| Certain 2002 amounts in the financial statements have been reclassified to conform to the 2003 presentation. These reclassifications did not have an effect on the Company’s total stockholder’s equity or net
income as previously reported.
(4) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (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 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 will adopt SFAS 143
effective January 1, 2003 and is currently evaluating the effects
adoption will have on the Company's consolidated financial statements.
(5) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In June 2001, the 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
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.
7
The pro forma effects of adopting SFAS No. 142 for the three and
nine-month periods ended September 30, 2002 and 2001 are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
Net income as reported $11,013 $ 8,258 $32,130 $49,310
Cumulative effectpreviously reported.
| (4) | RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS |
| In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS 143). SFAS 143 requires that the fair value of changea liability for an asset retirement obligation be recognized in accounting principle, netthe period in which it is incurred with associated asset retirement costs being capitalized as part of tax - - (896) -
------- ------- ------- -------
Income excluding cumulative effectthe carrying amount of change in accounting principle 11,013 8,258 31,234 49,310
Add: goodwill amortization - 274 - 849
------- ------- ------- -------
Net income excluding cumulative effectthe 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 change in accounting principlethe related asset. Management adopted SFAS 143 effective January 1, 2003 and goodwill amortization $11,013 $ 8,532 $31,234 $50,159
======= ======= ======= =======
it had no impact on the Company’s financial statements. |
The cumulative effect adjustment recognized upon adoption of SFAS 142
was $0.9 million (after tax). The adjustment consisted
| The following table presents the components of the Company’s comprehensive income: |
Three Months Ended
March 31
2003 2002
---- ----
(in thousands)
Net income from
the after-tax write-off of negative goodwill from prior acquisitions in
our Independent Power segment. If SFAS 142 had been adopted on January
1, 2001, net$ 8,605 $11,984
Other comprehensive income would have been lower for the nine-month period
ended September 30, 2002 by $0.9 million and higher for the three and
nine-month periods ended September 30, 2001 by $0.3 million and $0.8
million, respectively.
The Company's goodwill and intangible assets are contained within the
Independent Power segment. Changes to goodwill and intangible assets
during the nine-month period ended September 30, 2002, including the
effects of adopting SFAS No. 142, are as follows (in thousands)(loss):
Goodwill Other Intangible Assets
Balance at December 31, 2001, net of
accumulated amortization $25,566 $85,983
Change in accounting principle 1,493 -
Additions - 10,080
Adjustments - (14,108)
Amortization expense - (3,072)
------- -------
Balance at September 30, 2002, net of
accumulated amortization $27,059 $78,883
======= =======
On September 30, 2002, intangible assets totaled $78.9 million, net of
accumulated amortization of $7.0 million. Intangible assets are
primarily related to site development fees and above-market long-term
contracts, and all have definite lives ranging from 7 to 40 years, over
which they continue to be amortized. Amortization expense for
intangible assets for the next five years is expected to be
approximately $4.1 million a year.
Intangible asset additions during the nine-month period ended September
30, 2002 were primarily the result of a $9.3 million addition related
to preliminary purchase allocations in the acquisition of additional
ownership interest in the Harbor Cogeneration Facility (See Note 11).
This intangible asset primarily relates to an acquired ownership of
additional interest in a contract termination payment stream at the
facility.
8
Adjustments of intangible assets during the nine-month period ended
September 30, 2002 primarily relate to final adjustments to the
preliminary purchase price allocation of the Company's third quarter
2001 Las Vegas Cogeneration acquisition.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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 and 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.
(6) COMPREHENSIVE INCOME
The following table presents the components of the Company's
comprehensive income:
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income $11,013 $ 8,258 $32,130 $49,310
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 (4,604) (5,355) (5,846) (6,321)
-------- ------- ------- -------
Comprehensive income $ 6,409 $ 2,903 $26,284 $38,109
======== ======= ======= =======
(7) CHANGES IN LONG-TERM DEBT AND NOTES PAYABLE
On March 14, 2002, the Company closed on $135 million five-year senior
secured project-level financing for the Arapahoe and Valmont
Facilities. These projects have a total of 210 megawatts in service 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 was used for project construction. At
September 30, 2002, all of the $135 million financing had been
utilized.
