Black Hills Corporation (NYSE: BKH) conducts its business through its Utilities and Non-Utilities operating segments. The corporation, founded in 1941, is based in Rapid City, South Dakota. These segments coincide with the firm's subsidiaries to create a single operating unit. The Utilities segment is responsible for transmitting, generating, and distributing electricity to over 200,000 customers scattered across four states. Along with this focus, the company also distributes natural gas to around 530,000 customers throughout Colorado, Nebraska, Iowa, and Kansas. The company has ownership of 8,182 miles of distribution and electric transmission line, 630 megawatts of capacity for electric generation, 626 miles of pipeline for the transmission of intrastate gas, and 19,638 miles of gas distribution mains. 
In its non-regulated segment, the firm markets its crude oil and natural gas across the United States and Canada. The company has ownership and operating interests in natural gas and oil properties consisting of 580 net wells and interests in non-operating oil and natural gas properties including 90 net wells. The firm's natural gas and oil reserves total approximately 119 Bcfe, while its coal reserves are estimated at approximately 268 million tons. 
Black Hills Corp. was founded in 1883 as the Black Hills Electric Light Company. In 1941 the firm acquired its way into the power business and went public by selling shares for $16.50 as Black Hills Power & Light. Throughout the middle of the 20th century, Black Hills growth was fueled by the rise of the Industrial Revolution. Much of their expansion was due to the growth of many of their industrial customers, along with the Ellsworth Air Force Base. In the 1980's, Black Hills sought diversification through acquisitions. Black Hills attempted to get into the trucking business but the venture was a failure and quickly divested. The largest acquisition occurred in 2007, when Black Hills bought the regulated natural gas and electric utilities from Aquila Inc. This purchase greatly increased the size of their business geographically and nearly quadrupled the number of customers served. Black Hills Corp. has now been serving it's customers for over 125 years.
Black Hills conducts its business through two operating segments, non-regulated energy and utilities. The following analyzes these two segments.
The Non-Regulated Energy segment of the Black Hills Corporation operates in 4 different business segments (Coal, Energy Marketing, Oil & Gas, and Power Generation).
Black Hills Electric Generation is part of Black Hills Corporation's Non-Regulated energy group. It operates four independent power production facilities in the rocky mountain area and operates mainly coal-fired electric generation plants.
Black Hills Exploration and Production operates oil and natural gas producing properties in the Rocky Mountain area. The main purpose of Black Hills Exploration & Production is to acquire, explore for, develop and produce natural gas and crude oil for sale into commodity markets.
The graph to the right represents the composition of revenue of Black Hills non-regulated energy operations. As the graph shows, the leading source of revenue in this operating segment is its oil and gas operations at 39%. This is closely followed by coal, which makes up 30% of the revenue in the non-regulated segment. When compared to the utilities segment, the non-regulated segment makes up only 14% of the firms revenue. In monetary terms, oil and gas, the largest non-regulated segment brings in revenues of approximately $74 million. The other divisions, coal mining, power generation, and energy marketing, collect revenues of $58 million, $30 million, and $28 million respectfully.
The Utilities operating segment of Black Hills Corporation conducts business in two different areas, the natural gas segment and the electric utilities segment.
Natural Gas: The natural gas segment consists of Colorado Natural Gas Company, Kansas Natural Gas Company, Nebraska Natural Gas Company, and the Iowa Natural Gas Company. The Natural Gas segment currently provides natural gas to over 500,000 people in Colorado, Kansas, Nebraska and Iowa.
Electric Utilities: The electric utilities segment consists of Black Hills Power, Cheyenne Light Fuel and Power, and Colorado Electric. The electric utilities segment generates, transports, and distributes energy to over 200,000 customers in Wyoming, Colorado, Montana and South Dakota. Cheyenne Light distributes electricity as well as natural gas and operates out of Wyoming.
Although Black Hills has a negative Cash Converstion Cycle, they still trail behind most of their competition. This negative CCC is very important because it effectively allows BKH interest free financing of it's operations for 19.8 days. BKH is competitive in the Days Payable Outstanding category because they have secured good credit terms with their suppliers and do not have to payback their creditors very quickly. On average, BKH has 157 days before they pay off their creditors. For 2010, 43% of Black Hills' cost of goods sold was made up of accounts payable. Only Questar has better credit terms than BKH. Black Hills fails to compete in the Days of Sales Inventory and Days Sales Outstanding. BKH could greatly increase their ROIC by lowering their DSI ; this could be achieved by turning over their inventory quicker. Also, BKH offers the best credit terms to their customers as it takes them an average of 87.5 days to collect on their receivables. Although, favorable credit terms may help attract customers, they really hurt business as it ties up cash as Black Hills waits to be paid. Black Hills would greatly benefit by tightening their credit terms to get their DSO down to the levels of Otter Tail and Cabot Oil & Gas and shortening their CCC even further.
