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, 2002.
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number 001-31303
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, 2002
Common stock, $1.00 par value 26,806,394 shares
BLACK HILLS CORPORATION
I N D E X
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income- 3
Three and Twelve Months
Ended March 31, 2002 and 2001
Consolidated Balance Sheets- 4
March 31, 2002, December 31, 2001
and March 31, 2001
Consolidated Statements of Cash Flows- 5
Three Months Ended
March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6-16
Item 2. Management's Discussion and Analysis of 16-29
Financial Position and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 29
Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
2
BLACK HILLS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Twelve Months
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share amounts)
Operating revenues $ 301,874 $ 561,693 $ 1,297,844 $ 1,937,413
--------- --------- ----------- -----------
Operating expenses:
Fuel and purchased power 221,087 446,508 938,405 1,609,640
Operations and maintenance 14,412 14,052 62,413 53,008
Administrative and general 13,072 22,105 75,657 60,552
Depreciation, depletion and amortization 16,803 11,877 58,984 38,108
Taxes, other than income taxes 6,308 5,571 24,125 16,760
---------- --------- ----------- -----------
271,682 500,113 1,159,584 1,778,068
---------- --------- ----------- -----------
Operating income 30,192 61,580 138,260 159,345
---------- --------- ----------- -----------
Other income (expense):
Interest expense (9,639) (11,720) (37,979) (36,869)
Interest income 598 1,432 2,119 6,444
Other, net 1,816 1,412 10,346 5,033
---------- --------- ----------- -----------
(7,225) (8,876) (25,514) (25,392)
---------- --------- ----------- -----------
Income before minority interest, income taxes and
change in accounting principle 22,967 52,704 112,746 133,953
Minority interest (2,266) (1,960) (4,492) (13,298)
Income taxes (6,778) (18,652) (38,345) (44,912)
---------- --------- ----------- -----------
Income before change in accounting principle 13,923 32,092 69,909 75,743
Change in accounting principle 141 - 141 -
---------- --------- ----------- -----------
Net income 14,064 32,092 70,050 75,743
Preferred stock dividends (56) (42) (541) (120)
---------- --------- ----------- -----------
Net income available for common stock $ 14,008 $ 32,050 $ 69,509 $ 75,623
========== ========= =========== ===========
Weighted average common shares outstanding:
Basic 26,694 22,975 26,288 22,520
========== ========= =========== ===========
Diluted 26,968 23,393 26,647 22,823
========== ========= =========== ===========
Earnings per share of common stock:
Basic $ 0.52 $ 1.39 $ 2.64 $ 3.36
========== ========= =========== ===========
Diluted $ 0.52 $ 1.37 $ 2.63 $ 3.32
========== ========= =========== ===========
Dividends paid per share of common stock $ 0.29 $ 0.28 $ 1.13 $ 1.09
========== ========= =========== ===========
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
2002 2001 2001
---- ---- ----
(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 66,202 $ 29,666 $ 89,662
Securities available-for-sale 3,331 3,550 3,136
Receivables (net of allowance for doubtful accounts of $4,367,
$5,913 and $4,448, respectively) - 142,954 117,259 188,305
Derivative assets 22,948 39,336 33,560
Other assets 33,375 30,540 20,765
----------- ----------- -----------
268,810 220,351 335,428
----------- ----------- -----------
Investments 17,398 59,895 52,870
----------- ----------- -----------
Property, plant and equipment 1,713,653 1,564,794 1,099,584
Less accumulated depreciation and depletion (374,860) (328,400) (290,344)
----------- ----------- -----------
1,338,793 1,236,394 809,240
----------- ----------- -----------
Other assets:
Derivatives assets 7,645 6,874 2,852
Goodwill 30,185 29,950 29,064
Intangible assets 95,027 86,961 16,470
Other 19,014 18,342 14,373
----------- ----------- -----------
151,871 142,127 62,759
----------- ----------- -----------
$ 1,776,872 $ 1,658,767 $ 1,260,297
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 127,320 $ 102,041 $ 160,412
Accrued liabilities 49,573 40,178 68,195
Current maturities of long-term debt 42,115 35,904 13,133
Notes payable 390,196 361,240 233,258
Derivative liabilities 30,576 43,699 31,573
----------- ----------- -----------
639,780 583,062 506,571
----------- ----------- -----------
Long-term debt, net of current maturities 465,097 415,798 305,463
----------- ----------- -----------
Deferred credits and other liabilities:
Federal income taxes 75,750 75,398 60,561
Derivative liabilities 6,594 7,119 13,124
Other 42,791 42,693 39,199
----------- ----------- -----------
125,135 125,210 112,884
----------- ----------- -----------
Minority interest in subsidiaries 21,168 19,533 35,413
----------- ----------- -----------
Stockholders' equity:
Preferred stock - no par Series 2000-A; 21,500 shares authorized;
Issued and Outstanding: 5,177, 5,177 and 4000 shares,
respectively 5,549 5,549 4,000
----------- ----------- -----------
Common stock equity-
Common stock $1 par value; 100,000,000 shares authorized;
Issued: 26,997,090; 26,890,943 and 23,329,356 shares,
respectively 26,997 26,891 23,329
Additional paid-in capital 242,454 240,454 73,969
Retained earnings 256,775 250,515 217,252
Treasury stock, at cost (2,631) (4,503) (8,841)
Accumulated other comprehensive loss (3,452) (3,742) (9,743)
----------- ----------- -----------
520,143 509,615 295,966
----------- ----------- -----------
Total stockholders' equity 525,692 515,164 299,966
----------- ----------- -----------
$ 1,776,872 $ 1,658,767 $ 1,260,297
=========== =========== ===========
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
March 31
2002 2001
---- ----
(in thousands)
Operating activities:
Net income available for common $ 14,008 $ 32,050
Principal non-cash items-
Depreciation, depletion and amortization 16,803 11,877
Net change in derivative assets and liabilities 2,989 (3,508)
Deferred income taxes (159) (2,238)
Undistributed earnings in associated companies (1,846) (2,697)
Minority interest 2,266 1,960
Accounting change (141) -
Change in operating assets and liabilities-
Accounts receivable and other current assets (24,113) 112,809
Accounts payable and other current liabilities 33,613 (68,650)
Other, net (4,815) (3,397)
-------- --------
38,605 78,206
-------- --------
Investing activities:
Property, plant and equipment additions (57,740) (28,862)
(Increase) decrease in investments (1,795) 2,119
Payment for acquisition of net assets, net of cash acquired (23,229) -
-------- --------
(82,764) (26,743)
-------- --------
Financing activities:
Dividends paid on common stock (7,749) (6,280)
Treasury stock sold, net 1,872 226
Common stock issued 2,106 554
Increase in short-term borrowings 28,956 21,579
Long-term debt - issuance 60,435 -
Long-term debt - repayments (4,925) (2,456)
Subsidiary distributions to minority interests - (337)
-------- --------
80,695 13,286
-------- --------
Increase in cash and cash equivalents 36,536 64,749
Cash and cash equivalents:
Beginning of period 29,666 24,913
-------- --------
End of period $ 66,202 $ 89,662
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for-
Interest $ 9,466 $ 12,602
Income taxes $ 500 $ 5,900
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 on 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 2001 Annual
Report on Form 10-K filed with the Securities and Exchange Commission.