On June 18, 2002, the Company closed on a $75 million bridge credit
agreement. This credit agreement bridged the issuance of $75 million of
the Company's First Mortgage Bonds, which were issued on August 13,
2002. The termination date of the bridge credit agreement was August
13, 2002, the date on which the First Mortgage Bonds were issued.
9
On August 13, 2002, the Company issued $75 million of First Mortgage
Bonds, Series AE, due 2032. The First Mortgage Bonds have a 7.23
percent coupon with interest payable semi-annually, commencing February
15, 2003. Net proceeds from the offering were and will be used to fund
the Company's portion of construction and installation costs for an
AC-DC-AC Converter Station; for general capital expenditures for the
remainder of 2002 and 2003; to repay a portion of current bank
indebtedness; to satisfy bond maturities for certain outstanding first
mortgage bonds due in 2003; and for general corporate purposes.
On September 27, 2002, the Company closed on a $50 million secured
financing for the expansion at our Las Vegas II project, a 224-megawatt
gas-fired generation facility located in North Las Vegas, Nevada, that
expires on November 26, 2002. Proceeds from this financing were used to
pay down related party borrowings.
The Company's credit facilities contain certain restrictive covenants,
including restrictions on the ability of certain subsidiaries with
project level financings to dividend cash to the Parent in the amount
of approximately $17.5 million at September 30, 2002. Some of these
credit facilities were amended during the second quarter to remove
default provisions pertaining to credit rating status. The Company
complied with all the covenants at September 30, 2002.
Other than the above transactions, the Company had no other material
changes in its consolidated indebtedness, as reported in Notes 7 and 8
of the Company's 2001 Annual Report on Form 10-K.
(8) RELATED-PARTY TRANSACTIONS
Receivables
The Company has accounts receivable balances related to transactions
with other Black Hills Corporation subsidiaries. The balances were $0.7
million and $2.5 million as of September 30, 2002 and December 31,
2001, respectively.
The Company also has extended a line of credit to the Parent, which is
due on demand. Outstanding advances were $53.8 million at September 30,
2002 and $6.9 million at December 31, 2001. Interest income received on
the note was $224,000 and $262,000 for the three and nine-month periods
ended September 30, 2002. Advances under these notes bear interest at a
variable rate that does not exceed prime and is receivable monthly.
Note Payable
The Company has an unsecured line of credit with Black Hills
Generation, an indirect subsidiary of the Parent. Although the line of
credit is due on demand, Black Hills Generation has agreed not to
demand payment until such time as outside financing is obtained.
Borrowings under the note bear interest at prime rate (4.75 percent at
September 30, 2002) and interest is payable monthly. Borrowings were
$462.3 million at September 30, 2002 and $447.1 million at December 31,
2001. Interest expense on the borrowings under the note for the three
months and nine months ended September 30, 2002 was $5.9 million and
$16.9 million, respectively.
10
Other Balances and Transactions
In addition to the above transactions, the Company purchased natural
gas to fuel its combustion turbine from Enserco Energy, an indirect
subsidiary of the Parent. The amount purchased during the three and
nine-month periods ended September 30, 2002 was approximately $2.5
million and $4.9 million, respectively and is included in "Fuel and
purchased power" on the Condensed Consolidated Statements of Income.
The Company also received revenues of approximately $0.1 million and
$0.2 million for the three and nine-month periods, respectively, from
Black Hills Generation, an indirect subsidiary of Black Hills
Corporation, for the transmission of electricity.
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 September 30, 2002, 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.
