United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 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 1-7978
Black Hills Power, Inc.
Incorporated in South Dakota IRS Identification Number 46-0111677
625 Ninth Street
Rapid City, South Dakota 57701
Registrant's telephone number (605)-721-1700
Former name, former address, and former fiscal year if changed since last report
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
As of JulyOctober 31, 2001, there were issued and outstanding 23,416,396 shares of
the Registrant's common stock, $1.00 par value, all of which were held
beneficially and of record by Black Hills Corporation.
Reduced Disclosure
The Registrant meets the conditions set forth in General Instruction H (1) (a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
1
BLACK HILLS POWER, INC.
I N D E XTABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income- 3
Three and SixNine Months Ended
JuneSeptember 30, 2001 and 2000
Consolidated Balance Sheets- 4-5
JuneSeptember 30, 2001 and December 31, 2000
Consolidated Statements of Cash Flows- 6
Three and SixNine Months Ended June 31,September 30, 2001 and 2000
Notes to Consolidated Financial Statements 7-137-14
Item 2. Results of Operations 13-1515-18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 1619
Item 6. Exhibits and Reports on Form 8-K 1619
Signatures 1720
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months SixEnded Nine Months JuneEnded
September 30 JuneSeptember 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Operating revenues $84,077 $35,899 $172,701 $69,198$64,742 $75,762 $237,444 $144,960
------- ------- -------- ---------------
Operating expenses:
Fuel and purchased power 14,763 10,328 44,853 18,29816,617 17,937 61,470 36,235
Operations and maintenance 10,524 5,511 17,468 10,5159,315 9,507 26,785 20,022
Administrative and general 8,403 1,429 15,857 2,3944,333 4,641 20,190 7,036
Depreciation and amortization 6,964 3,909 13,836 7,8198,588 5,432 22,424 13,251
Taxes, other than income taxes 2,899 1,741 5,934 3,547
------- ---------2,973 1,801 8,906 5,348
-------- -------
43,553 22,918 97,948 42,573
------- --------- -------- --------------- --------
41,826 39,318 139,775 81,892
-------- -------- -------- --------
Operating income 40,524 12,981 74,753 26,625
------- ---------22,916 36,444 97,669 63,068
-------- --------------- -------- --------
Other income and (expense):
Interest expense (10,751) (4,435) (21,585) (8,970)(10,982) (7,890) (32,428) (16,060)
Investment income 1,898 1,468 3,841 2,7921,000 1,389 4,841 4,180
Other, net 2,692 604 3,981 757(368) 378 3,474 402
------- ---------------- -------- --------
(10,350) (6,123) (24,113) (11,478)
------- (6,161) (2,363) (13,763) (5,421)
------- --------- -------- ---------------
Income from continuing operations before
minority interest and income taxes 34,363 10,618 60,990 21,20412,566 30,321 73,556 51,590
Minority interest (2,611) - (4,571) -163 (10,276) (4,408) (10,276)
Income taxes (11,781) (3,523) (20,199) (6,912)(4,471) (6,999) (24,670) (13,911)
------- ------- -------- ---------------
Income from continuing operations 19,971 7,095 36,220 14,2928,258 13,046 44,478 27,403
Discontinued operation, net of
income taxes (Note 2) - 9663,284 4,832 2,8306,059
------- ------- -------- ---------------
Net income $19,971 $ 8,0618,258 $16,330 $ 41,052 $17,12249,310 $ 33,462
======= ======= ======== ===============
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial statements.
3
BLACK HILLS POWER, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
JuneSeptember 30 December 31
2001 2000
---- ----
(in thousands)
Assets
Assets
Current assets:
Cash and cash equivalents $ 25,57417,118 $ 12,697
Receivables (net of allowance for doubtful accounts of $3,058$2,161
and $3,631,$542, respectively)
Customers 17,36028,095 19,339
Related party 107,23234,464 89,203
Other 10,2177,044 19,653
Materials, supplies and fuel 16,15715,772 10,703
Prepaid expenses 6,2818,639 6,788
Derivatives at market value 8,596 -
Assets of discontinued operations (Note 2) - 247,548
------------- -------------
182,821------------
119,728 405,931
------------- -------------
Investment in affiliates 64,888------------
Investments 65,407 56,225
------------- -------------------------
Property and equipment 1,010,8161,190,772 817,728
Less accumulated depreciation (220,801)(227,742) (207,805)
------------- -------------
Net property and equipment 790,015------------
963,030 609,923
------------- -------------------------
Other assets:
Regulatory asset 4,134 4,134
Other, principally goodwill 35,863and other intangibles 83,866 31,713
------------- -------------
39,997------------
88,000 35,847
------------- -------------------------
Total $1,077,721$1,236,165 $1,107,926
============= =========================
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial statements.
