Black Hills (BKH)

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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. ^[1]

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. ^[1]

Business Overview

History

Contents 1 Business Overview 1.1 History 1.2 Business Segments 1.2.1 Non-Regulated Energy 1.2.2 Utilities 1.3 Financial Metrics 1.4 Operating Metrics 2 Industry Overview 2.1 Competition 2.1.1 Primary Competitors 2.2 Valuation 2.3 Industry Trends 2.4 Porter's Five Forces Analysis 3 Strategic Analysis 3.1 SWOT 3.2 Management 3.3 Geographic Diversification 4 References

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.^[2] 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.

Business Segments

Black Hills conducts its business through two operating segments, non-regulated energy and utilities. The following analyzes these two segments.

Non-Regulated Energy

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:

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 & Production

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.

• Enserco Energy

Enserco Energy is the energy marketing division of Black Hills Corporation's Non-Regulated Energy business segment. Enserco Energy is responsible for optimizing energy assets in the western regions of the United States and Canada.

• Wyodak Resources Development Corporation

Wyodak Resources Development Corporation or WRDC is responsible for the coal producing segment of Black Hills Corporation. It mines and processes low sulfur coal in Wyoming. This segment produced approximately six million tons of coal in 2009. ^[3]

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 graph below demonstrates the portion of revenue received through the company's regulated and non-regulated operating segments. It is clear from the graph that Black Hill's primary source of revenue is through its regulated operations. From its regulated operations, Black Hill brought in revenues of approximately $1.2 billion; whereas from its non-regulated segment, revenues totaled almost $187 million. Both of these operating segments saw a positive net income in 2010, but were offset slightly by a loss in corporate net income of $19.5 million. As a result, Black Hill's net income for its non-regulated and regulated operations was $68.7 million in 2010.

Utilities

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.

The table on the left represents the amount of revenue received through the company's regulated operations for both the natural gas and utility segments. Revenues have steadily increased since the 2008 economic crisis which caused the demand for energy to decrease and resulted in plummeting commodity prices. Since the crash, many of the prices of the firm's commodities have recovered; however, natural gas still remains relatively low. The company currently holds record levels of natural gas in storage, which in conjunction with decreased demand for commodities, has played a role in low prices for natural gas. This has resulted in a slight dip in revenue from 2009 to 2010 in the natural gas segment. The electric utilities segment saw increases in revenue in part due to the governments approval of rate increases for South Dakota, Wyoming, and Colorado Electric customers which resulted in annual revenue increases of $15.2 million, $3.1 million, and $17.9 million respectfully. Overall, the gas utilities segment has witnessed significant increases in revenues over the past three years. Apart from the slight decrease from 2009 to 2010, revenue has increased substantially over this three year span. This was also in part due to the approval of increases in rates for Nebraska Gas and Iowa Gas which brought in increased revenues of $8.4 million and $3.4 million respectfully. In both segments however, the fluctuation in earnings is heavily correlated to the condition of the economy. As consumer confidence continues to increase from the economic crisis in 2008, Black Hills can expect steady increases in revenue from its natural gas and electric utility segments.

Financial Metrics

The table to the right summarizes some of the more important financial metrics associated with Black Hills Corporation. As expected, the company has seen a steady increase in the level of revenue over the past three years. This can be largely attributed to the various acquisitions over the past few and a rise in the overall health of the economy, which has a large influence in the fluctuation of demand for commodities. Unfortunately, the firm saw a reduction in its bottom line as its net income decreased substantially over that past few years. This could have been attributed to Black Hills difficulty in keeping its costs down as the market experienced relatively high volatility in the cost its resources, specifically coal. The company also experienced a steady decline in its return on assets (ROA) and return on equity (ROE) since 2008. In just three years the company has saw its ROA decrease 1.64% and its ROE decline from 10.4% to 6.29%, a 4.11% drop. As the company creates more cost synergies among it's newly acquired segments, these numbers should begin to improve. One area the company has improved is the value of its EBITDA. Here the firm has witnessed an increase of $57 million, although its EBITDA margin dropped 1.5% in the same time frame. Over the past three years, operating margin, asset turnover and quick ratio have remained relatively stable.

