United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number 333-52664
Black Hills Corporation
Incorporated in South Dakota IRS Identification Number 46-0458824
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
---------- ----------
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 April 30, 2001
Common stock, $1.00 par value 26,369,885 shares
1
BLACK HILLS CORPORATION
I N D E X
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income- 3
Three and Twelve Months
Ended March 31, 2001 and 2000
Consolidated Balance Sheets- 4
March 31, 2001, December 31, 2000
and March 31, 2000
Consolidated Statements of Cash Flows- 5
Three and Twelve Months
Ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of 15-21
Financial Position and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 22
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23-24
Signatures 25
2
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Twelve Months
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands, except per share amounts)
Operating revenues $ 561,693 $ 247,959 $ 1,937,413 $ 871,633
----------- ----------- ----------- -----------
Operating expenses:
Fuel and purchased power 446,508 207,710 1,609,640 714,275
Operations and maintenance 14,052 8,702 53,008 34,198
Administrative and general 22,105 4,391 60,552 21,541
Depreciation, depletion and amortization 11,877 6,596 38,108 25,748
Taxes, other than income taxes 5,571 3,688 16,760 13,084
----------- ----------- ----------- -----------
500,113 231,087 1,778,068 808,846
----------- ----------- ----------- -----------
Operating income 61,580 16,872 159,345 62,787
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (11,720) (5,264) (36,869) (16,959)
Interest income 1,432 2,095 6,444 5,060
Other, net 1,412 (611) 5,033 3,880
----------- ----------- ----------- -----------
(8,876) (3,780) (25,392) (8,019)
----------- ----------- ----------- -----------
Income before minority interest and income taxes 52,704 13,092 133,953 54,768
Minority interest (1,960) -- (13,298) (2,000)
Income taxes (18,652) (4,031) (44,912) (15,671)
----------- ----------- ----------- -----------
Net income 32,092 9,061 75,743 37,097
Preferred stock dividends (42) -- (120) --
----------- ----------- ----------- -----------
Net income available for common stock $ 32,050 $ 9,061 $ 75,623 $ 37,097
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 22,975 21,376 22,520 21,472
=========== =========== =========== ===========
Diluted 23,393 21,410 22,823 21,512
=========== =========== =========== ===========
Earnings per share of common stock:
Basic $ 1.39 $ 0.42 $ 3.36 $ 1.73
=========== =========== =========== ===========
Diluted $ 1.37 $ 0.42 $ 3.32 $ 1.72
=========== =========== =========== ===========
Dividends paid per share of common stock $ 0.28 $ 0.27 $ 1.09 $ 1.05
=========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
3
BLACK HILLS CORPORATION
CONSOLIDATED BALANCE SHEETS
Unaudited Unaudited
March 31 December 31 March 31
2001 2000 2000
---- ---- ----
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 89,662 $ 24,913 $ 14,203
Securities available-for-sale 3,136 2,113 2,504
Receivables (net of allowance for doubtful accounts of $4,448,
$3,631 and $357, respectively) -
Customers 171,682 278,436 105,194
Other 16,623 21,283 79,396
Materials, supplies and fuel 12,618 16,545 9,734
Prepaid expenses 8,147 7,428 3,551
Derivatives at market value 33,630 68,292 5,158
----------- ----------- -----------
335,498 419,010 219,740
----------- ----------- -----------
Investments 66,357 63,965 13,095
----------- ----------- -----------
Property and equipment 1,099,584 1,072,129 716,218
Less accumulated depreciation and depletion (290,344) (277,848) (252,169)
----------- ----------- -----------
809,240 794,281 464,049
Other assets: ----------- ----------- -----------
Derivatives at market value 2,852 -- --
Regulatory asset 4,134 4,134 3,944
Other, principally goodwill 42,286 38,930 14,590
----------- ----------- -----------
49,272 43,064 18,534
----------- ----------- -----------
$ 1,260,367 $ 1,320,320 $ 715,418
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 13,133 $ 13,960 $ 1,329
Notes payable 233,258 211,679 119,274
Accounts payable 160,412 247,596 98,895
Accrued liabilities 68,195 49,661 28,834
Derivatives at market value 35,164 65,960 5,158
----------- ----------- -----------
510,162 588,856 253,490
----------- ----------- -----------
Long-term debt, net of current maturities 305,463 307,092 160,174
----------- ----------- -----------
Deferred credits and other liabilities:
Derivatives at market value 9,603 -- --
Investment tax credits 2,410 2,530 2,899
Federal income taxes 60,561 62,679 48,292
Reclamation and regulatory liability 22,393 22,340 22,542
Other 14,396 16,516 7,686
----------- ----------- -----------
109,363 104,065 81,419
----------- ----------- -----------
Minority interest in subsidiaries 35,413 37,961 --
----------- ----------- -----------
Stockholders' equity:
Preferred stock - no par Series 2000-A; 21,500 shares authorized;
Issued and Outstanding: 4,000, 4,000 and 0 shares, respectively 4,000 4,000 --
----------- ----------- -----------
Common stock equity-
Common stock $1 par value; 100,000,000 shares authorized;
Issued: 23,329,356; 23,302,111 and 21,746,460 shares, respectively 23,329 23,302 21,746
Additional paid-in capital 73,969 73,442 40,811
Retained earnings 217,252 191,482 165,430
Treasury stock (8,841) (9,067) (7,652)
Accumulated other comprehensive income (loss) (9,743) (813) --
----------- ----------- -----------
295,966 278,346 220,335
----------- ----------- -----------
Total stockholders' equity 299,966 282,346 220,335
----------- ----------- -----------
$ 1,260,367 $ 1,320,320 $ 715,418
=========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