4
BLACK HILLS POWER, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
JuneSeptember 30 December 31
2001 2000
---- ----
(in thousands)
Liabilities and Stockholder's Equity
Current liabilities:
Current maturities of long-term debt $ 14,47020,505 $ 13,961
Notes payable - 86,000
Notes payable - related party 250,238401,959 98,631
Accounts payable 20,70213,778 12,734
Accounts payable - related party 1,7273,376 3,756
Accrued liabilities 21,80124,992 20,337
Derivatives at market value 8,60315,101 -
Liabilities of discontinued operations (Note 2) - 163,661
------------- -------------
317,541---------- ----------
479,711 399,080
------------- ----------------------- ----------
Long-term debt, net of current maturities 433,814434,487 307,090
------------- ----------------------- ----------
Deferred credits:
Federal income taxes 54,91955,445 54,706
Investment tax credits 2,2892,168 2,530
Regulatory liability 4,4594,323 4,673
Other 9,95810,306 9,459
------------- --------------
71,625---------- ----------
72,242 71,368
------------- ------------------------ ----------
Minority interest in subsidiaries 27,24825,942 37,963
------------- ------------------------ ----------
Stockholder's equity:
Common stock $1 par value; 50,000,000 shares authorized;
Issued: 23,416,396 shares 23,416 23,416
Additional paid-in capital 80,07580,961 77,326
Retained earnings 129,848130,607 191,683
Accumulated other comprehensive loss (5,846)(11,201) -
------------- ------------------------ ----------
Total stockholder's equity 227,493223,783 292,425
------------- ------------------------ ----------
Total $1,077,721$1,236,165 $1,107,926
============= ======================== ==========
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial statements.
5
BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
ThreeNine Months
Six Months
June 30 JuneSeptember 30
2001 2000 2001 2000
---- ----
---- ----
(in thousands)
Cash flows from operations $ 24,660108,627 $ 4,095 $ 39,039 $ 19,668
--------- ---------30,865
--------- ---------
Investing activities:
Property and investment additions (177,623) (10,163) (195,056) (12,950)(375,477) (20,413)
Payment to acquire holdingsfor acquisition of minority
interestsnet assets, net of cash acquired (10,410) -- (10,410) ---
Payment for intangible assets including goodwill (50,413) -
Available for sale securities sold -- -- -- 4,315
(Increase) decrease in investments (689) 254 (1,272) (15,613)- 5,345
--------- ---------
--------- ---------
(188,722) (9,909) (206,738) (24,248)
--------- ---------(436,300) (15,068)
--------- ---------
Financing activities
Dividends paid (7,494) (5,876) (14,168) (11,749)(21,667) (18,072)
Common stock issued -- 103 -- 263- 3,680
Increase (decrease) in short-term borrowings 41,501 8,000 69,016 13,000221,325 (59,302)
Subsidiary distributions to minority interests (1,168) -- (1,505) ---
Change in long-term debt 129,688 786 127,233 259133,941 59,736
--------- ---------
--------- ---------
162,527 3,013 180,576 1,773
--------- ---------332,094 (13,958)
--------- ---------
Increase (decrease) in cash and cash equivalents (1,535) (2,801) 12,877 (2,807)4,421 1,839
Cash and cash equivalents:
Beginning of period 27,109 3,792 12,697 3,798
--------- ---------
--------- ---------
End of period $ 25,57417,118 $ 991 $ 25,574 $ 991
========= =========5,637
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 6,99032,931 $ 3,285 $ 20,826 $ 8,75517,979
Income taxes $ 16,335 $ 6,197 $ 19,944 $ 6,197
Stock dividend distribution to Black Hills Corporation, the parent company of
Black Hills Power, Inc. (Note 2) $ -- $ -- $ 89,643 $ ---
The accompanying notes to the consolidated financial statements are an
integral part of these consolidated financial statements.
6
BLACK HILLS POWER, INC.
