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 June 30, 2002.
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 July 31, 2002, 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.
BLACK HILLS POWER, INC.
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income- 3
Three and Six Months Ended
June 30, 2002 and 2001
Condensed Consolidated Balance Sheets- 4
June 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Cash Flows- 5
Six Months Ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6-14
Item 2. Results of Operations 15-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
BLACK HILLS POWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Six Months
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Operating revenues $75,509 $84,077 $143,094 $172,701
------- ------- -------- --------
Operating expenses:
Fuel and purchased power 13,654 14,763 25,235 44,853
Operations and maintenance 9,165 10,524 16,771 17,468
Administrative and general 9,986 8,403 15,352 15,857
Depreciation and amortization 11,344 6,964 21,604 13,836
Taxes, other than income taxes 3,566 2,899 7,413 5,934
------- ------- -------- --------
47,715 43,553 86,375 97,948
------- ------- -------- --------
Operating income 27,794 40,524 56,719 74,753
------- ------- -------- --------
Other income and (expense):
Interest expense (12,350) (10,679) (23,652) (21,446)
Investment income 593 1,898 1,085 3,841
Other expense (497) (181) (573) (310)
Other income 681 2,801 1,825 4,152
-------- ------- -------- --------
(11,573) (6,161) (21,315) (13,763)
-------- ------- -------- --------
Income from continuing operations before
minority interest, income taxes and change
in accounting principle 16,221 34,363 35,404 60,990
Minority interest (1,836) (2,611) (4,102) (4,571)
Income taxes (5,254) (11,781) (11,083) (20,199)
-------- ------- -------- --------
Income from continuing operations, before
change in accounting principle 9,131 19,971 20,219 36,220
Discontinued operation, net of income taxes
(Note 2) - - - 4,832
Change in accounting principle - - 896 -
-------- ------- -------- --------
Net income $ 9,131 $19,971 $21,115 $41,052
======== ======= ======== ========
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
3
BLACK HILLS POWER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30 December 31
2002 2001
---- ----
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 36,502 $ 14,832
Accounts receivable (net of allowance for doubtful accounts of $1,974 and $2,677, respectively) 39,523 32,334
Accounts receivable - related party 754 9,457
Materials, supplies and fuel 18,464 10,399
Derivative assets 243 -
Prepaid expenses 14,360 9,822
---------- ----------
109,846 76,844
---------- ----------
Investments 15,444 51,543
---------- ----------
Property and equipment 1,407,597 1,249,800
Less accumulated depreciation (289,141) (240,472)
---------- ----------
1,118,456 1,009,328
---------- ----------
Other assets:
Regulatory asset 4,071 4,071
Goodwill 27,059 25,566
Intangible assets 93,244 85,983
Derivative asset 156 5,746
Other 7,689 10,493
---------- ----------
132,219 131,859
---------- ----------
Total $1,375,965 $1,269,574
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 36,432 $ 35,881
Notes payable 24 450
Notes payable - related party 488,390 447,125
Accounts payable 9,553 13,271
Accounts payable - related party 518 4,385
Accrued liabilities 26,684 16,929
Derivative liability 7,514 10,212
---------- ----------
569,115 528,253
---------- ----------
Long-term debt, net of current maturities 475,552 415,314
---------- ----------
Deferred credits:
Federal income taxes 61,602 61,239
Regulatory liability 5,828 6,249
Derivative liability 6,255 5,949
Other 8,999 11,306
---------- ----------
82,684 84,743
---------- ----------
Minority interest in subsidiaries 22,549 19,536
---------- ----------
Stockholder's equity:
Common stock $1 par value; 50,000,000 shares authorized; 23,416,396 shares issued 23,416 23,416
Additional paid-in capital 80,961 80,961
Retained earnings 127,454 121,875
Accumulated other comprehensive loss (5,766) (4,524)
---------- ----------
226,065 221,728
---------- ----------
Total $1,375,965 $1,269,574
========== ==========
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
4
BLACK HILLS POWER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months
June 30
2002 2001
---- ----
(in thousands)
Cash flows from operations $33,661 $ 39,039
------- --------
Investing activities:
Property additions (85,987) (195,056)
(Increase) decrease in investments 1,151 (1,272)
Payment for acquisition of net assets, net of cash
acquired (13,243) (10,410)
------- --------
(98,079) (206,738)
------- --------
Financing activities
Dividends paid (15,536) (14,168)
Increase in short-term borrowings, net 40,839 69,016
Subsidiary distributions to minority interests - (1,505)
Long-term debt - issuance 71,003 135,014
Long-term debt - repayments (10,218) (7,781)
------- --------
86,088 180,576
------- --------
Increase in cash and cash equivalents 21,670 12,877
Cash and cash equivalents:
Beginning of period 14,832 12,697
------- --------
End of period $36,502 $25,574
======= ========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $24,118 $ 20,826
Income taxes $ 169 $ 19,944
Stock dividend distribution to Black Hills
Corporation, the parent company of Black Hills
Power, Inc. (Note 2) $ - $89,643
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated financial statements.
