Black Hills Corp. Reports 2010 Fourth Quarter and Full Year Results

Utility

State

Effective Date

Annual Revenue Increase (millions)

Black Hills Power

SD

4/1/2010

$

15.2

Black Hills Power

WY

6/1/2010

$

3.1

BHE-Colorado Electric

CO

8/6/2010

$

17.9

BHE-Nebraska Gas

NE

9/1/2010

$

8.3

BHE-Iowa Gas(a)

IA

6/18/2010

$

2.6

Total Revenue Increase

$

47.1

(a) Interim rates - Black Hills Energy – Iowa Gas filed a modified settlement agreement with the Iowa Utilities Board for a $3.4 million increase in annual revenues on Jan. 11, 2011. The original rate request was filed on June 8, 2010, and interim rates reflecting an increase of $2.6 million were implemented on June 18, 2010. The modified settlement excludes the integrity investment tracker and the three-year rate moratorium included in the original settlement agreement filed on Sept. 1, 2010, which was not approved by the IUB.

GAAP TO NON-GAAP ADJUSTMENT RECONCILIATION

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

(In millions, except per share amounts)

2010

2009

2010

2009

(after-tax)

Income

EPS

Income

EPS

Income

EPS

Income

EPS

Income from continuing operations (GAAP)

$

33.5

$

0.85

$

32.4

$

0.84

$

68.7

$

1.76

$

78.8

$

2.04

Adjustments for special items:

Unrealized (gain) loss on certain interest rate swaps

(17.2)

(0.44)

(11.6)

(0.30)

9.9

0.25

(36.2)

(0.93)

Asset impairment - ceiling test

—

—

—

—

—

—

27.8

0.72

Gain on partial sale of Wygen I

—

—

—

—

—

—

(16.9)

(0.44)

Gain on sale of Elkhorn, NE assets

—

—

—

—

(1.7)

(0.04)

—

—

Gain on partial sale of Wygen III

—

—

—

—

(4.1)

(0.10)

—

—

Improved effective tax rate

—

—

—

—

(2.4)

(0.06)

(3.8)

(0.10)

BHE acquisition facility fee

—

—

—

—

—

—

1.9

0.05

BHE integration expenses

—

—

1.0

0.03

—

—

3.4

0.09

Rounding

—

—

—

—

—

—

—

—

Total special items adjustment

(17.2)

(0.44)

(10.6)

(0.27)

1.7

0.05

(23.8)

(0.61)

Income from continuing operations (Non-GAAP)

$

16.3

$

0.41

$

21.8

$

0.57

$

70.4

$

1.81

$

55.0

$

1.43

CONSOLIDATED FINANCIAL RESULTS

BLACK HILLS CORPORATION

(In thousands, except per share amounts)

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

2010

2009

2010

2009

Revenues:

Utilities

$

291,394

$

303,229

$

1,120,721

$

1,100,204

Non-regulated Energy

37,881

45,258

186,530

169,374

$

329,275

$

348,487

$

1,307,251

$

1,269,578

Net income (loss):

Utilities (a)

$

20,961

$

18,453

$

74,563

$

57,071

Non-regulated Energy (b)

(2,168)

6,048

13,616

579

Corporate (c)

14,727

7,902

(19,494)

21,106

Income from continuing operations

33,520

32,403

68,685

78,756

Income from discontinued operations (d)

—

360

—

2,799

Net income

$

33,520

$

32,763

$

68,685

$

81,555

Weighted average common shares outstanding:

Basic

38,978

38,703

38,916

38,614

Diluted

39,438

38,790

39,091

38,684

Earnings per share:

Basic -

Continuing operations

$

0.86

$

0.83

$

1.76

$

2.04

Discontinued operations

—

0.01

—

0.07

Total

$

0.86

$

0.84

$

1.76

$

2.11

Diluted -

Continuing operations

$

0.85

$

0.84

$

1.76

$

2.04

Discontinued operations

—

0.01

—

0.07

Total

$

0.85

$

0.85

$

1.76

$

2.11

(a) Financial results for the 12 months ended Dec. 31, 2010 include a $1.7 million after-tax gain on the sale of operating assets for the Gas Utilities and a $4.1 million after-tax gain on the sale of a 23 percent ownership interest in Wygen III.

(b) Financial results for the 12 months ended Dec. 31, 2009 include a $27.8 million after-tax ceiling test impairment at our Oil and Gas Segment and a $16.9 million after-tax gain on the sale of a 23.5 percent ownership interest in Wygen I.

