United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2001.
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from _______________ to _______________.
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
Registrant's telephone number (605)-721-1700
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
---------- ----------
As of April 30, 2001, 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.
1
BLACK HILLS POWER, INC.
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income- 3
Three Months Ended
March 31, 2001 and 2000
Consolidated Balance Sheets- 4-5
March 31, 2001 and December 31, 2000
Consolidated Statements of Cash Flows- 6
Three Months Ended
March 31, 2001 and 2000
Notes to Consolidated Financial Statements 7-12
Item 2. Results of Operations 12-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months
March 31
2001 2000
---- ----
(in thousands)
Operating revenues $88,625 $33,299
------- -------
Operating expenses:
Fuel and purchased power 30,090 7,970
Operations and maintenance 6,946 5,005
Administrative and general 7,453 966
Depreciation and amortization 6,871 3,909
Taxes, other than income taxes 3,035 1,806
------- -------
54,395 19,656
------- -------
Operating income 34,230 13,643
------- -------
Other income and (expense):
Interest expense (10,767) (4,535)
Investment income 1,943 1,324
Other, net 1,221 182
------- -------
(7,603) (3,029)
------- -------
Income from continuing operations before minority interest and
income taxes 26,627 10,614
Minority interest (1,960) -
Income taxes (8,418) (3,389)
------- -------
Income from continuing operations 16,249 7,225
Discontinued operation, net of income taxes (Note 2) 4,832 1,836
------- -------
Net income $21,081 $9,061
======= =======
See accompanying notes to consolidated financial statements.
3
BLACK HILLS POWER, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
2001 2000
---- ----
(in thousands)
Assets
Current assets:
Cash and cash equivalents $ 27,109 $ 12,697
Receivables (net of allowance for doubtful accounts of $1,961
and $3,631, respectively)
Customers 18,395 19,339
Related party 112,827 89,203
Other 16,114 19,653
Materials, supplies and fuel 10,148 10,703
Prepaid expenses 6,748 6,788
Assets of discontinued operations (Note 2) - 247,548
-------- ----------
191,341 405,931
-------- ----------
Investment in affiliates 58,980 56,225
-------- ----------
Property and equipment 834,584 817,728
Less accumulated depreciation (214,989) (207,805)
-------- ----------
Net property and equipment 619,595 609,923
-------- ----------
Other assets:
Regulatory asset 4,134 4,133
Other 32,650 31,714
-------- ----------
36,784 35,847
-------- ----------
Total $906,700 $1,107,926
======== ==========
See accompanying notes to consolidated financial statements
4
BLACK HILLS POWER, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31 December 31
2001 2000
---- ----
(in thousands)
Liabilities and Stockholder's Equity
Current liabilities:
Current maturities of long-term debt $ 13,133 $ 13,961
Notes payable 97,129 86,000
Notes payable - related party 111,608 95,222
Accounts payable 20,605 15,232
Accounts payable - related party 3,450 1,258
Accrued liabilities 27,074 23,746
Derivatives at market value 12,435 -
Liabilities of discontinued operations (Note 2) - 163,661
---------- ----------
285,434 399,080
---------- ----------
Long-term debt, net of current maturities 305,463 307,090
---------- ----------
Deferred credits:
Federal income taxes 53,049 54,706
Investment tax credits 2,410 2,530
Regulatory liability 4,551 4,673
Other 10,602 9,459
--------- ----------
70,612 71,368
--------- ----------
Minority interest in subsidiaries 35,415 37,963
--------- ----------
Stockholder's equity:
Common stock $1 par value; 50,000,000 shares authorized;
Issued: 23,416,396 and 23,416,396 shares, respectively 23,416 23,416
Additional paid-in capital 77,326 77,326
Retained earnings 117,371 191,683
Accumulated other comprehensive income (loss) (8,337) -
--------- ----------
Total stockholder's equity 209,776 292,425
--------- ----------
Total $ 906,700 $1,107,926
========= ==========
See accompanying notes to consolidated financial statements.
5
BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months
March 31
2001 2000
---- ----
(in thousands)
Cash flows from operations $15,323 $16,137
------- -------
Investing activities:
Property additions (16,543) (3,353)
Available for sale securities sold - 4,315
Increase in investments (2,755) (15,867)
-------- -------
(19,298) (14,905)
-------- -------
Financing activities
Dividends paid (6,673) (5,872)
Common stock issued - 160
Increase (decrease) in short-term borrowings 27,515 5,000
Long-term debt payments (2,455) (526)
------- -------
18,387 (1,238)
------- -------
Increase (decrease) in cash and cash equivalents 14,412 (6)
Cash and cash equivalents:
Beginning of period 12,697 3,798
------- -------
End of period $27,109 $ 3,792
======= =======
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 7,831 $ 5,470
Stock dividend distribution to Black Hills Corporation, the
parent company of Black Hills Power, Inc. (Note 2) $89,643 $ -
See accompanying notes to consolidated financial statements.