5
BLACK HILLS POWER, INC.
Notes to Condensed 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 2001 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, 2002,
December 31, 2001 and June 30, 2001, financial information and are of a
normal recurring nature. The results of operations for the three and
six months ended June 30, 2002, 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.
The condensed consolidated financial statements and notes to condensed
consolidated financial statements have been restated to reflect the
continuing operations of the Company for all periods presented.
6
The net operating results of discontinued operations are included in
the Condensed Consolidated Statements of Income for the six months
ended June 30, 2001 under the caption "Discontinued operations, net of
income taxes" and are summarized as follows (in thousands):
Revenue $197,274
Income before income taxes 7,849
Federal income taxes 3,017
Net income 4,832
(3) RECLASSIFICATIONS
Certain 2001 amounts in the financial statements have been reclassified
to conform to the 2002 presentation. These reclassifications did not
have an effect on the Company's total stockholder's equity or net
income as previously reported.
(4) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" (SFAS 143). SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred with associated asset
retirement costs being capitalized as part of the carrying amount of
the long-lived asset. Over time, the liability is accreted to its
present value each period and the capitalized cost is depreciated over
the useful life of the related asset. Management expects to adopt SFAS
143 effective January 1, 2003 and is currently evaluating the effects
adoption will have on the Company's consolidated financial statements.
(5) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations," (SFAS 141) and No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142). The Company has
adopted SFAS 141, which requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but the carrying values are
reviewed annually (or more frequently if impairment indicators arise)
for impairment. If the carrying value exceeds the fair value, an
impairment loss shall be recognized. A discounted cash flow approach
was used to determine fair value of the Company's businesses for
purposes of testing for impairment. Intangible assets with a defined
life will continue to be amortized over their useful lives (but with no
maximum life). The Company adopted SFAS 142 on January 1, 2002.
7
The pro forma effects of adopting SFAS No. 142 for the three and six
month periods ended June 30, 2002 and 2001 are as follows (in
thousands):
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
Net income as reported $9,131 $19,971 $21,115 $41,052
Cumulative effect of change in
accounting principle, net of tax - - (896) -
------ ------- ------- -------
Income excluding cumulative effect of
change in accounting principle 9,131 19,971 20,219 41,052
Add: goodwill amortization - 375 - 695
------ ------- ------- -------
Net income excluding cumulative effect of
change in accounting principle and
goodwill amortization $9,131 $20,346 $20,219 $41,747
====== ======= ======= =======
The cumulative effect adjustment recognized upon adoption of SFAS 142
was $0.9 million (after tax). The adjustment consisted of income from
the after-tax write-off of negative goodwill from prior acquisitions in
our Independent Power segment. If SFAS 142 had been adopted on January
1, 2001, net income would have been lower for the six month period
ended June 30, 2002 by $0.9 million and higher for the three and
six-month periods ended June 30, 2001 by $0.4 million and $0.7 million,
respectively.
