TEXT-S&P revises Black Hills Corp outlook to positive

Tue Oct 16, 2012 4:23pm EDT

Overview
     -- Rapid City-based multiple-utility energy company Black Hills Corp.
 (BKH) has continued to strengthen its business risk profile with the
recent sale of 85% of its Bakken and Three Forks shale assets for $243 million.
The company intends to use the proceeds to redeem $225 million 6.5% senior 
unsecured notes due May 15, 2013, which will help to improve the financial 
risk profile.
     -- We have affirmed our ratings on BKH and its subsidiary Black Hills 
Power Inc. (BHP), including the 'BBB-' corporate credit rating and the 'BBB-' 
senior unsecured rating at BKH and the 'BBB+' senior secured issue rating at 
BHP, which is based on a '1+' recovery rating.
     -- We have revised the rating outlook to positive from stable.
     -- The positive outlook reflects the potential for a one-notch upgrade 
over the next 12 to 18 months based on the strengthening of the business risk 
profile and the expected improvement in the company's financial condition.

Rating Action
On Oct. 16, 2012, Standard & Poor's Ratings Services affirmed its ratings on 
multiple-utility energy company Black Hills Corp. and its subsidiary Black 
Hills Power Inc., including the 'BBB-' corporate credit rating and the 'BBB-' 
senior unsecured rating at BKH and the 'BBB+' senior secured issue rating at 
BHP, which is based on a '1+' recovery rating. We have revised the outlook to 
positive from stable.
Rationale
The outlook revision reflects our expectation that there is at least a 
one-in-three probability that the company will continue to achieve modest 
improvements in its financial metrics that would support a one-notch upgrade 
over the next 12 to 18 months. Higher ratings are possible if the company 
follows through on its intention to reduce debt with the proceeds of the shale 
assets and continues to strengthen its financial condition.

Standard & Poor's bases its rating on Black Hills Corp. on the company's 
consolidated credit profile. This includes a business risk profile we consider 
"excellent" and a financial risk profile we consider "aggressive" under our 
criteria. Black Hills is a multiple-utility energy company that includes 
electric utility Black Hills Power Inc. (BHP; BBB-/Positive/--), electric and 
natural gas utility Cheyenne Light, Fuel, & Power Co. (not rated), other 
regulated utilities that are owned by Black Hills Utility Holdings Inc. (not 
rated) and operate as Black Hills Energy, and various unregulated businesses. 
Black Hills has geographic and economic diversity, with utilities operating 
from Midwestern states to the Rocky Mountains. We project that the company 
will effectively manage its operations and construction program.

Our rating on Black Hills reflects a mostly regulated utility strategy that 
includes ongoing capital spending and dependence on continuous and timely cost 
recovery. We project that this should lead to robust cash flow measures and 
manageable debt leverage. We expect its unregulated operations in oil and gas 
exploration to be managed prudently and not increased in size beyond existing 
levels.

The excellent business profile incorporates Black Hills' strategy to be an 
energy company mostly composed of regulated utilities that have more than 
200,000 electric customers in Colorado, Montana, South Dakota, and Wyoming and 
more than 500,000 natural gas customers in Colorado, Iowa, Kansas, Nebraska, 
and Wyoming. Diversity of markets and regulation strengthen credit quality, 
but the widely dispersed operations and numerous regulatory jurisdictions 
require diligently filing for rate recovery. In addition, Black Hills' 
business profile reflects various risky unregulated energy ventures that 
comprise approximately 30% of consolidated operating income and include oil 
and gas exploration and production, unregulated power generation, and coal 
mining. Although these businesses are unregulated, the power generation, such 
as in Colorado, and coal mining operations are mostly contracted with 
affiliate utilities or power plants, so we view them as having lower risk.

Black Hills sold its energy marketing business, Enserco Energy Inc., earlier 
this year. The completed sale of this higher risk business helped to improve 
the company's business risk profile. The company received net proceeds of 
about $160 million to $170 million. The company used the proceeds pay down 
short-term debt.