Accounting methods historically employed require certain estimates as
of interim dates. The information furnished in the accompanying
financial statements reflects all adjustments which are, in the opinion
of management, necessary for a fair presentation of the March 31, 2002,
December 31, 2001 and March 31, 2001, financial information and are of
a normal recurring nature. The results of operations for the three and
twelve months ended March 31, 2002, are not necessarily indicative of
the results to be expected for the full year.
(2) RECLASSIFICATIONS
Certain 2001 amounts in the financial statements have been reclassified
to conform to the 2002 presentation. These reclassifications did not
have an effect on the Company's total stockholders' equity or net
income as previously reported.
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS
143). SFAS 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred with the associated asset retirement costs being capitalized
as part of the carrying amount of the long-lived asset. Over time, the
liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related
asset. Management expects to adopt SFAS 143 effective January 1, 2003
and is currently evaluating the effects adoption will have on the
Company's consolidated financial statements.
6
(4) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations," (SFAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). The Company has adopted SFAS 141, which requires
all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting. Under SFAS 142, goodwill
and intangible assets with indefinite lives are no longer amortized but
the carrying values are reviewed annually (or more frequently if
impairment indicators arise) for impairment. If the carrying value
exceeds the fair value, an impairment loss shall be recognized. A
discounted cash flow approach was used to determine fair value of the
Company's businesses for the purposes of testing for impairment.
Intangible assets with a defined life will continue to be amortized
over their useful lives (but with no maximum life). The Company adopted
SFAS 142 on January 1, 2002.
The pro forma effects of adopting SFAS No. 142 for the three and twelve
month periods ended March 31, 2002 and 2001 are as follows (in
thousands):
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
Net income as reported $14,008 $32,050 $69,509 $75,623
Less: cumulative effect of change in
accounting principle, net of tax 141 - 141 -
------- ------- ------- -------
Income excluding cumulative effect of
change in accounting principle 13,867 32,050 69,368 75,623
Add: goodwill amortization, net of tax - 235 575 1,022
------- ------- ------- -------
Net income excluding cumulative effect of
change in accounting principle and
goodwill amortization $13,867 $32,285 $69,943 $76,645
======= ======= ======= =======
The cumulative effect adjustment recognized upon adoption of SFAS 142
was $0.1 million (after tax), which had only a nominal impact on
earnings per share. The adjustment consisted of income from the
write-off of negative goodwill from prior acquisitions in our Power
Generation segment of $1.5 million, offset by a $1.3 million write-off
for the impairment of goodwill in our coal marketing business (fuel
marketing segment). The goodwill impairment was a result of changes in
the criteria for the measurement of impairments from an undiscounted
to a discounted cash flow method. If goodwill amortization had been
discontinued effective January 1, 2001, net income would have been
higher for the twelve month period ended March 31, 2002 and the three
and twelve month periods ended March 31, 2001 by $0.6 million, or 2
cents per share, $0.2 million, or 1 cent per share, and $1.0 million,
or 4 cents per share, respectively.
7
The substantial majority of the Company's goodwill and intangible
assets are contained within the Power Generation segment. Changes to
goodwill and intangible assets during the three month period ended
March 31, 2002, including the effects of adopting SFAS No. 142, are as
follows (in thousands):
Goodwill Other Intangible Assets
-------- -----------------------
Balance at December 31, 2001, net of
accumulated amortization $29,950 $86,961
Change in accounting principle 235 -
Additions - 9,504
Impairment of intangible asset - (417)
Amortization expense - (1,021)
------- -------
Balance at March 31, 2002, net of
accumulated amortization $30,185 $95,027
======= =======
On March 31, 2002, intangible assets totaled $95.0 million, net of
accumulated amortization of $6.1 million. Intangible assets are
primarily related to site development fees and above-market long-term
contracts, and all have definite lives over which they continue to be
amortized. Amortization expense for intangible assets is expected to be
approximately $5.1 million to $4.5 million for each year from 2003 to
2007.
Intangible assets increased during the three month period ended March
31, 2002 as a result of a $9.5 million addition related to preliminary
purchase allocations in the acquisition of additional ownership
interest in the Harbor Cogeneration Facility (See Note 9). This
intangible asset primarily relates to an above-market contract at the
Facility. Under the provisions of Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" there was also a $0.4 million (pre tax) impairment
loss of certain intangibles at the Company's coal marketing business
(Fuel Marketing segment), as a result of the depressed coal market. The
impairment loss is included in "Depreciation, depletion and
amortization" on the accompanying Consolidated Statements of Income.
In August 2001, the FASB issued SFAS 144. SFAS 144 supersedes FASB
Statement 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS 121) and the accounting
and reporting provisions of Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" (APB 30). SFAS 144
establishes a single accounting model for long-lived assets to be
disposed of by sale as well as resolves implementation issues related
to SFAS 121. The Company adopted SFAS 144 effective January 1, 2002.
Adoption did not have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
8
(5) COMPREHENSIVE INCOME
The following table presents the components of the Company's
comprehensive income:
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income available for common stock $14,008 $32,050 $69,509 $75,623
Other comprehensive income:
Unrealized gain (loss) on available-
for-sale securities (219) 1,023 195 210
Fair value adjustment on derivatives
designated as cash flow hedges 509 (9,953) 2,230 (9,953)
------- ------- ------- -------
Comprehensive income $14,298 $23,120 $71,934 $65,880
======= ======= ======= =======
(6) CHANGES IN LONG-TERM DEBT AND NOTES PAYABLE
On March 15, 2002, the Company closed on $135 million of senior secured
financing for the Arapahoe and Valmont Facilities. These projects have
a total of 210 megawatts in service and under construction and are
located in the Denver, Colorado area. Proceeds from this financing were
used to refinance $53.8 million of an existing seven-year senior
secured term project-level facility, pay down approximately $50.0
million of short-term credit facility borrowings and approximately
$31.2 million will be used for future project construction. At March
31, 2002, $114.3 million of the $135 million financing has been
utilized.
On January 4, 2002, the Company closed on a $50.0 million bridge credit
agreement. The credit agreement supplements our revolving credit
facilities in place at December 31, 2001 and has the same terms as
those facilities with an expiration date of June 30, 2002. Outstanding
borrowings under the agreement as of March 31, 2002 were $26.0 million.
Other than the above transactions, the Company had no other material
changes in its consolidated indebtedness, as reported in Notes 6 and 7
of the Company's 2001 Annual Report on Form 10-K.
Our credit facilities contain certain restrictive covenants, including
restrictions on the ability of certain subsidiaries with project level
financings to upstream cash. The Company and its subsidiaries had
complied with all the covenants at March 31, 2002.
