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 September 30, 1998. 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 Corporation Incorporated in South Dakota IRS Identification Number 46-0111677 625 Ninth Street Rapid City, South Dakota 57709 Registrant's telephone number (605)-348-1700 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the last practicable date. Class Outstanding at October 31, 1998 Common stock, $1.00 par value 21,570,990 shares BLACK HILLS CORPORATION I N D E X Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets- 3-4 September 30, 1998, December 31, 1997 and September 30, 1997 Consolidated Statements of Income- 5 Three, Nine and Twelve Months Ended September 30, 1998 and 1997 Consolidated Statements of Cash Flows- 6 Three, Nine and Twelve Months Ended September 30, 1998 and 1997 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of 11-15 Financial Position and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 BLACK HILLS CORPORATION Consolidated Balance Sheets Unaudited Unaudited September 30 December 31 September 30 1998 1997 1997 (in thousands) Assets Current assets: Cash and cash equivalents $ 12,015 $ 16,774 $11,200 Securities available for sale 23,951 13,969 14,579 Receivables, net Customers 58,830 39,639 43,696 Other 3,267 3,414 3,471 Materials, supplies, and fuel 9,936 8,642 8,219 Prepaid expenses 2,307 1,571 1,125 110,306 84,009 82,290 Property and investments: Electric 493,727 487,424 485,787 Coal mining 53,460 52,804 52,843 Oil and gas 60,178 52,412 50,943 Other 6,755 5,666 4,988 614,120 598,306 594,561 Less accumulated depreciation and depletion (213,990) (197,179) (193,764) Net property and investments 400,130 401,127 400,797 Other assets: Federal income taxes 8,068 8,061 8,268 Regulatory asset 4,042 3,776 3,626 Other 13,626 11,768 12,645 25,736 23,605 24,539 Total $536,172 $508,741 $507,626 See accompanying notes to consolidated financial statements. BLACK HILLS CORPORATION Consolidated Balance Sheets Unaudited Unaudited September 30 December 31 September 30 1998 1997 1997 (in thousands) Liabilities and Capitalization Current liabilities: Current maturities of long-term debt $ 1,330 $ 1,331 $ 1,331 Notes payable 1,502 23 1,528 Accounts payable 50,996 32,622 36,048 Accrued liabilities- Taxes 9,325 8,040 8,837 Interest 2,983 3,991 2,996 Other 8,035 7,800 7,103 74,171 53,807 57,843 Deferred credits: Federal income taxes 54,765 53,010 50,792 Investment tax credits 3,639 4,014 4,139 Reclamation costs 17,192 16,664 16,793 Regulatory liability 5,785 6,152 6,277 Other 6,826 6,331 6,327 88,207 86,171 84,328 Capitalization: Common stock equity- Common stock 21,717 21,705 14,466 Additional paid-in capital 40,238 39,995 47,158 Retained earnings 153,105 143,703 140,471 Treasury stock (3,296) - - Total common stock equity 211,764 205,403 202,095 Long-term debt 162,030 163,360 163,360 373,794 368,763 365,455 Total $536,172 $508,741 $507,626 See accompanying notes to consolidated financial statements. BLACK HILLS CORPORATION Consolidated Statements of Income (unaudited) Three Months Nine Months Twelve Months September 30 September 30 September 30 1998 1997 1998 1997 1998 1997 (in thousands, except per share amounts) Operating revenues: Electric $ 34,982 $ 33,358 $ 96,810 $ 94,738 $128,569 $125,099 Coal mining 8,185 8,178 23,956 24,005 31,030 31,572 Oil and gas 3,199 3,029 9,675 9,958 13,012 13,165 Energy marketing 97,803 53,617 286,304 53,617 375,476 53,617 144,169 98,182 416,745 182,318 548,087 223,453 Operating expenses: Fuel and purchased power 105,857 62,557 308,905 80,840 405,512 89,254 Operations and maintenance 8,113 8,511 24,168 23,596 32,313 31,847 Administrative and general 3,194 2,936 9,348 7,478 13,136 9,523 Depreciation, depletion, and amortization 6,093 5,439 18,463 16,731 24,044 22,196 Taxes, other than income taxes 3,122 3,097 9,394 9,430 11,948 12,383 126,379 82,540 370,278 138,075 486,953 165,203 Operating income (loss): Electric 14,436 12,141 37,493 32,427 49,678 42,460 Coal mining 3,433 3,198 9,737 9,731 12,224 12,362 Oil and gas 267 494 959 2,276 1,591 3,619 Energy marketing (346) (191) (1,722) (191) 2,359) (191) 17,790 15,642 46,467 44,243 61,134 58,250 Other income and (expense): Interest expense (3,656) (3,559) (10,860) (10,516) (14,470) (14,032) Investment income 771 585 2,077 1,412 2,799 1,805 Allowance for funds used during construction 54 44 148 152 184 141 Other, net (513) (197) (96) (409) (112) 553 (3,344) (3,127) (8,731) (9,361) (11,599) (11,533) Income before income taxes 