Notes to Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company's 2000 Annual Report on Form 10-K)
(1) MANAGEMENT'S STATEMENT
The financial statements included herein have been prepared by Black
Hills Power, Inc. (the Company) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to
such rules and regulations; however, the Company believes that the
footnotes adequately disclose the information presented. These financial
statements should be read in conjunction with the financial statements
and the notes thereto, included in the Company's 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 JuneSeptember 30, 2001,
December 31, 2000 and JuneSeptember 30, 2000, financial information and are
of a normal recurring nature. The results of operations for the three
and sixnine months ended JuneSeptember 30, 2001, are not necessarily indicative
of the results to be expected for the full year.
(2) NON-CASH DIVIDEND AND DISCONTINUED OPERATIONS
During the quarter ended March 31, 2001, the Company distributed a
non-cash dividend to its parent company, Black Hills Corporation (the
Parent). The dividend consisted of 50,000 common shares of Wyodak
Resources Development Corporation (Wyodak), which represents 100 percent
ownership of Wyodak. The Company therefore no longer operates in the
coal production segment, oil and natural gas production segment, fuel
marketing segment or communications as the Company had indirectly owned
the companies operating in these segments through its ownership of
Wyodak. As a result, the Company's only subsidiary is Black Hills Energy
Capital and its subsidiaries. The Company's investment in Wyodak at the
time of the distribution was $89.6 million.
The consolidated financial statements and notes to consolidated
financial statements have been restated to reflect the continuing
operations of the Company for all periods presented. The assets and
liabilities of Wyodak are shown in the Consolidated Balance Sheets under
the captions "Assets of discontinued operations" and "Liabilities of
discontinued operations".
7
The net operating results of discontinued operations are included in the
Consolidated Statements of Income under the caption "Discontinued
operations, net of income taxes" and are summarized as follows:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2000
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $ - $301,079 $197,274 $515,763
Income before income taxes - 1,481 7,849 4,434
Federal income taxes - 168 3,017 810
Net income - 966 4,832 2,830
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $ - $377,468 $197,274 $893,231
Income before income taxes - 4,857 7,849 8,442
Federal income taxes - 1,573 3,017 2,383
Net income - 3,284 4,832 6,059
(3) 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' investmentstockholder's equity or results of
operations as previously reported.
(4) NEW ACCOUNTING PRONOUNCEMENTS
In July 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). SFAS 141 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 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 life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company is required to adopt SFAS
142 effective January 1, 2002. Management is currently evaluating the
effect that adoption of the provisions of SFAS 142 that are effective
January 1, 2002 will have on the Company's financial statements.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS
No. 143). SFAS No. 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 No. 143 effective
January 1, 2003 and is currently evaluating the effects adoption will
have on the Company's consolidated financial statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supersedes FASB
Statement 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of" (SFAS No. 121) and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of
8
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale as well as resolve
implementation issues related to SFAS No. 121. Management expects to
adopt SFAS No. 144 effective January 1, 2002 and is currently
evaluating the effects adoption will have on the Company's consolidated
financial statements.
(5) CHANGE IN ACCOUNTING PRINCIPLE
In June 1998, the 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. SFAS 133 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. SFAS 133 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
8
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.
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 interest rate swaps documented as cash flow hedges, which upon
adoption resulted in a decrease to accumulated other comprehensive
income of $7.5 million.
(6) CHANGES IN LONG-TERM DEBT
AND NOTES PAYABLE
In conjunction with the closing of the Fountain Valley acquisition
(Note 12), the Company issued long-term non-recourse project level
financing. The debt matures July 1, 2006, has a floating interest rate
(5.13(4.96 percent at JuneSeptember 30, 2001) and is collateralized by a
mortgage on the project's land and facilities, leases and rights,
including rights to receive payments under long-term purchase power
contracts.
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 2000 Annual Report on Form 10-K.
