UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 |
| For the quarterly period ended June 30, 2007. |
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OR |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
| EXCHANGE ACT OF 1934 |
| For the transition period from __________ to __________. |
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| Commission File Number 1-7978 |
Black Hills Power, Inc. | |
Incorporated in South Dakota | IRS Identification Number 46-0111677 |
625 Ninth Street, Rapid City, South Dakota 57701 | |
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Registrant’s telephone number (605) 721-1700 | |
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Former name, former address, and former fiscal year if changed since last report | |
NONE |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes | x |
| No | o |
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | o |
| Accelerated filer | o |
| Non-accelerated filer | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | o |
| No | x |
As of July 31, 2007, there were issued and outstanding 23,416,396 shares of the Registrant’s common stock, $1.00 par value, all of which were held beneficially and of record by Black Hills Corporation.
Reduced Disclosure
The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
TABLE OF CONTENTS
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PART 1. | FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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| Condensed Statements of Income – |
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| Three and Six Months Ended June 30, 2007 and 2006 | 3 |
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| Condensed Balance Sheets – |
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| June 30, 2007 and December 31, 2006 | 4 |
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| Condensed Statements of Cash Flows – |
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| Six Months Ended June 30, 2007 and 2006 | 5 |
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| Notes to Condensed Financial Statements | 6-12 |
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Item 2. | Results of Operations | 13-17 |
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Item 4. | Controls and Procedures | 17 |
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PART II. | OTHER INFORMATION |
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Item 1. | Legal Proceedings | 18 |
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Item 1A. | Risk Factors | 18 |
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Item 6. | Exhibits | 18 |
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| Signatures | 19 |
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| Exhibit Index | 20 |
2
BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
| Three Months Ended | Six Months Ended | ||||||
| June 30, | June 30, | ||||||
| 2007 | 2006 | 2007 | 2006 | ||||
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Operating revenue | $ | 44,972 | $ | 47,036 | $ | 92,739 | $ | 91,004 |
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Operating expenses: |
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Fuel and purchased power |
| 16,670 |
| 20,588 |
| 33,705 |
| 36,636 |
Operations and maintenance |
| 6,775 |
| 8,095 |
| 12,680 |
| 13,402 |
Administrative and general |
| 4,463 |
| 4,991 |
| 9,628 |
| 10,826 |
Depreciation and amortization |
| 5,183 |
| 5,020 |
| 10,338 |
| 9,612 |
Taxes, other than income taxes |
| 1,821 |
| 1,851 |
| 3,783 |
| 3,940 |
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| 34,912 |
| 40,545 |
| 70,134 |
| 74,416 |
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Operating income |
| 10,060 |
| 6,491 |
| 22,605 |
| 16,588 |
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Other income (expense): |
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Interest expense |
| (2,953) |
| (3,367) |
| (5,918) |
| (6,610) |
Interest income |
| 238 |
| 465 |
| 413 |
| 751 |
Allowance for funds used |
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during construction – equity |
| 130 |
| — |
| 241 |
| — |
Other income, net |
| 18 |
| (3) |
| 162 |
| 183 |
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| (2,567) |
| (2,905) |
| (5,102) |
| (5,676) |
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Income before income taxes |
| 7,493 |
| 3,586 |
| 17,503 |
| 10,912 |
Income taxes |
| (2,612) |
| (1,150) |
| (5,923) |
| (3,577) |
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Net income | $ | 4,881 | $ | 2,436 | $ | 11,580 | $ | 7,335 |
The accompanying notes to condensed financial statements are an integral part of these condensed financial statements.