14,446 12,515 37,736 34,882 49,535 46,717 Income taxes (4,830) (3,871) (12,079) (10,898) (15,508) (14,600) Net income available for common stock $ 9,616 $ 8,644 $25,657 $23,984 $34,027 $32,117 Weighted average common shares outstanding (Basic): 21,577 21,696 21,639 21,689 21,655 21,685 (Diluted): 21,633 21,707 21,676 21,698 21,684 21,690 Earnings per share (Basic): $0.45 $0.40 $1.19 $1.11 $1.57 $1.48 (Diluted): $0.44 $0.40 $1.18 $1.11 $1.57 $1.48 Dividends paid per share of common stock $0.250 $0.237 $0.750 $0.710 $0.987 $0.940 See accompanying notes to consolidated financial statements. BLACK HILLS CORPORATION Consolidated Statements of Cash Flows (unaudited) Three Months Nine Months Twelve Months September 30 September 30 September 30 1998 1997 1998 1997 1998 1997 (in thousands) Operating activities: Net income $ 9,616 $ 8,644 $25,657 $23,984 $34,027 $32,117 Principal non-cash items- Depreciation, depletion, and amortization 6,093 5,439 18,463 16,731 24,044 22,196 Deferred income taxes and investment tax credits 295 37 767 865 2,165 1,775 Allowance for other funds used during construction (33) (21) (90) (80) (108) (41) (Increase) decrease in receivables, inventories, and other current assets (8,363) (33,701) (21,074) (30,312) (17,829) (26,077) Increase (decrease) in other current liabilities 3,332 31,089 18,886 28,546 16,355 31,943 Other, net (1,218) (668) (2,135) (1,267) (323) (833) 9,722 10,819 40,474 38,467 58,331 61,080 Investing activities: Property additions, excluding allowance for other funds used during construction (5,902) (6,325) (16,104) (15,463) (22,431) (25,362) Available for sale securities sold 586 11,764 11,810 17,743 12,317 44,623 Available for sale securities purchased (1,108) (8,132) (21,792) (20,864) (21,689) (48,517) Energy marketing assets - (6,810) - (6,810) - (6,810) (6,424) (9,503) (26,086) (25,394) (31,803) (36,066) Financing activities: Dividends paid (5,395) (5,140) (16,255) (15,397) (21,392) (20,392) Treasury stock, net (4) - (3,296) - (3,296) - Common stock issued 60 98 255 333 331 415 Net short-term borrowings 1,490 1,505 1,479 1,385 (26) 180 Long-term debt retired (514) (783) (1,330) (1,534) (1,330) (1,546) (4,363) (4,320) (19,147) (15,213) (25,713) (21,343) Increase (decrease) in cash and cash equivalents (1,065) (3,004) (4,759) (2,140) 815 3,671 Cash and cash equivalents: Beginning of period 13,080 14,204 16,774 13,340 11,200 7,529 End of period $12,015 $11,200 $12,015 $11,200 $12,015 $11,200 Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 4,593 $ 4,566 $ 8,183 $11,555 $14,393 $14,047 Income taxes $ 3,450 $ 2,140 $ 9,250 $ 8,640 $12,450 $11,840 Assumption of Clovis Point reclamation liability $ - $ - $ - $ - $ - $ 7,957 See accompanying notes to consolidated financial statements. BLACK HILLS CORPORATION Notes to Consolidated Financial Statements (Reference is made to Notes to Consolidated Financial Statements included in the Companys Annual Report and Form 10-K) (1) Managements Statement The financial statements included herein have been prepared by Black Hills Corporation (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 generally accepted accounting principles 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 Companys 1997 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 September 30, 1998, December 31, 1997 and September 30, 1997, financial information and are of a normal recurring nature. The results of operations for the three, nine and twelve months ended September 30, 1998, are not necessarily indicative of the results to be expected for the full fiscal year. (2) Capital Stock In January, 1998, the Board of Directors declared a 3-for-2 Common Stock Split effected in the form of a stock dividend. The stock dividend was distributed March 10, 1998 to shareholders of record on February 13, 1998. The common stock share and per share information in the accompanying consolidated financial statements and notes have been restated to reflect the stock distribution. In April 1998, the Board of Directors authorized the acquisition of up to 300,000 shares of the Companys Common Stock on the open market to fund possible future acquisitions and for other corporate purposes. At September 30, 1998, the Company has acquired 146,400 shares for such purposes and is reflected as treasury stock on the accompanying consolidated balance sheets. (3) Net Income Per Share The Company adopted the Financial Accounting Standards Board (FASB) Statement No. 128 Earnings Per Share in 1997 which requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each year. Diluted earnings per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options. A reconciliation of these amounts is as follows (in thousands, except per share amounts): Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1998 1997 1998 1997 1998 1997 Net Income $9,616 $8,644 $25,657 $23,984 $34,027 $32,117 Weighted average common shares outstanding: Basic 21,577 21,696 21,639 21,689 21,655 21,685 Dilutive effect of option plan 56 11 37 9 29 5 Diluted 21,633 21,707 21,676 21,698 21,684 21,690 Earnings per share (Basic): $0.45 $0.40 $1.19 $1.11 $1.57 $1.48 (Diluted): $0.44 $0.40 $1.18 $1.11 $1.57 $1.48 <TABLE/> (4) Comprehensive Income The Company adopted FASB Statement No. 130, Reporting Comprehensive Income, effective January 1, 1998. Statement No. 130 establishes standards for reporting and display of comprehensive earnings and its components in financial statements; however, the adoption of this Statement had no impact on the Companys net earnings or shareholders equity. Statement No. 130 requires minimum pension liability adjustments, unrealized gains or losses on the Companys available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders equity, to be included in other comprehensive earnings. There were no material differences between net earnings and comprehensive earnings for any periods presented in the accompanying financial statements. (5) Accounting Pronouncements FASB Statement No. 131 Disclosures about Segments of an Enterprise and Related Information requires that a publicly-held company report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The Statement also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The Company has historically presented segment information in the consolidated financial statements and related notes and as such does not expect adoption of the disclosures requirements of this pronouncement will have a material impact on its financial statements. The Company will adopt this Statement in the fourth quarter of 1998. FASB Statement No. 132 Employers Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106 requires revised disclosures about pension and other postretirement benefit plans. The Company does not expect that adoption of the disclosure requirements of this pronouncement will have a material impact on its financial statements. The Company will adopt this Statement in the fourth quarter of 1998. In March, 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Statement is effective for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. The statement defines which costs of computer software developed or obtained for internal use are capitalized and which costs are expensed. The Company has not yet determined when they will adopt the new Statement. The effect of adoption is not expected to materially affect the Companys financial position or results of operations. In May 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. The Statement is effective for fiscal years beginning after December 15, 1998. The Statement defines one-time start up costs and requires such costs to be expensed as incurred. The Company has not yet determined when they will adopt the new statement. The effect of adoption is not expected to materially affect the Companys financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivatives gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999.The Company has not yet quantified the impacts of adopting Statement 133 on its financial statements and has not determined the timing of adoption of Statement 133. However, the Statement could increase volatility in earnings and other comprehensive income. (6) New Business Venture On September 28, 1998 the Company through Black Hills FiberCom announced it will build a telecommunications fiber optic network. The newly formed company will invest approximately $40,000,000 over the next three years in state-of- the-art technology. Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity, Capital Resources, and Commitments In the past the Company has depended upon internally generated funds, issuance of short and long-term debt and sales of common stock to finance its activities. It is expected that future activities will also be financed by the most appropriate mix of these various sources of funds. The Company currently has bank lines of credit totaling $12 million which provide for interim borrowings and the opportunity for timing of permanent financing. The Company had a $250,000 balance at September 30, 1998. There are no compensating balance requirements associated with these lines of credit. In addition to the above lines of credit, Black Hills Energy Resources, Inc. has an uncommitted demand credit facility for up to $65 million. This facility allows $50 million for a transactional line of credit and $15 million overdraft line of credit. This facility is used to support the issuance of letters of credit. At September 30, 1998, Black Hills Energy Resources has approximately $33 million of outstanding letters of credit. In addition to the above lines of credit, Wyodak Resources Development Corp. has guaranteed a $15 million line of credit for Enserco Energy, Inc. to use to guarantee letters of credit. At September 30, 1998, there were no balances outstanding on this line of credit. In September, 1998, the Company announced that it will invest approximately $40 million over the next three years in state-of- the-art technology that will offer local and long distance telephone service, expanded cable television service, Internet access and high-speed data and video services. Such investment is expected to come from the appropriate mix of internally generated funds and short-term debt. Black Hills FiberCom will experience operating losses over the next two to four years as it develops and constructs its network infrastructure, builds its customer base and internal staffing, and develops its systems. Management believes Black Hills FiberComs operating losses will be offset by growth in the Companys other business segments and overall the Company should have stable or slight growth during this start up phase. Results of Operations Black Hills Corporation is an energy company consisting of four principal businesses: electric, coal mining, oil and gas production, and crude oil and natural gas marketing. Consolidated net income was $9,616,000, $25,657,000 and $34,027,000 for the three months, nine months and twelve months ended September 30, 1998, respectively, representing an increase of 11 percent, 7 percent and 6 percent, respectively. The increase in earnings was primarily due to increased electric sales, lower purchased power expense and strong cost management, partially offset by lower oil and gas commodity prices, mild weather and weak market conditions in the areas served by the energy marketing companies. Consolidated revenues and fuel and purchased power expense increased for the three months, nine months and twelve months ended September 30, 1998 primarily due to oil and natural gas purchases and sales from the energy marketing operations. Consolidated revenue and income from continuing operations provided by the four businesses as a percentage of the total were as follows: Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1998 1997 1998 1997 1998 1997 Revenues Electric 24% 34% 23% 52% 23% 56% Coal mining 6 8 6 13 6 14 Oil and gas 2 3 2 6 2 6 Energy marketing 68 55 69 29 69 24 100% 100% 100% 100% 100% 100% Net Income/(Loss) Electric 74% 71% 72% 66% 73% 64% Coal mining 28 27 29 29 28 30 Oil and gas 2 4 3 7 4 8 Energy marketing and Other (4) (2) (4) (2) (5) (2) 100% 100% 100% 100% 100% 100% <TABLE/> Capital expenditures and depreciation, depletion, and amortization by business segment were as follows (in thousands): Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1998 1997 1998 1997 1998 1997 Capital Expenditures (includes AFDC) Electric $2,267 $3,168 $7,569 $7,879 $12,272 $12,036 Coal mining 167 100 686 1,545 647 2,298 Oil and gas 3,288 2,887 7,766 5,993 9,235 10,743 Energy marketing 22 6,810 112 6,810 258 6,810 Other 191 191 61 126 127 326 $5,935 $13,156 $16,194 $22,353 $22,539 $32,213 Depreciation, Depletion, and Amortization Electric $3,797 $3,321 $11,392 $10,963 $15,037 $15,171 Coal mining 859 878 2,564 2,427 3,325 3,434 Oil and gas 1,292 1,142 4,075 3,243 5,107 3,493 Energy marketing 145 98 432 98 575 98 $6,093 $5,439 $18,463 $16,731 $24,044 $22,196 <TABLE/> Electric Operations Electric revenues increased 5 percent, 2 percent and 3 percent for the three, nine and twelve months ended September 30, 1998. Firm kilowatthour sales increased 3 percent for the three month period primarily due to increased residential, commercial and wholesale sales, were stable for the nine month period and increased 2 percent for the twelve month period due to serving the Montana-Dakota Utilities, Sheridan, Wyoming load beginning January 1, 1997. Industrial sales for the three month, nine month and twelve month periods declined primarily