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Black Hills Corp. Reports 55 Percent Increase In 2012 Second Quarter Adjusted Earnings Per Share

Second Quarter 2012 Compared to Second Quarter 2011

Gross margin increased primarily due to a $10.9 million increase related to rate adjustments that include a return on significant capital investments at Colorado Electric, increased retail margins of $2.5 million on higher quantities sold driven by warmer weather, an increase of $1.8 million from wholesale and transmission margins as a result of increased pricing, and a $0.5 million increase from the Environmental Improvement Cost Recovery Adjustment rider at Black Hills Power.

Operations and maintenance increased primarily due to operating the new generating facility in Pueblo, Colo. and associated increased corporate allocations, and an increase in major maintenance costs from our generating facilities.

Depreciation and amortization increased primarily due to a higher asset base associated with the 180 MW generating facility constructed in Pueblo, Colo. and the capital lease assets associated with the 200 MW generating facility providing capacity and energy from Colorado IPP.

Interest expense, net increased primarily due to interest associated with the financing of the Pueblo generating facility completed in December 2011.

       

Gas Utilities

 

 
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
2012   2011   2012 vs. 2011 2012   2011   2012 vs. 2011
(in millions)
Gross margin $ 41.9     $ 46.8     $ (4.9 ) $ 110.5     $ 123.9     $ (13.4 )
   
Operations and maintenance 28.5 28.2 0.3 59.8 62.8 (3.0 )
Depreciation and amortization 6.3     5.9     0.4   12.4     12.0     0.4  
Operating income 7.2 12.6 (5.4 ) 38.3 49.2 (10.9 )
 
Interest expense, net (5.7 ) (6.3 ) 0.6 (12.3 ) (13.3 ) 1.0
Other expense (income), net 0.1 0.1 0.1 0.1
Income tax (expense) (0.4 )   (2.0 )   1.6   (9.7 )   (12.3 )   2.6  
Income (loss) from continuing operations $ 1.2     $ 4.4     $ (3.2 ) $ 16.4     $ 23.7     $ (7.3 )
 
 
Three Months Ended June 30, Six Months Ended June 30,
Operating Statistics: 2012   2011   2012   2011
   
Total gas sales - Dth 6,281,224 9,216,956 25,970,749 34,204,826
Total transport volumes - Dth 13,374,219 13,838,502 31,424,403 30,125,054
 

Second Quarter 2012 Compared to Second Quarter 2011

Gross margin decreased primarily due to a $2.0 million impact from milder weather compared to the same period in the prior year. Heating degree days were 33 percent lower for the three months ended June 30, 2012 compared to the same period in the prior year and 31 percent lower than normal. A reclassification accounting adjustment was made in the current year recording $1.3 million against gross margin that in prior year was included in operations and maintenance.

Operations and maintenance is comparable to the prior year reflecting that the prior year included a favorable property tax true up adjustment of $0.8 million offset by a reclassification adjustment that was made in the current year recording $1.3 million of operating costs in gross margin.

Interest expense, net decreased primarily due to lower interest rates.

Income tax benefit (expense): The effective tax rate decreased as a result of a favorable true-up adjustment that had a more pronounced impact due to significantly lower pre-tax net income when compared to 2011. Prior year also realized a favorable true up adjustment, but its impact on the effective tax rate was less pronounced due to significantly higher pre-tax net income when compared to 2012.

Non-Regulated Energy Group

Loss from continuing operations from the Non-regulated Energy group for the three months ended June 30, 2012, was $14.5 million, compared to $0.0 million for the same period in 2011.

       

Power Generation

 
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
2012   2011   2012 vs. 2011   2012   2011   2012 vs. 2011
(in millions)
Revenue $ 18.7     $ 7.8     $ 10.9   $ 38.4     $ 15.4     $ 23.0  
   
Operations and maintenance 7.6 4.1 3.5 14.7 8.3 6.4
Depreciation and amortization 1.1     1.0     0.1   2.2     2.1     0.1  
Operating income 10.1 2.6 7.5 21.4 5.0 16.4
 