3
BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
(unaudited)
| June 30, | December 31, | ||
| 2007 | 2006 | ||
| (in thousands) | |||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 507 | $ | 1,223 |
Receivables (net of allowance for doubtful accounts |
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of $244 and $250, respectively) |
| 18,139 |
| 20,115 |
Receivables – affiliates |
| 850 |
| 1,935 |
Money pool note receivable – affiliates |
| 14,999 |
| 13,264 |
Materials, supplies and fuel |
| 17,174 |
| 17,579 |
Deferred income taxes |
| 189 |
| — |
Other current assets |
| 2,654 |
| 1,853 |
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| 54,512 |
| 55,969 |
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Investments |
| 3,711 |
| 3,552 |
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Property, plant and equipment |
| 685,940 |
| 675,987 |
Less accumulated depreciation |
| (270,646) |
| (265,247) |
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| 415,294 |
| 410,740 |
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Other assets: |
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Regulatory assets |
| 17,605 |
| 17,688 |
Other |
| 4,526 |
| 2,658 |
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| 22,131 |
| 20,346 |
| $ | 495,648 | $ | 490,607 |
LIABILITIES AND STOCKHOLDER’S EQUITY |
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Current liabilities: |
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Current maturities of long-term debt | $ | 2,005 | $ | 2,002 |
Accounts payable |
| 6,777 |
| 9,466 |
Accounts payable – affiliates |
| 2,770 |
| 3,414 |
Accrued liabilities |
| 13,918 |
| 21,862 |
Deferred income taxes |
| — |
| 138 |
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| 25,470 |
| 36,882 |
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Long-term debt, net of current maturities |
| 151,237 |
| 153,217 |
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Deferred credits and other liabilities: |
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Deferred income taxes |
| 68,403 |
| 65,164 |
Regulatory liabilities |
| 11,567 |
| 7,775 |
Other |
| 20,121 |
| 19,700 |
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| 100,091 |
| 92,639 |
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Stockholder’s equity: |
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Common stock $1 par value; 50,000,000 shares authorized; |
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23,416,396 shares issued |
| 23,416 |
| 23,416 |
Additional paid-in capital |
| 39,575 |
| 39,575 |
Retained earnings |
| 157,390 |
| 145,810 |
Accumulated other comprehensive loss |
| (1,531) |
| (932) |
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| 218,850 |
| 207,869 |
| $ | 495,648 | $ | 490,607 |
The accompanying notes to condensed financial statements are an integral part of these condensed financial statements.
4
BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| Six Months Ended | |||
| June 30, | |||
| 2007 | 2006 | ||
| (in thousands) | |||
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Operating activities: |
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Net income | $ | 11,580 | $ | 7,335 |
Adjustments to reconcile net income to cash |
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provided by operating activities: |
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Depreciation and amortization |
| 10,338 |
| 9,612 |
Deferred income tax |
| 2,942 |
| 346 |
Allowance for funds used during construction – |
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equity |
| (241) |
| — |
Change in operating assets and liabilities – |
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Accounts receivable and other current assets |
| 1,793 |
| 113 |
Accounts payable and other current liabilities |
| (11,503) |
| (1,918) |
Other operating activities |
| (1,188) |
| 1,446 |
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| 13,721 |
| 16,934 |
Investing activities: |
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Property, plant and equipment additions |
| (10,566) |
| (14,669) |
Change in note receivable from affiliate, net |
| (1,735) |
| — |
Other investing activities |
| (159) |
| (152) |
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| (12,460) |
| (14,821) |
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Financing activities: |
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Change in note payable to parent company, net |
| — |
| (819) |
Long-term debt – repayments |
| (1,977) |
| (1,974) |
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| (1,977) |
| (2,793) |
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Decrease in cash and cash equivalents |
| (716) |
| (680) |
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Cash and cash equivalents: |
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Beginning of period |
| 1,223 |
| 685 |
End of period | $ | 507 | $ | 5 |
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Supplemental disclosure of cash flow information: |
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Non-cash investing and financing activities: |
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Property, plant and equipment acquired |
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with accrued liabilities | $ | 74 | $ | 321 |
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Cash paid during the period for: |
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Interest | $ | 8,525 | $ | 6,601 |
Income taxes paid | $ | 12,477 | $ | 4,927 |
The accompanying notes to condensed financial statements are an integral part of these condensed financial statements.
5
BLACK HILLS POWER, INC.
Notes to Condensed Financial Statements
(unaudited)
(Reference is made to Notes to Financial Statements
included in the Company’s 2006 Annual Report on Form 10-K)
(1) | MANAGEMENT’S STATEMENT |
The financial statements included herein have been prepared by Black Hills Power, Inc. (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the footnotes adequately disclose the information presented. These financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company’s 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the June 30, 2007, December 31, 2006 and June 30, 2006, financial information and are of a normal recurring nature. The results of operations for the three months and six months ended June 30, 2007, are not necessarily indicative of the results to be expected for the full year.
(2) | RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS |
FIN 48
On January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes” (SFAS 109) and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 did not have a material effect on the Company’s financial position, results of operation or cash flows.