(7) SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY'S BUSINESS
The Company's reportable segments are those that are based on the
Company's method of internal reporting, which generally segregates the
strategic business groups due to differences in products, services and
regulation. As of March 31, 2002, substantially all of the Company's
operations and assets are located within the United States. The
Company's operations are conducted through six business segments that
include: Electric
9
group and segment, which supplies electric utility
service to western South Dakota, northeastern Wyoming and southeastern
Montana; Integrated 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; Power
Generation, 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 2001 Annual Report on Form 10-K. In
accordance with the provisions of SFAS No. 71, intercompany coal sales
are not eliminated. 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)
Quarter to Date
March 31, 2002
Fuel marketing $211,911 $ 1,167 $ (218)
Power production 32,082 - 5,671
Oil and gas 5,390 697 878
Mining 5,450 2,752 2,335
Electric 37,110 82 7,823
Communications 7,181 365 (2,227)
Corporate - - (198)
Intersegment eliminations - (2,313) -
-------- -------- -------
Total $299,124 $ 2,750 $14,064
======== ======== =======
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
Quarter to Date
March 31, 2001
Fuel marketing $452,299 $3,592 $15,559
Power production 18,045 - (1,106)
Oil and gas 8,581 - 2,956
Mining 5,407 2,856 2,315
Electric 70,580 - 17,339
Communications 3,925 1,101 (3,891)
Corporate - - (829)
Intersegment eliminations - (4,693) (251)
-------- ------ -------
Total $558,837 $2,856 $32,092
======== ====== =======
10
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
12 Months Ended
March 31, 2002
Fuel marketing $ 927,949 $13,393 $19,281
Power production 108,331 - 8,353
Oil and gas 27,427 3,487 8,119
Mining 20,580 11,159 11,611
Electric 178,886 82 35,721
Communications 23,514 3,514 (10,636)
Corporate - - (1,928)
Intersegment eliminations - (20,478) (471)
---------- ------- -------
Total $1,286,687 $11,157 $70,050
========== ======= =======
External Inter-segment
Operating Revenues Operating Revenues Net Income (loss)
12 Months Ended
March 31, 2001
Fuel marketing $1,603,712 $ 16,767 $ 28,975
Power production 57,547 - 2,004
Oil and gas 23,802 1,145 7,047
Mining 20,665 10,033 6,966
Electric 210,589 - 47,293
Communications 11,065 3,877 (13,795)
Corporate - - (1,913)
Intersegment eliminations - (21,789) (834)
---------- -------- --------
Total $1,927,380 $ 10,033 $ 75,743
========== ======== ========
Other than the following transactions, the Company had no other
material changes in total assets of its reporting segments, as reported
in Note 14 of the Company's 2001 Annual Report on Form 10-K, beyond
changes resulting from normal operating activities.
The Power Generation segment had a net addition to non working capital
assets of approximately $52 million primarily related to ongoing
construction of the expansions at the Las Vegas Cogeneration and
Arapahoe facilities and the acquisition of additional ownership
interest at the Harbor Cogeneration facility (Note 9).
The Fuel Marketing segment acquired additional ownership interest in a
pipeline company for $11.0 million (Note 9).
11
(8) RISK MANAGEMENT ACTIVITIES
The Company actively manages its exposure to certain market risks as
described in Note 2 of the Company's Annual Report on Form 10-K.
Details of derivative and hedging activities included in the
accompanying Consolidated Balance Sheets and Consolidated Statements of
Income are as follows:
Fuel Marketing Activities
The Company's fuel marketing operations fall under the purview of
Statement of Financial Accounting Standard No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities" and
Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy
Trading and Risk Management Activities" (EITF 98-10). As such, these
activities are accounted for under mark-to-market accounting. The
Company records its fair values as either Derivative assets and/or
Derivative liabilities on the accompanying Consolidated Balance Sheet.
The net gains or losses are recorded as Revenues in the accompanying
Consolidated Statements of Income.
The contract or notional amounts and terms of the Company's derivative
commodity instruments held for trading purposes are set forth below:
March 31, 2002 December 31, 2001 March 31, 2001
Maximum Maximum Maximum
Notional Term in Notional Term in Notional Term in
(thousands of MMBtu's) Amounts Years Amounts Years Amounts Years
------- ----- ------- ----- ------- -----
Natural gas basis swaps purchased 24,826 2 9,882 1 31,474 2
Natural gas basis swaps sold 29,067 2 10,696 1 35,437 2
Natural gas fixed-for float swaps purchased 12,752 2 10,646 2 5,806 1
Natural gas fixed-for-float swaps sold 13,966 2 11,815 2 5,124 1
Natural gas swing swaps purchased 1,370 1 465 1 - -
Natural gas swing swaps sold 3,630 1 930 1 - -
Natural gas physical purchases 35,993 1 13,159 1 - -
Natural gas physical sales 16,502 1 19,339 1 - -
(thousands of barrels)
Crude oil purchased 4,015 1 3,139 1 2,658 1
Crude oil sold 4,008 1 3,142 1 2,550 1
(thousands of tons)
Coal purchased 1,657 4 1,554 4 1,178 1
Coal sold 1,289 4 1,448 4 1,202 1
12
As required under SFAS 133 and EITF 98-10, derivatives and energy
trading activities were marked to fair value and the gains and/or
losses recognized in earnings. The amounts related to the accompanying
Consolidated Balance Sheets and Statements of Income as of March 31,
2002, December 31, 2001, and March 31, 2001, are as follows (in
thousands):
Current Non-current Current Non-current
Derivative Derivative Derivative Derivative Unrealized
March 31, 2002 Assets Assets Liabilities Liabilities Gain (Loss)
------ ------ ----------- ----------- -----------
Natural gas $14,004 $1,253 $12,179 $ 999 $2,079
Crude Oil 8,518 - 7,732 - 786
Coal 412 467 1,187 305 (613)
------- ------ ------- ------ ------
$22,934 $1,720 $21,098 $1,304 $2,252
======= ====== ======= ====== ======
December 31, 2001
Natural gas $29,755 $ 661 $25,437 $ 953 $4,026
Crude Oil 6,267 - 5,497 - 770
Coal 1,192 467 1,018 - 641
------- ------ ------- ------- --------
$37,214 $1,128 $31,952 $ 953 $5,437
======= ====== ======= ======= ========
March 31, 2001
Natural gas $20,365 $2,617 $18,472 $ 689 $3,821
Crude oil 6,627 - 5,972 - 655
Coal 6,014 - 4,473 - 1,541
------- ------ ------- ------- -------
$33,006 $2,617 $28,917 $ 689 $6,017
======= ====== ======= ======= =======
At March 31, 2002, the Company had a mark to fair value unrealized gain
of $2.3 million for its fuel marketing activities. Of this amount, $1.8
million was current and $0.5 million was non-current. The current
portion of unrealized gains included $2.9 million gain associated with
hedged transactions and $(1.1) million loss associated with open
positions. The Company anticipates that substantially all of the
current portion of unrealized gains for hedged transactions will be
realized during the next twelve months. Conversely, estimated and
actual realized gains or losses related to open positions will likely
change during 2002 as market prices change from the March 31, 2002
estimates.