Interest expense, net (4.0 ) (1.8 ) (2.2 ) (8.7 ) (3.6 ) (5.1 )
Other (income) expense, net 1.2 (1.2 )
Income tax benefit (expense) (2.2 )   (0.3 )   (1.9 ) (1.9 )   (0.9 )   (1.0 )
Income (loss) from continuing operations $ 3.9     $ 0.5     $ 3.4   $ 10.8     $ 1.7     $ 9.1  
   
Three Months Ended June 30, Six Months Ended June 30,
2012   2011   2012   2011
Operating Statistics:    
Contracted fleet power plant availability -
Coal-fired plants

99.2

% 99.5 % 99.6 % 99.8 %
Gas-fired plants

98.9

% 100.0 % 99.2 % 100.0 %
Total availability 99.0 % 99.7 % 99.3 % 99.8 %
 

Second Quarter 2012 Compared to Second Quarter 2011

Revenue increased due to commencement of commercial operation of our new 200 MW generating facility in Pueblo, Colo. on Jan. 1, 2012.

Operations and maintenance increased primarily due to the costs to operate and corporate allocations relating to our 200 MW generating facility in Pueblo, Colo., which began serving customers on Jan. 1, 2012.

Depreciation and amortization were consistent with prior year. The new generating facility's Power Purchase Agreement to supply capacity and energy to Colorado Electric is accounted for as a capital lease under GAAP; as such, depreciation expense for the facility is recorded at Colorado Electric for segment reporting purposes.

Interest expense, net increased due to the decrease in capitalized interest as a result of completing construction on our generating facility in Pueblo, Colo.

       

Coal Mining

 
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
2012   2011   2012 vs. 2011   2012   2011   2012 vs. 2011
(in millions)
Revenue $ 13.1     $ 15.5     $ (2.4 ) $ 28.1     $ 31.0     $ (2.9 )
   
Operations and maintenance 9.9 13.0 (3.1 ) 21.4 27.6 (6.2 )
Depreciation, depletion and amortization 3.0     4.6     (1.6 ) 6.7     9.2     (2.5 )
Operating income (loss) 0.3 (2.1 ) 2.4 0.1 (5.8 ) 5.9
 
Interest income, net 0.4 0.9 (0.5 ) 1.2 1.9 (0.7 )
Other income (expense) 0.6 0.5 0.1 1.5 1.1 0.4
Income tax benefit (expense) (0.1 )   0.2     (0.3 ) (0.6 )   1.1     (1.7 )
Income (loss) from continuing operations $ 1.2     $ (0.4 )   $ 1.6   $ 2.2     $ (1.7 )   $ 3.9  
 
   
Three Months Ended June 30, Six Months Ended June 30,
2012   2011   2012   2011
Operating Statistics: (in thousands)
Tons of coal sold 983   1,235 2,086   2,605
 
Cubic yards of overburden moved 2,280 2,933 4,922 6,388
 

Second Quarter 2012 Compared to Second Quarter 2011

Revenue decreased primarily due to a 20% decrease in tons sold. This decrease was due to the December 2011 expiration of an unprofitable long-term train load-out contract which represented approximately 29% of our tons sold in 2011. Additionally, tons sold decreased due to a planned and unplanned outage at Neil Simpson II. These decreases were partially offset by increased volumes sold to the Wyodak plant which had experienced an outage in 2011. Approximately 50% of our coal production was sold under contracts that include price adjustments based on actual mining cost increases.

Operations and maintenance decreased primarily from a 20 percent reduction in tons sold related to an unprofitable train-load out contract that expired at the end of 2011 reducing overburden moved, and mining efficiencies.

Depreciation, depletion and amortization decreased primarily due to lower equipment usage and lower depreciation of mine reclamation asset retirement costs.

Interest income, net decreased primarily due to a decrease in inter-company notes receivable upon payment of a dividend to our parent.

Income tax benefit (expense): The change in the effective tax rate was primarily due to the impact of percentage depletion.

