Black Hills Announces Q3 Financial Results; Revises 2010 Guidance

Black Hills Corp. (NYSE: BKH) today announced third quarter 2010 financial results.

Adjusted income from continuing operations was $14.8 million or $0.38 per share, compared to $2.6 million or $0.07 per share for the same period in 2009 (this is a non-GAAP measure. See the accompanying schedule for the GAAP to non-GAAP adjustment reconciliation). On a GAAP basis, the company reported income from continuing operations and net income of $12.4 million or $0.32 per share for third quarter 2010, compared to a loss from continuing operations of $3.9 million or $0.10 per share, and net loss of $2.2 million or $0.06 per share for the same period in 2009.

For the nine months ended Sept. 30, 2010, adjusted income from continuing operations was $54.1 million or $1.39 per share, compared to $33.2 million or $0.85 per share for the same period in 2009 (this is a non-GAAP measure. See the accompanying schedule for the GAAP to non-GAAP adjustment reconciliation). On a GAAP basis, the company reported income from continuing operations and net income of $35.2 million or $0.90 per share for the nine months ended Sept. 30, 2010, compared to income from continuing operations of $46.4 million or $1.20 per share, and net income of $48.8 million or $1.26 per share for the same period in 2009.

"Financial results from operations were strong this quarter as a result of the implementation of new and interim utility rates in five jurisdictions and improvements in energy marketing. We continue to make significant progress on many of our strategic initiatives and are in the final stages of our integration projects that provide us a scalable and unified platform for growth," said David R. Emery, chairman, president and chief executive officer of Black Hills Corp. "We began full construction of our utility and IPP gas-fired generation projects in Colorado, completed a $200 million senior note offering, sold a 23 percent ownership interest in Wygen III and further diversified Enserco through the addition of power and environmental marketing. I am encouraged by our financial progress and very proud of our employees who continue to demonstrate a commitment to serving customers and operating efficiently."  

Black Hills Corp. highlights for third quarter 2010 and other recent events include:

Utilities

• On July 7, 2010, the South Dakota Public Utilities Commission approved a settlement agreement for an increase in annual utility revenue of $15.2 million for Black Hills Power. New rates were effective on April 1, 2010, for Black Hills Power South Dakota customers.
• On July 14, 2010, Black Hills Power sold a 23 percent ownership interest in its Wygen III power generation facility to the Consolidated Wyoming Municipalities Electric Power System Joint Powers Board for $62 million, resulting in a $4.1 million gain. The sale terminates the power purchase agreement with the City of Gillette and also initiates an operating cost sharing arrangement for the life of the plant.
• On July 22, 2010, Black Hills Energy – Colorado Electric and Black Hills Colorado IPP received an air permit from the State of Colorado Department of Public Health and Environment and immediately began construction on two gas-fired power generation facilities that will serve Black Hills Energy – Colorado Electric customers beginning Jan. 1, 2012.
  • The 180-megawatt regulated utility project and related transmission investments are expected to cost between $250 million and $260 million, with $130.7 million expended as of Sept. 30, 2010.
  • The 200-megawatt non-regulated IPP project will serve Black Hills Energy – Colorado Electric utility customers through a 20-year power purchase agreement and is expected to cost between $240 million and $265 million, with $104.9 million expended as of Sept. 30, 2010.
• On Aug. 5, 2010, the Colorado Public Utilities Commission approved a settlement agreement for an increase in annual utility revenue of $17.9 million for Black Hills Energy – Colorado Electric, based on a return on equity of 10.5 percent and a capital structure of 52 percent equity. New rates were effective on Aug. 6, 2010 for Black Hills Energy – Colorado Electric customers.
• On Aug. 10, 2010, the City of Pueblo announced the renewal of a 20-year franchise agreement with Black Hills Energy – Colorado Electric to operate and maintain electrical infrastructure facilities in city streets.
• On Aug. 18, 2010, the Nebraska Public Service Commission approved an increase in annual utility revenue of $8.3 million for Black Hills Energy – Nebraska Gas, based on a return on equity of 10.1 percent and a capital structure of 52 percent equity effective on Sept. 1, 2010, for Black Hills Energy – Nebraska Gas customers.
• On Sept. 1, 2010, Black Hills Energy – Iowa Gas filed a settlement agreement with the Iowa Utilities Board for a $3.4 million increase in annual revenues. The original rate request was filed for a $4.7 million annual increase in utility revenues on June 8, 2010, with the Iowa Utilities Board. Interim rates reflecting an annual utility revenue increase of $2.6 million were implemented on June 18, 2010, and will be adjusted after the IUB issues a final rate order.
• On Sept. 9, 2010, Black Hills Power announced suspension of operations at its 62-year-old, 34.5-megawatt coal-fired Osage Power Plant in Osage, Wyo., beginning Oct. 1, 2010. Osage will remain an asset in the generation portfolio, maintain all operating permits and has the ability to resume full operations if needed.
• During the quarter, the effective tax rate decreased primarily as a result of a $2.2 million tax benefit for a repairs deduction taken for tax purposes and the flow-through treatment of the associated tax benefit resulting from a rate case settlement. This decrease in the company's effective tax rate is partially offset by a lower tax benefit from AFUDC-equity, which decreased upon commercial operations of Wygen III.