13
Non-trading Energy Activities
On March 31, 2002, December 31, 2001 and March 31, 2001, the Company
had the following swaps and related balances (in thousands):
Accumulated
Maximum Current Non-current Current Non-current Other
Terms in Derivative Derivative Derivative Derivative Comprehensive
Notional* Years Assets Assets Liabilities Liabilities Income (Loss) Earnings
--------- ----- ------ ------ ----------- ----------- ------------- --------
March 31, 2002
Crude oil swaps 330,000 2 $ 14 $ - $ 617 $ 78 $ (516) $(165)
Natural gas swaps 1,284,000 1 - - 29 - (116) 87
-------- ------- -------- ---- -------- -----
$ 14 $ - $ 646 $ 78 $ (632) $ (78)
======== ======= ======== ==== ======== =====
December 31, 2001
Crude oil swaps 90,000 1 $ 529 $ - $ - $ - $ 529 $ -
Natural gas swaps 1,216,000 1 1,593 - - - 1,463 130
-------- ------- -------- ---- -------- -----
$ 2,122 $ - $ - $ - $ 1,992 $130
======== ======= ======== ==== ======== =====
March 31, 2001
Crude oil swaps 243,000 2 $ 367 $ 235 $ 499 $ - $ 294 $(191)
Crude oil options 90,000 1 187 - - - 230 (43)
Natural gas swaps 1,131,000 1 - - 2,157 - (2,157) -
-------- ------ ------- ---- -------- -----
$ 554 $ 235 $ 2,656 $ - $ (1,633) $(234)
======== ====== ======= ==== ======== =====
- -----------------------
*crude in bbls, gas in MMBtu's
Nearly all hedges at March 31, 2002 expire during the next twelve
months. Based on March 31, 2002 market prices, $(0.6) million will be
realized and reported in earnings during the next twelve months. These
estimated realized losses for the next twelve months were calculated
using March 31, 2002 market prices. Estimated and actual realized
losses will likely change during the next twelve months as market
prices change.
14
Financing Activities
On March 31, 2002, December 31, 2001 and March 31, 2001, the Company's
interest rate swaps and related balances were as follows (in
thousands):
Weighted
Average Non- Accumulated
Current Fixed Maximum Current current Current Non-current Other
Notional Interest Terms in Derivative Derivative Derivative Derivative Comprehensive
Amount Rate Years Assets Liabilities Liabilities Income (Loss) Income(Loss)
--------- ---- ----- ------ ----------- ----------- ------------- ------------
March 31, 2002
Swaps on project
financing $316,397 5.85% 4 $ - $5,925 $ 7,799 $ 5,077 $ (6,951)
Swaps on corporate
debt 75,000 4.45% 2 - - 1,033 135 (1,168)
-------- ----- ------ ------- -------- --------
Total $391,397 $ - $5,925 $ 8,832 $ 5,212 $ (8,119)
======== ===== ====== ======= ======== ========
December 31, 2001
Swaps on project
financing $316,397 5.85% 4 $ - $5,746 $10,212 $ 5,949 $(10,415)
Swaps on corporate
debt 75,000 4.45% 3 - - 1,535 217 (1,752)
-------- ----- ------ ------- -------- --------
Total $391,397 $ - $5,746 $11,747 $ 6,166 $(12,167)
======== ===== ====== ======= ======== ========
March 31, 2001
Swaps on project
financing $126,161 7.38% 5 $ - $ - $ - $11,753 $ 11,753
Swaps on corporate
debt 50,000 5.19% 3 - - - 682 682
-------- ----- ------ ------- ------- --------
Total $176,161 $ - $ - $ - $12,435 $ 12,435
======== ===== ====== ======= ======= ========
Based on March 31, 2002 market interest rates, $8.8 million will be
realized as additional interest expense during the next twelve months.
Estimated and realized amounts will likely change during the next
twelve months as market interest rates change.
(9) ACQUISITIONS
On March 8, 2002, the Company acquired an additional 67 percent
ownership interest in Millennium Pipeline Company L.P., which owns and
operates a 200-mile pipeline. The pipeline has a capacity of
approximately 65,000 barrels of oil per day, and transports imported
crude oil from Beaumont, Texas to Longview, Texas, which is the
transfer point to connecting carriers. The Company also acquired
additional ownership interest in Millennium Terminal Company, L.P.,
which has 1.1 million barrels of crude oil storage connected to the
Millennium Pipeline at the Oil Tanking terminal in Beaumont. The
Millennium system is presently operating near capacity through shipper
agreements. These acquisitions give the Company 100 percent ownership
in the Millennium companies. Total cost of the acquisitions was $11.0
million and was funded through borrowings under short-term revolving
credit facilities.
15
On March 15, 2002, the Company paid $25.7 million to acquire an
additional 30 percent interest in the Harbor Cogeneration Facility (the
Facility), a 98 megawatt gas-fired plant located in Wilmington,
California. This acquisition was funded through borrowings under
short-term revolving credit facilities and gives the Company an 83
percent ownership interest and voting control of the Facility.
The Company's investments in these entities prior to the above
acquisitions were accounted for under the equity method of accounting
and included in Investments on the accompanying Consolidated Balance
Sheets. Each of the above acquisitions gave the Company majority
ownership and voting control of the respective entities, therefore,
the Company now includes the accounts of each of the entities in its
consolidated financial statements.
The above acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the purchase prices have been
allocated to the acquired assets and liabilities based on preliminary
estimates of the fair values of the assets purchased and the
liabilities assumed as of the date of acquisition. The estimated
purchase price allocations are subject to adjustment, generally within
one year of the date of the acquisition. The purchase prices and
related acquisition costs exceeded the fair values assigned to net
tangible assets by approximately $9.5 million, which was recorded as
long-lived intangible assets.
The impact of these acquisitions was not material in relation to the
Company's results of operations. Consequently, pro forma information
is not presented.
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 unregulated and regulated businesses have
expanded significantly in recent years. Our integrated energy group, Black Hills
Energy, Inc., produces and markets electric 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. Our electric utility,
Black Hills Power, Inc., serves approximately 59,200 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 through Black Hills FiberCom,
LLC.
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 2001 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Our business strategy, industry outlooks,
capital requirements and market risks as disclosed in that filing continue to be
consistent with management's current expectations and assessments.
16
Results of Operations
Consolidated Results
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
2002 2001 2002 2001
---- ---- ---- ----
Revenues
Integrated energy 86% 86% 84% 89%
Electric utility 12 13 14 11
Communications 2 1 2 -
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Net Income/(Loss)
Integrated energy 60% 61% 65% 59%
Electric utility 56 54 51 62
Communications and other (16) (15) (16) (21)
--- --- --- ---
100% 100% 100% 100%
=== === === ===
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Consolidated earnings for the three month period ended March 31, 2002 were $14.0
million or $0.52 per share compared to $32.1 million or $1.37 per share in the
same period of the prior year. Approximately $0.07 of the first quarter 2002
earnings per share was attributable to the collection of previously reserved
amounts.
The decrease in earnings was a result of substantial decreases in prevailing
prices for natural gas, crude oil and wholesale electricity and in gross margins
from natural gas marketing activities compared to the same period in 2001.