4
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Twelve Months
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Operating activities:
Net income available for common $ 32,050 $ 9,061 $ 75,623 $ 37,097
Principal non-cash items-
Depreciation, depletion and amortization 11,877 6,596 38,108 25,748
Derivative fair value adjustment (3,508) -- (5,839) --
Gain on sales of assets -- -- (3,736) (2,541)
Deferred income taxes and investment tax credits (2,238) 609 510 2,731
Minority interest 1,960 -- 13,298 2,000
Change in operating assets and liabilities-
Accounts receivable and other current assets 112,809 (23,207) (72,774) (30,504)
Accounts payable and other current liabilities (68,650) 21,286 94,137 29,135
Other, net (3,397) (1,189) (557) (8,728)
--------- --------- --------- ---------
80,903 13,156 138,770 54,938
--------- --------- --------- ---------
Investing activities:
Property additions (28,862) (14,849) (148,143) (88,357)
(Increase) decrease in investments (578) (21,505) 9,932 (82,047)
Payment for acquisition of net assets, net of
cash acquired -- -- (28,688) --
Proceeds from sales of assets -- -- 5,500 3,463
Available-for-sale securities purchased -- -- (422) (5,212)
Available-for-sale securities sold -- 5,082 -- 21,787
--------- --------- --------- ---------
(29,440) (31,272) (161,821) (150,366)
--------- --------- --------- ---------
Financing activities:
Dividends paid (6,280) (5,870) (23,801) (22,827)
Treasury stock (purchased) sold, net 226 378 (1,189) (1,405)
Common stock issued 554 160 4,248 434
Increase in short-term borrowings 21,579 21,695 73,732 114,704
Long-term debt - issuance -- -- 60,608 --
Long-term debt - repayments (2,456) (526) (3,786) (1,330)
Subsidiary distributions to minority interests (337) -- (11,302) --
--------- --------- --------- ---------
13,286 15,837 98,510 89,576
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents 64,749 (2,279) 75,459 (5,852)
Cash and cash equivalents:
Beginning of period 24,913 16,482 14,203 20,055
--------- --------- --------- ---------
End of period $ 89,662 $ 14,203 $ 89,662 $ 14,203
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest $ 12,602 $ 6,335 $ 36,932 $ 17,091
Income taxes $ 5,900 $ -- $ 24,418 $ 8,584
Non-cash net assets of Indeck Capital, Inc. acquired
through issuance of common and preferred stock $ -- $ -- $ 34,493 $ --
The accompanying notes to consolidated financial statements are an integral part
of these consolidated financial statements.
5
BLACK HILLS CORPORATION
Notes to Consolidated Financial Statements
(unaudited)
(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 accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations; however, the Company believes that the
footnotes adequately disclose the information presented. These financial
statements should be read in conjunction with the financial statements
and the notes thereto, included in the Company's 2000 Annual Report on
Form 10-K filed with the Securities and Exchange Commission.
Accounting methods historically employed require certain estimates as of
interim dates. The information furnished in the accompanying financial
statements reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the March 31, 2001,
December 31, 2000 and March 31, 2000, financial information and are of a
normal recurring nature. The results of operations for the three and
twelve months ended March 31, 2001, are not necessarily indicative of
the results to be expected for the full year.
(2) RECLASSIFICATIONS
Certain 2000 amounts in the financial statements have been reclassified
to conform to the 2001 presentation. These reclassifications did not
have an effect on the Company's stockholders' investment or results of
operations as previously reported.
(3) CHANGE IN ACCOUNTING PRINCIPLE
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities." SFAS 133, as amended, establishes accounting and
reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured
at its fair value. The Statement requires that changes in the
derivative instrument's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met.
SFAS 133 allows special hedge accounting for fair value and cash flow
hedges. The Statement provides that the gain or loss on a derivative
instrument designated and qualifying as a fair value hedging instrument
as well as the offsetting loss or gain on the hedged item attributable
to the hedged risk be recognized currently in earnings in the same
accounting period. SFAS 133 provides that the effective portion of the
gain or loss on a derivative instrument designated and qualifying as a
cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same
period or periods during which the hedged forecasted transaction
affects earnings. The remaining gain or loss on the derivative
instrument, if any, must be recognized currently in earnings.
6
SFAS 133 requires that on date of initial adoption, an entity shall
recognize all freestanding derivative instruments in the balance sheet
as either assets or liabilities and measure them at fair value. The
difference between a derivative's previous carrying amount and its fair
value shall be reported as a transition adjustment. The transition
adjustment resulting from adopting this Statement shall be reported in
net income or other comprehensive income, as appropriate, as the effect
of a change in accounting principle in accordance with paragraph 20 of
Accounting Principles Board Opinion No. 20 (APB 20), "Accounting
Changes."
On January 1, 2001, the Company adopted SFAS 133. The Company had
certain non-trading energy contracts and interest rate swaps documented
as cash flow hedges, which upon adoption resulted in a cumulative
decrease to accumulated other comprehensive income of $10.1 million.