6
BLACK HILLS POWER, INC.
Notes to Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company's 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 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 2000 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 March 31, 2001,
December 31, 2000 and March 31, 2000, financial information and are of a
normal recurring nature. The results of operations for the three months
ended March 31, 2001, are not necessarily indicative of the results to
be expected for the full year.
(2) NON-CASH DIVIDEND AND DISCONTINUED OPERATIONS
During the quarter ended March 31, 2001, the Company distributed a
non-cash dividend to its parent company, Black Hills Corporation
(Parent). The dividend consisted of 50,000 common shares of Wyodak
Resources Development Corporation (Wyodak), which represents 100 percent
ownership of Wyodak. The Company therefore no longer operates in the
coal production segment, oil and natural gas production segment, fuel
marketing segment or communications as the Company had indirectly owned
the companies operating in these segments through its ownership of
Wyodak. As a result the Company's only subsidiary is Black Hills Energy
Capital and its subsidiaries. The Company's investment in Wyodak at the
time of the distribution was $89.6 million.
7
The consolidated financial statements and notes to consolidated
financial statements have been restated to reflect the continuing
operations of the Company for all periods presented. The assets and
liabilities of Wyodak are shown in the Consolidated Balance Sheets under
the captions "Assets of discontinued operations" and "Liabilities of
discontinued operations".
The net operating results of discontinued operations are included in the
Consolidated Statements of Income under the caption "Discontinued
operations, net of income taxes" and are summarized as follows:
Three Months Ended Three Months Ended
March 31, 2001 March 31, 2000
-------------- --------------
(in thousands)
Revenue $197,274 $215,583
Income before income taxes 7,849 3,190
Federal income taxes 3,017 643
Net income 4,832 1,836
(3) RECLASSIFICATIONS
Certain 2000 amounts in the financial statements have been reclassified
to conform to the 2001 presentation. These reclassifications did not
have an effect on the Company's stockholders' investment or results of
operations as previously reported.
(4) CHANGE IN ACCOUNTING PRINCIPLE
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133, as amended, establishes accounting and
reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured
at its fair value. The Statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS 133 allows special hedge accounting for fair value and cash flow
hedges. The Statement provides that the gain or loss on a derivative
instrument designated and qualifying as a fair value hedging instrument
as well as the offsetting loss or gain on the hedged item attributable
to the hedged risk be recognized currently in earnings in the same
accounting period. SFAS 133 provides that the effective portion of the
gain or loss on a derivative instrument designated and qualifying as a
cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same
period or periods during which the hedged forecasted transaction
affects earnings.
8
The remaining gain or loss on the derivative instrument, if any, must
be recognized currently in earnings.
SFAS 133 requires that on date of initial adoption, an entity shall
recognize all freestanding derivative instruments in the balance sheet
as either assets or liabilities and measure them at fair value. The
difference between a derivative's previous carrying amount and its fair
value shall be reported as a transition adjustment. The transition
adjustment resulting from adopting this Statement shall be reported in
net income or other comprehensive income, as appropriate, as the effect
of a change in accounting principle in accordance with paragraph 20 of
Accounting Principles Board Opinion No. 20 (APB 20), "Accounting
Changes."
On January 1, 2001, the Company adopted SFAS 133. The Company had
certain interest rate swaps documented as cash flow hedges, which upon
adoption resulted in a cumulative decrease to accumulated other
comprehensive income of $7.5 million.
(5) COMPREHENSIVE INCOME
The following table presents the components of the Company's
comprehensive income:
Three Months Ended
March 31
2001 2000
---- ----
(in thousands)
Net income $21,081 $9,061
Other comprehensive income:
Fair value adjustment on derivatives designated as cash
flow hedges, net of minority interest (8,337) -
------- ------
Comprehensive income $12,744 $9,061
======= ======
(6) RELATED-PARTY TRANSACTIONS
Receivables
-----------
The Company has an unsecured line of credit extended to Black Hills
Fiber Systems, an indirect subsidiary of Black Hills Corporation, which
is due on demand. Outstanding advances were $110.8 million and $87.8
million as of March 31, 2001 and December 31, 2000, respectively.
Advances under the note bear interest at prime rate (8.0 percent at
March 31, 2001) and interest is receivable monthly. Interest income
received on the note for the three months ended March 31, 2001 and 2000
was $1.9 million and $0, respectively.
In addition, the Company has accounts receivable balances related to
transactions with other Black Hills Corporation subsidiaries. The
balances were $2.0 million and $1.4 million as of March 31, 2001 and
December 31, 2000, respectively.
