Securities and Exchange Commission Washington, D.C. 20549 Form 10Q X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999. 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, 1999 Common stock, $1.00 par value 21,349,881 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, 1999, December 31, 1998 and September 30, 1998 Consolidated Statements of Income- 5 Three, Nine and Twelve Months Ended September 30, 1999 and 1998 Consolidated Statements of Cash Flows- 6 Three, Nine and Twelve Months Ended September 30, 1999 and 1998 Notes to Consolidated Financial Statements 7-13 Item 2. Management's Discussion and Analysis of 14-19 Financial Position and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 BLACK HILLS CORPORATION Consolidated Balance Sheets September 30 December 31 September 30 1999 1998 1998 (unaudited) (in thousands) (unaudited) Assets Current assets: Cash and cash equivalents $ 13,928 $ 14,764 $ 14,421 Securities available for sale 11,417 22,675 23,951 Receivables, net Customers 124,724 87,068 67,557 Other 4,736 2,919 3,267 Materials, supplies, and fuel 16,056 9,733 9,205 Prepaid expenses 3,563 3,321 3,083 ----------- ---------- ----------- 174,424 140,480 121,484 --------- -------- --------- Property and investments: Electric utility 512,393 496,883 493,727 Non-regulated energy 128,307 115,271 114,180 Communication and others 33,840 7,395 4,883 ----------- ---------- ---------- 674,540 619,549 612,790 Less accumulated depreciation and depletion (245,607) (229,942) (214,043) --------- -------- -------- Net property and investments 428,933 389,607 398,747 --------- --------- --------- Other assets: Federal income taxes 11,736 12,347 8,068 Regulatory asset 3,978 3,978 4,042 Other 14,846 13,005 13,626 ---------- ---------- ---------- 30,560 29,330 25,736 ----------- ---------- ---------- Total $633,917 $559,417 $545,967 ======== ======== ======== See accompanying notes to consolidated financial statements. BLACK HILLS CORPORATION Consolidated Balance Sheets September 30 December 31 September 30 1999 1998 1998 (unaudited) (in thousands) (unaudited) Liabilities and Capitalization Current liabilities: Current maturities of long-term debt $ 1,330 $ 1,330 $ 1,330 Notes payable 25,291 5,090 1,502 Accounts payable 121,125 74,087 60,816 Accrued liabilities- Taxes 9,597 9,950 9,079 Interest 2,989 3,956 3,196 Other 9,079 8,169 8,043 ---------- ---------- ---------- 169,411 102,582 83,966 -------- --------- --------- Deferred credits: Federal income taxes 57,257 55,107 54,765 Investment tax credits 3,145 3,514 3,639 Reclamation costs 17,513 17,000 17,192 Regulatory liability 5,302 5,661 5,785 Other 7,334 6,857 6,826 ----------- ---------- ---------- 90,551 88,139 88,207 ---------- --------- --------- Capitalization: Common stock equity- Common stock 21,736 21,719 21,717 Additional paid-in capital 40,588 40,254 40,238 Retained earnings 157,343 147,774 153,105 Treasury stock (6,412) (3,081) (3,296) ------------ ----------- -------- Total common stock equity 213,255 206,666 211,764 Long-term debt 160,700 162,030 162,030 ---------- --------- --------- 373,955 368,696 373,794 ---------- --------- --------- Total $633,917 $559,417 $545,967 ======== ======== ======== 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 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- (in thousands, except per share amounts) Operating revenues: Electric utility $36,425 $ 34,982 $100,231 $ 96,810 132,657 $128,569 Non-regulated energy 183,354 135,176 473,945 388,519 635,444 488,103 --------- --------- --------- --------- --------- ---------- 219,779 170,158 574,176 485,329 768,101 616,672 --------- --------- --------- --------- --------- ---------- Operating expenses: Fuel and purchased power 178,575 131,130 460,470 375,932 615,806 472,540 Operations and maintenance 8,594 8,113 24,567 24,168 33,173 32,313 Administrative and general 5,017 4,062 14,145 10,901 19,122 14,860 Depreciation, depletion, and amortization 7,632 6,117 19,454 18,501 25,015 24,081 Oil and gas ceilings test write-down - - - - 13,546 - Taxes, other than income taxes 3,286 3,133 9,116 9,434 12,177 11,989 ----------- ----------- ---------- ---------- ---------- ---------- 203,104 152,555 527,752 