Decreases in commodity prices also resulted in unrealized losses recognized
through mark-to-market accounting at our Fuel Marketing segment having a
negative impact on 2002 earnings compared to 2001. Unusual energy marketing
conditions existed in the first quarter of 2001 stemming primarily from gas and
electricity shortages in the West. Approximately half of the 2001 first quarter
earnings were attributed to the unusual market conditions that existed at that
time. Wholesale electricity average peak prices at Mid-Columbia were around $280
per megawatt-hour during the first quarter of 2001 compared to approximately $26
per megawatt-hour during the first quarter of 2002. Average spot gas prices in
the West Coast region were approximately $13 per MMBtu in the first quarter of
2001 compared to $2.50 in the first quarter of 2002. While the above factors
contributed negatively to earnings, we had an increase in the production of
coal, oil and natural gas and our communications business unit showed a decrease
in its net loss attributable to a substantial expansion of its customer base.
Consolidated revenues for the three month period ended March 31, 2002 were
$301.9 million compared to $561.7 million for the same period in 2001. The
decrease in revenues was a result of the high energy commodity prices in 2001,
slightly offset by increased revenue in the communications business unit and
power production segment and increased production in coal, oil and gas.
17
Consolidated operating expenses for the three month period decreased from $500.1
million in 2001 to $271.7 million in 2002. The decrease was due to a substantial
decrease in gas prices as discussed above. Depreciation, depletion and
amortization expense increased from $11.9 million in 2001 to $16.8 million in
2002 primarily as a result of our increased investment in independent power
generation.
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Consolidated earnings for the twelve month period ended March 31, 2002
were $69.5 million or $2.63 per share compared to $75.6 million or $3.32 per
share for the same period of the prior year.
The decrease in earnings for the twelve month period ended March 31, 2002 was a
result of the substantial decrease in prevailing prices for natural gas, crude
oil and wholesale electricity and in the gross margins from natural gas
marketing activities compared to the same period of 2001. Decreases in commodity
prices also resulted in unrealized losses recognized through mark-to-market
accounting at our Fuel Marketing segment having a negative impact on 2002
earnings compared to 2001. Volumes of natural gas marketed and off-system
electric sales also declined due to a decrease in the demand of natural gas and
electricity in the western markets compared to the prior year. We estimate
approximately one-third of the earnings for the twelve month period ended March
31, 2001 could have been attributable to high prices of natural gas and
electricity related to the volatile western markets during that period of time.
Consolidated revenues for the twelve month period ended March 31, 2002 were $1.3
billion compared to $1.9 billion for the same period in 2001. The decrease in
revenues was a result of the high energy commodity prices in late 2000 and 2001,
slightly offset by increased revenue in the oil and gas segment from increased
production, power production segment and communications business unit.
Consolidated operating expenses for the twelve month period decreased from $1.8
billion in 2001 to $1.2 billion in 2002. The decrease was due to the substantial
decrease in gas prices as discussed above. All other operating expenses
increased due to our growth primarily in the power production segment and
communications business unit.
18
The following business group and segment information does not include
intercompany eliminations:
Integrated Energy Group
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue:
Fuel marketing $213,078 $455,891 $ 941,342 $1,620,479
Power generation 32,082 18,045 108,331 57,547
Oil and gas 6,087 8,581 30,914 24,947
Coal mining 8,202 8,263 31,739 30,698
-------- -------- ---------- ----------
Total revenue $259,449 $490,780 $1,112,326 $1,733,671
Expenses 240,961 454,092 1,031,615 1,643,459
-------- -------- ---------- ----------
Operating income $ 18,488 $ 36,688 $ 80,711 $ 90,212
Net income $ 8,464 $ 18,896 $ 45,524 $ 43,079
EBITDA $ 27,763 $ 41,178 $ 123,059 $ 97,080
EBITDA represents earnings before interest, income taxes, depreciation and
amortization. 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 and various measures of power generation:
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
Fuel production:
Tons of coal sold 1,001,000 818,000 3,702,000 3,075,000
Barrels of oil sold 114,300 99,000 461,000 354,000
Mcf of natural gas sold 1,287,800 1,006,000 4,901,000 3,564,000
Mcf equivalent sales 1,973,600 1,600,000 7,667,000 5,688,000
19
March 31
2002 2001
---- ----
Independent power capacity:
MWs of independent power capacity in service 646 250
MWs of independent power capacity under construction* 364 450
- -------------------
*includes a 90 MW plant under a lease arrangement
The following is a summary of average daily fuel marketing volumes:
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
Natural gas - MMBtus 842,000 866,000 1,042,000 920,000
Crude oil - barrels 44,000 37,000 38,000 43,000
Coal - tons 4,400 6,100 5,600 4,700
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Earnings for the integrated energy group for the three months ended March 31,
2002 were $8.5 million compared to $18.9 million in the same period of the prior
year. Earnings decreased primarily due to a substantial decline in energy
prices. The power generation segment reported earnings growth attributed to
additional generating capacity and the reporting of additional net income of
$1.9 million relating to the collection of previously reserved amounts for
California operations. A 23 percent increase in gas and oil production sales
partially offset an earnings decrease in the oil and gas segment caused by lower
prices. Earnings from coal mining operations increased slightly, as increases in
production were offset by lower prices received. The fuel marketing segment's
earnings decreased primarily due to a substantial decrease in margins received
and unrealized losses recognized through mark-to-market accounting as a result
of decreased commodity prices at March 31, 2002.
The independent energy business group's revenues and expenses both decreased 47
percent for the three months ended March 31, 2002 compared to the same period in
2001. The decrease in revenue and expenses was a direct result of the
substantial decline in fuel and power prices.
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Earnings for the integrated energy group for the twelve months ended March
31, 2002 were $45.5 million compared to $43.1 million for the same period of the
prior year, a 6 percent increase. Earnings increases in the power generation,
oil and gas and coal mining segments were partially offset by a decrease in fuel
marketing earnings. The power generation segment reported earnings growth
attributed to additional generating capacity and the reporting of additional net
income relating to the collection in 2002 of previously reserved amounts for
California operations that were reserved for in the prior twelve month period. A
35 percent increase in gas and oil production sales contributed to the earnings
increase. Earnings from coal mining operations increased 67 percent as a result
of: a 20 percent increase in production offset by lower prices received, a coal
contract settlement and a gain on the sale of mining equipment. The fuel
marketing segments earnings decreased primarily due to a substantial decrease in
margins received and unrealized losses recognized through mark-to-market
accounting as a result of decreased commodity prices at March 31, 2002. These
decreases were partially offset by a 13
20
percent increase in the daily volumes of natural gas marketed.
The independent energy business group's revenues and expenses decreased 36
percent and 37 percent, respectively, for the twelve months ended March 31, 2002
compared to the same period in 2001. The decrease in revenue and expenses was a
direct result of the substantial decline in fuel and power prices.