Upon adoption of SFAS 133, most of the Company's energy trading
activities previously accounted for under Emerging Issues Task Force
Issue No. 98-10, "Accounting for Energy Trading and Risk Management
Activities" (EITF 98-10) fell under the purview of SFAS 133. The effect
from this adoption on the energy trading companies and energy trading
activities was not material because, unless otherwise noted, the
trading companies do not designate their energy trading activities as
hedge instruments. This "no hedge" designation results in these
derivatives being measured at fair value and gains and losses
recognized currently in earnings. This treatment under SFAS 133 is
comparable to the accounting under EITF 98-10.
(4) COMPREHENSIVE INCOME
The following table presents the components of the Company's
comprehensive income:
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Net income available for common stock $32,050 $9,061 $75,623 $37,097
Other comprehensive income:
Unrealized gain on available-for-sale
securities 1,023 - 210 -
Fair value adjustment on derivatives
designated as cash flow hedges (9,953) - (9,953) -
-------- ------ ------- -------
Comprehensive income $23,120 $9,061 $65,880 $37,097
======= ====== ======= =======
(5) 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. As of March 31, 2001, substantially all of the Company's
operations and assets are located within the United States. The
7
Company's operations are conducted through six business segments that
include: Electric group and segment, which supplies electric utility
service to western South Dakota, northeastern Wyoming and southeastern
Montana; Independent Energy group consisting of the following segments:
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; Fuel Marketing, which markets natural gas,
oil, coal and related services to customers in the East Coast, Midwest,
Southwest, Rocky Mountain, West Coast and Northwest regions markets;
Independent Power, which produces and sells power to wholesale
customers; and Communications group and Others, which primarily markets
communications and software development services.
Segment information follows the same accounting policies as described
in Note 1 of the Company's 2000 Annual Report on Form 10-K. Segment
information included in the accompanying Consolidated Balance Sheets
and Consolidated Statements of Income is as follows (in thousands):
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
(In thousands)
Quarter to Date
March 31, 2001
Electric $ 70,580 $ -- $ 17,337
Mining 5,407 2,856 2,066
Oil and gas 8,581 -- 2,956
Fuel marketing 452,299 3,592 15,559
Independent power 18,045 -- (1,106)
Communications and others 3,925 1,101 (4,720)
Intersegment eliminations -- (4,693) --
-------- -------- --------
Total $558,837 $ 2,856* $ 32,092
======== ======== ========
*In accordance with the provisions of SFAS No. 71, intercompany coal sales are
not eliminated.
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
(In thousands)
Quarter to Date
March 31, 2000
Electric $ 33,299 $ -- $ 7,198
Mining 5,561 2,534 2,363
Oil and gas 3,962 -- 890
Fuel marketing 202,054 -- 570
Independent power -- -- 31
Communications and others 549 906 (1,991)
Intersegment eliminations -- (906) --
-------- -------- --------
Total $245,425 $ 2,534* $ 9,061
======== ======== ========
*In accordance with the provisions of SFAS No. 71, intercompany coal sales are
not eliminated.
8
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
(In thousands)
12 Months Ended
March 31, 2001
Electric $ 210,589 $ -- $ 47,244
Mining 20,665 10,033 6,405
Oil and gas 23,802 1,145 7,047
Fuel marketing 1,603,712 16,767 28,975
Independent power 57,547 -- 2,004
Communications and others 11,065 3,877 (15,932)
Intersegment eliminations -- (21,789) --
---------- ---------- ----------
Total $1,927,380 $ 10,033* $ 75,743
========== ========== ==========
*In accordance with the provisions of SFAS No. 71, intercompany coal sales are
not eliminated.
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
(In thousands)
March 31, 2000
Electric $133,437 $ -- $ 27,611
Mining 23,772 7,641 9,399
Oil and gas 14,031 -- 3,086
Fuel marketing 691,925 -- 688
Independent power -- -- (62)
Communications and others 827 3,397 (3,625)
Intersegment eliminations -- (3,397) --
-------- -------- --------
Total $863,992 $ 7,641* $ 37,097
======== ======== ========
*In accordance with the provisions of SFAS No. 71, intercompany coal sales are
not eliminated.
During the quarter ended March 31, 2001, as part of the Company's
restructuring plan associated with the new "holding company" structure
effected in the fourth quarter 2000, the Company transferred ownership
interest in Wyodak Development Corporation between its wholly-owned
subsidiaries Black Hills Power and Black Hills Energy Ventures. This
transaction had the effect of reducing the "Electric" reporting
segment's total assets by approximately $89.6 million. Black Hills
Energy Ventures is an "intermediate level" holding company and is not
included in a reporting segment. The Company had no other material
changes in total assets of its reporting segments beyond changes
resulting from normal operating activities.
9
(6) LEGAL PROCEEDINGS
On April 3rd, 2001, we reached a settlement of ongoing litigation with
PacifiCorp filed in the United States District Court, District of
Wyoming, (File No. 0cv-155B). The litigation concerned the parties'
rights and obligations under the Further Restated and Amended Coal
Supply Agreement dated May 5, 1987, by which PacifiCorp purchased coal
from our coal mine to meet the coal requirements of the Wyodak Power
Plant. The Settlement Agreement provided for the dismissal of the
litigation, with prejudice, coupled with the execution of several new
coal-related agreements between the parties discussed below. We believe
the value of the Settlement Agreements is equal to the net present
value of the litigated Further Restated and Amended Coal Supply
Agreement.