(c) 2010 fourth quarter and 12 month financial results for our Corporate activities include, respectively, a $17.2 million after-tax gain and $9.9 million after-tax loss related to non-cash mark-to-market adjustment on certain interest rate swaps.  2009 fourth quarter and 12 month financial results for our Corporate activities include, respectively, an $11.6 million after-tax gain and $36.2 million after-tax gain related to non-cash mark-to-market adjustment on certain interest rate swaps.

(d) Discontinued operations for the three and 12 months ended Dec. 31, 2009 primarily reflect the results of the final working capital and income tax adjustments for the 2008 IPP asset sale.  

Gross margin: Gross margin increased $8.8 million primarily due to an increase of $5.7 million related to the impact of the Black Hills Power and Colorado Electric rate cases, an increase of $0.6 million for an updated transmission cost adjustment at Colorado Electric and increased intercompany revenues of $0.7 million due to a new shared services agreement related to resources utilized by affiliated entities.

Operations and maintenance: Operations and maintenance expense increased $3.6 million primarily due to additional costs associated with the operations of Wygen III which commenced commercial operations on April 1, 2010, increased intercompany costs related to the new shared services agreement and costs associated with a major overhaul at Black Hills Power's Ben French generation facility.

Depreciation and amortization: Depreciation and amortization increased $0.5 million primarily due to the commencement of depreciation on the Wygen III plant, which began commercial operations on April 1, 2010.

Interest expense, net: Interest expense, net increased $0.5 million due to higher interest expense of $0.7 million compared to the same period in the prior year as a result of higher rates on long-term debt compared to short-term debt, partially offset by an increase of $0.2 million in AFUDC-borrowed.  AFUDC-borrowed increased $1.3 million associated with the borrowed funds for the construction at Colorado Electric offset by a decrease of $1.1 million at Black Hills Power resulting from commencement of commercial operation of Wygen III on April 1, 2010.

Other income: Other income decreased $0.9 million primarily due to 2009 including a gain of $0.7 million from the sale of SO2 emission credits.  

Income tax: The effective tax rate for the three months ended Dec. 31, 2010 was comparable to the same period in the prior year.

Gross margin: Gross margins decreased $0.2 million primarily due to milder weather partially offset by increased interim rates at Iowa Gas and approved rates at Nebraska Gas, which were effective subsequent to the fourth quarter of 2009.

Operations and maintenance: Operations and maintenance expense increased $1.5 million primarily due to increases in workers compensation insurance expense and for litigation related accruals.  

Depreciation and amortization: Depreciation and amortization decreased $0.9 million primarily due to assets that became fully depreciated during 2010.

Interest expense, net: Interest expense, net increased $0.7 million primarily due to higher interest rates within the assigned capital structure.

Other (expense) income: Other (expense) income was comparable to the same period in the prior year.

Income tax: The effective tax rate for the three months ended Dec. 31, 2010, decreased compared to the same period in the prior year primarily as a result of a flow-through tax adjustment at Iowa Gas.

Gross margin: Gross margin increased $24.3 million primarily due to an increase of $16.6 million related to the impact of the Black Hills Power and Colorado Electric rate cases, an increase of $2.2 million for an updated transmission cost adjustment at Colorado Electric, increased off-system sales margins of $3.0 million, and increased intercompany revenues of $2.8 million due to a new shared services agreement related to resources utilized by affiliated entities.

Operations and maintenance: Operations and maintenance expense increased $7.6 million primarily due to additional costs associated with the operations of Wygen III, which commenced commercial operations on April 1, 2010, increased intercompany costs related to a new shared services agreement and costs associated with a major overhaul at Ben French.

Gain on sale of operating asset: A $4.1 million gain on sale was recognized on the sale of a 23 percent ownership interest in the Wygen III generating facility to the City of Gillette, Wyo.

Depreciation and amortization: Depreciation and amortization increased $2.4 million primarily due to the commencement of depreciation on Wygen III, which began commercial operations on April 1, 2010.

Interest expense, net: Interest expense, net increased $2.6 million due to higher interest expense of $5.6 million compared to the same period in the prior year as a result of higher rates associated long-term financings completed during 2009 and 2010 compared to rates on short-term debt held in 2009, partially offset by an increase in AFUDC-borrowed of $3.0 million.  AFUDC-borrowed increased $4.4 million at Colorado Electric due to construction of the Pueblo Airport Generating Station, offset by a decrease in AFUDC-borrowed at Black Hills Power of $1.4 million, due to the commencement of commercial operations of Wygen III.