The Company's goodwill and intangible assets are contained within the
Independent Power segment. Changes to goodwill and intangible assets
during the six-month period ended June 30, 2002, including the effects
of adopting SFAS No. 142, are as follows (in thousands):
Goodwill Other Intangible Assets
-------- -----------------------
Balance at December 31, 2001, net of
accumulated amortization $25,566 $85,983
Change in accounting principle 1,493 -
Additions - 9,504
Amortization expense - (2,243)
------- -------
Balance at June 30, 2002, net of
accumulated amortization $27,059 $93,244
======= =======
On June 30, 2002, intangible assets totaled $93.2 million, net of
accumulated amortization of $6.2 million. Intangible assets are
primarily related to site development fees and above-market long-term
contracts, and all have definite lives ranging from 7 to 40 years, over
which they continue to be amortized. Amortization expense for
intangible assets is expected to be approximately $5.1 million to
$4.5 million for each year from 2003 to 2007.
Intangible assets increased during the six month period ended June 30,
2002 as a result of a $9.5 million addition related to preliminary
purchase allocations in the acquisition of additional ownership
interest in the Harbor Cogeneration Facility (see Note 11). This
intangible asset primarily relates to an above-market contract at the
Facility.
8
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 supersedes FASB
Statement 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS 121) and the accounting
and reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30). SFAS 144
establishes a single accounting model for long-lived assets to be
disposed of by sale as well as resolves implementation issues related
to SFAS 121. The Company adopted SFAS 144 effective January 1, 2002.
Adoption did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
(6) COMPREHENSIVE INCOME
The following table presents the components of the Company's
comprehensive income:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income $9,131 $19,971 $21,115 $41,052
Other comprehensive income:
Initial impact of adoption of SFAS 133, net of
minority interest - - - (4,880)
Fair value adjustment on derivatives designated as
cash flow hedges, net of minority interest (3,080) 2,491 (1,242) (966)
------ ------- ------- -------
Comprehensive income $6,051 $22,462 $19,873 $35,206
====== ======= ======= =======
(7) CHANGES IN LONG-TERM DEBT AND NOTES PAYABLE
On March 15, 2002, the Company closed on $135 million of senior secured
financing for the Arapahoe and Valmont Facilities. These projects have
a total of 210 megawatts in service and under construction and are
located in the Denver, Colorado area. Proceeds from this financing were
used to refinance $53.8 million of an existing seven-year senior
secured term project-level facility, pay down approximately $50.0
million of short-term credit facility borrowings and approximately
$31.2 million will be used for future project construction. At June 30,
2002, $124.9 million of the $135 million financing has been utilized.
On June 18, 2002, we closed on a $75 million bridge credit agreement.
As of June 30, 2002, there were no borrowings outstanding under this
bridge credit agreement. This credit agreement bridges the issuance of
$75 million of the Companies First Mortgage Bonds, which we issued
on August 13, 2002. The termination date of the bridge credit agreement
was August 13, 2002, the date on which the First Mortgage Bonds were
issued.
Our credit facilities contain certain restrictive covenants, including
restrictions on the ability of certain subsidiaries with project level
financings to dividend cash to the parent company in the amount of
approximately $14 million at June 30, 2002. Some of these credit
facilities were amended during the second quarter to remove default
provisions pertaining to credit rating status. The Company and its
subsidiaries had complied with all the covenants at June 30, 2002.
9
Other than the above transactions, the Company had no other material
changes in its consolidated indebtedness, as reported in Notes 7 and 8
of the Company's 2001 Annual Report on Form 10-K.
(8) RELATED-PARTY TRANSACTIONS
Receivables
The Company has accounts receivable balances related to transactions
with other Black Hills Corporation subsidiaries. The balances were $0.8
million and $2.5 million as of June 30, 2002 and December 31, 2001,
respectively. At December 31, 2001, the Company also had an unsecured
line of credit outstanding from Black Hills Corporation for $6.9
million.