As visible in the graph, Cabot Oil & Gas has a substantial lead in terms of the productivity of its employees. This firm has a significantly smaller workforce yet still turns out profits of approximately $884 million and over $2 million per employee. Black Hills Corporation is third when compared to these 3 competitors with a revenue per employee of $617,000. Questar and Otter Tail turned out a revenue per employee of $657,000 and $287,000 respectfully.
Another key aspect in the industry is the amount of assets which provide not only constant supply, but also potential growth for the firm. The chart below addresses the following four assets which are critical to a firms success: net productive wells, interstate pipeline, gas distribution mains and service lines, and net acreage. These properties are shared among three of the four competitors that are evaluated in this analysis.
One of the primary factors which must be taken into account within the Electric Utilities segment is the amount of power which is needed to satisfy customer demand. This demand requires the company to determine the appropriate balance between owned capacity and purchasing the difference to offset excess demand. As seen in the table to the left, Black Hills has been unable to match consumer demand. The summer of 2009 and 2010 saw the largest discrepancy with a net excess capacity of -291 MW and -269 MW respectively.
Black Hills Corp. generates the most revenue per year among its competition, but because of its high cost structure it fails to turn that revenue into high levels of profit. BKH EBITDA and Operating Margins are far behind that of Questar and Cabot Oil & Gas. This could be due to the costs needed to merge Black Hills' recent acquisitions along with creating synergies among its operations. The acquisitions have also dramatically increased their financial leverage over the years resulting in BKH becoming the most highly leveraged firm within the four competitors analyzed. Having high financial leverage has its benefits and it downfalls. There are tax advantages that accompany high leverage, and a highly leverage firm can take advantage of very high returns on investment if the debt is managed properly. The downfall of being highly leveraged is that if the company fails to pay on their debts, they risk bankruptcy.
Questar is by far the champion of the industry. They provide the best return on both assets and equity, with an ROA of 2.8% and an ROE of approximately 8.7% higher than the next closest firm. This is largely due to their low cost structure that allows them to turn much of their revenue to profits. Questar is also significantly higher in terms of net income and operating margin compared to its competitors. Furthermore, the firm has a net income of approximately $236 million and an operating margin of around 8% above Cabot Oil & Gas, which comes in second in terms of those metrics.
The industry Betas are all fairly low. This is largely due to the inelastic demand of energy. People do cut back some on their energy consumption during tough economic times, but Americans have become dependent on electricity and can only scale back so much. Black Hills has a Beta of 1.005 which means that they have an almost identical risk to the market.
Most of the energy companies fail to provide their shareholders with any economic value. Questar was able to provide a return larger than their shareholder's required return as visible in their positive economic value added (EVA), whereas Black Hills had the lowest EVA among the competitors evaluated in this analysis at -319. The remaining competitors, Cabot Oil & Gas and Otter Tail, also experienced negative EVA's of -290 and -90 respectfully. Black Hills has the lowest WACC meaning its shareholders require the smallest required return. This advantage was quite significant as Black Hills was able to to acquire capital at 1.5% less than its closest competitor. Although BKH benefits from the low acquisition cost of capital, it failed to capitalize on this low WACC as exhibited in its negative ROIC. This negative ROIC signifies a negative return on invested capital (ROIC) thus providing no additional value to shareholders. Black Hill's inability to achieve positive returns on its invested capital, has resulted in its negative economic value added.
The EBITDA multiple is a solid alternative to the Price to Earnings ratio especially in an industry that requires considerable investments in infrastructure, like the energy industry. Unlike market cap, enterprise value takes into account debt and is a much better indicator of firm's value in a takeover. Also, the fact that debt is taken into account makes the EBITDA Multiple an improvement over the P/E ratio because it can be used to compare companies with different financial leverage. This ratio indicates how much a firm is willing to pay to acquire another firm. A low multiple means the firm might be undervalued by the market and could be the target of a possible takeover.
Throughout the industry, the EBITDA multiples are pretty similar. On average, firms are willing to pay about nine times EBITDA to acquire these energy companies. Black Hills and Questar are the most closely related in terms of the services they provide and business segments in which they operate. This is reflected in their almost identical EBITDA multiples. Cabot Oil & Gas' EBITDA multiple is approximately 3.3 times higher than Black Hills Corporation. This can be attributed to the fact that their primary focus in the oil and gas segment. Questar and Black Hills greater diversification can be beneficial in the reduction of risk; however, may reduce their overall value when compared to firm's specializing in a segment which is performing well.