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SAB No. 108 – Effects of Prior Year Misstatements on Current Year Financial Statements
During September 2006 the staff of the SEC released SAB No. 108 on Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB No. 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction can either be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment made to the opening balance of retained earnings for that year, or by restating prior periods. Disclosure requirements include the nature and amount of each individual error being corrected in the cumulative adjustment, as well as a disclosure of when and how each error being corrected arose and the fact that the errors had previously been considered immaterial. SAB No. 108 was effective January 1, 2007. SAB No. 108 did not have a material effect on the Company’s financial position, results of operation or cash flows.
(3) | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
SFAS No. 157
During September 2006 the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which applies to other accounting pronouncements that require or permit fair value measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is currently evaluating the impact SFAS 157 will have on the Company’s financial statements.
SFAS 159
During February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159), which establishes a fair value option under which entities can elect to report certain financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS 159 will have on the Company’s financial statements.
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(4) | COMPREHENSIVE INCOME |
The following table presents the components of the Company’s comprehensive income (in thousands):
| Three Months Ended | |||
| June 30, | |||
| 2007 | 2006 | ||
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Net income | $ | 4,881 | $ | 2,436 |
Other comprehensive income, net of tax: |
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Fair value adjustment on derivatives |
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designated as cash flow hedges |
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(net of tax of $(30) and $(14), respectively) |
| 55 |
| 27 |
Reclassification adjustments included |
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in net income (net of tax of $(6) and $(6), |
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respectively) |
| 11 |
| 11 |
Comprehensive income | $ | 4,947 | $ | 2,474 |
| Six Months Ended | |||
| June 30, | |||
| 2007 | 2006 | ||
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Net income | $ | 11,580 | $ | 7,335 |
Other comprehensive income, net of tax: |
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Fair value adjustment on derivatives |
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designated as cash flow hedges |
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(net of tax of $163 and $(131), |
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respectively) |
| (303) |
| 245 |
Reclassification adjustments included |
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in net income (net of tax of $160 and $18, |
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respectively) |
| (296) |
| (34) |
Comprehensive income | $ | 10,981 | $ | 7,546 |
Balances by classification included within Accumulated other comprehensive loss on the accompanying Condensed Balance Sheets are as follows (in thousands):
| Derivatives | Employee |
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| Designated as | Benefit |
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| Cash Flow Hedges | Plans | Total | |||
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As of June 30, 2007 | $ | (1,039) | $ | (492) | $ | (1,531) |
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As of December 31, 2006 | $ | (440) | $ | (492) | $ | (932) |
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(5) | RELATED-PARTY TRANSACTIONS |
Receivables and Payables
The Company has accounts receivable balances related to transactions with other Black Hills Corporation subsidiaries. The balances were $0.9 million and $1.9 million as of June 30, 2007 and December 31, 2006, respectively. The Company also has accounts payable balances related to transactions with other Black Hills Corporation subsidiaries. The balances were $2.8 million and $3.4 million as of June 30, 2007 and December 31, 2006, respectively.
| Money Pool Notes Receivable and Notes Payable |
The Company has entered into a Utility Money Pool Agreement with Black Hills Corporation (the Parent); and Cheyenne Light, Fuel and Power, (Cheyenne Light) an electric and gas utility subsidiary of the Parent. Under the agreement, the Company may borrow from the Parent. The Agreement restricts the Company from loaning funds to the Parent or to any of the Parent’s non-utility subsidiaries; the Agreement does not restrict the Company from making dividends to the Parent. Borrowings under the agreement bear interest at the daily cost of external funds as defined under the Agreement, or if there are no external funds outstanding on that date, then the rate will be the daily one month LIBOR rate plus 100 basis points.
The Company through the Utility Money Pool had a net note receivable balance from Cheyenne Light of $15.0 million and $13.3 million as of June 30, 2007 and December 31, 2006, respectively. Advances under this note bear interest at 0.70 percent above the daily LIBOR rate (6.02 percent at June 30, 2007). Net interest income of $0.2 million and $0.1 million was recorded for the three months ended June 30, 2007 and 2006, respectively; and $0.4 million and $0.1 million for the six months ended June 30, 2007 and 2006, respectively.
Other Balances and Transactions
The Company also received revenues of approximately $0.6 million and $0.6 million for the three months ended June 30, 2007 and 2006, respectively; and $1.0 million and $0.8 million for the six months ended June 30, 2007 and 2006, respectively, from Black Hills Wyoming, Inc., an indirect subsidiary of Black Hills Corporation, for the transmission of electricity.