438,936 718,839 555,783 --------- --------- --------- -------- --------- ---------- Operating income 16,675 17,603 46,424 46,393 49,262 60,889 ---------- --------- ---------- ---------- ---------- ---------- Other income and (expense): Interest expense (4,847) (3,709) (12,933) (10,984) (16,656) (14,594) Investment income 2,039 793 4,029 2,129 4,863 2,850 Other, net (9) (169) (266) 315 (552) 507 Minority interest 464 - 979 - 979 - ----------- --------- ----------- ---------- ---------- ---------- (2,353) (3,085) (8,191) (8,540) (11,366) (11,237) ---------- --------- ----------- ---------- ---------- ---------- Income before income taxes 14,322 14,518 38,233 37,853 37,896 49,652 Income taxes (4,597) (4,902) (11,714) (12,196) (11,227) (15,625) ---------- ---------- ----------- ----------- ----------- ---------- Net income available for common stock $ 9,725 $ 9,616 $ 26,519 $ 25,657 $ 26,669 $ 34,027 ========== ========= ======== ========= ========= ========= Weighted average common shares Outstanding (Basic): 21,442 21,577 21,465 21,639 21,492 21,655 ========== ========== ========== ========== ========== ========= (Diluted): 21,494 21,633 21,506 21,676 21,523 21,684 ========== ========== ========== ========== ========== ========= Earnings per share (Basic): $0.45 $0.45 $1.24 $1.19 $1.24 $1.57 =========== =========== ============ =========== =========== ========== (Diluted): $0.45 $0.44 $1.23 $1.18 $1.24 $1.57 =========== ========== ============ ========= =========== ======== Dividends paid per share of common stock $0.26 $0.25 $0.78 $0.75 $1.03 $0.987 =========== ========== =========== ========= =========== ========= 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 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- (in thousands) Operating activities: Net income $ 9,725 $ 9,616 $26,519 $25,657 $26,669 $34,027 Principal non-cash items- Depreciation, depletion, and amortization 7,632 6,117 19,454 18,501 38,561 24,081 Deferred income taxes and investment tax credits (85) 295 (156) 767 (3,386) 2,165 (Increase) decrease in receivables, inventories, and other current assets (38,389) (10,256) (46,038) (29,846) (65,967) (26,601) Increase (decrease) in other current liabilities 32,103 6,197 46,628 28,681 61,656 26,150 Other, net (4,443) (1,145) (4,387) (789) (5,750) 1,024 ------------ ---------- ----------- ----------- ------------ ---------- 6,543 10,824 42,020 42,971 51,783 60,846 ----------- ------- --------- -------- ---------- --------- Investing activities: Net property additions, including allowance for other funds used during construction (23,063) (5,935) (53,055) (16,194) (62,142) (22,539) Available for sale securities sold 3,381 586 16,839 11,810 18,683 12,317 Available for sale securities purchased (2,098) (1,108) (5,581) (21,792) (6,149) (21,689) ---------- ---------- ----------- ---------- ------------ ---------- (21,780) (6,457) (41,797) (26,176) (49,608) (31,911) --------- --------- ---------- --------- ----------- --------- Financing activities: Dividends paid (5,651) (5,428) (16,950) (16,255) (22,380) (21,392) Treasury stock, net 119 33 (3,331) (3,296) (3,116) (3,296) Common stock issued 101 56 351 255 369 331 Net short-term borrowings 19,678 1,490 20,201 1,479 23,789 (26) Long-term debt payments (514) (514) (1,330) (1,331) (1,330) (1,331) ----------- ---------- ------------- ----------- ----------- ---------- 13,733 (4,363) (1,059) (19,148) (2,668) (25,714) -------- --------- ------------- --------- ----------- --------- Increase (decrease) in cash and cash equivalents (1,504) 4 (836) (2,353) (493) 3,221 Cash and cash equivalents: Beginning of period 15,432 14,417 14,764 16,774 14,421 11,200 -------- -------- --------- --------- --------- --------- End of period $13,928 $14,421 $13,928 $ 14,421 $13,928 $14,421 ======== ======= ======== ======== ======= ======= Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 5,884 $ 4,593 $13,900 $ 8,183 $16,863 $14,393 Income taxes $ 2,150 $ 3,450 $ 9,322 $ 9,250 $13,183 $12,450 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 Company's Annual Report and Form 10-K) (1) Management's 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 Company's 1998 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, 