New Restated and Amended Coal Supply Agreement: Effective January 1,
2001, the parties agreed to terminate the Further Restated and Amended
Coal Supply Agreement, and replace it with the New Restated and Amended
Coal Supply Agreement (New Agreement). The New Agreement begins on
January 1, 2001, and extends to December 31, 2022. Under the New
Agreement, we received an extension of sales beyond the June 8, 2013
term of the former Coal Supply Agreement. PacifiCorp will receive a
price reduction for each ton of coal purchased. The minimum purchase
obligation under the New Agreement increased to 1,500,000 tons of coal
for each calendar year of the contract term, subject to adjustment for
planned outages. The New Agreement further provides for a special
one-time payment by PacifiCorp in the amount of $7,374,000, to be paid
on or before September 1, 2001. This payment will be recognized as
revenue over the life of the New Agreement.
Coal Option Agreement: The term of this agreement begins no later than
October 1, 2001, and extends until December 31, 2010. The agreement
provides that PacifiCorp shall purchase 1,400,000 tons of coal during
the period of October 1, 2001 through December 31, 2002, and 1,000,000
tons of coal in 2003 at a fixed price. The agreement further provides
us with a "put" option for 2002 and 2003 under which we may put to
PacifiCorp up to 500,000 tons of coal from the Wyodak Mine at a market
based price. For each calendar year from January 1, 2004 through 2010,
the put option is increased to a maximum of 1,000,000 tons at a market
based price. The "put" tonnages will be reduced or offset for
quantities of K-Fuel purchased by PacifiCorp under the KFx Facility
Output Agreement. Additionally, for each calendar year during which we
are selling to PacifiCorp K-Fuel under the KFx Facility Output
Agreement described below, and in which we have not exercised our "put"
option, PacifiCorp may elect to purchase an equal amount of tonnage
from our coal reserves to use in a 50/50 blend with the K-Fuel, up to
500,000 tons per year in 2002 through 2007 at a market based price with
a fixed floor.
Asset Option Agreement: This agreement provides PacifiCorp an option to
purchase a 10% interest in the KFx facility or the legal entity that
owns the KFx facility at a market based price. Additionally, the
agreement provides to PacifiCorp an option to sell us PacifiCorp's
interest in the "In Pit" conveyor system currently owned by PacifiCorp
and utilized at the Wyodak Mine at a fixed price. If PacifiCorp
exercises its option to sell us the In Pit system, we have a
corresponding right to put to PacifiCorp the "North Conveyor System,"
which serves as the backup coal delivery system for the Wyodak Power
Plant at a fixed price.
KFx Facility Output Agreement: The KFx plant is a coal enhancement
facility we own located near our Wyodak Coal Mine. The KFx plant was
built to produce an enhanced coal known as "K-Fuel." Assuming the plant
becomes operational, PacifiCorp agrees to purchase K-Fuel for a term
beginning January 1, 2002, and extending to December 31, 2007. If the
plant is not operational on or before December 31, 2003, the agreement
will
10
become void. Under this agreement, PacifiCorp agrees to purchase
the output of K-Fuel from the KFx plant, up to a maximum of 500,000
tons for each calendar year from 2002 through 2007 at fixed price with
market based escalation. WRDC reserves the right to sell up to a total
of 100,000 tons from the output of the KFx plant to other customers
during the same time period.
(7) PRICE RISK MANAGEMENT
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. In the normal course of business,
the Company actively manages its exposure to these market risks by
entering into various hedging transactions, which are authorized under
its Risk Management Policies and Procedures that place clear controls
on these activities. Hedging transactions involve the use of a variety
of derivative financial instruments.
The Company accounts for all energy trading activities at fair value as
of the balance sheet date and recognizes currently the net gains or
losses resulting from the revaluation of these contracts to fair value
in its results of operations. As a result, substantially all of the
energy trading activities of the Company's gas marketing, crude oil
marketing, and coal marketing operations are accounted for under fair
value accounting methodology as prescribed in SFAS 133 or EITF 98-10.
The Company, through its independent energy business group, utilizes
financial instruments for its fuel marketing services. These financial
instruments include fixed-for-float swap financial instruments, basis
swap financial instruments and costless collars traded in the
over-the-counter financial markets.