The consolidated financial profile, which we consider aggressive, reflects 
adjusted financial measures that are in line with the rating. We expect that 
financial measures will strengthen over 2012 as the company incorporates cost 
recovery of the completed construction projects in Colorado in operating cash 
flow. For the 12 months ended June 30, 2012, funds from operations (FFO) 
relative to total debt was 14%, total debt to total capital was 59%, and debt 
to EBITDA was 4.6x. In addition, net cash flow (FFO after dividends) to 
capital spending was 51%. As capital spending decreases and expected cost 
recovery is put in place, cash flow should increase and permit Black Hills to 
internally fund almost all of its capital requirements. FFO interest coverage 
was 3x.

Our expectation is that financial measures will strengthen as growth in 
capital spending recedes and capital investments are reflected in revenues. 
Our baseline forecast includes FFO to total debt of 16%, total debt to total 
capital of 59%, and adjusted debt to EBITDA of about 4.7x over the 
intermediate term, all in line with an aggressive financial profile. The 
consolidated adjustments for Black Hills reflect purchased-power obligations, 
operating leases, and pension-related items.

Liquidity
Liquidity is "adequate" under Standard & Poor's liquidity methodology, which 
categorizes liquidity in five standard descriptors. Adequate liquidity 
supports our 'BBB-' issuer credit rating on Black Hills. The company's 
projected sources of liquidity, mostly operating cash flow and available bank 
lines, exceed its projected uses, mainly necessary capital expenditures and 
debt maturities, by more than 1.2x. Black Hill's ability to absorb 
high-impact, low-probability events with limited need for refinancing, its 
flexibility to lower capital spending or sell assets, its sound bank 
relationships, its solid standing in credit markets, and its generally prudent 
risk management further support our assessment of its liquidity as adequate.

We base our liquidity assessment on the following factors and assumptions:
     -- We expect Black Hills' liquidity sources, including cash, FFO, and 
parent credit facility availability over the next 12 months, to exceed uses by 
about 1.2x. Uses include necessary capital spending, working capital, debt 
maturities, and shareholder distributions.
     -- Debt maturities are manageable over the next 12 months.
     -- We believe liquidity sources would exceed uses even if EBITDA were to 
decrease by 15%.
     -- In our assessment, Black Hills has good relationships with its banks 
and has a good standing in the credit markets, having successfully issued debt 
during the recent credit crisis.

In our analysis of liquidity over the next 12 months for Black Hills, we 
assume $615 million of liquidity sources consisting of FFO and credit facility 
availability. We estimate liquidity uses of $450 million for capital spending, 
maturing debt, working capital, and shareholder distributions.

Black Hills' credit agreement includes financial covenants requiring a 
recourse leverage ratio no greater than 65%. As of June 30, 2012, the company 
was in compliance with the covenants.

Debt maturities are minimal through 2012. However, 2013 and 2014 maturities 
are $229 million and $262 million, respectively. We expect the company to 
redeem the 2013 maturity with the proceeds from the shale assets.

Outlook
The positive outlook on Black Hills reflects our view that we could raise the 
ratings one notch within the next 12 to 18 months with sustained financial 
performance above our base case forecast level of adjusted FFO to total debt 
of 16% and lower than our adjusted debt to total capital of 59%. Fundamental 
to our forecast are expectations of the redemption of debt and continued 
improvement in financial measures based on the reduction of capital spending 
and the reflection of capital investments in revenues. Our baseline forecast 
includes FFO to total debt of more than 15%, debt to EBITDA of about 4.7x, and 
debt to total capital of 60%. We could revise the outlook back to stable if 
financial performance stalls or deteriorates, such that FFO to total debt 
falls below 14% and debt to capital rises above 63% on a sustained basis.

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 
     -- Analytical Methodology, April 15, 2008 
     -- Ratios And Adjustments, April 15, 2008 

Ratings List
Ratings Affirmed; Outlook Action
                                           To                 From

Black Hills Corp.
Black Hills Power Inc.
Corporate Credit Rating                   BBB-/Positive/--   BBB-/Stable/--

Ratings Affirmed

Black Hills Corp.
 Senior Unsecured                          BBB-

Black Hills Power Inc.
 Senior Secured                            BBB+
  Recovery Rating                          1+


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