Segment information follows the same accounting policies as described
in Note 1 of the Company's 2001 Annual Report on Form 10-K. Segment
information included in the accompanying Condensed Consolidated Balance
Sheets and Condensed Consolidated Statements of Income is as follows
(in thousands):
Income from Continuing
Operating Revenues Operations
Quarter Ended
September 30, 2002
Electric $45,291 $ 8,304
Independent power 32,391 2,709
-------- -------
Total $77,682 $11,013
======= =======
11
Income from Continuing
Operating Revenues Operations
Quarter Ended
September 30, 2001
Electric $43,518 $ 7,929
Independent power 19,649 329
-------- --------
Total $63,167 $ 8,258
======= ========
Income from Continuing
Operating Revenues Operations
Year to Date
September 30, 2002
Electric $120,786 $22,918
Independent power 96,958 8,316
---------- -------
Total $217,744 $31,234
======== =======
Income from Continuing
Operating Revenues Operations
Year to Date
September 30, 2001
Electric $175,698 $42,053
Independent power 51,669 2,425
---------- -------
Total $227,367 $44,478
======== =======
Other than the following transactions, the Company had no other
material changes in total assets of its reporting segments, as reported
in Note 15 of the Company's 2001 Annual Report on Form 10-K, beyond
changes resulting from normal operating activities.
The Independent Power segment had a net addition to non working capital
assets of approximately $106 million primarily related to ongoing
construction of the expansions at the Las Vegas Cogeneration II and
Arapahoe facilities and the acquisition of additional ownership
interest at the Harbor Cogeneration facility (Note 11).
12
(10) RISK MANAGEMENT ACTIVITIES
The Company actively manages its exposure to certain market risks as
described in Note 3 of the Company's 2001 Annual Report on Form 10-K.
Included in the accompanying Condensed Consolidated Balance Sheets as
of September 30, 2002 and December 31, 2001, are derivative assets of
$0.3 million and $5.7 million and derivative liabilities of $18.2
million and $16.2 million, respectively, related to fixed-for-float
interest rate swaps on certain financings. These transactions are
accounted for as cash flow hedges,
and have been determined to be fully
effective. Because these hedges are fully effective, the entire
derivative fair value is recorded in accumulated other comprehensive
income. These swaps had a current notional amount of $213.6 million and
a weighted average interest rate of 5.99 percent at September 30, 2002
and a current notional amount of $316.4 million and a weighted average
interest rate of 5.85 percent at December 31, 2001.
The Company anticipates a portion of the unrealized losses recorded in
accumulated other comprehensive income will be realized as increased
interest expense in the next 12 months. Based on September 30, 2002
market interest rates, $9.1 million will be realized as additional
interest expense during the next 12 months. Estimated and realized
amounts will likely change during the next year as market interest
rates change.
At September 30, 2002, the Company had $365.9 million of outstanding,
floating-rate debt of which $152.3 million was not offset with interest
rate swap transactions that effectively convert the debt to a fixed
rate.
At December 31, 2001, the Company had a $100 million forward starting
floating-to-fixed interest rate swap to hedge the anticipated floating
rate debt financing related to the Company's Las Vegas Cogeneration
expansion. This swap terminated during the second quarter 2002 and
resulted in a $1.1 million gain. This swap was treated as a cash flow
hedge and accordingly in the second quarter of 2002 the resulting gain
was carried in Accumulated Other Comprehensive Income on the Condensed
Consolidated Balance Sheet and was to be amortized over the life of the
anticipated long-term financing. In the third quarter of 2002, this
cash flow hedge was determined to be ineffective due to uncertainties
about the eventual timing and form of financing for this project. As a
result, the $1.1 million was taken into earnings. The gain was offset
by the expensing of approximately $1.0 million of deferred financing
costs related to the anticipated financing.
In addition, the Company entered into a $50 million treasury lock to
hedge a portion of the Company's $75 million First Mortgage Bond
offering completed in August 2002 (Note 7). The treasury lock cash
settled on August 8, 2002, the bond pricing date, and resulted in a
$1.8 million loss. This treasury lock was treated as a cash flow hedge
and accordingly the resulting loss is carried in Accumulated Other
Comprehensive Loss on the Condensed Consolidated Balance Sheet and
amortized over the life of the related bonds as additional interest
expense.