1999, December 31, 1998 and September 30, 1998, financial information and are of a normal recurring nature. The results of operations for the three, nine and twelve months ended September 30, 1999, are not necessarily indicative of the results to be expected for the full year. (2) Capital Stock In April 1999, the Board of Directors authorized the acquisition of up to 1,000,000 shares of the Company's Common Stock on the open market to fund possible future acquisitions by the Company, for its Employee Stock Option Plan, and for other general purposes. The Board had authorized a similar purchase of 300,000 shares in April 1998. At September 30, 1999, the Company had acquired 291,309 shares for such purposes. The acquired shares are reflected as treasury stock on the accompanying Consolidated Balance Sheets. (3) Net Income Per Share Financial Accounting Standards Board (FASB) Statement No. 128 "Earnings Per Share" 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 Sept 30 Sept 30 Sept 30 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Net Income $9,725 $ 9,616 $26,519 $25,657 $26,669 $34,027 ====== ======= ======= ======= ======= ======= Weighted average common shares outstanding: Basic 21,442 21,577 21,465 21,639 21,492 21,655 Dilutive effect of option plan 52 56 41 37 31 29 --------- --------- --------- --------- --------- --------- Diluted 21,494 21,633 21,506 21,676 21,523 21,684 ====== ====== ====== ====== ====== ====== Earnings per share (Basic): $0.45 $0.45 $1.24 $1.19 $1.24 $1.57 ===== ===== ===== ===== ===== ===== (Diluted): $0.45 $0.44 $1.23 $1.18 $1.24 $1.57 ===== ===== ===== ===== ===== ===== (4) Comprehensive Income FASB Statement No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive earnings and its components in financial statements. Statement No. 130 requires minimum pension liability adjustments, unrealized gains or losses on the Company's 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) Summary of Information Relating to Segments of the Company's Business Effective December 31, 1998 the Company adopted FASB Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information." Black Hills Corporation's business segments include: Electric which supplies electric utility service to western South Dakota, northeastern Wyoming and southeastern Montana; Non-regulated Energy consisting of: Mining which engages in the mining and sale of coal from its mine near Gillette, Wyoming; Oil and Gas which produces, explores and operates oil and gas interests located in the Rocky Mountain region, Texas, California and other states; and Energy Marketing which markets natural gas, oil, coal and related services to customers in the East Coast, Midwest, Southwest, Rocky Mountain, West Coast and Northwest markets and Communications and Others which primarily markets communications and software development services. Financial data for the business segments are as follows (in thousands): ASSETS Non-regulated Energy --------------------------------------- Oil Energy Communications At September 30, 1999 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ ------------ Current assets $ 56,666 $50,843 $ 1,468 $122,879 $ 11,696 $ (69,128) $ 174,424 Total assets 473,118 126,565 31,503 137,322 56,464 (191,055) 633,917 At September 30, 1998 Current assets $ 39,949 $23,054 $ 1,528 $ 65,183 $ 8,483 $ (16,713) $ 121,484 Total assets 453,582 98,374 34,983 74,139 16,259 (131,370) 545,967 Non-regulated Energy --------------------------------------- Third Quarter Oil Energy Communications September 30, 1999 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ ----------- Electric revenues $ 36,425 - - - - - $ 36,425 Coal revenues - 8,076 - 12,331 - - 20,407 Gas revenues - - 1,341 117,427 - - 118,768 Oil revenues - - 1,273 42,167 - - 43,440 Other revenues - - 739 - 791 (791) 739 -------------- ------------ ------------ ------------- --------------------- ------------------ ----------- Total revenues $ 36,425 $ 8,076 $ 3,353 $ 171,925 $ 791 $ (791) $ 219,779 -------------- ------------ ------------ ------------- --------------------- ------------------ ----------- Depreciation, depletion & amortization $ 3,768 $ 871 $ 861 $ 2,097 $ 35 $ - $ 