Throughout the most recent economic downturn, energy commodity prices have soared to near record highs. Foreign conflict and political tensions have played a large role in the recent spike of prices. This has presented many problems for the industry as many of the services offered from Black Hills require the use of natural gas, crude oil, and coal. While crude oil prices have added to costs, natural gas prices have remained low. In recent years, the industry has observed an abundant supply of natural gas. The large volumes of natural gas in storage has allowed for record lows in natural gas prices. The increased prices combined with economic recession has led to lower demand in energy and increased inability for consumers to pay bills.
In response to the disastrous oil spill experienced a year ago by BP, the public has become increasingly outspoken in regards to environmental protection. This forces companies to weigh the delicate balance between public approval and profits. Furthermore, the government has sought to curb corporations actions which induce harm on the environment. A few of the regulations which have had a substantial impact on business in this industry are: Clean Air Act, The Energy Policy Act of 1992, Clean Water Act, Solid Waste Disposal, Greenhouse Gas Regulations.
Since power companies operate in a natural monopoly, they are strictly regulated. Power companies such as Black Hills are regulated not only by the local and state governments, but also by the Federal Energy Regulatory Commission or FERC. The FERC imposes strict penalties on companies that don't follow FERC guidelines or are dishonest to their customers. All power generation companies are also subject to rate increase limitations. Any rate increases a utility company plans to make must first be approved by the FERC. The FERC also imposes emissions requirements. Under the Clean Air Act of 1990, the government limits the amount of air pollution a power company can emit. If the company emits more pollution than allowed under the Clean Air Act, the company is required to purchase an energy allowance from another company that did not go over its limit. Since companies are allowed to sell energy allowances that are not used, companies are encouraged to be as environmentally friendly as possible. According to Black Hills 2010 annual report, the corporation has sufficient energy allowances (operating permits) for their Gillette CT and Wygen I facilities.
In order to abide by the various governmental regulations imposed on companies operating in this industry, Black Hills expects its expenditures to be approximately $17 million during the next three years.
The state of Colorado has passed new legislation that will require all power companies operating within the state to obtain 30 percent of the power they generate from renewable energy resources by 2020. Black Hills has recently announced that the corporation plans to participate in a wind turbine project in order to meet this new energy standard. The project is scheduled to be completed at the end of 2012, and will include approximately 16 wind turbines.
In 2009 Cheyenne Light & Power, which operates in Wyoming, announced that it planned to begin purchasing 30 MW of electricity from the Silver Sage wind farm in an effort to diversify their energy portfolio with more renewable energy resources. The Silver Sage wind farm consists of 20 wind turbines used for power generation. Through this energy purchase agreement, Black Hills Corporation has secured another source of renewable energy for the next two decades.
The conflict surrounding global warming stimulated a push towards the development of more eco-friendly sources of energy. The government has responded to this movement through the implementation of tax incentives for companies seeking more environmentally friendly energy. Renewable energy companies have depended on these incentives since they were instated. Experts expect these incentives to continue into the future and to play a pivotal role in further development of clean energy resources. President Obama has recently signed a contract which qualifies companies constructing renewable energy projects a 30% tax credit which is capable of being converted into Treasury cash grants. In developing new equipment, companies are also able to receive a 100% depreciation bonus through December 2011. As a result of these incentives, many energy companies have become increasingly willing to move away from traditional energy means to produce more renewable forms of energy.
Barriers to Entry: Black Hills Corporation has diversified itself into the oil, natural gas, and coal mining industries. Along with mining natural resources which are used in the generation of power, the firm also produces and supplies power to customers in the Rocky Mountain area. All of these industries have extremely high barriers to entry because capital requirements are immense and government regulations are very strict. Electricity is a product with virtually no product differentiation and access to distribution is closely regulated by the government.
Supplier Power: Black Hills Corporation has an advantage in force, because they are a vertically integrated company. Even though Black Hills produces its own power, customer demand exceeds the amount of power that they are able to produce, and the company is forced to purchase power from other sources. When Black Hills is forced to purchase power from other sources, supplier power is relatively higher, but in other areas where Black Hills produces all of it's own electricity, supplier power is non-existent.