9
(7) COMPREHENSIVE INCOME
The following table presents the components of the Company's
comprehensive income:
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Net income $19,971 $8,061 $41,052 $17,122$8,258 $16,330 $49,310 $33,462
Other comprehensive income:
Initial impact of adoption of SFAS 133,
net of minority interest - - (4,880) -
Fair value adjustment on derivatives
designated as cash flow hedges, net of
minority interest 2,491(5,355) - (966)(6,321) -
------ ------- ------ ------- -------
Comprehensive income $22,462 $8,061 $35,206 $17,122$2,903 $16,330 $38,109 $33,462
====== ======= ====== ======= =======
9
(8) RELATED-PARTY TRANSACTIONS
Receivables
The Company hashad an unsecured line of credit extended to Black Hills
FiberCom LLC, an indirect subsidiary of the Parent, which iswas due on
demand. Outstanding advances were $88.2 million$0 at September 30, 2001 and $87.8
million as of June 30, 2001 and December 31, 2000, respectively.2000. Interest income received on the note
for the three months ended JuneSeptember 30, 2001 and 2000 was $1.6 million$512,000 and
$0$412,000 respectively, and for the sixnine months ended JuneSeptember 30, 2001
and 2000 was $3.5$4.1 million and $0$436,000 respectively. The Company also
has a line of credit extended to Wyodak,the Parent Company, which is due on
demand. Outstanding advances were $14.0$31.1 million at JuneSeptember 30, 2001
and $0 at December 31, 2000. Interest income received on the note was
$163,000$237,000 for the three and sixnine month periods ended JuneSeptember 30, 2001
and $0 in the same period for the year 2000. Advances under these notes
bear interest at a variable rate that does not exceed prime and is
receivable monthly.
In addition, the Company has accounts receivable balances related to
transactions with other Black Hills Corporation subsidiaries. The
balances were $5.1$3.4 million and $1.4 million as of JuneSeptember 30, 2001
and December 31, 2000, respectively.
Note Payable
The Company has an unsecured line of credit with itsBlack Hills
Generation, an indirect subsidiary of the Parent, which is due on
demand. Borrowings under the note were $75.5$402.0 million at JuneSeptember 30,
2001 and $0 at December 31, 2000. Interest expense was $491,000$3.1 million for
the three and sixnine month periods ended JuneSeptember 30, 2001 and $0 for
the same periods ended JuneSeptember 30, 2000. These borrowings bear
interest at a variable rate that does not exceed prime and is payable
monthly.
10
The Company also hashad an unsecured line of credit with Wyodak, an
indirect subsidiary of the Parent, which iswas due on demand. Borrowings
under this note were $174.7 million$0 at JuneSeptember 30, 2001 and $98.6 million at
December 31, 2000. Interest expense for the three months ended
JuneSeptember 30, 2001 and 2000 was $1.9$705,000 and $1.4 million, respectively
and $5.0 million and $0, respectively and $3.6$1.4 million and $0 for the sixnine months ended JuneSeptember
30, 2001 and 2000. These borrowings bear interest at a variable rate
that does not exceed prime and is payable monthly.
Other Payables
The Company has accounts payable balances related to transactions with
other ParentBlack Hills Corporation subsidiaries. The balances were $1.7$3.4
million at JuneSeptember 30, 2001 and $3.8 million at December 31, 2000.
Other Balances and Transactions
In addition to the notes described above, the Company purchased natural
gas to fuel its combustion turbine from Enserco Energy, an indirect
subsidiary of the Parent. The amounts purchased during the three month
period and sixnine month periodperiods ended JuneSeptember 30, 2001 were
approximately $3.6$3.0 million and $7.5$14.0 million, respectively, and isare
included in "Fuel and purchased power" on the Consolidated Statements
of Income.
10
In the opinion of management, the described related-party transactions
have been fair and reasonable to the Company and have been entered into
under terms and rates substantially the same as those transactions
entered into with unrelated third parties in the ordinary course of
business.
(9) SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY'S BUSINESS
The Company's reportable segments are those that are based on the
Company's method of internal reporting, which generally segregates the
strategic business groups due to differences in products, services and
regulation. Prior to the first quarter of 2001, the Company reported
six operating segments consisting of Electric, Mining, Oil and Gas,
Fuel Marketing, Independent Power and Communications. Due to the
distribution of Wyodak common stock as described in Note 2, the Company
no longer has companies operating in the Mining, Oil and Gas, Fuel
Marketing and Communications segments.
The Company's operations are now conducted through two business
segments. As of JuneSeptember 30, 2001, substantially all of the Company's
operations and assets are located within the United States. The two
segments consist of: Electric, which supplies electric utility service
to western South Dakota, northeastern Wyoming and southeastern Montana;
and Independent Power, which produces and sells power to wholesale
customers.electricity in a number
of markets, with strong emphasis in the western United States.
Independent Power's operations were not significant to the Company
until the Indeck Capital acquisition in the third quarter of 2000.