The Company recorded revenues of $1.3 million and $0.6 million for the six months ended June 30, 2007 and 2006, respectively, relating to payments received pursuant to a natural gas swap entered into with Enserco Energy, an indirect subsidiary of the Parent, with a third party transacted by Enserco on the Company's behalf.
The Company purchases coal from Wyodak Resources Development Corp., an indirect subsidiary of the Parent. The amount purchased during the three months ended June 30, 2007 and 2006 was $2.8 million and $2.2 million, respectively; and $5.5 million and $4.8 million for the six months ended June 30, 2007 and 2006, respectively.
In addition, the Company also pays the Parent for allocated corporate support service cost incurred on its behalf. Corporate costs allocated from the Parent were $2.9 million and $2.3 million for the three months ended June 30, 2007 and 2006, respectively; and $5.6 million and $5.3 million for the six months ended June 30, 2007 and 2006, respectively.
The Company has funds on deposit from Black Hills Wyoming for transmission system reserve in the amount of $1.7 million at June 30, 2007 and December 31, 2006, which is included in Other, Deferred credits and other liabilities on the accompanying Balance Sheets. Interest on the funds accrues quarterly at an average prime rate (8.25 percent at June 30, 2007).
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(6) | RISK MANAGEMENT |
The Company holds natural gas in storage for use as fuel for generating electricity with its gas-fired combustion turbines. To minimize associated price risk and seasonal storage level requirements, the Company utilizes various derivative instruments in managing these risks. On June 30, 2007 and December 31, 2006, the Company had the following derivatives and related balances (in thousands):
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| Maximum | Current | current | Current | current | Other | |||||
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| Terms in | Derivative | Derivative | Derivative | Derivative | Comprehensive | |||||
| Notional* | Years | Assets | Assets | Liabilities | Liabilities | Income/(Loss) | |||||
June 30, |
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2007 |
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Natural gas |
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swaps | 455,000 | 0.83 | $ | — | $ | — | $ | 76 | $ | — | $ | (76) |
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December 31, |
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2006 |
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Natural gas |
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swaps | 310,000 | 0.25 | $ | 878 | $ | — | $ | — | $ | — | $ | 878 |
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*gas in MMbtu’s
Based on June 30, 2007 market prices, a loss of $(0.1) million would be realized and reported in pre-tax earnings during the next twelve months related to derivatives designated as a cash flow hedge. Estimated and actual realized losses will likely change during the next twelve months as market prices change.
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(7) | EMPLOYEE BENEFIT PLANS |
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (Plan) covering the employees of the Company who meet certain eligibility requirements.
The components of net periodic benefit cost for the Plan are as follows (in thousands):
| Three Months Ended | Six Months Ended | ||||||
| June 30, | June 30, | ||||||
| 2007 | 2006 | 2007 | 2006 | ||||
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Service cost | $ | 284 | $ | 271 | $ | 568 | $ | 542 |
Interest cost |
| 731 |
| 680 |
| 1,462 |
| 1,360 |
Expected return on plan assets |
| (971) |
| (889) |
| (1,942) |
| (1,778) |
Prior service cost |
| 26 |
| 26 |
| 52 |
| 52 |
Net loss |
| 102 |
| 166 |
| 204 |
| 332 |
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Net periodic benefit cost | $ | 172 | $ | 254 | $ | 344 | $ | 508 |
The Company does not anticipate that it will need to make a contribution to the Plan in the 2007 fiscal year.
Supplemental Nonqualified Defined Benefit Plans
The Company has various supplemental retirement plans for key executives of the Company (Supplemental Plans). The Supplemental Plans are non-qualified defined benefit plans.
The components of net periodic benefit cost for the Supplemental Plans are as follows (in thousands):
| Three Months Ended | Six Months Ended | ||||||
| June 30, | June 30, | ||||||
| 2007 | 2006 | 2007 | 2006 | ||||
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Interest cost | $ | 28 | $ | 28 | $ | 56 | $ | 56 |
Net loss |
| 14 |
| 16 |
| 28 |
| 32 |
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Net periodic benefit cost | $ | 42 | $ | 44 | $ | 84 | $ | 88 |
The Company anticipates that it will make contributions to the Supplemental Plans for the 2007 fiscal year of approximately $0.1 million. Contributions are expected to be in the form of benefit payments.