Non-regulated Energy

• Late in the third quarter, Enserco, the company's energy marketing subsidiary, expanded its business lines to include power and environmental marketing. Risk tolerance and capital allocated to the segment are expected to remain the same.
• Enserco's $10.9 million unrealized gain included $3.2 million unrealized gain for margins on long-term coal deals executed during the quarter as well as gains on long coal positions resulting from market price increases. More than 85 percent of these long positions have recently been closed.

Corporate

• On July 16, 2010, a public offering of a $200 million aggregate principal amount of senior unsecured notes due July 15, 2020, was completed. The notes are priced at par and carry an interest rate of 5.875 percent.
• On Aug. 31, 2010, the company announced several leadership changes including the planned March 2011 retirement of Tom Ohlmacher, president and chief operating officer of the non-regulated energy business and the expansion of responsibility for Linn Evans, president and chief operating officer for the utility businesses, to include power generation and coal mining operations.
• For the third quarter of 2010, a non-cash unrealized loss related to certain interest rate swaps of $8.9 million after-tax was recognized.
• During the quarter, the company recorded a $2.4 million reduction in tax expense reflecting a re-measurement of a tax position in accordance with accounting for uncertain tax positions. Of this tax benefit, approximately $2.0 million was recorded in the corporate segment. The re-measurement was prompted by a settlement agreement with the IRS Appeals Division, and an associated cash refund of approximately $16 million is expected to be received later this year or early 2011.

Compared to the third quarter of 2009, GAAP income (loss) from continuing operations increased $16.2 million in the third quarter of 2010 reflecting the following:

Utilities - Third Quarter 2010

• $8.0 million increase in electric utility earnings
• $2.9 million increase in gas utility earnings

Non-regulated Energy - Third Quarter 2010

• $5.9 million increase in energy marketing earnings
• $1.0 million increase in oil and gas earnings
• Power generation earnings that were comparable to the prior year
• $0.6 million decrease in coal mining earnings

Corporate - Third Quarter 2010

• $1.0 million decrease in corporate earnings (third quarter 2010 included an $8.9 million net non-cash unrealized loss and third quarter 2009 included a $5.7 million net non-cash unrealized loss)

EARNINGS GUIDANCE

The previous 2010 adjusted income from continuing operations earnings guidance range of $1.80 to $2.05 is adjusted to $1.80 to $1.95. The main variation from the reaffirmed guidance provided on Aug. 5, 2010, primarily reflects the impact of lower natural gas prices on the company's energy marketing and oil and gas businesses. This revised estimate is also predicated on a number of considerations disclosed previously and includes the following updates:

• Increased capital expenditures in 2010 expected to be $512 million, compared to the previous $425 million to $475 million range. The accelerated spending will likely capture the tax benefits of bonus depreciation;
• Previously disclosed undesignated long-term debt hedges remain in place with no additional unrealized mark-to-market impacts;
• Total oil and natural gas production in range of 10.9 Bcfe to 11.3 Bcfe;
• Oil and gas average NYMEX prices for October 2010 through December 2010 of $3.80 per MMBtu for natural gas and $81.78 per Bbl for oil; production-weighted average well-head prices of $2.81 per Mcf and $71.86 per Bbl, all based on forward strips, and average hedged prices of $3.99 per Mcf and $58.47 per Bbl.
• Modest fourth quarter earnings from energy marketing.