11
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)
Quarter to Date
JuneSeptember 30, 2001
Electric $61,601$43,518 $ - $16,784$7,929
Independent power 22,47621,224 - 3,187329
------- --------- -------------
Total $84,077$64,742 $ - $19,971$8,258
======= ========= =======
======
External Inter-segment
Operating Revenues Operating Revenues Net Income
(loss)Quarter to Date
September 30, 2000
Electric $48,607 $ - $10,105
Independent power 27,155 - 2,941
------- --------- -------
Total $75,762 $ - $13,046
======= ========= =======
External Inter-segment
Operating Revenues Operating Revenues Net Income
Year to Date
JuneSeptember 30, 2001
Electric $132,180$175,698 $ - $34,124$42,053
Independent power 40,52161,746 - 2,0962,425
-------- --------- -------
Total $172,701$237,444 $ - $36,220$44,478
======== ========= =======
External Inter-segment
Operating Revenues Operating Revenues Net Income
Year to Date
September 30, 2000
Electric $117,805 $ - $24,462
Independent power 27,155 - 2,941
-------- --------- -------
Total $144,960 $ - $27,403
======== ========= =======
1112
(10) LEGAL PROCEEDINGS
On April 3, 2001, Wyodak reached a settlement of ongoing litigation
with PacifiCorp filed in the United States District Court, District of
Wyoming, (File No. 00CV-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. As discussed in Note 2,
the Company has distributed its ownership of Wyodak to its parent
company. As a result, the Company is no longer a concerned party to
this litigation.
(11) PRICE RISK MANAGEMENT
Non-trading Energy Activities
The Company acquired several fixed-for-float swaps as part of the Las
Vegas Co-generation acquisition (Note 12) completed on August 31, 2001.
These swaps fixed the price for an index price gas purchase agreement.
The swaps hedge the natural gas purchase price for 5,000 Mmbtus per day
through April 30, 2010. The fair value of these swaps at acquisition
closing was $8.6 million.
At acquisition closing, the swaps were designated as cash flow hedges,
properly documented, and effectiveness testing established. The
critical terms of the hedge match the critical terms of the hedged item
so no ineffectiveness can be expected. At quarter-end, the hedges met
effectiveness testing and retained their cash flow hedge status.
At September 30, 2001, the change in fair value of the swaps was not
significant. No adjustments were made to the fair value of the
derivative instrument on the balance sheet, no adjustments were made to
other comprehensive income, and no earnings impact was recorded.
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 JuneSeptember 30,
2001, the Company had interest rate swaps with an average balance
notional amount of $112.7$306 million, having a maximum term of sixten years and
a fair value of $(8.6)$(15.1) 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 JuneSeptember 30, 2001, the Company had $541.5$697 million outstanding,
floating-rate debt ($398 million is with related parties) of which $415.3$378
million was not offset with interest rate swap transactions that
effectively convert the debt to a fixed rate.
13
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.
(12) ACQUISITIONS
Early inIn 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 comecame on-line early in themid third quarter of
2001. The facility was purchased from Enron Corporation forCorporation. Total cost of
the project is approximately $183 million and has been financed
primarily with non-recourse financing from Union Bank of California.
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.
12
(13) SUBSEQUENT EVENT
Early in the third quarter ofOn August 31, 2001, Black Hills Energy Capital announced it had signed a definitive agreement toclosed on the purchase
of a 273 MW gas-fired co-generation power generation complexplant project located in
North Las Vegas, Nevada from Enron North America, a wholly-owned
subsidiary of Enron Corporation. The transaction is expected to close during the third
quarter 2001.
Expansion of the presentfacility currently has a 51 MW
co-generation site near Las Vegaspower plant in operation. Most of the power from that
facility is now
under way. Constructiona long-term contract expiring in 2024. The Company
has sold 50% of a new combined cycle generation facility
adjacentthis power plant to another party, however, under
generally accepted accounting principles the existing plant will add approximatelyCompany is required to
consolidate 100% of this plant. The project also has a 222 MW of
capacitycombined-
cycle expansion under way, which is 100%-owned by the Company. The
facility is scheduled to the existing plant site. The new generation is expected to
phase in operationsbe fully operational in the third quarter of
2002. The facility2002 and will featureutilize LM-6000 gas-fired turbine technology comparable to the Company
facilities in Colorado and Wyoming. The Company has initiated
discussions with several banks and expects to finance the project
primarily with non-recourse debt.