11
Non-pension Defined Benefit Postretirement Plans
Employees who are participants in the Company’s Postretirement Healthcare Plans (Healthcare Plans) and who meet certain eligibility requirements are entitled to postretirement healthcare benefits.
The components of net periodic benefit cost for the Healthcare Plans are as follows (in thousands):
| Three Months Ended | Six Months Ended | ||||||
| June 30, | June 30, | ||||||
| 2007 | 2006 | 2007 | 2006 | ||||
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Service cost | $ | 52 | $ | 62 | $ | 104 | $ | 124 |
Interest cost |
| 100 |
| 100 |
| 200 |
| 200 |
Net transition obligation |
| 13 |
| 29 |
| 26 |
| 58 |
Prior service cost |
| — |
| (5) |
| — |
| (10) |
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Net periodic benefit cost | $ | 165 | $ | 186 | $ | 330 | $ | 372 |
The Company anticipates that it will make contributions to the Healthcare Plan for the 2007 fiscal year of approximately $0.2 million. Contributions are expected to be made in the form of benefit payments.
It has been determined that the Company’s post-65 retiree prescription drug plans are actuarially equivalent and qualify for the Medicare Part D subsidy. The decrease in net periodic postretirement benefit cost due to the subsidy is not material to the Company.
(8) | LEGAL PROCEEDINGS |
The Company is subject to various legal proceedings, claims and litigation as described in Note 11 of the Notes to Consolidated Financial Statements in the Company’s 2006 Annual Report on Form 10-K. There have been no material developments in any previously reported proceedings or any new material proceedings that have developed or material proceedings that have terminated during the first six months of 2007.
12
ITEM 2. | RESULTS OF OPERATIONS |
| Three Months Ended | Six Months Ended | ||||||
| June 30, | June 30, | ||||||
| 2007 | 2006 | 2007 | 2006 | ||||
| (in thousands) | |||||||
|
|
|
|
|
|
|
|
|
Revenue | $ | 44,972 | $ | 47,036 | $ | 92,739 | $ | 91,004 |
Operating expenses |
| 34,912 |
| 40,545 |
| 70,134 |
| 74,416 |
Operating income | $ | 10,060 | $ | 6,491 | $ | 22,605 | $ | 16,588 |
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
and net income | $ | 4,881 | $ | 2,436 | $ | 11,580 | $ | 7,335 |
The following tables provide certain operating statistics for the Company:
| Electric Revenue | |||||||||
| (in thousands) | |||||||||
|
| |||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||
|
| Percentage |
|
| Percentage |
| ||||
Customer Base | 2007 | Change | 2006 | 2007 | Change | 2006 | ||||
|
|
|
|
|
|
|
|
|
|
|
Commercial | $ | 13,094 | 10% | $ | 11,892 | $ | 26,193 | 12% | $ | 23,290 |
Residential |
| 9,667 | 9 |
| 8,868 |
| 22,079 | 13 |
| 19,556 |
Industrial |
| 5,482 | 6 |
| 5,187 |
| 10,578 | 4 |
| 10,198 |
Municipal sales |
| 647 | 9 |
| 591 |
| 1,226 | 10 |
| 1,111 |
Total retail sales |
| 28,890 | 9 |
| 26,538 |
| 60,076 | 11 |
| 54,155 |
Contract wholesale |
| 5,832 | (1) |
| 5,920 |
| 12,289 | 2 |
| 12,028 |
Wholesale off system |
| 7,415 | (30) |
| 10,575 |
| 13,998 | (26) |
| 18,809 |
Total electric sales |
| 42,137 | (2) |
| 43,033 |
| 86,363 | 2 |
| 84,992 |
Other revenue |
| 2,835 | (29) |
| 4,003 |
| 6,376 | 6 |
| 6,012 |
Total revenue | $ | 44,972 | (4)% | $ | 47,036 | $ | 92,739 | 2% | $ | 91,004 |
| Megawatt Hours Sold | |||||||||
|
| |||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||
|
| Percentage |
|
| Percentage |
| ||||
Customer Base | 2007 | Change | 2006 | 2007 | Change | 2006 | ||||
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| 160,482 | 2% |
| 158,046 |
| 326,576 | 3% |
| 316,639 |
Residential |
| 106,788 | 1 |
| 105,484 |
| 259,524 | 5 |
| 247,278 |
Industrial |
| 110,004 | 2 |
| 108,333 |
| 209,258 | (1) |
| 211,360 |
Municipal sales |
| 7,788 | 2 |
| 7,652 |
| 15,208 | 3 |
| 14,711 |
Total retail sales |