13
(11) ACQUISITIONS
On March 15, 2002, the Company paid $25.7 million to acquire an
additional 30 percent interest in the Harbor Cogeneration Facility
(Harbor), a 98-megawatt gas-fired plant located in Wilmington,
California. This acquisition was funded through borrowings from a
related party. At September 30, 2002 the Company had an 88 percent
ownership interest in Harbor.
The Company's investment in Harbor prior to the above acquisition was
accounted for under the equity method of accounting and included in Investments on the accompanying Condensed Consolidated Balance Sheets.
The above acquisition gave the Company majority ownership and voting
control of Harbor. Therefore, the Company now includes the accounts of
Harbor in its consolidated financial statements.
The above acquisition has been accounted for under the purchase method
of accounting and, accordingly, the purchase price 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. The estimated purchase price allocations
are subject to adjustment, generally within one year of the date of the
acquisition. The purchase price and related acquisition costs exceeded
the fair values assigned to net tangible assets by approximately $9.3
million, which was recorded as long-lived intangible assets.
The impact of this acquisition was not material in relation to the
Company's results of operations. Consequently, pro forma information is
not presented.
(12) LEGAL PROCEEDINGS
In June 2002, a forest fire damaged approximately 11,000 acres of
private and government land located near Deadwood and Lead, South
Dakota. The fire destroyed approximately 20 structures (seven houses
and 13 outbuildings) and caused the evacuation of the cities of Lead
and Deadwood for approximately 48 hours.
The cause of the fire was investigated by the State of South Dakota.
Alleged contact between power lines owned by the Company and
undergrowth were implicated as the cause. The Company has initiated its
own investigation into the cause of the fire, including the hiring of
expert fire investigators and that investigation is continuing.
The Company has been put on notice of potential private civil claims
for property damage and business loss. In addition, the State of South
Dakota initiated a civil action in the Seventh Judicial Circuit Court,
Pennington County, South Dakota, seeking recovery of damages for fire
suppression costs, reclamation and remediation. If it is determined
that power line contact was the cause of the fire, and that the Company
was negligent in the maintenance of those power lines, the Company
could be liable for resultant damages. Management cannot predict the
outcome of either the Company's investigation, or the viability of
potential claims. Management believes that any such claims will not
have a material adverse effect on the Company's financial condition or
results of operations.
14
Discontinued operations (351) 1,838
------- -------
Comprehensive income
$ 8,254 $13,822
======= =======
| (6) | RELATED-PARTY TRANSACTIONS |
| The Company has accounts receivable balances related to transactions with other Black Hills Corporation subsidiaries. The balances were $1.0 million and $1.7 million as of March 31, 2003 and December 31, 2002, respectively. |
| The Company also has extended a line of credit to its Parent, Black Hills Corporation (the Parent), which is due on demand. However, the Company has formally agreed that such amounts will not be demanded until January 1, 2004 or until such time that the Parent has amounts available to repay the obligation and continue its normal operations through January 1, 2004. Outstanding advances were $54.9 million at March 31, 2003 and $52.5 million at December 31, 2002. Interest income received on the note was $0.4 million and $0 for the three month periods ended March 31, 2003 and 2002. Advances under these notes bear interest at a variable rate that does not exceed prime (4.25 percent at March 31, 2003) and is receivable monthly. |
| Other Balances and Transactions |
| In addition to the above transactions, in order to fuel its combustion turbine, the Company purchased natural gas from Enserco Energy, an indirect subsidiary of the Parent. The amount purchased during the three month periods ended March 31, 2003 and 2002 was approximately $1.7 million and $1.2 million, respectively and is included in “Fuel and purchased power” on the Condensed Statements of Income. The Company also received revenues of approximately $1.6 million and $0.1 million for the three month periods, respectively, from Black Hills Wyoming, Inc., an indirect subsidiary of Black Hills Corporation, for the transmission of electricity. |