Other income: Other income decreased $3.0 million primarily due to lower AFUDC-equity of $1.9 million, which decreased upon the placement of Wygen III into commercial operations on April 1, 2010.  Additionally, 2009 included a $0.7 million gain from the sale of SO2 emission credits.  

Income tax: The effective tax rate decreased primarily as a result of a $2.2 million tax benefit for a rate case settlement related to expensing certain items that had been capitalized for income tax purposes partially offset by lower benefit from AFUDC-equity, which decreased upon commercial operations of Wygen III.  

Gross margin: Gross margins increased $5.5 million primarily due to increased interim rates at Iowa Gas, approved rates at Nebraska Gas and Colorado Gas, and an approved Gas System Reliability surcharge at Kansas Gas, which were not effective for a full year in 2009, partially offset by lower volumes as a result of milder weather.

Operations and maintenance: Operations and maintenance expenses increased $1.4 million primarily due to increases in employee benefit costs, workers compensation insurance and for litigation related accruals.  

Gain on sale of operating assets:  A $1.7 million gain on sale recognized on assets sold by Nebraska Gas to the City of Omaha, Nebraska after a portion of Nebraska Gas' service territory was annexed by the City.

Depreciation and amortization: Depreciation and amortization decreased $3.1 million primarily due to assets that became fully depreciated during 2009 and 2010.

Interest expense, net: Interest expense, net increased $6.7 million primarily due to higher interest rates within the assigned capital structure.

Other expense: Other expense was comparable to the same period in the prior year.

Income tax: The effective tax rate for the twelve months ended Dec. 31, 2010, was comparable to the same period in the prior year.

The following tables provide certain Utilities group operating statistics:

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

Electric Utilities:

2010

2009

2010

2009

Retail sales - MWh

1,104,757

1,082,221

4,532,191

4,403,459

Contracted wholesale sales - MWh (a)

97,046

171,574

468,782

645,297

Off-system sales - MWh (a)

382,438

418,502

1,749,524

1,692,191

1,584,241

1,672,297

6,750,497

6,740,947

Total gas sales - Cheyenne Light - Dth

1,449,845

1,495,457

4,876,539

4,741,477

Regulated power plant availability:

Coal-fired plants

96.1

%

96.9

%

93.9

%

92.1

%

Other plants (b)

89.3

%

99.4

%

96.2

%

96.9

%

Total availability

93.6

%

97.9

%

94.8

%

94.0

%

(a) Decreases reflect the termination of PPAs with MDU and the City of Gillette concurrent with these customer's purchasing ownership interests in the Wygen III power plant.

(b) 2010 reflects a planned, but extended outage for the combustion turbines at Ben French during the fourth quarter.

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

Gas Utilities:

2010

2009

2010

2009

Total gas sales - Dth

16,041,456

18,360,873

55,265,630

56,671,438

Total transport volumes - Dth

15,640,569

14,775,538

59,879,450

55,104,284

Revenue: Revenue was comparable to the same period in 2009.

Operations and maintenance: Operations and maintenance expense was comparable to the same period in the prior year.

Depreciation and amortization: Depreciation and amortization were comparable to the same period in the prior year.

Interest expense, net: Interest expense, net increased $1.1 million primarily due to an increase in debt from the $120.0 million project financing at Black Hills Wyoming.

Other income: Other income was comparable to the same period in the prior year.

Income tax: The effective tax rate for the three months ended Dec. 31, 2010, decreased compared to the same period in the prior year primarily due to the effect of a research and development tax credit.

Revenue and gross margin: Revenue and gross margin decreased $2.5 million as losses in power marketing and coal were partially offset by higher margins in oil and natural gas marketing.  

Operations: Operations expense decreased $0.8 million primarily due to a decreased provision for incentive compensation expense related to lower gross margins partially offset by increased costs associated with employee additions required for marketing commodities added in 2010.

Depreciation and amortization: Depreciation and amortization was comparable to the same period in the prior year.

Interest expense, net: Interest expense, net decreased $0.3 million due to decreased amortization expense related to the credit facility costs.

Other income: Other income was comparable to the same period in the prior year.

Income tax benefit: An income tax benefit was generated during the fourth quarter of 2010 and 2009.  The effective tax rate for the three months ended Dec. 31, 2010, was lower than the same period in the prior year due to favorable true-up tax adjustments recorded in 2009.