These derivatives are not held for speculative purposes but rather
serve to hedge the Company's exposure related to commodity purchases or
sales commitments. Under SFAS 133 and EITF 98-10, these transactions
qualify as derivatives or energy trading activities that must be
accounted for at fair value. As such, realized and unrealized gains and
losses are recorded as a component of income. Because the Company does
not as a policy permit speculation with "open" positions, substantially
all of its trading activities are back-to-back positions where a
commitment to buy/(sell) a commodity is matched with a committed
sale/(buy) or financial instrument. The quantities and maximum terms of
derivative financial instruments held for trading purposes at March 31,
2001 and 2000 are as follows:
Max. Term
March 31, 2001 Volume Covered (Years)
-------------- -------------- -------
(MMBtus)
Natural gas basis swaps purchased 31,473,674 2
Natural gas basis swaps sold 35,437,168 2
Natural gas fixed-for-float swaps purchased 5,805,996 1
Natural gas fixed-for-float swaps sold 5,123,995 1
(Tons)
Coal tons sold 1,201,946 1
Coal tons purchased 1,178,446 1
11
Max. Term
March 31, 2000 Volume Covered (Years)
-------------- -------------- -------
(MMBtus)
Natural gas futures contracts purchased 120,000 1
Natural gas basis swaps purchased 23,531,340 3
Natural gas basis swaps sold 14,486,340 3
Natural gas fixed-for-float swaps purchased 8,785,816 1
Natural gas fixed-for-float swaps sold 10,477,702 1
As required under SFAS 133 and EITF 98-10, derivatives and energy
trading activities were marked to fair value on March 31, 2001, and the
gains and losses recognized in earnings. The entries for the
accompanying consolidated balance sheet and income statement as of and
for the three and twelve month periods ended March 31, 2001 are as
follows (in thousands):
Three Month Twelve Month
Instrument Asset Liability Gain (loss) Gain (loss)
- ---------- ----- --------- ------------ -----------
Natural gas basis swaps $ 5,164 $ 10,501 $ 5,235 $ (5,337)
Natural gas fixed-for-float swaps 4,002 5,133 1,363 (1,131)
Natural gas physical 13,815 2,186 (2,335) 11,629
Coal transactions 6,014 4,473 631 1,541
Crude oil transactions 6,627 5,972 132 655
-------- -------- -------- --------
Totals $ 35,622 $ 28,265 $ 5,026 $ 7,357
======== ======== ======== ========
There were no significant differences between the fair values of derivative
assets and liabilities at March 31, 2000.
Non-trading Energy Activities
-----------------------------
To reduce risk from fluctuations in the price of oil and natural gas,
the Company enters into swaps and costless collar transactions. The
transactions are used to hedge price risk from sales of the Company's
forecasted crude oil and natural gas production. For such transactions,
the Company utilizes hedge accounting as allowed under SFAS 133.
At March 31, 2001, the Company had fixed-for-float swaps and costless
collars to hedge portions of its crude oil and natural gas production.
These transactions were identified as cash flow hedges, properly
documented, and effectiveness testing established. At quarter-end, the
hedges met the effectiveness testing criteria and retained their cash
flow hedge status. The crude oil hedges recorded ineffectiveness due to
basis risk and time value. The effective portion of the gain or loss on
these derivatives is reported in other comprehensive income and the
ineffective portion is reported in earnings.
At March 31, 2001, the Company had fixed-for-float swaps for 17,000
barrels of crude oil per month through December of 2001 with a net fair
value of $(0.2) million and
12
10,000 barrels of crude oil per month for January through September of
2002 with a net fair value of $0.2 million. The Company had costless
collars (purchased put - sold call)for 10,000 barrels of crude oil per
month for 2001 with a net fair value of $0.2 million. In addition, the
Company hedged its forecasted 2001 natural gas production with
fixed-for-float swaps. At March 31, 2001 these natural gas swaps were
for 1,131,000 MMBtus with a net fair value of $(2.2) million.
The effective portion of the gains and losses on these derivatives was
recorded in other comprehensive income. At March 31, 2001, other
comprehensive income for all non-trading energy swaps and options was
$1.6 million.
Derivative fair value gains and losses are recorded in other
comprehensive income for the effective portion of the hedge and in
earnings for the ineffective portion. The ineffective portion includes
both time value and basis risk. The net gain recognized in earnings
prior to actual cash settlement is $0.4 million.
Financing Activities
--------------------
To reduce risk from fluctuations in interest rates, the Company enters
into interest rate swap transactions. These transactions are used to
hedge interest rate risk for variable rate debt financing. For such
transactions, the Company utilizes hedge accounting per the
requirements of SFAS 133. These transactions were identified as cash
flow hedges, properly documented, and effectiveness testing
established. At quarter-end, these hedges met effectiveness testing
criteria and retained their cash flow hedge status. At March 31, 2001,
the Company had interest rate swaps with a average balance notional
amount of $163.3 million, having a maximum term of six years and a fair
value of $(12.4) million. Because these hedges are fully effective (no
time value or basis risk), the entire derivative fair value is recorded
in other comprehensive income.
At March 31, 2001, the Company had $390.6 million of outstanding,
floating-rate debt of which $214.5 million was not offset with interest
rate swap transactions that effectively convert the debt to a fixed
rate.
Credit Risk
-----------
In addition to the risk associated with price movements, credit risk is
also inherent in the Company's risk management activities. Credit risk
relates to the risk of loss resulting from non-performance of
contractual obligations by a counterparty. While the Company has not
experienced significant losses due to the credit risk associated with
these arrangements, the Company has off-balance sheet risk to the
extent that the counterparties to these transactions may fail to
perform as required by the terms of each such contract.
(8) SUBSEQUENT EVENTS
Common Stock Offering
---------------------
During the first quarter of 2001, the Company announced the public
offering of 3 million shares of common stock with an option for the
underwriters to purchase 450,000 additional shares. Credit Suisse First
Boston, Lehman Brothers, CIBC World Markets and UBS Warburg acted as
the managers of the underwriting syndicate.
13
Early in the second quarter of 2001 the Company announced the offering
price was set at $52 per share and all 3 million shares were sold with
the underwriters exercising their over-allotment option to purchase an
additional 383,000 shares. Net proceeds were approximately $165 million
after commissions and expenses. The proceeds will be used to fund a
portion of the expansion and construction costs related to certain
power plant assets of the Company's independent energy group, to repay
a portion of current indebtedness under revolving credit facilities,
and for general corporate purposes.
