350         106,454

Industrial:
Black Hills Power                          7,534           7,210             14,869          13,220
Cheyenne Light                             7,304           5,344             14,528          10,199
Colorado Electric                          9,535           9,647             18,573          19,284
Total Industrial                          24,373          22,201             47,970          42,703

Municipal:
Black Hills Power                            846             847              1,638           1,561
Cheyenne Light                               514             490                968             948
Colorado Electric                          3,277           3,492              6,584           6,039
Total Municipal                            4,637           4,829              9,190           8,548

Total Retail Revenue - Electric          132,364         125,753            272,737         251,269

Contract Wholesale:
Total Contract Wholesale - Black
Hills Power                                4,473           4,926             10,071          10,693

Off-system Wholesale:
Black Hills Power                          5,411           7,849             14,486          14,099
Cheyenne Light                             1,787           2,094              4,174           4,776
Colorado Electric                          1,912           2,133              3,995           3,240
Total Off-system Wholesale                 9,110          12,076             22,655          22,115

Other Revenue:
Black Hills Power                          6,945           7,552             13,823          14,702
Cheyenne Light                               534             482              1,287           1,048
Colorado Electric                          1,118             986              2,336           2,321
Total Other Revenue                        8,597           9,020             17,446          18,071

Total Revenue - Electric         $       154,544     $   151,775     $      322,909     $   302,148


                                     Three Months Ended             Six Months Ended
                                          June 30,                      June 30,
Quantities Generated and
Purchased (in MWh)                   2014           2013           2014           2013
Generated -
Coal-fired:
Black Hills Power (a)               336,842        450,097        754,090        877,112
Cheyenne Light                      162,847        155,384        332,636        327,696
Colorado Electric                         -              -              -              -
Total Coal-fired                    499,689        605,481      1,086,726      1,204,808

Natural Gas and Oil:
Black Hills Power                     2,665          4,558          4,972          7,678
Cheyenne Light                            -              -              -              -
Colorado Electric (b)                40,599        107,535         58,668        138,589
Total Natural Gas and Oil            43,264        112,093         63,640        146,267

Wind:
Colorado Electric                    13,230         11,834         27,558         23,007
Total Wind                           13,230         11,834         27,558         23,007

Total Generated:
Black Hills Power                   339,507        454,655        759,062        884,790
Cheyenne Light                      162,847        155,384        332,636        327,696
Colorado Electric                    53,829        119,369         86,226        161,596
Total Generated                     556,183        729,408      1,177,924      1,374,082

Purchased -
Black Hills Power                   365,463        349,183        796,265        737,382
Cheyenne Light                      197,225        205,027        404,543        406,872
Colorado Electric (b)               467,197        412,037        937,299        867,175
Total Purchased                   1,029,885        966,247      2,138,107      2,011,429

Total Generated and Purchased:
Black Hills Power                   704,970        803,838      1,555,327      1,622,172
Cheyenne Light                      360,072        360,411        737,179        734,568
Colorado Electric                   521,026        531,406      1,023,525      1,028,771
Total Generated and Purchased     1,586,068      1,695,655      3,316,031      3,385,511


__________


(a) Decrease reflects the retirement of Neil Simpson I on March 21, 2014.

(b) Decrease reflects a current year unplanned outage due to a turbine bearing replacement and combustor upgrade at Pueblo Airport Generation Station, and utilization of Pueblo Airport Generating Station Units #1 and #2 in place of purchased power from Colorado IPP during the six months ended June 30 2013.


                                    Three Months Ended June 30,     Six Months Ended June 30,
Quantity (in MWh)                        2014           2013            2014           2013
Residential:
Black Hills Power                         107,394      113,525           278,704      274,495
Cheyenne Light                             57,328       60,669           127,983      136,125
Colorado Electric                         132,256      140,755           285,887      296,191
Total Residential                         296,978      314,949           692,574      706,811

Commercial:
Black Hills Power                         176,541      174,763           360,989      350,380
Cheyenne Light                            129,688      132,214           256,100      261,643
Colorado Electric                         174,239      180,340           332,418      351,045
Total Commercial                          480,468      487,317           949,507      963,068

Industrial:
Black Hills Power                         104,914      105,856           205,765      197,488
Cheyenne Light                             94,861       65,716           185,586      135,668
Colorado Electric                         111,090       92,867           201,207      171,416
Total Industrial                          310,865      264,439           592,558      504,572

Municipal:
Black Hills Power                           7,709        8,147            15,394       15,930
Cheyenne Light                              2,131        2,143             4,624        4,738
Colorado Electric                          31,385       29,049            58,073       47,095
Total Municipal                            41,225       39,339            78,091       67,763

Total Retail Quantity Sold              1,129,536    1,106,044         2,312,730    2,242,214

Contract Wholesale:
Total Contract Wholesale - Black
Hills Power                                71,999       77,653           167,227      181,437

Off-system Wholesale:
Black Hills Power                         169,498      277,840           424,294      516,287
Cheyenne Light                             42,250       61,514            94,606      131,822
Colorado Electric                          50,178       38,238            80,924       70,015
Total Off-system Wholesale                261,926      377,592           599,824      718,124

Total Quantity Sold:
Black Hills Power                         638,055      757,784         1,452,373    1,536,017
Cheyenne Light                            326,258      322,256           668,899      669,996
Colorado Electric                         499,148      481,249           958,509      935,762
Total Quantity Sold                     1,463,461    1,561,289         3,079,781    3,141,775

Other Uses, Losses or Generation,
net (a):
Black Hills Power                          66,915       46,054           102,954       86,155
Cheyenne Light                             33,814       38,155            68,280       64,572
Colorado Electric                          21,878       50,157            65,016       93,009
Total Other Uses, Losses and
Generation, net                           122,607      134,366           236,250      243,736

Total Energy                            1,586,068    1,695,655         3,316,031    3,385,511


__________


(a) Includes company uses, line losses, and excess exchange production.


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