due to Homestake Mining Company. Our low-cost generation allowed the Company to recapture a portion of the margin loss from Homestake in the spot energy market. Such spot energy sales result from additional physical energy available to sell from existing sources. Electric expenses decreased 3 percent, 5 percent and 5 percent for the three months, nine months, and twelve months ended September 30, 1998 due to continued cost containment and lower purchased power and fuel costs. For the twelve months ended September 30, 1998, such cost containment and lower purchased power and fuel costs partially offset additional cost associated with serving the Sheridan, Wyoming load. Mining Operations Mining earnings increased $370,000, $579,000 and $118,000 for the three month, nine month and twelve month periods ended September 30, 1998, primarily due to increased non-operating income and continued cost management. Tons of coal sold were relatively flat for the three months, nine months and twelve months ended September 30, 1998 as compared to the prior periods. Oil and Gas Production Operations Oil and gas earnings decreased $171,000, $876,000 and $1,386,000 for the three months, nine months and twelve months ended September 30, 1998 primarily as a result of decreased commodity prices partially offset by production increases. Average oil prices decreased 34 percent, 33 percent and 30 percent and average gas prices decreased 9 percent, 15 percent and 6 percent for the three months, nine months and twelve months ended September 30, 1998, respectively. Production increased 30 percent, 17 percent and 14 percent for the three month, nine month and twelve month periods, respectively. Energy Marketing Operations Energy marketing revenues and related fuel and purchased power expenses represents the crude oil and natural gas purchases and sales of Black Hills Energy Resources, Inc. which was acquired on July 25, 1997. Crude oil and natural gas wholesale marketing operations are high-volume, low margin operations. Mild weather in the East Coast and Midwest markets served and high storage levels through the winter depressed margins for the nine month and twelve month periods. Black Hills Energy Resources marketed 343,000 mmbtus and 22,700 barrels of oil per day for the three month period ended September 30, 1998, 331,000 mmbtus and 18,100 barrels of oil per day for the nine month period and 302,000 mmbtus and 16,800 barrels of oil per day for the twelve month period. At September 30, 1998, Energy Marketing activities have occurred in crude oil and natural gas sales and have not included electricity. Accounting Pronouncements FASB Statement No. 131 Disclosures about Segments of an Enterprise and Related Information requires that a publicly-held company report financial and descriptive information about its operating segments in financial statements issued to shareholders for interim and annual periods. The Statement also requires additional disclosures with respect to products and services, geographic areas of operation, and major customers. The Company has historically presented segment information in the consolidated financial statements and related notes and as such does not expect adoption of the disclosures requirements of this pronouncement will have a material impact on its financial statements. The Company will adopt this Statement in the fourth quarter of 1998. FASB Statement No. 132 Employers Disclosures about Pensions and Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106 requires revised disclosures about pension and other postretirement benefit plans. The Company does not expect that adoption of the disclosure requirements of this pronouncement will have a material impact on its financial statements. The Company will adopt this Statement in the fourth quarter of 1998. In March, 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The Statement is effective for fiscal years beginning after December 15, 1998. Earlier application is encouraged in fiscal years for which annual financial statements have not been issued. The statement defines which costs of computer software developed or obtained for internal use are capitalized and which costs are expensed. The Company has not yet determined when they will adopt the new Statement. The effect of adoption is not expected to materially affect the Companys financial position or results of operations. In May 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities. The Statement is effective for fiscal