Acquisitions
------------
Early in the second quarter of 2001, the Company's independent power
subsidiary, Black Hills Energy Capital, closed on the purchase of the
Fountain Valley facility, a 240 megawatt generation facility located
near Colorado Springs, Colorado, featuring six LM-6000 simple-cycle,
gas-fired turbines. The facility is currently under construction and is
expected to come on-line early in the third quarter of 2001. The
facility was purchased from Enron Corporation for approximately $175
million and was financed primarily with non-recourse financing from
Union Bank of California.
In addition, the Company has obtained an 11-year contract with Public
Service of Colorado to utilize the facility for peaking purposes. The
contract is a tolling arrangement in which the Company assumes no fuel
risk.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We are a growth oriented, diversified energy holding company operating
principally in the United States. Our regulated and unregulated businesses have
expanded significantly in recent years. Our independent energy group produces
and markets power and fuel. We produce and sell electricity in a number of
markets, with a strong emphasis in the western United States. We also produce
coal, natural gas and crude oil primarily in the Rocky Mountain region and
market fuel products nationwide. We also own Black Hills Power, Inc., an
electric utility serving approximately 58,600 customers in South Dakota, Wyoming
and Montana. Our communications group offers state-of-the-art broadband
communications services to residential and business customers in Rapid City and
the northern Black Hills region of South Dakota.
The following discussion should be read in conjunction with Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - included in our 2000 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Our business and industry outlooks, capital
requirements and market risks as disclosed in that filing continue to be
consistent with management's current expectations and assessments.
Results of Operations
Consolidated Results
Consolidated earnings for the three month period ended March 31, 2001 were $32.1
million or $1.37 per share compared to $9.1 million or $0.42 per share in the
same period of the prior year. Consolidated earnings for the twelve month period
ended March 31, 2001 were $75.6 million or $3.32 per share compared to $37.1 or
$1.72 per share for the same period of the prior year.
Increases in earnings for the three and twelve month periods ended March 31,
2001 were primarily driven by strong natural gas marketing activity, increased
fuel production, expanded power generation and increased wholesale off-system
utility sales. Strong results in our independent energy business group and
electric utility business group were partially offset by losses in our
communications group and increased reserves for exposure to the unstable markets
in the western United States.
Unusual energy market conditions in the western United States continue to
contribute to our strong financial performance. We estimate approximately half
of the current three month period's and one-third of the current twelve month
period's earnings per share could be attributable to high prices of natural gas
and electricity related to the volatile western markets.
Consolidated revenues for the three and twelve month periods ended March 31,
2001 were $561.7 million and $1.9 billion, respectively. Revenues for the same
periods ended March 31, 2000 were $248.0 million and $871.6 million,
respectively.
The growth in revenues was a result of high energy commodity prices and
increased volumes of fuel marketed, primarily as a result of extreme price
volatility in the western markets, acquisitions and growth in the independent
energy business group and increases in off-system sales by our electric utility.
15
Revenue and net income (loss) provided by each business group as a percentage of
our total revenue and net income were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
Revenues
Independent Energy 86% 86% 89% 85%
Electric utility 13 13 11 15
Communications 1 1 -- --
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
Net Income/(Loss)
Independent energy 61% 43 59% 35%
Electric utility 54 79 62 74
Communications and other (15) (22) (21) (9)
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
Net income from the independent energy group exceeded net income derived from
our utility for the first time in the first quarter 2001. We expect that
earnings growth from the independent energy group over the next few years will
be driven primarily by our continued expansion in the independent power
production segment. We also believe that continued strength in commodity prices
and energy markets will provide the opportunity for strong results in our fuel
marketing and oil and gas production operations.
Our electric utility has continued to produce modest growth in revenue and
earnings from the retail business over the past two years. We believe that this
trend is stable and that, absent unplanned system outages, it will continue for
the next several years due to the extension of our electric utility's rate
freeze until January 1, 2005. The share of the utility's future earnings
generated from wholesale off-system sales will depend on many factors, including
native load growth, plant availability and commodity prices in the western
markets.
Although our communications business continues to significantly increase
residential and business customers, we expect it will sustain approximately $10
million in net losses in 2001, with annual losses decreasing thereafter and
profitability expected in the next three to four years.
16
The following business group and segment information includes intercompany
eliminations with the exception of intercompany coal sales which are not
eliminated in accordance with the provisions of SFAS No. 71 and the calculations
of EBITDA:
Independent Energy Group
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $487,188 $214,111 $1,715,759 $737,369
Expenses 355,716 208,510 1,622,635 720,753
------- ------- --------- -------
Operating income $131,472 $5,601 $93,124 $16,616
Net income $19,475 $3,854 $44,431 $13,111
EBITDA $42,445 $7,056 $99,933 $26,400
EBITDA represents earnings before interest, income taxes, depreciation and
amortization and any non-recurring or non-cash items. EBITDA is used by
management and some investors as an indicator of a company's historical ability
to service debt. Management believes that an increase in EBITDA is an indicator
of improved ability to service existing debt, to sustain potential future
increases in debt and to satisfy capital requirements. However, EBITDA is not
intended to represent cash flows for the period, nor has it been presented as an
alternative to either operating income, or as an indicator of operating
performance or cash flows from operating, investing and financing activities, as
determined by generally accepted accounting principles. EBITDA as presented may
not be comparable to other similarly titled measures of other companies.