Fuel Marketing
- --------------
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $213,078 $455,891 $941,342 $1,620,479
Operating income $ 264 $ 25,378 $ 28,750 $ 48,203
Net income (loss) $ (218) $ 15,559 $ 19,281 $ 28,975
EBITDA $ (220) $ 25,819 $ 27,427 $ 48,693
Our fuel marketing companies generate large amounts of revenue and corresponding
expense related to buying and selling energy commodities. Fuel marketing is
extremely competitive, and margins are typically very small.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Revenues and earnings decreased primarily due to a substantial decline in
commodity prices and margins received, as well as a 3 percent decrease in
natural gas average daily volumes marketed. Unusual energy marketing conditions
existed in the first quarter of 2001 stemming primarily from gas and electricity
shortages in the West. Average spot gas prices in the West Coast region were
approximately $13 per MMBtu in the first quarter of 2001 compared to $2.50 in
the first quarter of 2002. As a result of changing commodity prices, earnings
were impacted by unrealized losses recognized through mark-to-market accounting
treatment. Unrealized mark-to-market gains/(losses) for the three month periods
ended March 31, 2002 and 2001 were $(3.2) million and $5.0 million,
respectively, resulting in a quarter over quarter earnings decrease of
$(8.2) million.
Earnings for the three months ended March 31, 2002, also include a $0.4 million
pre-tax impairment of intangible assets in our coal marketing operations as a
result of the depressed coal market and a $1.3 pre-tax impairment of goodwill
recorded as a change in accounting principle resulting from the implementation
of SFAS 142.
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Revenues and earnings decreased 42 percent and 33 percent, respectively,
primarily due to a substantial decrease in margins received and a decline in
commodity prices, partially offset by a 13 percent increase in the daily volumes
of natural gas marketed. Unusual energy marketing conditions existed for a
substantial part of the twelve month period ended March 31, 2001, stemming
primarily from gas and electricity shortages in the West. As a result of
changing commodity prices, earnings were impacted by unrealized losses
recognized through mark-to-market accounting treatment. Unrealized
mark-to-market gains/(losses) for the twelve month periods ended March 31, 2002
and 2001 were $(5.1) million and $7.4 million, respectively, resulting in a year
over year decrease of $(12.5) million.
21
Earnings for the twelve months ended March 31, 2002 also include a $0.4 million
pre-tax impairment of intangible assets in our coal marketing operations as a
result of the depressed coal market and a $1.3 million pre-tax impairment of
goodwill recorded as a change in accounting principle resulting from the
implementation of SFAS 142.
Power Generation
- ----------------
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $32,082 $18,045 $108,331 $57,547
Operating income $15,281 $ 5,540 $ 37,196 $25,792
Net income (loss) $ 5,671 $(1,106) $ 8,353 $ 2,004
EBITDA $21,759 $ 7,168 $ 58,954 $24,828
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Revenue, operating income and net income increased substantially for the three
month period ended March 31, 2002 compared to the same period in 2001 attributed
to additional generating capacity and additional earnings of $1.9 million in
2002 relating to the collection of previously reserved amounts for California
operations that were reserved for in the prior period. As of March 31, 2002, we
had 646 megawatts of independent power capacity in service compared to 250
megawatts at March 31, 2001.
The increase in net income for the three month period ended March 31, 2002 was
also benefited by approximately a $1.0 million after-tax adjustment for negative
goodwill to reflect the impact of a change in accounting for goodwill in
accordance with the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142) effective January 1,
2002.
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Revenues nearly doubled and earnings more than quadrupled for the twelve
months ended March 31, 2002, compared to the same period of the prior year, due
to additional generating capacity, a full year of operations for this segment
and the recording of certain non-recurring items. Our power generation segment
began in the third quarter of 2000 with the acquisition of Indeck Capital. As of
March 31, 2002, we had 646 megawatts of independent power capacity in service
with an additional 364 megawatts under construction (including a 90 MW plant
under a lease arrangement).
Non-recurring items that affected earnings include: a $1.9 million after-tax
benefit for the twelve month period ended March 31, 2002, relating to the
collection of amounts previously reserved for in the prior period for exposure
to the California market, a $1.0 million after-tax benefit for negative goodwill
recorded in the twelve month period ended March 31, 2002, to reflect the impact
of a change in accounting for goodwill in accordance with the adoption of SFAS
142, and a $4.4 million after-tax charge recorded in the twelve month period
ended March 31, 2002, related to our exposure to Enron.
22
Oil and Gas
- -----------
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $6,087 $8,581 $30,914 $24,947
Operating income $1,018 $4,398 $11,489 $10,974
Net income $ 878 $2,956 $ 8,119 $ 7,047
EBITDA $3,035 $6,127 $19,617 $16,025
The following is a summary of our estimated economically recoverable oil and gas
reserves at March 31 measured 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.
2002 2001
---- ----
Barrels of oil (in millions) 4.6 4.2
Bcf of natural gas 24.7 17.2
Total in Bcf equivalents 52.3 42.9
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Revenue and earnings of the oil and gas production business segment decreased
for the three month period ended March 31, 2002, compared to the same period in
2001 due to a 43 percent decrease in the average price received partially offset
by a 23 percent increase in production volumes. The increase in production was
primarily related to the acquisition of 74 gas and oil wells from Stewart
Petroleum Corporation of Denver, Colorado in the second quarter of 2001.
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Revenue and earnings of the oil and gas production business segment
increased 24 percent and 15 percent, respectively for the twelve month period
ended March 31, 2002, compared to the same period in the prior year as a result
of a 35 percent increase in production volumes partially offset by an 8 percent
decrease in the average price received. The increase in production volumes was
primarily due to development drilling and the acquisition of 74 gas and oil
wells from Stewart Petroleum Corporation of Denver, Colorado in the second
quarter of 2001.
Coal Mining
- -----------
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $8,202 $8,263 $31,739 $30,698
Operating income $2,380 $2,674 $ 6,292 $ 8,155
Net income $2,335 $2,315 $11,611 $ 6,966
EBITDA $3,645 $3,330 $18,145 $10,387
23
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Revenue and net income from our coal mining segment were relatively stable for
the three month period ended March 31, 2002, compared to the same period in
2001. A 22 percent increase in tons of coal sold was offset by lower prices
received.
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Revenue increased slightly for the twelve month period ended March 31,
2002, compared to the same period in the prior year due to a 20 percent increase
in tons of coal sold, partially offset by lower prices received.
Earnings increased $4.6 million as a result of a coal contract settlement, a
gain on the sale of mining equipment and the increase in tons of coal sold. Tons
of coal sold increased primarily due to the commencement of sales through our
train load-out facility.
In 2001, we reached a settlement of ongoing litigation with PacifiCorp
concerning rights and obligations under a coal supply agreement under which
PacifiCorp purchased coal from our coal mine to meet the coal requirements of
the Wyodak Power Plant. As a result of this settlement, we recognized $5.6
million pre-tax, non-operating income in the twelve month period ended March 31,
2002. In addition, we sold a conveyor system which resulted in a $2.6 million
pre-tax gain.