       

Oil and Gas

 
Three Months Ended Six Months Ended
June 30, Variance June 30, Variance
2012   2011   2012 vs. 2011   2012   2011   2012 vs. 2011
(in millions)
Revenue $ 20.6     $ 18.8     $ 1.8   $ 42.3     $ 36.7     $ 5.6  
   
Operations and maintenance 10.3 10.2 0.1 21.2 20.8 0.4
Depreciation, depletion and amortization 13.0 7.6 5.4 22.4 14.9 7.5
Impairment of long-lived assets 26.9         26.9   26.9         26.9  
Operating income (29.6 ) 1.0 (30.6 ) (28.1 ) 1.1 (29.2 )
 
Interest expense, net (1.2 ) (1.4 ) 0.2 (2.8 ) (2.8 )
Other (income) expense 0.1 0.1 0.1 (0.1 ) 0.2
Income tax benefit (expense), net 11.1     0.2     10.9   11.2     1.0     10.2  
Income (loss) from continuing operations $ (19.6 )   $ (0.1 )   $ (19.5 ) $ (19.6 )   $ (0.8 )   $ (18.8 )
 
       
Percentage Percentage
Three Months Ended June 30, Increase Six Months Ended June 30, Increase
Operating Statistics: 2012   2011   (Decrease)   2012   2011   (Decrease)
Bbls of crude oil sold 155,362   100,901 54 % 300,839   204,451 47 %
Mcf of natural gas sold 2,451,811 2,106,121 16 % 4,840,286 4,117,288 18 %
Gallons of NGL sold 837,626 988,819 (15 )% 1,652,211 1,853,259 (11 )%
Mcf equivalent sales 3,503,644 2,852,787 23 % 6,881,350 5,608,745 23 %
 
Depletion expense/Mcfe $ 3.47 $ 2.40 45 % $ 2.98 $ 2.38 25 %
 
   
Three Months Ended June 30, 2012 Three Months Ended June 30, 2011
    Natural Gas     Natural Gas
Average Prices Crude Oil Natural Gas Liquids Crude Oil Natural Gas Liquids
(Bbl)   (MMcf)   (gallons) (Bbl)   (MMcf)   (gallons)
Average hedged price received $ 76.71 $ 3.12 $ 0.74 $ 79.53 $ 4.29 $ 1.01
 
Average well-head price $ 79.41 $ 1.28 $ 94.60 $ 2.95
 
 
Six Months Ended June 30, 2012 Six Months Ended June 30, 2011
Natural Gas Natural Gas
Average Prices Crude Oil Natural Gas Liquids Crude Oil Natural Gas Liquids
(Bbl)   (MMcf)   (gallons) (Bbl)   (MMcf)   (gallons)
Average hedged price received $ 77.33 $ 3.36 $ 0.84 $ 73.10 $ 4.47 $ 0.97
 
Average well-head price $ 81.57 $ 1.49 $ 89.59 $ 2.80
 

Second Quarter 2012 Compared to Second Quarter 2011

Revenue increased primarily due to increased production. A 54 percent increase in crude oil sales, due primarily to activities from new wells in the company’s ongoing drilling program in the Bakken shale formation, was partially offset by a 4 percent decrease in the average price received for crude oil sold. A 14 percent increase in natural gas and NGL volumes, due primarily to the completion of three Mancos formation test wells in the San Juan and Piceance Basins, was partially offset by a 27 percent decrease in average price for natural gas.

Depreciation, depletion and amortization increase primarily reflects a $3.4 million year-to-date impact of adjusting our expected 2012 reserve additions due to the deferred drilling activities in the San Juan Mancos formation, as well as higher cost reserves associated with our Bakken activities.

Impairment of long-lived assets represents a write-down in the book value of our natural gas and crude oil properties driven by low natural gas prices. The write-down reflected a 12 month average NYMEX price of $3.15 per Mcf, adjusted to $2.66 per Mcf at the wellhead, for natural gas, and $95.67 per barrel, adjusted to $85.36 per barrel at the wellhead, for crude oil.

Income tax (expense) benefit: For 2012, the benefit generated by percentage depletion had a significantly reduced impact on the effective tax rate compared to the same period in 2011.

Corporate

Second Quarter 2012 Compared to Second Quarter 2011

Loss from continuing operations for Corporate was $13.2 million for the three months ended June 30, 2012 compared to Loss from continuing operations of $9.4 million for the three months ended June 30, 2011. The increased loss was primarily as a result of an unrealized, non-cash mark-to-market loss on certain interest rate swaps for the quarter ended June 30, 2012 of approximately $15.6 million compared to a $7.8 million unrealized, mark-to-market non-cash loss on these interest rate swaps in the prior year.

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