The following is a summary of sales volumes of our coal, oil and natural gas
production:
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
Tons of coal sold 818,000 793,000 3,075,000 3,146,000
Barrels of oil sold 99,000 79,000 354,000 316,000
Mcf of natural gas sold 1,006,000 716,000 3,564,000 2,799,000
Mcf equivalent sales 1,600,000 1,190,000 5,688,000 4,695,000
17
The following is a summary of average daily fuel marketing volumes:
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
Natural gas - MMBtus 866,000 630,300 920,000 500,000
Crude oil - barrels 37,000 44,000 43,000 25,300
Coal - tons 6,100 4,600 4,700 4,700
The independent energy business group's revenues increased 128 percent and 133
percent for the three and twelve month periods, respectively. Earnings of this
group increased 405 percent and 239 percent for the three and twelve month
periods, respectively. The revenue and earnings increase for the periods were a
direct result of increased volumes, increased fuel and power prices related to
gas and electricity shortages in the West Coast markets, and the closing of the
Indeck Capital acquisition. Daily volumes of natural gas marketed increased 37
percent and 84 percent for the three and twelve month periods, respectively. In
addition, the increase in the twelve month period was aided by the acquisition
of Indeck Capital and the sale of our ownership interest in a power fund
management company which resulted in a $3.7 million pre-tax gain.
Coal Mining Segment
- -------------------
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $8,263 $8,095 $30,698 $31,413
Operating income $2,674 $3,314 $8,155 $12,886
Net income $2,066 $2,363 $6,405 $9,399
EBITDA $3,330 $3,801 $10,387 $14,580
A planned five-week overhaul of the Wyodak plant during the second quarter of
2000 resulted in lower coal sales and earnings for the current twelve month
period compared to the prior year.
Oil and Gas Segment
- -------------------
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $8,581 $3,962 $23,802 $14,031
Operating income $4,398 $1,330 $10,974 $4,821
Net income $2,956 $890 $7,047 $3,086
EBITDA $6,127 $2,096 $16,025 $7,685
18
Revenue and earnings of the oil and gas production business segment increased
for the three and twelve month periods due to increases in gas volumes sold of
40 percent and 27 percent, respectively, while average gas prices were 3.6 times
and 1.7 times higher than the same periods in the prior year, respectively.
Barrels of oil sold increased 25 percent and 12 percent for the three and twelve
month periods while prices remained comparable.
The following is a summary of our estimated oil and gas reserves at March 31
determined using constant product prices at the end of the respective period.
Estimates of economically recoverable reserves are based on a number of
variables, which may differ from actual results.
2001 2000
---- ----
Barrels of oil (in millions) 4.2 3.9
Bcf of natural gas 17.2 17.4
Total in Bcf equivalents 42.9 41.0
In addition to the reserves as of March 31, 2001 noted above, we announced
during the first quarter 2001 a definitive agreement to purchase operating and
non-operating interests in 74 gas and oil wells from Stewart Petroleum for
approximately $10 million. The acquisition was closed early in the second
quarter of 2001 and is expected to increase our proved reserves by approximately
10 billion cubic feet equivalent of which approximately 86 percent are natural
gas. The acquisition is expected to increase our current production rates by
approximately 10 percent.
Fuel Marketing Segment
- ----------------------
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $452,299 $202,054 $1,603,712 $691,925
Operating income $25,188 $988 $48,203 $(919)
Net income $15,559 $570 $28,975 $688
EBITDA $25,819 $1,105 $48,693 $4,312
Revenues and earnings increased primarily due to a significant increase in
natural gas volumes marketed during the current three and twelve month periods
while margins received also increased substantially.
The significant increases can, in part, be attributed to the unusual market
conditions in the western markets, which primarily stem from the natural gas and
electricity shortages in California and may not recur in the future. However, we
believe that the continued growth in demand for natural gas will create
opportunities for us to continue to generate strong fuel marketing operating
results in the future.
19
Independent Power Production Segment
- ------------------------------------
Our independent power segment produced revenues of $18.0 million and $57.5
million for the three and twelve month periods ended March 31, 2001,
respectively. Earnings for the same periods were $(1.1) million and $2.0
million, respectively. Results from this segment were not significant for the
three and twelve month periods ended March 31, 2000. Current periods results
stem from our acquisition of Indeck Capital in the third quarter of 2000. The
net loss for the current three month period is due to credit reserves of $2.5
million being established to offset this segments' direct exposure to the
volatile western markets.
Early in the second quarter of 2001, we closed on the purchase of the Fountain
Valley facility, a 240 megawatt generation facility located near Colorado
Springs, Colorado, featuring six LM-6000 simple-cycle, gas-fired turbines. The
facility is currently under construction and is expected to come on-line early
in the third quarter of 2001. In addition, we obtained an 11-year contract with
Public Service of Colorado to utilize the facility for peaking purposes. The
contract is a tolling arrangement in which the Company assumes no fuel risk.