Note Payable
------------
The Company has a unsecured line of credit with Wyodak Resource
Development Corporation, an indirect subsidiary of Black Hills
Corporation, which is due on demand. Borrowings under the note bear
interest at a rate based on LIBOR plus 1.375 and certain
9
adjustments (7.245 percent at March 31, 2001) and interest is payable
monthly. Interest expense on the borrowings under the note for the
three months ended March 31, 2001 and 2000 was $1.7 million and $0,
respectively.
Other Balances and Transactions
-------------------------------
In addition to the notes described above, the Company purchased natural
gas to fuel its combustion turbine from Enserco Energy, an indirect
subsidiary of Black Hills Corporation. The amount purchased during the
three month period ended March 31, 2001 was approximately $3.6 million
and is included in "Fuel and purchased power" on the Consolidated
Statements of Income.
In the opinion of management, the described related-party transactions
have been fair and reasonable to the Company and have been entered into
under terms and rates substantially the same as those transactions
entered into with unrelated third parties in the ordinary course of
business.
(7) SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY'S BUSINESS
The Company's reportable segments are those that are based on the
Company's method of internal reporting, which generally segregates the
strategic business groups due to differences in products, services and
regulation. Prior to the first quarter of 2001, the Company reported
six operating segments consisting of Electric, Mining, Oil and Gas,
Fuel Marketing, Independent Power and Communications. Due to the
distribution of Wyodak common stock as described in Note 2, the Company
no longer has companies operating in the Mining, Oil and Gas, Fuel
Marketing and Communications segments.
The Company's operations are now conducted through two business
segments. As of March 31, 2001, substantially all of the Company's
operations and assets are located within the United States. The two
segments consist of: Electric, which supplies electric utility service
to western South Dakota, northeastern Wyoming and southeastern Montana;
and Independent Power, which produces and sells power to wholesale
customers. Independent Power's operations were not significant to the
Company until the Indeck Capital acquisition in the third quarter of
2000.
Segment information follows the same accounting policies as described
in Note 1 of the Company's 2000 Annual Report on Form 10-K. Segment
information included in the accompanying Consolidated Balance Sheets
and Consolidated Statements of Income is as follows (in thousands):
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
(In thousands)
Quarter to Date
March 31, 2001
Electric $ 70,580 $ - $17,337
Independent power 18,045 - (1,088)
-------- ---------- -------
Total $88,625 $ - $16,249
======== ========== =======
10
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
(In thousands)
Quarter to Date
March 31, 2000
Electric $ 33,299 $ - $7,225
========= ========= ======
(8) LEGAL PROCEEDINGS
On April 3rd, 2001, Wyodak reached a settlement of ongoing litigation
with PacifiCorp filed in the United States District Court, District of
Wyoming, (File No. 0cv-155B). The litigation concerned the parties'
rights and obligations under the Further Restated and Amended Coal
Supply Agreement dated May 5, 1987, by which PacifiCorp purchased coal
from our coal mine to meet the coal requirements of the Wyodak Power
Plant. The Settlement Agreement provided for the dismissal of the
litigation, with prejudice, coupled with the execution of several new
coal-related agreements between the parties. As discussed in Note 2,
the Company has distributed its ownership of Wyodak to its parent
company. As a result, the Company is no longer a concerned party to
this litigation.
(9) PRICE RISK MANAGEMENT
Financing Activities
--------------------
To reduce risk from fluctuations in interest rates, the Company enters
into interest rate swap transactions. These transactions are used to
hedge interest rate risk for variable rate debt financing. For such
transactions, the Company utilizes hedge accounting per the
requirements of SFAS 133. These transactions were identified as cash
flow hedges, properly documented, and effectiveness testing
established. At quarter-end, these hedges met effectiveness testing
criteria and retained their cash flow hedge status. At March 31, 2001,
the Company had interest rate swaps with a average balance notional
amount of $163.3 million, having a maximum term of six years and a fair
value of $(12.4) million. Because these hedges are fully effective (no
time value or basis risk), the entire derivative fair value is recorded
in other comprehensive income.
At March 31, 2001, the Company had $254.5 million of outstanding,
floating-rate debt of which $78.3 million was not offset with interest
rate swap transactions that effectively convert the debt to a fixed
rate.
Credit Risk
-----------
In addition to the risk associated with price movements, credit risk is
also inherent in the Company's risk management activities. Credit risk
relates to the risk of loss resulting from non-performance of
contractual obligations by a counterparty. While the Company has not
experienced significant losses due to the credit risk associated with
these arrangements, the Company has off-balance sheet risk to the
extent that the counterparties to these transactions may fail to
perform as required by the terms of each such contract.