7,632 Operating income (loss) 15,286 3,122 1,008 (1,464) (1,277) - 16,675 Interest expense 3,396 315 131 197 808 - 4,847 Income taxes 4,089 1,075 269 (531) (305) - 4,597 Net income (loss) 8,190 2,522 613 (1,032) (568) - 9,725 Property additions 7,887 261 1,267 152 13,496 - 23,063 Non-regulated Energy --------------------------------------- Third Quarter Oil Energy Communications September 30, 1998 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Electric revenues $ 34,982 - - - - - $ 34,982 Coal revenues - 8,185 - 2,958 - - 11,143 Gas revenues - - 1,058 89,103 - - 90,161 Oil revenues - - 1,283 31,417 - - 32,700 Other revenues - - 858 314 558 (558) 1,172 -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Total revenues $ 34,982 $ 8,185 $ 3,199 $ 123,792 $ 558 $ (558) $ 170,158 -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Depreciation, depletion & amortization $ 3,797 $ 859 $ 1,292 $ 169 - - $ 6,117 Operating income (loss) 14,436 3,433 267 (147) (386) - 17,603 Interest expense 3,407 5 105 190 2 - 3,709 Income taxes 3,955 1,154 (38) (88) (81) - 4,902 Net income (loss) 7,110 2,680 203 (211) (166) - 9,616 Property additions 2,267 167 3,288 22 191 - 5,935 Non-regulated Energy --------------------------------------- Year To Date Oil Energy Communications September 30, 1999 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ ------------- Electric revenues $100,231 - - - - - $ 100,231 Coal revenues - 22,832 - 31,422 - - 54,254 Gas revenues - - 3,846 289,832 - - 293,678 Oil revenues - - 3,317 120,462 - - 123,779 Other revenues - - 2,234 - 2,171 (2,171) 2,234 -------------- ------------ ------------ ------------- --------------------- ------------------ ------------- Total revenues $100,231 $22,832 $ 9,397 $ 441,716 $ 2,171 $ (2,171) $ 574,176 -------------- ------------ ------------ ------------- --------------------- ------------------ ------------- Depreciation, depletion & amortization $ 11,664 $ 2,583 $ 2,589 $ 2,542 $ 76 $ - $ 19,454 Operating income (loss) 39,017 9,374 2,321 (1,733) (2,555) - 46,424 Interest income 10,100 730 414 566 1,123 - 12,933 Income taxes 9,664 2,779 501 (701) (529) - 11,714 Net income (loss) 19,987 7,443 1,416 (1,344) (983) - 26,519 Property additions 12,577 3,125 5,741 245 31,367 - 53,055 Non-regulated Energy --------------------------------------- Year To Date Oil Energy Communications September 30, 1998 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Electric revenues $ 96,810 - - - - - $ 96,810 Coal revenues - 23,956 - 2,958 - - 26,914 Gas revenues - - 3,228 264,292 - - 267,520 Oil revenues - - 3,913 87,160 - - 91,073 Other revenues - - 2,534 478 1,801 (1,801) 3,012 -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Total revenues $ 96,810 $23,956 $ 9,675 $ 354,888 $ 1,801 $ (1,801) $ 485,329 -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Depreciation, depletion & amortization $ 11,392 $ 2,564 $ 4,075 $ 470 - - $ 18,501 Operating income (loss) 37,493 9,737 959 (1,359) (437) - 46,393 Interest income 10,191 5 231 549 8 - 10,984 Income taxes 9,484 3,257 41 (620) 34 - 12,196 Net income (loss) 18,475 7,588 719 (1,112) (13) - 25,657 Property additions 7,569 686 7,766 112 61 - 16,194 Non-regulated Energy --------------------------------------- Twelve Months Ended Oil Energy Communications September 30, 1999 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Electric revenues $132,657 - - - - - $ 132,657 Coal revenues - 30,289 - 41,388 - - 71,677 Gas revenues - - 4,690 400,996 - - 405,686 Oil revenues - - 4,534 150,487 - - 155,021 Other revenues - - 3,060 - 2,806 (2,806) 3,060 -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Total revenues $132,657 $30,289 $ 12,284 $ 592,871 $ 2,806 $ (2,806) $ 768,101 -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Depreciation, depletion & amortization $ 15,154 $ 3,271 $ 3,728 $ 2,760 $ 102 - $ 25,015 Oil and gas ceilings test write-down - - 13,546 - - - 13,546 Operating income (loss) 51,420 12,360 (10,978) (490) (3,050) - 49,262 Interest income 13,481 733 538 775 1,129 - 16,656 Income taxes 12,791 3,614 (4,229) (261) (688) - 11,227 Net income (loss) 26,338 9,440 (7,279) (642) (1,188) - 26,669 Property additions 16,590 3,886 8,144 511 33,011 - 62,142 