years beginning after December 15, 1998. The Statement defines one-time start up costs and requires such costs to be expensed as incurred. The Company has not yet determined when they will adopt the new statement. The effect of adoption is not expected to materially affect the Companys financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivatives gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting Statement 133 on its financial statements and has not determined the timing of adoption of Statement 133. However, the Statement could increase volatility in earnings and other comprehensive income. Year 2000 Issues What is referred to as the Year 2000 problem (Year 2000 problem) is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Companys computer systems and products that have date- sensitive software may recognize a date using 00 as the Year 1900 rather than the Year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Management has formed a Year 2000 Committee to establish and ensure the Companys compliance with what is commonly known as the Year 2000 problem. In addition, consultants may be engaged to assist with a comprehensive review of the Companys state of readiness and to assist with any necessary remedial plans for the Year 2000 date change. The Companys review encompassed supporting information technology systems, product generation and distribution systems, and business supply chain systems and infrastructure. Management presently believes that with modifications to the CompanYs existing software and conversions to new software, the Year 2000 problem can be mitigated. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 problem could have a material adverse effect on the Companys business, financial condition and results of operations. Management further believes that the cost of either repairing or replacing certain business systems to ensure business continuance beyond Year 2000 should not have a significant impact on the results of operations. The cost of the Year 2000 project is currently estimated at less than $1 million and is being funded through operating cash flows. These costs are primarily attributable to the purchase of new software and equipment which will be expensed or capitalized on a basis consistent with the Companys accounting policies for capital assets. Other than seeking representations and assurances, the Company has not made an assessment as to whether any of its customers, suppliers or service providers will be affected by the date change. The Companys business, financial condition and results of operations may be adversely impacted should the efforts of customers, suppliers or service providers for the Company to address the Year 2000 issue prove to be inadequate. The Companys risk management program includes emergency backup and recovery procedures to be followed in the event of failure of a business-critical system. These procedures will be expanded to include specific procedures for potential Year 2000 issues. Contingency plans to protect the business from Year 2000-related interruptions are being developed. These plans will be complete by June 1999 and will include, for example, development of backup procedures, identification of alternate suppliers and possible increases in safety inventory levels. Forward Looking Statements The above information includes forward-looking statements that are subject to certain risks, uncertainties and assumptions. Although management believes that its expectations are based on reasonable assumptions, it can give no assurances that its goals will be achieved. Actual results may differ materially from managements expectations as a result of a variety of factors including, but not necessarily limited to, technological changes, regulation, market conditions and marketing success, general economic conditions, and a changing competitive environment. BLACK HILLS CORPORATION Part II - Other Information Item 1. Legal Proceedings There are no legal proceedings to be reported on for the quarter ending September 30, 1998. Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K On September 28, 1998, the Registrant filed a Form 8- K announcing that it will build a telecommunications fiber optic network to serve the growing needs of Rapid City and the Northern Black Hills of South Dakota. 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 - Finance (Principal Financial Officer) /s/ Mark T. Thies Mark T. Thies, Controller (Principal Accounting Officer) Dated: November 12, 1998