Revenue: Revenue decreased $0.6 million primarily due to an 11 percent decline in average price, partially offset by a 6 percent increase in volumes sold primarily due to sales to Wygen III, which commenced commercial operation in April 2010.  

Operations and maintenance: Operations and maintenance expense decreased $3.0 million.  During 2010, the company received approval from the State of Wyoming's Department of Environmental Quality for a revised post-mining topography plan.  The new plan includes a more efficient method of conducting final reclamation of the mine site by re-assessing the handling of overburden.  Accordingly, the quantity of overburden cubic yards meeting backfill requirements was modified, positively impacting operations and maintenance costs.  

Depreciation, depletion and amortization: Depreciation, depletion and amortization increased $4.9 million primarily due to a year-to-date adjustment for asset retirement costs that increased the asset base on which the unrestricted asset was to be depreciated upon throughout the year.

Interest income, net: Interest income, net increased $0.3 million primarily due to increased lending to affiliates at higher short-term interest rates.

Other income: Other income was comparable to the same period in the prior year.

Income tax: The effective tax rate increased primarily as a result of no tax benefit generated by percentage depletion during the fourth quarter of 2010 compared to a tax benefit generated by percentage depletion during the fourth quarter of 2009.

Revenue: Revenue decreased $1.3 million primarily due to a 20 percent and 14 percent decrease in the average hedged price of natural gas and crude oil, respectively, and with a 4 percent decrease in gas volume, partially offset by a 34 percent increase in oil volume primarily due to production from new wells in the company's ongoing Bakken formation drilling program. The volume decline for gas was largely driven by natural production declines from producing properties, and reduced capital deployment during 2010 and 2009.  

Operations and maintenance: Operations and maintenance expense decreased $0.6 million primarily as a result of cost containment efforts.

Depreciation, depletion and amortization: Depreciation, depletion and amortization increased $1.7 million primarily due to a higher depletion rate per Mcfe resulting from increasing investment in the company's ongoing Bakken formation drilling program.

Interest expense, net: Interest expense, net was comparable to the same period in the prior year.

Other income: Other income was comparable to the same period in the prior year.

Income tax benefit: Income tax benefit in the fourth quarter of 2010 was impacted by an unfavorable state income tax true-up adjustment.  Income tax benefit for the fourth quarter of 2009 was affected by a tax benefit generated by percentage depletion.  

Revenue: Revenue was comparable to the same period in the prior year.

Operations and maintenance: Operations and maintenance expenses increased $2.3 million primarily due to maintenance costs for the major overhaul and extended outage at Wygen I and increased transmission costs.

Gain on sale of operating assets: The gain on sale in 2009 of $26.0 million represents the sale of a 23.5 percent ownership interest in the Wygen I power generation facility.

Depreciation and amortization: Depreciation and amortization were comparable to the same period in the prior year.

Interest expense, net: Interest expense, net decreased $0.8 million primarily due to a decrease in debt from an intercompany debt restructuring, partially offset by interest expense associated with the $120.0 million project financing at Black Hills Wyoming.

Other income: Other income was comparable to the same period in the prior year.

Income tax: The effective tax rate for the 12 months ended Dec. 31, 2010 decreased compared to the same period in the prior year primarily due to the effect of a research and development tax credit.

Revenue and gross margin: Revenue and gross margin increased $9.5 million primarily on higher incremental margins in the areas of natural gas and oil marketing. Coal marketing, which was acquired in June 2010, produced positive incremental margins, partially offset by losses in power marketing.    

Operations: Operations expense increased $4.5 million primarily due to higher provisions for incentive compensation expense related to increased gross margins, increased bank fees as a result of higher letters of credit due to a higher utilization level, and increased costs associated with employee additions required for marketing commodities added in 2010.  

Depreciation and amortization: Depreciation and amortization was comparable to the same period in the prior year.

Interest expense, net: Interest expense, net increased $0.4 million due to decreased interest income partially offset by decreased amortization expense related to the credit facility costs.

Other income: Other income was comparable to the same period in the prior year.

Income tax: Tax expense was recorded for the 12 months ended Dec. 31, 2010, compared to a tax benefit for the same period in the prior year.  

Revenue: Revenue decreased $0.4 million primarily due to lower prices on coal contracts.  There was a decrease in volumes sold primarily due to customer plant outages and lower demand for coal, offset by sales to Wygen III, which commenced commercial operations in April 2010.    