Non-regulated Energy --------------------------------------- Twelve Months Ended Oil Energy Communications September 30, 1998 Electric Mining and Gas Marketing & Others Eliminations Total -------------- ------------ ------------ ------------- --------------------- ------------------ -------------- Electric revenues $128,569 - - - - - $ 128,569 Coal revenues - 31,030 - 2,958 - - 33,988 Gas revenues - - 4,277 323,781 - - 328,058 Oil revenues - - 5,307 116,842 - - 122,149 Other revenues - - 3,428 480 2,100 (2,100) 3,908 -------------- ------------ ------------ ------------- --------------------- ------------------ --------------- Total revenues $128,569 $31,030 $13,012 $ 444,061 $ 2,100 $ (2,100) $ 616,672 -------------- ------------ ------------ ------------- --------------------- ------------------ --------------- Depreciation, depletion & amortization $ 15,037 $ 3,325 $ 5,107 $ 612 - - $ 24,081 Operating income (loss) 49,678 12,224 1,591 (2,012) (592) - 60,889 Interest income 13,599 5 302 678 10 - 14,594 Income taxes 12,308 4,059 108 (883) 33 - 15,625 Net income (loss) 24,766 9,653 1,271 (1,660) (3) - 34,027 Property additions 12,272 647 9,235 258 127 - 22,539 (6) Energy Trading and Risk Management Activities Effective January 1, 1999, the Company adopted the provisions in Emerging Issues Task Force 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities. (EITF 98-10)." EITF requires disclosure of energy trading and risk management activity for energy contracts used for trading purposes. At September 30, 1999, the Company had approximately 222,000 mmbtus of natural gas forward sales at a fixed price, and approximately 256,000 tons of coal forward purchases at a fixed price, that were not offset by respective purchase and sales contracts. The market value of such contracts approximates the fixed prices. (7) Rate Freeze Extension The Company's electric utility operations agreed to an extension of it's rate freeze for South Dakota retail customers until January 1, 2005, barring extraordinary circumstances. The extension of the rate freeze was approved by the South Dakota Public Utilities Commission on June 22, 1999. The extraordinary circumstances allowing future rate proceedings include certain forced outages at its two largest plants, high inflation, loss of a significant customer, new government impositions, certain fuel cost increases and electric deregulation. In addition, the Company's electric utility operations shall not have a fuel and purchased power adjustment tariff, except if an extraordinary event occurs. The electric utility also retains wholesale capacity and energy revenues, has assignment rights for wholesale contracts and may enter into certain affiliate transactions with its affiliated exempt wholesale generator, all subject to reasonableness and prudency review at future rate proceedings. (8) Accounting Pronouncements In June, 1999, FASB issued Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." This statement delayed the effective date of FASB Statement No. 133 until fiscal quarters beginning after June 15, 2000. (9) Energy Marketing Reorganization In September, the Company reorganized its natural gas marketing operations. The Houston wholesale gas marketing operations were transferred into the Denver office and the Company recorded a $1.2 million after tax non-cash write-down of goodwill related to the Houston wholesale gas marketing operations. In addition, on October 6, 1999, the Company sold its Rocky Mountain retail gas marketing operations to Western Natural Gas Marketing, LLC. The Company expects to record an after tax gain of approximately $1 million related to this sale in the fourth quarter. (10) Reclassifications Certain 1999 and 1998 amounts in the financial statements have been reclassified to conform to the 1999 presentation. These reclassifications did not affect the Company's stockholders' investment or results of operations. Management's 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 $44,000,000, which provide for interim borrowings and the opportunity for timing of permanent financing. The Company had $23,200,000 outstanding under these lines of credit on September 30, 1999. 