11
(10) SUBSEQUENT EVENTS
Acquisitions
------------
Early in the second quarter of 2001, the Company's independent power
subsidiary, Black Hills Energy Capital, closed on the purchase of the
Fountain Valley facility, a 240 megawatt generation facility located
near Colorado Springs, Colorado, featuring six LM-6000 simple-cycle,
gas-fired turbines. The facility is currently under construction and is
expected to come on-line early in the third quarter of 2001. The
facility was purchased from Enron Corporation for approximately $175
million and was financed primarily with non-recourse financing from
Union Bank of California.
In addition, the Company has obtained an 11-year contract with Public
Service of Colorado to utilize the facility for peaking purposes. The
contract is a tolling arrangement in which the Company assumes no fuel
risk.
ITEM 2. RESULTS OF OPERATIONS
Consolidated Results
Consolidated earnings for the three months ended March 31, 2001 were
$21.1 million compared to $9.1 million in the same period of the prior
year. Consolidated earnings from continuing operations for the three
month period ended March 31, 2001 were $16.2 million compared to $7.2
million for the same period of the prior year. As discussed in Note 2
of Notes to Consolidated Financial Statements, during the quarter ended
March 31, 2001, the Company distributed ownership interest in Wyodak to
its parent company, Black Hills Corporation. The consolidated financial
statements have been restated to reflect the continuing operations of
the Company for all periods presented.
The increase in earnings from continuing operations for the three
months ended March 31, 2001 were driven by expanded power generation
and increased wholesale off-system utility sales. Unusual energy market
conditions in the United States continue to contribute to our strong
financial performance.
The increase in earnings from discontinued operations for the three
months ended March 31, 2001 were primarily driven by strong natural gas
marketing activity, increased fuel production and expanded power
generation partially offset by losses in the communications group.
Strong earnings growth for both the continuing and discontinued
operations of the Company was partially offset by reserves for exposure
to the unstable markets in the western United States.
Consolidated revenues from continuing operations for the three months
ended March 31, 2001 were $88.6 million compared to $33.3 million for
the same period of the prior year. The growth in revenues was a result
of high electric energy prices, primarily as a result of extreme price
volatility in the western markets, and increases in off-system sales by
our electric utility.
12
Electric Utility
Three Months Ended
March 31
2001 2000
---- ----
(in thousands)
Revenue $70,580 $33,299
Operating income 28,664 13,644
Net income 17,337 7,225
EBITDA 33,167 17,478
Electric utility revenues increased 112 percent for the three month periods
ended March 31, 2001 compared to the same period in the prior year. Earnings for
the segment increased 141 percent over the same period. The increase in revenues
and earnings was primarily due to a 145 percent increase in wholesale off-system
sales at average prices that were seven times higher than the average prices in
the same periods of the prior year. The increase in off-system sales was driven
by high spot market prices for energy, which enabled us to generate more energy
from our combustion turbine facilities, including the Neil Simpson combustion
turbine which we placed into commercial operation in June 2000.
Independent Power Production
Our independent power segment produced revenues of $18.0 million and earnings of
$(1.1) million for the three month period ended March 31, 2001. Current periods
results stem from our acquisition of Indeck Capital in the third quarter of
2000. The net loss for the current three month period is due to credit reserves
of $2.5 million being established to offset this segments' direct exposure to
the volatile western markets.
Early in the second quarter of 2001, we closed on the purchase of the Fountain
Valley facility, a 240 megawatt generation facility located near Colorado
Springs, Colorado, featuring six LM-6000 simple-cycle, gas-fired turbines. The
facility is currently under construction and is expected to come on-line early
in the third quarter of 2001. In addition, we obtained an 11-year contract with
Public Service of Colorado to utilize the facility for peaking purposes. The
contract is a tolling arrangement in which the Company assumes no fuel risk.
13
BLACK HILLS POWER, INC.
Part II - Other Information
Item 1. Legal Proceedings
-----------------
On April 3, 2001, our former subsidiary, Wyodak Resources
Development Corporation, reached a settlement of ongoing
litigation with PacifiCorp filed in the United States District
Court, District of Wyoming (File No. 0cv-155B). For more
information on this legal proceeding, see Note 8 - LEGAL
PROCEEDINGS - of Notes to Consolidated Financial Statements in
this Form 10-Q.
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
None
14
BLACK HILLS CORPORATION
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 CORPORATION
/s/ Roxann R. Basham
----------------------------------------------
Roxann R. Basham, Vice President - Controller
(Principal Accounting Officer)
Mark T. Thies
----------------------------------------------
Mark T. Thies, Senior VP & CFO
(Principal Financial Officer)
Dated: May 21, 2001
15