Electric Utility Group
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $37,192 $70,580 $178,968 $210,589
Operating expenses 22,865 41,916 109,197 127,361
------- ------- -------- --------
Operating income $14,327 $28,664 $ 69,771 $ 83,228
Net income $ 7,823 $17,339 $ 35,721 $ 47,293
EBITDA $18,627 $33,167 $ 81,466 $ 98,983
The following table provides certain operating statistics:
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
Firm (system) sales - MWh 505,543 525,812 1,992,087 2,003,842
Off-system sales - MWh 161,112 255,354 870,367 837,062
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
Revenue, operating expenses and net income decreased 47 percent, 45 percent and
55 percent, respectively for the three month period ended March 31, 2002
compared to the same period in the prior year primarily due to a 37 percent
decrease in off-system electric megawatt-hour sales and an 81 percent decrease
in the average price per megawatt-hour sold of off-system sales. Firm
residential and contracted electricity sales increased, but were offset by a
decline in industrial sales due to the closing of the Homestake Gold Mine at
year-end 2001.
24
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. Revenue, operating expenses and net income decreased 15 percent, 14
percent and 24 percent, respectively for the twelve month period ended March 31,
2002, compared to the same period in the prior year primarily due to a 40
percent decrease in the average price per megawatt-hour sold for off-system
sales partially offset by a 4 percent increase in off-system electric
megawatt-hour sales.
The average price received for off-system sales for the twelve month period
ended March 31, 2002, was approximately $60 per megawatt-hour compared to $99
per megawatt-hour for the same period in the prior year.
Communications Group
Three Months Ended Twelve Months Ended
March 31 March 31
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue-external* $ 7,181 $ 3,925 $ 23,569 $ 11,065
Revenue-intersegment* 365 1,101 3,459 3,877
Operating expenses 10,021 8,798 38,982 29,037
------- ------- -------- --------
Operating loss $(2,475) $(3,772) $(11,954) $(14,095)
Net loss $(2,227) $(3,891) $(10,636) $(13,795)
EBITDA $ 513 $(1,436) $ (1,193) $ (6,874)
- -------------
* External revenue is revenue from our broadband communications business.
Intersegment revenue is primarily revenue from our information services company
derived from providing services to our other business segments.
March 31 December 31
2002 2001 2001 2000
---- ---- ---- ----
Business customers 2,600 980 2,250 650
Residential customers 17,550 10,060 15,660 8,370
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
The communications business group reported EBITDA positive results in the first
quarter of 2002. The net loss for the three month period ended March 31, 2002
was $(2.2) million, compared to $(3.9) million in 2001. The performance
improvement is due largely to a substantial increase in revenue as a result of a
larger customer base, partially offset by increased costs of sales and
administrative expenses.
The total number of customers exceeded 20,000 at the end of March 2002 - a 13
percent increase over the customer base at December 31, 2001 and an 82 percent
increase compared to March 31, 2001.
25
Twelve Months Ended March 31, 2002 Compared to Twelve Months Ended March 31,
2001. The net loss for the twelve month period ended March 31, 2002 was $(10.6)
million, compared to $(13.8) million for the same period in the prior year. The
performance improvement was the result of an 82 percent increase in our customer
base offset by increased cost of sales, administrative expenses, reserves for
inventory and carrier billings and increased interest expense.
We expect our communications group will sustain approximately $6.5 million in
net losses in calendar year 2002, with annual losses decreasing thereafter and
profitability expected by 2004. The recovery of capital investment and future
profitability are dependent primarily on our ability to attract new customers.
If we are unable to attract additional customers or technological advances make
our network obsolete, we could have a material write-down of assets.
Critical Accounting Policies
Goodwill and Other Intangible Assets
As required, on January 1, 2002 we adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). Under SFAS 142, goodwill and intangible assets with indefinite lives
are no longer amortized but the carrying values are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Intangible assets
with a defined life will continue to be amortized over their useful lives (but
with no maximum). Initial adoption of SFAS 142 did not have a material impact on
our financial position or results of operations. Adoption of SFAS 142 provisions
for non-amortization of goodwill and indefinite lived intangibles will impact
our future earnings results. Results for the three months ended March 31, 2002
were approximately $0.2 million, or 1 cent per share, higher than the comparable
period in 2001 due to non-amortization of goodwill.
Other than the above, there have been no material changes in our critical
accounting policies from those reported in our 2001 Annual Report on Form 10-K
filed with the Securities Exchange Commission. For more information on our
critical accounting policies, see Part II, Item 7 in our 2001 Annual Report on
Form 10-K.
Liquidity and Capital Resources
Cash Flow Activities
During the three month period ended March 31, 2002, 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 to fund a material amount
of our property additions. We continue to fund property and investment additions
primarily related to construction of additional electric generation facilities
for our integrated energy business group through a combination of operating cash
flow, increased short-term debt and long-term non-recourse project financing.
Cash flows from operations decreased $39.6 million for the three month period
ended March 31, 2002 compared to the same period in the prior year primarily due
to the decrease in net income and working capital.
26
On March 8, 2002, we acquired an additional 67 percent interest in Millennium
Pipeline Company, L.P., which owns and operates a 200-mile pipeline and an
additional ownership interest in Millenium Terminal Company, L.P., which has 1.1
million barrels of crude oil storage connected to the Millennium Pipeline at the
Oil Tanking terminal in Beaumont, Texas. Total cost of the acquisition was $11.0
million and was funded through borrowings under short-term revolving credit
facilities.
On March 15, 2002, we acquired an additional 30 percent interest in the Harbor
Cogeneration Facility, a 98 megawatt gas-fired plant located in Wilmington,
California for $25.7 million. This acquisition was also funded through
borrowings under short-term revolving credit facilities.
On March 15, 2002, we closed on $135 million of senior secured financing for the
Arapahoe and Valmont facilities, 210 megawatts in service and under construction
in the Denver, Colorado area. Proceeds from this financing were used to
refinance $53.8 million of an existing seven-year secured term project-level
facility, pay down approximately $50.0 million of short-term credit facility
borrowings and approximately $31.2 million will be used for future project
construction.
In addition, during the first quarter of 2002, we completed a $50.0 million
bridge credit agreement. The credit agreement supplements our revolving credit
facilities and has the same terms as those facilities with an expiration date of
June 30, 2002.
Dividends
Dividends paid on our common stock totaled $0.29 per share in the first quarter
of 2002. This reflects a 3.6 percent increase approved by our board of directors
in January 2002 from $0.28 per share in the first quarter of 2001. Dividends
were paid out of current earnings. The determination of the amount of future
cash dividends, if any, to be declared and paid will depend upon, among other
things, our financial condition, funds from operations, the level of our capital
expenditures, restrictions under our credit facilities and our future business
prospects.
Short-Term Liquidity and Financing Transactions
Our principal sources of short-term liquidity are our revolving bank facilities
and cash provided by operations. As of March 31, 2002 we had $66.2 million
of cash and $450 million of bank facilities. The bank facilities consist
of a $50 million bridge facility due June 30, 2002, a $200 million facility due
August 27, 2002 and a $200 million facility due August 27, 2004. These bank
facilities can be used to fund our working capital needs, for general corporate
purposes and to provide liquidity for a commercial paper program if implemented.