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, 1999, Black Hills Energy Resources has approximately $35.3 million of outstanding letters of credit. In addition to the above lines of credit, Wyodak Resources Development Corp. has guaranteed a $15,000,000 line of credit for Enserco Energy, Inc. to use to guarantee letters of credit. At September 30, 1999, there were no balances outstanding on this line of credit. Market Risk Disclosures There has not been any significant changes in market risk since December 31, 1998. Commodity Risk The Company is exposed to market risk stemming from changes in commodity prices. These changes could cause fluctuations in the Company's earnings and cash flows. Trading Activities For trading transactions that do not qualify for hedge accounting, the Company utilizes marked-to-market accounting, and such financial instruments are recorded at fair value with realized and unrealized gains (losses) recorded as a component of income. The quantities and maximum terms of derivative financial instruments held for trading purposes at September 30, 1999 and 1998 are not significant to the Company's financial position or results of operations. Non-trading Activities The notional quantities and maximum terms of derivative financial instruments held for non-trading activities at September 30, 1999, are presented below: Max. Term Fair Value Volume (Years) (in thousands) Natural Gas (Volume in MMBtu's): Natural gas futures contracts purchased 820,000 2 $ 338 Natural gas basis swaps contracts bought 17,739,000 3 662 Natural gas basis swaps contracts sold (17,846,000) 3 (541) Natural gas swap contracts bought 12,603,000 2 2,130 Natural gas swap contracts sold (14,326,000) 2 (2,151) Natural gas collar transactions; puts purchased, call sold 534,500 2 (46,325) Natural gas collar transactions; calls purchased, puts sold 534,500 2 47,875 Crude Oil (Volume in barrels): Crude oil puts purchased 24,000 1 5 Crude oil swap contracts sold (240,000) 2 (692) Because these contracts are entered into for hedging purposes, the Company expects that the gains (losses) will be offset by gains (losses) on the underlying physical transactions; such physical transactions are subject to weather trends, transportation and delivery risks and other factors that the Company monitors on a regular basis. The notional amounts detailed above are intended to be indicative of the Company's level of activity in such derivatives. Interest Rate Risk The Company's exposure to market risk for changes in interest rates relates primarily to the Company's short-term investments and long-term debt obligations. The Company does not use derivative financial instruments in its available for sale securities. At September 30, 1999, the effect of a 100 basis point increase in interest rates does not have a material effect to the Company's results of operations or financial condition, due to the short-term duration of the investment portfolio. The Company has no cash flow exposure due to rate changes for long-term debt obligations. The Company primarily enters into debt obligations to support general corporate purposes including capital expenditures and working capital needs. Results of Operations Black Hills Corporation is an energy and communications company consisting of three principal businesses: electric utility, non-regulated energy, and communications. Consolidated net income was $10,889,000 for the three months ended, $27,683,000 for the nine months ended and $36,633,000 for the twelve months ended September 30, 1999 (before non-cash charges), representing an increase of 13 percent for the three month period and 8 percent for the nine and twelve month periods. The increases were primarily due to strong electric utility income and non-regulated energy results partially offset by expected communications start-up losses. In September 1999, the Company recorded a $1.2 million after tax charge primarily due to a non-cash write-down of certain intangible assets associated with the natural gas operations in Houston, Texas. In December 1998, the Company recorded an $8.8 million after tax charge primarily due to a non-cash write-down of certain oil and natural gas assets. Consolidated revenues and