As part of the transaction, the Company also has secured long-term
contracts for the output of the facility. Nearly all of the capacity
and energy produced by the existing 51 MW plant is under contract
through 2024 with the remainder being merchant power.technology. The power of the planned 222 MW combined-cycle plantexpansion is
soldalso under a 15-year contract.
Thelong-term contract which expires in 2017. This contract
for the expansion requires the purchaser to provide fuel to the power
plant when the plantit is dispatched. The cost for the entire facility is
expected to be approximately $330 million and the Company is in the
process of obtaining long-term financing, which is expected to be
primarily non-recourse project debt.
The acquisition has been accounted for under the purchase method of
accounting and, accordingly, the purchase price of approximately $205
million has been allocated to the acquired assets and liabilities based
on preliminary estimates of the fair values of the assets purchased and
the liabilities assumed as of the date of acquisition. Fair values in
the allocation include assets acquired of approximately $157 million
(excluding goodwill and other intangibles) and liabilities assumed of
approximately $2 million. The estimated purchase price allocations are
subject to adjustment, generally within one year of the date of the
acquisition. Should new or additional facts about the acquisitions
become available within one year of the date of acquisition, any
changes to the preliminary estimates will be reflected as an adjustment
to goodwill. The purchase price and related acquisition costs exceeded
the fair values assigned to net tangible assets by approximately $50
million, which was recorded as long-lived intangible assets and
goodwill. Operating activities of the acquired company have been
included in the accompanying consolidated financial statements since
the acquisition date.
14
ITEM 2. RESULTS OF OPERATIONS
Consolidated Results
Consolidated earnings were $20.0$8.3 million and $8.1$16.3 million for the three
month periods ended JuneSeptember 30, 2001 and June 30, 2000, respectively and $41.1$49.3
million and $17.1$33.5 million for the sixnine months ended JuneSeptember 30, 2001
and June 30, 2000. Consolidated earnings from continuing operations for the sixnine
months ended JuneSeptember 30, 2001 were $36.2$44.5 million compared to $14.3$27.4
million for the same period of the prior year. As discussed in Note 2
of Notes to Consolidated Financial Statements, during the quarter ended
March 31, 2001, the Company distributed ownership interest in Wyodak to
its parent company, Black Hills Corporation. The consolidated financial
statements have been restated to reflect the continuing operations of
the Company for all periods presented.
The decrease in earnings for the three month period ended September 30,
2001 can be attributed to a decline in energy prices and off-system
sales. The increase in earnings from continuing operations for the three and
sixnine
month periodsperiod ended JuneSeptember 30, 2001 werewas primarily driven by expanded
power generation and increased wholesale off-system utility sales.
Unusual energy market conditions in the United States continued to
contributecontributed to
our strong financial performance. Energy prices decreased substantially
beginning in June 2001.
Consolidated revenues for the three months ended JuneSeptember 30, 2001
were $84.1$64.7 million compared to $35.9$75.8 million for the same period of the
prior year. Consolidated revenues from continuing operations were
$172.7$237.4 million and $69.2$145.0 million for the sixnine month period ended
JuneSeptember 30, 2001 and June 30, 2000, respectively. The growth in revenues
year-to-date was a result of high electric energy prices, primarily as
a result of extreme price volatility in the western markets, and
increases in off-system sales by our electric utility.
13
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 westernavailable markets.
We expect that earnings growth from the independent energy grouppower production
segment over the next few years will be driven primarily by our
continued expansion in the independent power production segment.of generation facilities.
Electric Utility
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $61,601 $35,899 $132,180 $69,198
Operating income 29,310 12,980 57,974 26,625
Net income 16,784 7,094 34,123 14,292
EBITDA 33,179 16,924 66,346 34,401
EBITDA
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
(in thousands)
Revenue $43,518 $48,607 $175,698 $117,805
Operating income 15,246 18,613 73,221 45,238
Net income 7,929 10,105 42,053 24,462
EBITDA* 18,692 22,465 85,038 56,867
*EBITDA represents earnings before interest, income taxes, depreciation and
amortization.
15
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 accounting principles generally accepted in the
United States. EBITDA as presented may not be comparable to other similarly
titled measures of other companies.