| 385,062 | 1 |
| 379,515 |
| 810,566 | 3 |
| 789,988 |
Contract wholesale |
| 151,828 | (2) |
| 154,694 |
| 316,938 | — |
| 316,945 |
Wholesale off system |
| 150,363 | (44) |
| 268,174 |
| 284,212 | (37) |
| 448,337 |
Total electric sales |
| 687,253 | (14) |
| 802,383 |
| 1,411,716 | (9) |
| 1,555,270 |
13
| Three Months Ended | Six Months Ended | ||
| June 30, | June 30, | ||
| 2007 | 2006 | 2007 | 2006 |
Regulated power |
|
|
|
|
plant fleet availability: |
|
|
|
|
Coal fired plants | 93.9% | 83.9% | 94.6% | 90.6% |
Other plants | 99.1% | 99.5% | 99.5% | 99.4% |
Total availability | 96.2% | 90.9% | 96.8% | 94.5% |
| Three Months Ended | Six Months Ended | ||||
| June 30, | June 30, | ||||
|
| Percentage |
|
| Percentage |
|
Resources | 2007 | Change | 2006 | 2007 | Change | 2006 |
|
|
|
|
|
|
|
MWhs generated: |
|
|
|
|
|
|
Coal | 434,707 | 19% | 366,821 | 875,225 | 7% | 820,954 |
Gas | 28,643 | 149 | 11,482 | 34,341 | 151 | 13,693 |
| 463,350 | 22% | 378,303 | 909,566 | 9% | 834,647 |
|
|
|
|
|
|
|
MWhs purchased | 254,588 | (45)% | 464,219 | 549,051 | (29)% | 776,506 |
Total resources | 717,938 | (15)% | 842,522 | 1,458,617 | (9)% | 1,611,153 |
| Three Months Ended | Six Months Ended | ||
| June 30, | June 30, | ||
| 2007 | 2006 | 2007 | 2006 |
Heating and cooling degree days: |
|
|
|
|
Actual |
|
|
|
|
Heating degree days | 857 | 710 | 3,912 | 3,656 |
Cooling degree days | 203 | 211 | 203 | 211 |
|
|
|
|
|
Percent of normal |
|
|
|
|
Heating degree days | 86% | 71% | 91% | 85% |
Cooling degree days | 201% | 209% | 201% | 209% |
14
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006. Income from continuing operations increased $2.4 million primarily due to lower maintenance expenses compared to 2006, which included a planned maintenance outage of the Wyodak plant, and higher retail revenues in 2007 resulting from rate increases that went into effect January 1, 2007. These items were partially offset by higher allocated corporate costs and lower gross margin from off-system sales.
Total revenues decreased 4 percent for the three month period ended June 30, 2007, compared to the same period in the prior year. Wholesale off-system sales decreased 30 percent due to a 44 percent decrease in MWhs sold partially offset by a 25 percent increase in average price received. MWhs available for wholesale off-system sales decreased from the prior period due to storm damage related transmission constraints to the east of our AC-DC transmission tie and increased native load. Following transmission repairs, we were able to resume full utilization of the AC-DC tie in June 2007. Decreases in off-system sales were partially offset by higher revenues from retail sales resulting from the January 1, 2007 rate increase and a slight increase in MWhs sold.
Operating expenses decreased 14 percent for the three month period ended June 30, 2007, compared to the same period in the prior year. Fuel and purchased power costs decreased 19 percent primarily due to a 14 percent decrease in MWh resource requirements resulting from a significant decrease in off-system sales volumes and higher MWhs generated from our low-cost coal resources due to the availability of the Wyodak plant for the whole period, partially offset by higher per MWh cost for purchased power. Maintenance costs for the three month period ended June 30, 2007 also decreased compared to costs incurred for 2006.
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006. Income from continuing operations increased $4.2 million primarily due to lower maintenance expenses compared to 2006, which included a planned maintenance outage of the Wyodak plant and higher retail revenues in 2007 resulting from rate increases that went into effect January 1, 2007. These items were partially offset by lower gross margin from off-system sales.