fuel and purchased power expense increased for the three, nine and twelve months ended September 30, 1999 primarily due to increased oil, natural gas and coal purchases and sales from the energy marketing operations. Consolidated revenue and income from continuing operations provided by the business segments as a percentage of the total were as follows: Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Revenues Electric utility 17% 21% 18% 20% 17% 21% Non-regulated energy 83 79 82 80 83 79 ---- ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% 100% === === ==== === === === Net Income/(Loss) Electric utility 75% 74% 72% 72% 72% 73% Non-regulated energy 30* 28 31* 28 31* 27 Communications and other (5) (2) (3) - (3) - ---- ---- ---- ---- ---- ---- 100% 100% 100% 100% 100% 100% === === === === === === *Excludes $10.0 million (net-of-tax) write-down of certain oil and natural gas properties (December 1998) and certain intangible assets (September 1999) 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 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Capital Expenditures (includes AFDC) Electric utility $7,887 $2,267 $ 12,577 $7,569 $16,590 $12,272 Non-regulated energy 1,680 3,477 9,111 8,564 12,541 10,140 Communications and other 13,496 191 31,367 61 33,011 127 ------- ------ ------- ------- ------- ------- $23,063 $5,935 $53,055 $16,194 $62,142 $22,539 ======= ====== ======= ======= ======= ======= Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 1999 1998 1999 1998 1999 1998 ---- ---- ---- ---- ---- ---- Depreciation, Depletion, and Amortization Electric utility $3,768 $3,797 $11,664 $11,392 $15,154 $15,037 Non-regulated energy 3,829 2,320 7,714 7,109 9,759 9,044 Oil and gas ceilings test write-down - - - - 13,546 - Communications and others 35 - 76 - 102 - ------- ------ ------- ------- ------- ------- $7,632 $6,117 $19,454 $18,501 $38,561 $24,081 ======= ====== ======= ======= ======= ======= Electric Operations Earnings from electric operations increased $1,080,000, $1,512,000 and $1,572,000 for the three, nine and twelve month periods ending September 30, 1999 respectively. Total kilowatthour sales increased 5 percent for the three month period and 4 percent for the nine and twelve month periods due to increased residential, commercial, wholesale and off-system sales. Degree days, a measure of weather trends, were 3 percent higher for the three month period and 4 percent and 7 percent lower for the nine and twelve month periods as compared to the prior periods. Increased revenues were partially offset by increased operations and maintenance expenses due to planned plant outages. Non-regulated Energy Operations Earnings from non-regulated energy operations increased $595,000, $1,540,000 and $2,220,000 for the three months, nine months, and twelve months ended September 30, 1999 (excluding a $1.2 million non-cash charge) primarily due to stable coal mining earnings, strong oil and natural gas production earnings and improved energy marketing results. Earnings from oil and gas operations increased $410,000 and $697,000 for the three months and nine months ended September 30, 1999 and increased $250,000 (excluding write-down of certain oil and gas assets) for the twelve months ended September 30, 1999, as compared to 1998. Increased earnings were primarily due to increased oil prices, increased gas production and lower depletion expense. Production increased 7 percent, 11 percent and 12 percent for the three, nine and twelve month periods. Oil prices increased 70 percent and 20 percent for the three and nine month periods, and were flat for the twelve month period. Gas prices decreased 9 percent for the three and nine month periods and 15 percent for the twelve month period. Average gas prices decreased primarily due to the production increases in lower price and lower cost Montana properties for the three and nine month periods. In December 1998, Black Hills Exploration and Production recognized a $13,546,000 pretax loss related to a write-down of oil and gas properties. The write-down was primarily due to historically low crude oil prices, lower natural gas prices and decline in value of certain unevaluated properties. Absent