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.

Operating Metrics

In the electrical utilities industry, projects are often signed on a contract basis. Due to a limited customer base, Black Hills corporation, and other players in the industry, must compete intensively to obtain long-term contracts. Once contracts are awarded, firms may face difficulties in their ability to sustain margins originally projected for the contract. Unforeseen events may lead to the fluctuation in variable and fixed costs which threaten to reduce the operating margin of a once profitable project. One metric which can measure the firm's ability to maintain these margins is monitoring the effectiveness of its workforce. The following graph represents the revenue generated per employee for four firms in the industry.

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.

When viewing the above chart, Black Hills and Questar's property assets reveal the close resemblance of their business operations. Net productive wells represent the number of wells that are capable of production. Black Hills operates 36 more wells than Questar; however, has 4,100 less than Cabot Oil & Gas. This substantial difference stems from the fact that Cabot's primary operations focus on the exploration, development, exploitation of gas; whereas Black Hills and Questar have much more diversified operations. In terms of interstate pipeline, Black Hills lags behind the competition with 1,942 miles less than its competitor Questar. Instead of investing significant amounts of capital into the production and ownership of interstate pipelines, Black Hills uses third-parties as a means to invest less, while also hedging against fluctuations in commodity prices. Similarly, Questar also has a significantly larger investment in gas distribution mains and service lines. This is in part due to the larger number of customers Questar serves in the Gas Utility segment. Questar provides its services to approximately 910,000 customers, while Black Hills serves only 527,000. Net acreage is the final property compared and is an asset shared among all three competitors. Once again, due to its focus on gas and oil reserves, Cabot Oil & Gas has a substantial amount of capitol invested in acreage. This provides them with the opportunity to further explore and develop land to increase the supply of its energy resources. In terms of net acreage, Black Hills has approximately 207,000 more acres than Questar. This provides the company with more opportunities to explore and develop land in the event of an increase in demand for oil and gas commodities. While Black Hills does fall below the competition in a few of these property asset categories, the firm has reduced the effect of this deficit by diversifying in electric transmission lines, capacity for electric generation, and interest in non-operating oil and natural gas wells.

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.

To offset the difference between consumer demand and the company's level of capacity, the firm is forced to purchase the remaining supply. The graph to the right shows that in the past three years, Black Hills has been forced to purchase a larger portion of its power than it supplies on its own. In order to compensate this lack of capacity, the firm is faced with the significant costs associated with purchasing the excess power needed to generate electricity. The price to purchase power in 2008, 2009, and 2010 was $38.06, $28.93 and $30.23 per MWh respectively.^[1] This resulted in costs of approximately $126.4 million, $125.2 million,and $124.2 million to purchase power for the 2008, 2009, 2010 years based on Black Hills recorded quantity of MWh's purchased for the given years.^[1]

Industry Overview

Competition

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.

Primary Competitors

• Questar Corporation (NYSE:STR) operates as a natural gas-focused energy company out of Salt Lake City, Utah. The company is involved in energy marketing, producing and exploring for oil and gas, offers midstream services, and also provides interstate gas transportation and conducts a retail gas distribution. The company conducts is primary production, development, and exploration in the Rocky Mountain and Mid-continental regions. The midstream services provided by the company consist of natural gas-gathering for third parties and affiliates, markets equity and its third-party products to remarketers and refiners, operates underground gas storage. In 2009, the firm had reserves of 2,746.9 Bcfe, owns and operates the Southern Trails Pipeline, and also controls approximately 2,568 miles of interstate pipeline.^[5]