Note Payable
The Company has an unsecured line of credit with Black Hills
Generation, an indirect subsidiary of Black Hills Corporation, which is
due on demand, however, Black Hills Generation has agreed not to demand
payment until such time as outside financing is obtained. Borrowings
under the note bear interest at prime rate (4.75 percent at June 30,
2002) and interest is payable monthly. Borrowings were $484.4 million
at June 30, 2002 and $447.2 million at December 31, 2001. Interest
expense on the borrowings under the note for the three months and six
months ended June 30, 2002 was $5.6 million and $11.0 million,
respectively. In addition, the Company has an unsecured line of credit
with Black Hills Corporation in the amount of $3.8 million. Borrowings
under the note bear interest at 3.0 percent and interest is payable
monthly.
Other Balances and Transactions
In addition to the above transactions, 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 and six month periods ended June 30, 2002 was approximately $1.3
million and $2.5 million, respectively and is included in "Fuel and
purchased power" on the Condensed Consolidated Statements of Income.
The Company also received revenues of approximately $0.1 million for
the three and six month periods ended June 30, 2002, from Black Hills
Generation, an indirect subsidiary of Black Hills Corporation, for the
transmission of electricity.
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.
10
(9) 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 June 30, 2002, 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.
Segment information follows the same accounting policies as described
in Note 1 of the Company's 2001 Annual Report on Form 10-K. Segment
information included in the accompanying Condensed Consolidated Balance
Sheets and Condensed Consolidated Statements of Income is as follows
(in thousands):
Income from Continuing
Operating Revenues Operations
------------------ ----------
Quarter to Date
June 30, 2002
Electric $38,303 $6,792
Independent power 37,206 2,339
-------- -------
Total $75,509 $9,131
======= ======
Income from Continuing
Operating Revenues Operations
------------------ ----------
Quarter to Date
June 30, 2001
Electric $61,601 $16,784
Independent power 22,476 3,187
-------- -------
Total $84,077 $19,971
======= =======
11
Income from Continuing
Operating Revenues Operations
------------------ ----------
Year to Date
June 30, 2002
Electric $ 75,494 $14,614
Independent power 67,600 5,605
-------- -------
Total $143,094 $20,219
======== =======
Income from Continuing
Operating Revenues Operations
------------------ ----------
Year to Date
June 30, 2001
Electric $132,180 $34,124
Independent power 40,521 2,096
-------- -------
Total $172,701 $36,220
======== =======
Other than the following transactions, the Company had no other
material changes in total assets of its reporting segments, as reported
in Note 15 of the Company's 2001 Annual Report on Form 10-K, beyond
changes resulting from normal operating activities.
The Independent Power segment had a net addition to non working capital
assets of approximately $75 million primarily related to ongoing
construction of the expansions at the Las Vegas Cogeneration and
Arapahoe facilities and the acquisition of additional ownership
interest at the Harbor Cogeneration facility (Note 11).
(10) RISK MANAGEMENT ACTIVITIES
The Company actively manages its exposure to certain market risks as
described in Note 3 of the Company's 2001 Annual Report on Form 10-K.
Included in the accompanying Condensed Consolidated Balance Sheets as
of June 30, 2002 and December 31, 2001, are derivative assets of $0.4
million and $5.7 million and derivative liabilities of $13.8 million
and $16.2 million, respectively, related to fixed-for-float interest
rate swaps on project financings. These transactions are accounted for
as cash flow hedges and have been determined to be fully effective.
Because these hedges are fully effective, the entire derivative fair
value is recorded in accumulated other comprehensive income. These
swaps had a current notional amount of $215.0 million and a weighted
average interest rate of 6.0 percent at June 30, 2002 and a current
notional amount of $316.4 million and a weighted average interest rate
of 5.85 percent at December 31, 2001.
The Company anticipates a portion of the unrealized losses recorded in
accumulated other comprehensive income will be realized as increased
interest expense in the next 12 months. Based on June 30, 2002 market
interest rates, $7.5 million will be realized as additional interest
expense during the next 12 months. Estimated and realized amounts will
likely change during the next year as market interest rates change.