other factors impacting depletion expense, the Company expects future depletion expense per unit of production to be reduced because of this write-down. Earnings from energy marketing operations increased $343,000, $1,025,000 and $2,182,000 for the three, nine and twelve month periods ending September 30, 1999 (excluding a $1.2 million write-down of certain intangible assets). The increase was primarily due to increased margins and volumes marketed in the natural gas and crude oil partially offset by adverse market conditions in coal marketing. The energy marketing operations marketed 533,000 mmbtus of gas, 18,400 barrels of oil and 5,500 tons of coal per day in the three month period ended September 30, 1999 and 482,700 mmbtus and 22,700 barrels per day for the three month period ended September 30, 1998. For the nine month period, 513,000 mmbtus, 19,000 barrels and 4,800 tons were marketed in 1999 and 453,000 mmbtus and 18,100 barrels were marketed in 1998. For the twelve month period ending September 30, 1999, 524,000 mmbtus, 20,000 barrels and 4,700 tons per day were marketed as compared to 418,000 mmbtus and 16,800 barrels of oil per day in 1998. The Company acquired its coal marketer, Black Hills Coal Network, in September 1998. Communications Operations Deployment continues on the state of the art communications network in Rapid City and the northern Black Hills of South Dakota. Installation and testing of CATV, telephone switching and communications transport systems continues to progress in line with management's expectations. The company began serving customers, on a test basis, in the third quarter. The company expects to increase customer additions throughout the remainder of 1999 and complete its initial build-out by the end of 2000. Losses for the three month, nine month, and twelve month periods ended September 30, 1999 primarily represent start-up administrative and operating expenses and were lower than management's expectations. Increased Materials, supplies and fuel and Property and investments on the Consolidated Balance Sheets related primarily to the continuing development of the communications network. 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 Company's computer process control systems 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 had previously formed a Year 2000 Committee to review and ensure the Company's compliance with what is commonly known as the "Year 2000 problem". In addition, consultants have reviewed the Company's state of readiness. The Company's review encompassed supporting information technology systems, generation control systems and distribution systems, and business supply chain systems and infrastructure. Management presently believes that with modifications that have been made to the Company's existing software and/or conversions to new software, the Year 2000 problem has been mitigated. The cost of either repairing or replacing certain business systems to ensure business continuance beyond Year 2000 did not have a significant impact on the results of operations. The cost of the Year 2000 project is less than $1 million and is funded through operating cash flows. These costs are primarily attributable to the purchase of new software and equipment which are expensed or capitalized on a basis consistent with the Company's 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 Company's 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 Company's risk management program includes emergency backup and recovery procedures to be followed in the event of failure of a business-critical system. These procedures include specific procedures for potential Year 2000 issues. Contingency plans to protect the business from Year 2000-related interruptions were completed in October 1999 and include, for example, complete backup procedures for business critical operations, 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 management's 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, 1999. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Annual Report on Form 11-K of the Black Hills Corporation 401K Plan b. Reports on Form 8-K None 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, 1999