• Otter Tail Corporation (NYSE:OTTR) is involved in the United States and internationally in both electric and nonelectric operations. The corporation is headquartered in Fergus Falls, Minnesota and was founded in 1907. Otter Tail's operations consist of the following segments: Plastics, Manufacturing, Electric, Food Ingredient Processing, Health Services, and Other Business Operations. Black Hills Corporation competes primarily with the Electric segment of Otter Tail. In this unit Otter Tail transmits,produces, distributes, and sells electric energy through wind, coal, hydro, wind, natural gas, and oil. In 2009, approximately 130,900 customers received their electricity through Otter Trail.^[6] Along with the previously mentioned characteristics, this segment also acts as a wholesale player in the Midwest Independent Transmission System Operator markets. In its Other Business Operations segment, the firm also engages in the energy service and transportation businesses.

• Cabot Oil & Gas Corporation (NYSE:COG) conducts the development, exploration, and exploitation of gas and oil properties across the United States. The corporation is based out of Houston, Texas and was founded in 1989. The reserves of this firm are scattered throughout the Gulf Coast, Mid-Continent, Rocky Mountains, and Appalachia. Along with its primary business, COG also produces, stores, transports, and gathers natural gas for the purpose of resale. In 2009 it had 2,060 billion cubic feet of natural gas reserves. During 2010, Cabot Oil & Gas agreed to a joint venture in the Eagle Ford shale with EOG Resources. This venture called for the development of a 18,000 acre window of mature oil.^[7]

The data shows that Black Hills Corporation lags behind two of its primary competitors in terms of sheer volume of natural reserves. In terms of developed reserves, Black Hills is approximately 389 billion of cubic feet equivalent (bcfe) and 1630 bcfe behind Questar and Cabot Oil & Gas respectively. Similarily, for undeveloped reserves, Black Hills trails Questar by 248 bcfe and Cabot Oil & Gas by a substantial 940 bcfe. This puts Black Hills at a significant disadvantage in this utility segment if demand outstrips their natural gas reserve capacity. As discussed previously, Cabot Oil & Gas operates primarily in the gas and oil industries. Due to this specialization, Cabot is able to invest a higher level of capital in the discovery, exploration and exploitation of natural reserves. This puts them at an advantage in terms of matching capacity and demand within the oil and natural gas market; however, increases their overall level of risk due their dependence on fluctuation in the price of resources. Black Hills and Questar's operations are much more diversified which reduces their level of risk in the event of a negative downturn in one segment of their operations.

Valuation

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.

Industry Trends

• Cost of Fossil Fuels

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.

• Government Environmental Regulations

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.

• Black Hills Environmental Response

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.

• Movement Towards Renewable Energy

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.

Porter's Five Forces Analysis

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.

Strategic Analysis

SWOT

• Strengths

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.

• Weaknesses

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.^[9] 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.^[10] 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.^[11] Black Hills' competitor Questar scored a 4 out of 5 in employee satisfaction, indicating that that their employees are more satisfied.^[12] 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 .

• Opportunities

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.

• Threats

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.

Management

Geographic Diversification

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.

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7} "Black Hills Corp. 10-K" accessed April 17, 2011
2. ↑ "Formation of Black Hills Power and Light Company" accessed April 22, 2011
3. ↑ "Black Hills Corporation Subsidiaries" Accessed April 18th, 2011
4. ↑ Bloomberg Terminal Accessed April 12, 2011
5. ↑ Questar 10-K 2010 accessed April 14, 2011
6. ↑ Ottertail 10-K 2010 accessed April 12, 2011
7. ↑ Cabot Oil & Gas 10-K 2010 April 12, 2011
8. ↑ Bloomerberg Terminal accessed April 18, 2011
9. ↑ "Questar Website" accessed April 22, 2011
10. ↑ "South Dakota Solar Packet" accessed April 22, 2011
11. ↑ "Black Hills Reviews" accessed April 22, 2011
12. ↑ "Questar Reviews" accessed April 22, 2011
13. ↑ "Black Hills Corp" accessed April 14, 2011
14. ↑ Investor Update Presentation from April 11, 2011 accessed April 22, 2011