12
At June 30, 2002, the Company had $359.2 million of outstanding,
floating-rate debt of which $144.1 million was not offset with interest
rate swap transactions that effectively convert the debt to a fixed
rate.
At December 31, 2001, the Company had a $100 million forward starting
floating-to-fixed interest rate swap to hedge the anticipated floating
rate debt financing related to the Company's Las Vegas Cogeneration
expansion. This swap terminated during the second quarter 2002 and
resulted in a $1.1 million gain. This swap was treated as a cash flow
hedge and accordingly the resulting gain will continue to be carried in
Accumulated Other Comprehensive Income on the Condensed Consolidated
Balance Sheet and amortized over the life of the related long-term
financing.
In addition, the Company entered into a $50 million treasury lock to
hedge a portion of the Company's $75 million First Mortgage Bond
offering completed in August 2002 (Note 13). The treasury lock
effectively fixes, at current rates, the interest rate for the first
28.5 years of the 30-year bonds. The treasury lock settled on August 8,
2002, the bond pricing date, and resulted in a loss which will continue
to be carried in Accumulated Other Comprehensive Income on the
Condensed Consolidated Balance Sheet and amortized over the life of the
related bonds as additional interest expense. At June 30, 2002, the
treasury lock had a fair market value of $0.
(11) ACQUISITIONS
On March 15, 2002, the Company paid $25.7 million to acquire an
additional 30 percent interest in the Harbor Cogeneration Facility
(Harbor), a 98-megawatt gas-fired plant located in Wilmington,
California. This acquisition was funded through borrowings from a
related party and gives the Company an 83 percent ownership interest
and voting control of Harbor.
The Company's investment in Harbor prior to the above acquisition was
accounted for under the equity method of accounting and included in
Investments on the accompanying Condensed Consolidated Balance Sheets.
The above acquisition gave the Company majority ownership and voting
control of Harbor, therefore, the Company now includes the accounts of
Harbor in its consolidated financial statements.
The above acquisition has been accounted for under the purchase method
of accounting and, accordingly, the purchase price has been allocated
to the acquired assets and liabilities based on preliminary estimates
of the fair values of the assets purchased and the liabilities assumed
as of the date of acquisition. The estimated purchase price allocations
are subject to adjustment, generally within one year of the date of the
acquisition. The purchase price and related acquisition costs exceeded
the fair values assigned to net tangible assets by approximately $9.5
million, which was recorded as long-lived intangible assets.
The impact of this acquisition was not material in relation to the
Company's results of operations. Consequently, pro forma information is
not presented.
13
(12) LEGAL PROCEEDINGS
In June 2002, a forest fire damaged approximately 10,800 acres of
private and government land located near Deadwood and Lead, South
Dakota. The fire destroyed approximately 20 structures (seven houses
and 13 outbuildings) and caused the evacuation of the cities of Lead
and Deadwood for approximately 48 hours.
The cause of the fire was investigated by the State of South Dakota.
Sagging power lines owned by us were implicated as the cause. We have
initiated our own investigation into the cause of the fire, including
the hiring of expert fire investigators, and that investigation is
continuing.
Although we have been put on notice of potential claims, no civil
action or regulatory proceeding has been initiated against us at this
time. If, however, it is determined that sagging power lines owned by
us were the cause of the fire and that we were negligent in the
maintenance of those power lines, we could be liable for resultant
damages. Although we cannot predict the outcome of either our
investigation or of potential claims, management believes that any such
claims will not have a material adverse effect on our financial
condition or results of operations.
(13) SUBSEQUENT EVENT
On August 13, 2002, the Company issued $75 million of First Mortgage
Bonds, Series AE, due 2032. The Mortgage Bonds have a 7.23% coupon with
interest payable semi-annually, commencing February 15, 2003. Net
proceeds from the offering were and will be used to fund the Company's
portion of construction and installation costs for an AC-DC-AC
Converter Station; for general capital expenditures for the remainder
of 2002 and 2003; to repay a portion of current bank indebtedness; to
satisfy bond maturities for certain outstanding first mortgage bonds
due in 2003; and for general corporate purposes.