In 2011, Black Hills expects earnings adjusted income from continuing operations to be in the range of $1.90 to $2.15 per share. This estimate is predicated on a number of considerations, including the following:

• Planned capital expenditures in 2011 estimated to be $430 million to $475 million; including oil and gas capital expenditures of $35 million to $45 million;
• Assumed equity financing in the range of $125 million to $150 million with an assumed mid-year 2011 issuance. The assumed offering is expected to provide sufficient equity financing for generation projects currently under construction in Colorado;
• Previously disclosed undesignated long-term debt hedges remain in place with no additional unrealized mark-to-market impacts;
• Normal operations and weather conditions within utility service territories impacting customer usage, off-system sales, construction, maintenance and/or capital investment projects;
• Increased earnings at our electric and gas utilities resulting from the implementation of 2010 rate orders and the successful completion of pending and potential rate requests;
• No significant unplanned outages at any of company's power generation facilities;
• Modest increase in energy marketing income as a result of additional margins from oil, coal, power and environmental marketing activities;
• Total oil and natural gas production in range of 11.0 Bcfe to 11.9 Bcfe;
• Oil and gas annual average NYMEX prices of $4.94 per MMBtu for natural gas and $85.77 per Bbl for oil; production-weighted average well-head prices of $3.90 per Mcf and $76.72 per Bbl, all based on forward strips, and average hedged prices of $4.54 per Mcf and $68.98 per Bbl; and
• No additional significant acquisitions or divestitures.

USE OF NON-GAAP FINANCIAL MEASURE

As noted in this news release, in addition to presenting its earnings information in conformity with Generally Accepted Accounting Principles, the company has provided non-GAAP earnings data reflecting adjustments for special items as specified in the GAAP to Non-GAAP adjustment reconciliation table below. Adjusted income from continuing operations and adjusted net income are defined as income from continuing operations and net income, in each case adjusted for expenses and gains that are unusual, non-routine, non-recurring or special in a way that does not reflect the company's core operating performance. The company believes that non-GAAP financial measures are useful to investors because the items excluded are not indicative of the company's continuing operating results. Also, the company's management uses these non-GAAP financial measures as an indicator for planning and forecasting future periods. Adjusted income from continuing operations and adjusted net income have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Our presentation of adjusted income from continuing operations and adjusted net income should not be construed as an inference that our future results will be unaffected by other expenses that are unusual, non-routine or non-recurring.

DIVIDENDS

On Oct. 28, 2010, our board of directors declared a quarterly dividend on common stock. Common shareholders of record at the close of business on Nov. 17, 2010, will receive $0.36 cents per share, equivalent to an annual dividend rate of $1.44, payable on Dec. 1, 2010.

CONFERENCE CALL AND WEBCAST

The company will host a live conference call and webcast at 11a.m. EDT on Friday, Oct. 29, 2010, to discuss the company's financial and operating performance.

Those interested in listening to the live broadcast from within the United States can call 866-783-2137. International callers can call 857-350-1596. All callers need to enter the pass code 88923178 when prompted. To access the live webcast and download a copy of the investor presentation, go to the Black Hills website at www.blackhillscorp.com and click "Webcast" in the "Investor Relations" section. The presentation will be posted on the website before the webcast. Listeners should allow at least five minutes for registering and accessing the presentation.

For those unable to listen to the live broadcast, a replay will be available on the company's website or by telephone through Friday, Nov. 12, 2010, at 888-286-8010 in the United States and at 617-801-6888 for international callers. The replay pass code is 12415103.

BUSINESS UNIT PERFORMANCE SUMMARY

(Minor differences in comparative amounts may result due to rounding. All amounts are presented on an after-tax basis unless otherwise indicated.)

Corporate - Third Quarter 2010

Loss for the three months ended Sept. 30, 2010, was $10.1 million compared to loss of $9.1 million for the same period in 2009. Results for the third quarter of 2010 reflect an $8.9 million unrealized mark-to-market non-cash loss related to interest rate swaps no longer designated as hedges for accounting purposes and a $2.0 million decrease in income tax expense due to a re-measurement of a previously recorded uncertain tax position. The tax position relates to depreciation method changes, and a $0.6 million increase in net interest expense compared to the third quarter of 2009, which included a $5.7 million unrealized mark-to-market non-cash gain related to interest rate swaps.

Source: Black Hills Corp.