Black Hills Corp. Still Loves Utilities

By Eric Fox | October 17, 2011 AAA

Black Hills Corp. (NYSE:BKH) is continuing to invest in the company's regulated and non regulated utility businesses as it looks to generate earnings growth over the long term.
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Business Overview
Black Hills is a diversified energy company with both regulated and non regulated operations in the United States. These businesses include natural gas distribution, electric utilities, power generation and energy marketing. The company also has a small upstream exploration and production business and a coal operation.

Utility Operations
Black Hills generates nearly all of its operating income from the company's utility operations. Black Hills had 95% of its operating income here in the trailing 12-month period ending June 30, 2011, compared to only 27% in 2007.

Black Hills owns separate electric utilities operating in the Western and Midwestern areas of the United States. Black Hills Electric, Cheyenne Light and Colorado Electric provide services to more than 200,000 customers in South Dakota, Montana, Wyoming and Colorado. The company's assets include 687 megawatts of power generation and more than 8,000 miles of transmission and distribution lines.

Black Hills also own natural gas distribution companies that provide services to approximately 500,000 customers in Kansas, Nebraska, Colorado and Iowa.

Growth Investments
Black Hills is planning to invest between $613 million and $748 million in various utility projects to generate growth from 2012 and 2015. The company has already announced approximately 50% of these projects with the other projects still in the initial stages.

Black Hills is nearly finished with the construction of two natural gas generation projects in Colorado. The company expects a 180 megawatt regulated unit and a 200 megawatt unregulated unit to come on line at the beginning of 2012.

Black Hills also has a 29 megawatt wind power generation project underway in Colorado. The company has budgeted $27 million for this facility and expects it to come on line by the fourth quarter of 2012.

Regulated Assets
Since most of the company's utility operations are regulated, Black Hills must file a request with the appropriate regulatory authorities to raise rates to its customers. The company was approved in early 2011 for a small rate increase in its Iowa gas operations.

Black Hills has filed for a rate increase in Colorado starting in 2012. The company is asking for an 11% return on equity and a rate base of $438 million. If this increase is granted, the company expects to generate an additional $40 million in revenue.

Exploration and Production
Black Hills also operates a small exploration and production operation with both operated and non operated properties. The company reported proved reserves of 131 Bcfe at the end of 2010, with 73% of these reserves composed of natural gas.

One play that the company is working on is the Mancos Shale, where Black Hills has a three-well program underway in the San Juan and Piceance Basin.

Other operators that have exposure here include Gasco Energy (NYSE:GSX), which is targeting the Mancos Shale and other formations in the Uinta and Green River Basins. Approach Resources (Nasdaq:AREX) is also involved and has approximately 80,000 net acres prospective for the Mancos Shale.

Dividend
Black Hills also pays an annual dividend of $1.46 per share, providing shareholders with a current yield of 4.6%. The company has raised its dividend for 41 consecutive years. Other utilities with high dividend yields include Hawaiian Electric (NYSE:HE), which has a current yield of 5%.

The Bottom Line
Black Hills might be a boring utility to some investors but the company's regulated operations reduce earnings volatility. The company also rewards shareholders with a dividend stream that has been growing for generations. (For additional reading, see our Oil And Gas Industry Primer.)

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