14
ITEM 2. RESULTS OF OPERATIONS
Consolidated Results
Three Months Ended June 30, 2002 Compared to Three Months Ended June
30, 2001. Consolidated net income for the three months ended June 30,
2002 was $9.1 million compared to $20.0 million in the same period of
the prior year. The decrease in net income is a result of decreased
off-system sales and increased depreciation expense, offset by
increased generating capacity.
Consolidated revenues for the three months ended June 30, 2002 were
$75.5 million compared to $84.1 million for the same period of the
prior year. The decrease in revenues was a result of decreased prices
for off-system sales by our electric utility, offset by expanded power
production.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30,
2001. Consolidated net income for the six months ended June 30, 2002
was $21.1 million compared to $41.1 million in the same period of the
prior year. Consolidated income from continuing operations, before
change in accounting principle, for the six-month period ended June 30,
2002 was $20.2 million compared to $36.2 million for the same period in
the prior year. As discussed in Note 2 of Notes to Consolidated
Financial Statements, during the quarter ended March 31, 2001, the
Company distributed its ownership interest in Wyodak to its parent
company, Black Hills Corporation. The consolidated Condensed Statement
of Income has been restated to reflect the continuing operations of
the Company.
The decrease in income from continuing operations is a result of
decreased off-system sales and increased depreciation expense, offset
by increased generating capacity and the collection of previously
reserved amounts for California operations.
Consolidated revenues for the six months ended June 30, 2002 were
$143.1 million compared to $172.7 million for the same period of the
prior year. The decrease in revenues was a result of decreased prices
for off-system sales by our electric utility, offset by expanded power
production.
Electric Utility
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $38,303 $61,601 $75,494 $132,180
Operating income 13,353 29,310 27,680 57,974
Net income 6,792 16,784 14,614 34,124
EBITDA 17,845 33,337 36,471 66,506
15
Three Months Ended June 30, 2002 Compared to Three Months Ended June
30, 2001. Electric utility revenues decreased 38 percent for the
three-month period ended June 30, 2002 compared to the same period in
the prior year. Net income for the segment decreased 60 percent from
the same period in the prior year. The decrease in revenues and net
income was primarily due to a 28 percent decrease in wholesale
off-system sales at average prices that were 68 percent lower than the
average prices in the same period of the prior year. Firm residential
and contracted electricity sales increased, but were offset by a
decline in industrial sales due to the closing of Homestake Gold Mine
at year-end 2001. Fuel and purchased power expense decreased 26 percent
for the three month period ended June 30, 2002 compared to the same
period in 2001, and total operating expense decreased 23 percent for
the same period.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30,
2001. Electric utility revenues decreased 43 percent for the six-month
period ended June 30, 2002, compared to the same period in the prior
year. Net income for the segment decreased 57 percent from the same
period in the prior year. The decrease in revenues and net income was
primarily due to a 33 percent decrease in wholesale off-system sales at
average prices that were 75 percent lower than average prices in the
same period of the prior year. Firm residential and contracted
electricity sales increased, but were offset by a decline in industrial
sales due to the closing of Homestake Gold Mine at year-end 2001. Fuel
and purchased power expense decreased 54 percent for the six month
period ended June 30, 2002 compared to the same period in 2001, and
operating expense decreased 36 percent for the same period.