Electric Utility Group
- ----------------------
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $70,580 $33,299 $210,589 $133,437
Operating income $28,664 $13,644 $83,228 $52,555
Net income $17,337 $7,198 $47,244 $27,611
EBITDA $33,167 $17,478 $98,983 $67,949
Electric utility revenues increased 112 percent and 58 percent for the three and
twelve month periods ended March 31, 2000, respectively, compared to the same
periods in the prior year. Earnings for the segment increased 141 percent and
71 percent over the same periods, respectively. The increase in revenues and
earnings for the three and twelve month periods was primarily due to a 145
percent and a 91 percent increase in wholesale off-system sales at average
prices that were seven times and four times higher than the average prices in
the same periods of the prior year, respectively. The increase in off-system
sales was driven by high spot market prices for energy since the middle of 2000,
which enabled us to generate more energy from our combustion turbine facilities,
including the Neil Simpson combustion turbine which we placed into commercial
operation in June 2000.
20
Communications Group
- --------------------
Three Months Ended Twelve Months Ended
March 31 March 31
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $3,925 $549 $11,065 $827
Operating expenses 7,697 2,712 25,160 6,289
----- ----- ------ -----
Operating income $(3,772) $(2,163) $(14,095) $(5,462)
Net income $(3,891) $(1,899) $(14,019) $(3,315)
EBITDA $(1,436) $(1,466) $(6,874) $(3,011)
As of March 31, 2001 our Communications business group is providing broadband
services to approximately 10,000 residential and 1,000 business customers.
Operating losses primarily attributable to increased interest, depreciation and
operating expenses, are expected to continue as we proceed with completion of
the network and increase the customer base.
Liquidity and Capital Resources
During the three and twelve month periods ended March 31, 2001, we generated
sufficient cash flow from operations to meet our operating needs, to pay
dividends on common and preferred stock, to pay long-term debt maturities and
substantially increase our cash position over March 31, 2000. We continue to
fund property additions primarily related to construction of additional electric
generation facilities for our independent energy business group through a
combination of operating cash flow, increased short-term debt and long-term
non-recourse project financing. Investing and financing activities increased
primarily due to short and long-term borrowings related to project financing.
During the first quarter of 2001, the Company announced the public offering of 3
million shares of common stock with an option for the underwriters to purchase
450,000 additional shares. Credit Suisse First Boston, Lehman Brothers, CIBC
World Markets and UBS Warburg acted as the managers of the underwriting
syndicate.
Early in the second quarter of 2001 the Company announced the offering price was
set at $52 per share and all 3 million shares were sold with the underwriters
exercising their over-allotment option to purchase an additional 383,000 shares.
Net proceeds were approximately $165 million after commissions and expenses. The
proceeds will be used to fund a portion of the expansion and construction costs
related to certain power plant assets of the Company's independent energy group,
to repay a portion of current indebtedness under revolving credit facilities,
and for general corporate purposes.
There have been no material changes in our forecasted changes in liquidity and
capital requirements from those reported in Item 7 of our 2000 Annual Report on
Form 10-K filed with the Securities Exchange Commission.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk faced by the Company from
those reported in the Company's 2000 Annual Report on Form 10-K filed with the
Securities Exchange Commission. For more information on market risk, see Part
II, Item 7 in the Company's 2000 Annual Report on Form 10-K, and Notes to
Consolidated Financial Statements in this Form 10-Q.
22
BLACK HILLS CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
On April 3, 2001, we reached a settlement of ongoing litigation
with PacifiCorp filed in the United States District Court,
District of Wyoming (File No. 0cv-155B). For more information on
this legal proceeding, see Note 6 - LEGAL PROCEEDINGS - of Notes
to Consolidated Financial Statements in this Form 10-Q.
Item 2. Changes In Securities and Use of Proceeds
(c) On April 20, 2001 we issued the following unregistered
securities pursuant to the 2000 earn-out consideration agreed
to in the acquisition of Indeck Capital, Inc. on July 7, 2000.
The unregistered securities were issued under Rule 506 of
Regulation D of the Securities Act of 1933.
Series 2000-A
Stockholder Common Shares Issued Preferred Stock Issued
----------- -------------------- ----------------------
Gerald R. Forsythe 21,786 554
John W. Salyer 4,216 107
Michelle R. Fawcett 2,284 58
Marsha Fournier 2,284 58
Monica Breslow 2,284 58
Melissa S. Forsythe 2,284 58
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10* New Restated and Amended Coal Supply Agreement dated as
of January 1, 2001 between Wyodak Resources Development
Corp. and PacifiCorp (filed on April 16, 2001 as
Exhibit 10.4 to the Registrant's Form S-1 No.
333-57440).
------------
* Previously filed as part of the filing indicated and
incorporated by reference herein.
23
(b) Reports on Form 8-K
We have filed the following Reports on Form 8-K since
December 31, 2000.
Form 8-K dated December 5, 2000, filed January 12, 2001.
Reported Adirondack Hydro Development Corporation, an
indirect subsidiary of the Registrant, acquired a
19.8 percent limited partnership interest in each of
Northern Electric Power Company, L.P. and South Glens
Falls Limited Partnership from Allstate Insurance
Company and Allstate Life Insurance Company.
Form 8-K/A1 dated February 16, 2001.
Filed the financial statements and exhibits for the
Form 8-K filed on January 12, 2001.
Form 8-K dated April 6, 2001.
Reported the Settlement of the PacifiCorp Litigation.
24
BLACK HILLS CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLACK HILLS CORPORATION
/s/ Roxann R. Basham
---------------------------------------------
Roxann R. Basham, Vice President - Controller
(Principal Accounting Officer)
/s/ Mark T. Thies
---------------------------------------------
Mark T. Thies, Senior VP & CFO
(Principal Financial Officer)
Dated: May 15, 2001
25