Threat from Substitutes: Due to the high fixed cost of installing power lines and natural gas pipelines, combined with strict government regulation, there is virtually no threat from substitutes for Black Hills' customers. The only threat that Black Hills faces is the threat of a renewable energy source replacing there coal burning power producing plants.
Determinants of Rivalry: Threat of rivalry is currently very limited. Many sources of renewable energy are not yet cost effective and therefore pose a very small short term threat to Black Hills Corporation.
Determinants of Buyer Power: Most customers have no choice as to what power company they use. The only buyer power that exists is the threat that customers could start using less electricity and natural gas if prices get to high.
Black Hills Corporation, like other power companies, operates within a natural monopoly. Their customers have no choice as to which power company they can use. Black Hills is headquartered in South Dakota, which is a very pro-business state. There is currently no corporate income tax and no business inventory tax in South Dakota. Black Hills has a high financial leverage ratio, which has tax benefits on deductions on interest payments.
Black Hills does not have the capacity to produce all of the energy that it provides, so the company is required to purchase energy from other sources. Black Hills competitor, Questar, holds a 95 percent market share in southwestern Wyoming. Black Hills operates on the eastern side of Wyoming, and would have a hard time expanding into the western side of the state that is dominated by Questar. Another weakness is in South Dakota, a state in which Black Hills operates, where customers pay only 6.61 cents per kilowatt hour compared to the national average of 9.46 cents per kilowatt hour. According to glassdoor.com, another weakness of the company is that its employees are "dissatisfied." The company only scored a 2.2 out of 5 in employee satisfaction. Black Hills' competitor Questar scored a 4 out of 5 in employee satisfaction, indicating that that their employees are more satisfied. Black Hills corporation has also resisted a move towards cleaner environmentally friendly energy in favor of higher pollution coal burning energy facilities. The clean energy projects it is currently involved in are only in place due to government pressure and regulation .
One opportunity that Black Hills has is the ability to construct more power generation facilities in order to fill the gap between the power that they generate and the power that is demanded by its customers. Being able to generate more power would eliminate the need for Black Hills to purchase power from other sources eliminating the corresponding price risk. Another opportunity for the company is renewable energy. Black Hills has already begun to take advantage of investing in a wind power generation facility to produce clean energy.
Since Black Hills currently purchases a large portion of the energy it distributes, one threat that it faces is the price of the energy that the company purchases. Another large threat facing Black Hills is the possibility of more government regulation against coal burning power generation facilities. The majority of energy produced by Black Hills comes from the burning of coal, one of the least environmentally friendly ways to produce electricity. The government may step in to further reduce the emissions of these facilities in the future. Also, Black Hills high financial leverage ratio has increased the firm's liquidity risk on long term debt. If Black Hills is unable to make interest payments on the debt, the company's creditors could force them into bankruptcy.
Black Hills Power & Cheyenne Light operate in South Dakota & Wyoming, Colorado Electric operates only in Colorado. These are all subsidiaries of Black Hills Corp.
In the gas utilities segment, revenue is divided among the states of Iowa, Nebraska, Colorado, and Kansas. The company prides itself on its ability to market its energy resources in order to retain customers and expand its business to new customers. However, over the past three years, the company has been relatively unsuccessful in expanding its customer base. Since 2008, the only state which has witnessed a significant increase in the number of customers is Colorado. Black Hill's managed to increase its customer base in Colorado by 3.23%; whereas Iowa, Nebraska, and Kansas experienced changes of 0.8%, -0.75%, and 1.2% respectfully. This questions the company's ability to market its product effectively in order to expand its level of market share.
Similarly, the companies within the Electric Utilities segment have experienced little growth in their level of customers. Colorado Electric, which has the largest number of customers of the three, saw a -0.4% change in its number of customers since 2008. The other two companies, Black Hills Power and Cheyenne Light, had their customer base fluctuate by -1.6% and 1.21% respectfully. Of the three companies, Cheyenne Light was the only one to see their level of customers rise. In its natural gas division, Cheyenne also experienced a positive customer growth of 3.7% since 2008. The graph above shows that Black Hills Power provides the largest share of revenue of the three companies within the Electric Utilities segment. Black Hills Power has almost 26,000 customers less than its Colorado Electric counterpart. This models the efficient performance of this company in light of a decrease in its overall customer base. Cheyenne Light also operates very efficiently. This company provides 20% of the Electric Utilities revenue while containing approximately 20% of the customer base.
This map shows the geographic distribution of Black Hills various operations. Most of BKH operations take place in the central United States, but recent acquisitions have expanded production west to California and North into Canada. While production has been slowly expanding across North America, BKH still only services customers in the Black Hills greater region.