Independent Power Production
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $37,206 $22,476 $67,600 $40,521
Operating income 14,441 11,214 29,039 16,779
Net income 2,339 3,187 6,501 2,096
EBITDA 19,641 14,161 40,496 21,354
Three Months Ended June 30, 2002 Compared to Three Months Ended
June 30, 2001. Independent power revenues increased 66 percent for the
three-month period ended June 30, 2002 compared to the same period in
the prior year. This increase can be attributed to additional
generating capacity. As of June 30, 2002 we had 606 megawatts of
independent power capacity in service compared to 287 megawatts as of
June 30, 2001. An 102 percent increase in operating expense and a 53
percent increase in interest expense contributed to a 27 percent
decrease in net income.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30,
2001. Independent power revenues increased 67 percent for the six-month
period ended June 30, 2002 compared to the same period in the prior
year. Operating income increased 73 percent for the same period. Net
income for the six-month period was more than triple net income for the
prior six-month period. Additional independent power capacity of 606
megawatts at June 30, 2002, compared to 287 megawatts at June 30, 2001
contributed to
16
the increase in revenue and net income, offset by increased
depreciation and interest expense. In addition, $1.9 million
after-tax was collected for previously recorded reserves pertaining
to exposure in the California markets and the adoption of SFAS 142
resulted in a net income benefit of $0.9 million after tax.
Forward Looking Statements
Some of the statements in this Form 10-Q include "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
could cause actual results to differ materially from those contained in
the forward-looking statements, including, among other things: (1)
unanticipated developments in the western power markets, including
unanticipated governmental intervention, deterioration in the financial
condition of counterparties, default on amounts due from
counterparties, adverse changes in current or future litigation,
adverse changes in the tariffs of the California Independent System
Operator, market disruption and adverse changes in energy and commodity
supply, volume and pricing and interest rates; (2) prevailing
governmental policies and regulatory actions with respect to allowed
rates of return, industry and rate structure, acquisition and disposal
of assets and facilities, operation and construction of plant
facilities, recovery of purchased power and other capital investments,
and present or prospective wholesale and retail competition; (3) the
State of California's efforts to reform its long-term power purchase
contracts; (4) changes in and compliance with environmental and safety
laws and policies; (5) weather conditions; (6) population growth and
demographic patterns; (7) competition for retail and wholesale
customers; (8) pricing and transportation of commodities; (9) market
demand, including structural market changes; (10) changes in tax rates
or policies or in rates of inflation; (11) changes in project costs;
(12) unanticipated changes in operating expenses or capital
expenditures; (13) capital market conditions; (14) technological
advances by competitors; (15) competition for new energy development
opportunities; (16) legal and administrative proceedings that influence
our business and profitability; (17) the effects on our business,
including the availability of insurance, resulting from the terrorist
actions on September 11, 2001, or any other terrorist actions or
responses to such actions; (18) the effects on our business resulting
from the financial difficulties of Enron and other energy companies,
including their effects on liquidity in the trading and power industry,
and their effects on the capital markets views of the energy or trading
industry, and our ability to access the capital markets on the same
favorable terms as in the past; (19) the effects on our business in
connection with a lowering of our credit rating (or actions we may take
in response to changing credit ratings criteria), including, increased
collateral requirements to execute our business plan, demands for
increased collateral by our current counterparties, refusal by our
current or potential counterparties or customers to enter into
transactions with us and our inability to obtain credit or capital in
amounts or on terms favorable to us; (20) risk factors discussed in
this Form 10-Q; and (21) other factors
17
discussed from time to time in our filings with the SEC. 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.
18
BLACK HILLS POWER, INC.
Part II - Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 11 to
the Company's 2001 Annual Report on Form 10-K and Note 12 in
Item 1 of Part I of this Quarterly Report on Form 10-Q, which
information from Note 12 is incorporated by reference into
this item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 99.1 Certification pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We have filed the following Reports on Form 8-K during
the quarter ended June 30, 2002:
Form 8-K dated May 31, 2002. Reported under
Item 4, the change in our independent public
accountants from Arthur Andersen LLP to Deloitte &
Touche LLP.
19
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.
/s/ Roxann R. Basham
---------------------------------------------
Roxann R. Basham, Vice President - Controller
(Principal Accounting Officer)
/s/ Mark T. Thies
---------------------------------------------
Mark T. Thies, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer)
Dated: August 14, 2002
20
EXHIBIT INDEX
Exhibit (99.1) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit (99.2) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.