At March 31, 2002, we had $389 million of bank borrowings outstanding under
these facilities. The corresponding amount outstanding at April 30, 2002 was
$393 million. After inclusion of applicable letters of credit, the remaining
borrowing capacity under the bank facilities was $27 million and $23 million at
March 31, 2002 and April 30, 2002, respectively.
The above bank facilities include covenants that are common in such
arrangements. Such covenants include a consolidated net worth in an amount of
not less than the sum of $375 million and 50 percent of the aggregate
consolidated net income beginning June 30, 2001; a recourse leverage ratio not
to exceed 0.65 to 1.00; an interest coverage ratio of not less than 3.00 to
1.00; and a credit rating of at least "BBB-" from Standard & Poor's or" Baa3"
from Moody's Investor Service. If these covenants are violated, it would be
considered an event of default and the
27
lender has the right to terminate the remaining commitment and accelerate the
principal and interest outstanding to become immediately due. In addition,
certain of our interest rate swap agreements include cross-default provisions.
These provisions would allow the counterparty the right to terminate the swap
agreement and liquidate at a prevailing market rate, in the event of default.
Our consolidated net worth was $525.7 million at March 31, 2002. The long-term
debt component of our capital structure at March 31, 2002 was 49 percent and our
total debt leverage (long-term debt and short-term debt) was 63 percent.
In addition, Enserco Energy, Inc., our gas marketing unit, has a $75 million
uncommitted, discretionary line of credit to provide support for the purchase of
natural gas. We provide no guarantee to the lender under this facility. At March
31, 2002, there were outstanding letters of credit issued under the facility of
$43.8 million with no borrowing balances on the facility.
Similarly, Black Hills Energy Resources, Inc., our oil marketing unit, has a $25
million uncommitted, discretionary credit facility. This line of credit provides
credit support for the purchases of crude oil by Black Hills Energy Resources.
We provide no guarantee to the lender under this facility. At March 31, 2002,
Black Hills Energy Resources had letters of credit outstanding of $21.1 million
and no balance outstanding on its overdraft line.
Black Hills Coal Network, Inc. has a $5.5 million uncommitted, discretionary
line of credit to provide support for the purchase of coal. At March 31, 2002
there were outstanding borrowings on the facility of $0.3 million and
outstanding letters of credit issued in the amount of $0.8 million.
Based upon our expected cash flows from operations, expected project financings
for the year, credit facility capacity, and projected cash needs in the near
term, we currently believe we have sufficient capital to fund all requirements
to July 2002 and anticipate that we will be able to obtain additional financing
to fund future requirements.
We are currently seeking long-term project-level non-recourse financing in the
range of $200-$220 million for the Las Vegas Project, a 277 megawatt gas-fired
generation complex located in North Las Vegas, Nevada prior to June 30, 2002.
Total project costs are estimated to be $330 million of which approximately $269
million was expended as of March 31, 2002 and was funded with short-term credit
facility borrowings. We are in the early stages of planning an $80-$100 million
first mortgage bond offering at our Electric Utility business segment and
anticipate renewing our $200 million credit facility that expires in August
2002. Completion of these financings will substantially improve our liquidity.
Our ability to obtain additional financing will depend upon a number of factors,
including our future performance and financial results and capital market
conditions. We cannot be sure that we will be able to raise additional capital
on reasonable terms or at all.
There have been no other material changes in our forecasted changes in liquidity
and capital requirements from those reported in Item 7 of our 2001 Annual Report
on Form 10-K filed with the Securities Exchange Commission.
28
Forward Looking Statements
The above information includes "forward-looking statements" as defined by the
Securities and Exchange Commission. These statements concern the Company's
plans, expectations and objectives for future operations. All statements, other
than statements of historical facts, included above that address activities,
events or developments that the Company expects, believes or anticipates will or
may occur in the future are forward-looking statements. The words believe,
intend, anticipate, estimate, aim, project and similar expressions are also
intended to identify forward-looking statements. These forward-looking
statements may include, among others, such things as expansion and growth of the
Company's business and operations; future financial performance; future
acquisition and development of power plants; future production of coal, oil and
natural gas; reserve estimates; future communications customers; and business
strategy. These forward-looking statements are based on assumptions which the
Company believes are reasonable based on current expectations and projections
about future events and industry conditions and trends affecting the Company's
business. However, whether actual results and developments will conform to the
Company's expectations and predictions is subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
contained in the forward-looking statements, including the following factors:
prevailing governmental policies and regulatory actions with respect to allowed
rates of return, industry and rate structure, acquisition and disposal of assets
and facilities, operation and construction of plant facilities, recovery of
purchased power and other capital investments, and present or prospective
wholesale and retail competition; changes in and compliance with environmental
and safety laws and policies; weather conditions; population growth and
demographic patterns; competition for retail and wholesale customers; pricing
and transportation of commodities; market demand, including structural market
changes; changes in tax rates or policies or in rates of inflation; changes in
project costs; unanticipated changes in operating expenses or capital
expenditures; capital market conditions; counterparty credit risk; technological
advances; competition for new energy development opportunities; legal and
administrative proceedings that influence the Company's business and
profitability; and unanticipated developments in the western power markets,
including unanticipated governmental intervention, deterioration in the
financial condition of counterparties, default on amounts due, adverse changes
in current or future litigation and adverse changes in the tariffs of the
California Independent System Operator Corporation. Any such forward-looking
statements should be considered in conjunction with Black Hills Corporation's
most recent annual report on Form 10-K and its interim quarterly reports on Form
10-Q on file with the Securities and Exchange Commission. New factors that could
cause actual results to differ materially from those described in
forward-looking statements emerge from time to time, and it is not possible for
the Company to predict all such factors, or to the extent to which any such
factor or combination of factors may cause actual results to differ from those
contained in any forward-looking statement. The Company assumes no obligation to
update publicly any such forward-looking statements, whether as a result of new
information, future events, or otherwise.
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 2001 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 2001 Annual Report on Form 10-K, and Notes to
Consolidated Financial Statements in this Form 10-Q.
29
BLACK HILLS CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
-----------------
For information regarding legal proceedings, see Note 10 to
the Company's 2001 Annual Report on Form 10-K.
Item 6. Exhibits and Reports of Form 8-K
--------------------------------
99.1 Letter to Commission Pursuant to Temporary Note 3T
30
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, 2002
31
Exhibit 99.1
Black Hills Corporation
625 Ninth Street
Rapid City, SD 57701
LETTER TO COMMISSION PURSUANT TO TEMPORARY NOTE 3T
May 15, 2002
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, Black
Hills Corporation has obtained a letter of representation from Arthur Andersen
LLP stating that their review our Form 10-Q was subject to their quality
control system for the U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards, that there was appropriate continuity of Arthur Andersen
LLP personnel working on the review and availability of national office
consultation. Availability of personnel at foreign affiliates of Arthur Andersen
is not relevant to this review.
Very truly yours,
Black Hills Corporation
/s/ Mark T. Thies
Mark T. Thies
Senior Vice President and
Chief Financial Officer