Operations and maintenance: Operations and maintenance expense decreased $4.1 million. During 2010, the company received approval from the State of Wyoming's Department of Environmental Quality for a revised post-mining topography plan.  The new plan includes a more efficient method of conducting final reclamation of the mine site by re-assessing the handling of overburden.  Accordingly, the quantity of overburden cubic yards meeting backfill requirements increased, therefore lowering operations and maintenance costs.  

Depreciation, depletion and amortization: Depreciation, depletion and amortization increased $3.9 million primarily due to an adjustment of the growth rate for asset retirement costs that increased the asset base on which the unrestricted asset was depreciated on.

Interest income, net: Interest income, net increased $1.1 million primarily due to increased lending to affiliates at higher interest rates.

Other income: Other income decreased $0.9 million primarily due to lower rental income related to the Wygen III site lease.  The site lease was entered into during the third quarter of 2009 with billings back to March 2008.

Income tax: The effective tax rate decreased primarily due to an increase tax benefit from percentage depletion.  

Revenue: Revenue increased $2.3 million primarily due to a 28 percent and 3 percent increase in the annual average hedged price received for oil and gas, respectively, and a 3 percent increase in oil production, partially offset by a decrease of 12 percent in gas production. The increase in oil production is primarily due to production of new wells in our ongoing Bakken drilling program. The decrease in natural gas production was largely driven by natural production declines from producing properties and reflects reduced capital deployment during 2010 and 2009.  

Operations and maintenance: Operations and maintenance expense decreased $0.6 million primarily as a result of cost containment efforts.

Depreciation, depletion and amortization: Depreciation, depletion and amortization increased $0.4 million due to an increased depletion rate per Mcfe resulting from increasing investment in the company's ongoing Bakken formation drilling program, partially offset by a decrease in volumes sold.

Impairment of long-lived assets: 2009 reflects a $27.8 million after-tax non-cash ceiling test impairment charge.  

Interest expense, net: Interest expense, net increased $0.5 million primarily due to higher interest rates.

Other income: Other income was comparable to the same period in the prior year.

Income tax (expense) benefit: The effective tax rate in 2010 includes a tax benefit related to percentage depletion and a $0.4 million re-measurement of a previously recorded uncertain tax position prompted by a settlement agreement with the IRS Appeals Division.  The effective tax rate in 2009 was impacted by a tax benefit of $3.8 million related to a positive adjustment of a previously recorded tax position.

The following tables contain certain Non-regulated Energy operating statistics:

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

2010

2009

2010

2009

Power Generation:

Contracted fleet power plant availability -

Gas-fired plants

99.7

%

97.9

%

99.9

%

92.0

%

Coal-fired plants

98.1

%

97.9

%

98.5

%

96.1

%

Total availability

98.8

%

97.9

%

99.1

%

94.4

%

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

2010

2009

2010

2009

Energy Marketing:

Average daily quantities -

Natural gas physical - MMBtus

1,576,250

1,857,000

1,586,000

1,974,300

Crude oil physical - barrels

19,965

13,500

18,455

12,400

Coal - tons (a)

39,665

—

33,250

—

(a) Represents the activity from the coal marketing business acquired on June 1, 2010.

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

2010

2009

2010

2009

Coal Mining:

(in thousands)

Tons of coal sold

1,590

1,495

5,931

5,955

Cubic yards of overburden moved

3,869

3,716

15,679

14,539

Three Months Ended Dec. 31,

Twelve Months Ended Dec. 31,

Crude Oil and Natural Gas Production

2010

2009

2010

2009

Bbls of oil sold

106,900

79,550

375,650

366,000

Mcf of natural gas sold

2,252,600

2,350,350

9,046,500

10,266,900

Mcf equivalent sales

2,894,000

2,827,650

11,300,400

12,462,900

Dec. 31, 2010

Dec. 31, 2009

Oil and Gas Total Proved

Oil

Natural Gas

Total

Oil

Natural Gas

Total

Reserves: (a)

(Mbbl)

(MMcf)

(MMcfe)

(Mbbl)

(MMcf)

(MMcfe)

Total proved reserves

5,940

95,456

131,096

5,274

87,660

119,304

Well-head reserve prices

$

70.82

$

3.45

$

53.59

$

2.52

(a) Oil and gas reserve information is based on reports prepared by Cawley, Gillespie & Associates, Inc. an independent consulting and engineering firm.