Electric utility revenues increased 72decreased 11 percent and 91increased 49 percent for the
three and sixnine month periods ended JuneSeptember 30, 2001, respectively, compared to
the same periods in the prior year. Earnings from the electric utility increased $9.7decreased
$2.2 million and $19.8increased $17.6 million for the three-three and six-nine month periods
ended JuneSeptember 30, 2001, respectively. Increased year-to-date earnings continued to bewere
driven by off-system sales in the wholesale markets; average prices were
approximately double the three-month average price received and more than triple the six-monthnine-month average price received compared to the same
periodsperiod of the prior year. However, in June 2001, wholesale electricity prices
decreased in response to changes in western energy market conditions. Average
prices received for off-system sales for the three month period decreased 32
percent compared to the same period in 2000. Off-system megawatt hours sold
increased 138decreased 11 percent for the three months and 141increased 64 percent for the sixnine
months ended JuneSeptember 30, 2001 compared to the same periods in 2000, due to higher market prices and the 40 MW
generating capacity added in 2000. In
addition, the electric utility had modest gains in firm residential and
commercial electric sales and a reduction of reserves in the secondthird quarter
related to reduced exposure in the stabilizing western markets. These increases
were partially offset by higher fuel and operating costs associated with
operation of the gas turbines and other power plant operations, and higher
purchased power costs.
14
The following table provides certain operating statistics.
Three Months Ended Six Months Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
Firm (system) sales - MWh 464,000 462,000 990,000 958,000
Off-system sales - MWh 293,000 123,000 550,000 228,000
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
Firm (system) sales - MWh 537,000 519,000 1,527,000 1,477,000
Off-system sales - MWh 211,000 237,000 761,000 465,000
Independent Power Production
Our independent
Three Months Ended Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
Revenue $21,224 $27,155 $61,746 $27,155
Operating income $ 7,670 $17,831 $24,448 $17,831
Net income $ 329 $ 2,941 $ 2,425 $ 2,941
EBITDA $12,592 $ 9,506 $33,946 $ 9,506
16
Earnings from Independent power segment produced revenues of $22.5 million and earnings of
$3.2 million for the three month period ended June 30, 2001 and revenues of
$40.5 million and earnings of $2.1 million for the six months ended June 30,
2001. Current period results stem from our acquisition of Indeck Capitaloperations were affected by lower power prices
in the third quarter of 2000.West and lower-than-normal water flows at hydro plants in New York.
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 comecame on-line early
in themid 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.
During the third quarter of 2001, Black Hills Energy Capital closed on the
purchase of a 273 MW gas-fired co-generation power plant project located in
North Las Vegas, Nevada. The facility currently has a 51 MW co-generation power
plant in operation. Most of the power from that facility is under a long-term
contract expiring in 2024. The Company has sold 50% of this power plant to
another party. The project also has a 222 MW combined-cycle expansion under way,
which is 100%-owned by the Company. The facility is scheduled to be fully
operational in the third quarter of 2002 and will utilize LM-6000 technology.
The power of the expansion is also under a long-term contract which expires in
2017. This contract for the expansion requires the purchaser to provide fuel to
the power plant when it is dispatched.
Forward Looking Statements.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;plants 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; 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
17
considered in conjunction with the Company'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.
1518
BLACK HILLS POWER, INC.
PartPART II - Other InformationOTHER INFORMATION
Item 1. Legal Proceedings
On April 3, 2001, our former subsidiary, Wyodak Resources
Development Corporation, reached a settlement of ongoing
litigation with PacifiCorp filed in the United States District
Court, District of Wyoming (File No. 00CV-155B). For more
information on thisregarding legal proceeding,proceedings, see Note 10 - LEGAL
PROCEEDINGS - of Notes to the
Consolidated Financial Statements in this Form 10-Q.10-Q, the Company's
2000 Annual Report on Form 10-K and the Company's quarterly
reports on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001.
Item 6. Exhibits and Reports of Form 8-K
None
1619
BLACK HILLS CORPORATIONPOWER, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLACK HILLS CORPORATIONPOWER, INC.
By: /s/ Roxann R. Basham
-----------------------------------------------------------------------------------------
Roxann R. Basham, Vice President - Controller
(Principal Accounting Officer)
By: /s/ Mark T. Thies
----------------------------------------------------------------------------------------
Mark T. Thies, Senior VP & CFO
(Principal Financial Officer)
Dated: AugustNovember 14, 2001
1720