Revenues increased 2 percent for the six month period ended June 30, 2007, compared to the same period in the prior year. Higher retail revenues resulted from rate increases that went into effect January 1, 2007 and a 3 percent increase in MWhs sold, partially offset by wholesale off-system sales decreasing 26 percent due to a 37 percent decrease in MWhs sold partially offset by a 17 percent increase in average price received. MWhs available for wholesale off-system sales decreased from the prior period due to storm damage related transmission constraints to the east of our AC-DC transmission tie and increased native load. Following transmission repairs, we were able to resume full utilization of the AC-DC tie in June 2007.
Operating expenses decreased 6 percent for the six month period ended June 30, 2007, compared to the same period in the prior year. Fuel and purchased power costs decreased 8 percent, primarily due to a 9 percent decrease in MWh resource requirements resulting from a significant decrease in MWhs sold off-system and higher MWhs generated from our low-cost coal resources due to the increased availability of the Wyodak plant for the period, partially offset by higher per MWh cost for purchased power. Operating expense for the six months ended June 30, 2007 was also affected by decreased maintenance costs compared to costs incurred for 2006 scheduled outages and higher depreciation expense.
15
SAFE HARBOR FOR FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes “forward-looking statements” as defined by the Securities and Exchange Commission, or SEC. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including the risk factors described in Item 1A of our 2006 Annual Report on Form 10-K and in Item 1A. of Part II of this Quarterly Report on Form 10-Q filed with the SEC, and the following:
• Our ability to obtain adequate cost recovery for our retail utility operations through regulatory proceedings and receive favorable rulings in the periodic applications to recover costs for fuel and purchased power; |
• The amount and timing of capital deployment in new investment opportunities or for the repurchase of debt or stock; |
• Our ability to successfully maintain or improve our corporate credit rating; |
• The timing and extent of scheduled and unscheduled outages of power generation facilities; |
• The possibility that we may be required to take impairment charges to reduce the carrying value of some of our long-lived assets when indicators of impairment emerge; |
• Changes in business and financial reporting practices arising from the enactment of the Energy Policy Act of 2005. |
• Our ability to remedy any deficiencies that may be identified in the review of our internal controls; |
• The timing, volatility and extent of changes in energy-related and commodity prices, interest rates, energy and commodity supply or volume, the cost and availability of transportation of commodities, and demand for our services, all of which can affect our earnings, liquidity position and the underlying value of our assets; |
• Our ability to effectively use derivative financial instruments to hedge commodity risks; |
• Our ability to minimize defaults on amounts due from counterparty transactions; |
• Changes in or compliance with laws and regulations, particularly those relating to taxation, safety and protection of the environment; |
• Weather and other natural phenomena; |
• Industry and market changes, including the impact of consolidations and changes in competition; |
• The effect of accounting policies issued periodically by accounting standard-setting bodies; |
• The cost and effects on our business, including insurance, resulting from terrorist actions or responses to such actions or events; |
• The outcome of any ongoing or future litigation or similar disputes and the impact on any such outcome or related settlements; |
• Capital market conditions, which may affect our ability to raise capital on favorable terms; |
• Price risk due to marketable securities held as investments in benefit plans; |
• General economic and political conditions, including tax rates or policies and inflation rates; and |
• Other factors discussed from time to time in our other filings with the SEC. |
16
New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of June 30, 2007. Based on their evaluation, they have concluded that our disclosure controls and procedures are adequate and effective.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2007 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
17
BLACK HILLS POWER, INC.
Part II – Other Information
Item 1. | Legal Proceedings |
For information regarding legal proceedings, see Note 11 of Notes to Consolidated Financial Statements in Item 8 of the Company’s 2006 Annual Report on Form 10-K and Note 8 of our Notes to Financial Statements in this Quarterly Report on Form 10-Q, which information from Note 8 is incorporated by reference into this item.
Item 1A. | Risk Factors |
There have been no material changes in our Risk Factors from those reported in Item 1A. of Part I of our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Item 6. | Exhibits |
Exhibit 31.1 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 31.2 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
18
BLACK HILLS POWER, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BLACK HILLS POWER, INC. |
|
|
|
|
| David R. Emery |
| David R. Emery, Chairman, President and |
| Chief Executive Officer |
|
|
|
|
| /s/ Mark T. Thies |
| Mark T. Thies, Executive Vice President and |
| Chief Financial Officer |
|
|
Dated: August 14, 2007 |
|
19
EXHIBIT INDEX
Exhibit Number | Description |
|
|
|
|
Exhibit 31.1 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 31.2 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
20