| In September 2001, a fire, which is known as the Hell Canyon fire, occurred in the southwestern portion of the Black Hills region of South Dakota. The State of South Dakota has alleged that the fire occurred when a high voltage electrical span maintained by the Company broke and electrical arcing from the severed line ignited dry grass. The fire burned approximately 10,000 acres of land owned by the Black Hills National Forest, the Oglala Sioux Tribe and other private landowners. The State of South Dakota initiated litigation against the Company in the Seventh Judicial Circuit Court, Fall River County, South Dakota, on January 31, 2003. The complaint seeks recovery of damages for alleged injury to timber, fire suppression and rehabilitation costs. A claim for treble damages is asserted with respect to the claim for injury to timber. It is expected that the United States Forest Service will assert substantially similar claims against the Company. The Company’s investigation into the cause and origin of the fire is still pending. The total amount of damages claimed by the State of South Dakota is not specified in the complaint. The Company has denied all claims and will vigorously defend this matter, the timing or outcome of which is uncertain. |
| In June 2002, a forest fire, sometimes referred to as the Grizzly Gulch fire, damaged approximately 11,000 acres of private and governmental land located near Deadwood and Lead, South Dakota. The fire destroyed approximately 20 structures and caused the evacuation of the cities of Lead and Deadwood for approximately 48 hours. |
| The cause of the Grizzly Gulch fire was investigated by the State of South Dakota. Contact between power lines owned by the Company and undergrowth was alleged to be the cause. The Company has initiated its own investigation into the cause of the fire, including the hiring of expert fire investigators and that investigation is continuing. |
| The State of South Dakota initiated a civil action in the Seventh Judicial Circuit Court, Pennington County, South Dakota seeking recovery of damages for fire suppression, reclamation and remediation costs, and treble damages for injury to trees. The United States government initiated a civil action in U.S. District Court, District of South Dakota, asserting similar claims. Neither the State of South Dakota nor the United States specified the amount of their alleged damages. In addition, the Company has been notified of potential private civil claims for property damage and business loss. The Company has denied all claims and will vigorously defend this matter. The State of South Dakota has subsequently joined its claim in the federal action. |
| If it is determined that power line contact was the cause of either fire and that the Company was negligent in the maintenance of those power lines, the Company could be liable for some or all of the damages related to these claims. Although the Company cannot predict the outcome or the viability of potential claims with respect to either fire, based on information currently available, management believes that any such claims, if determined adversely to the Company, will not have a material adverse effect on the Company’s financial condition or results of operations. |
| The Company is subject to various other legal proceedings, claims and litigation which arise in the ordinary course of operations. In the opinion of management, the amount of liability, if any, with respect to these actions would not materially affect the financial position or results of operations of the Company. |
ITEM 2. RESULTS OF OPERATIONS
Consolidated Results
Three Months Ended
September 30,March 31
2003 2002
Compared to Three Months Ended
September 30, 2001. Consolidated net---- ----
(in thousands)
Revenue $43,762 $37,192
Operating expense 30,110 22,865
------- -------
Operating income for the three months ended
September 30, 2002 was $11.0 million compared to $8.3 million in the
same period of the prior year. The increase in net income is a result
of increased generating capacity, increased earnings from additional
ownership of an energy partnership and increased off-system sales
partially offset by increased depreciation expense.
Consolidated revenues for the three months ended September 30, 2002
were $77.7 million compared to $63.2 million for the same period of the
prior year. The increase in revenues was a result of increased
off-system sales by our electric utility and expanded power production.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001. Consolidated net income for the nine months ended
September 30, 2002 was $32.1 million compared to $49.3 million in the
same period of the prior year. Consolidated income$13,652 $14,327
======= =======
Income from continuing operations before change in accounting principle, for the nine-month
period ended September 30, 2002 was $31.2 million compared to $44.5
million for the same period in the prior year. As discussed in Note 2
of Notes to Consolidated Financial Statements, during the quarter ended
March 31, 2001, the Company distributed its ownership interest in
Wyodak to its parent company, Black Hills Corporation. The consolidated
Condensed Statement of Income has been restated to reflect the
continuing operations of the Company.
The decrease in income from continuing operations is a result of
decreased off-system sales, a substantial decrease in prevailing prices
for wholesale electricity and increased depreciation expense. These
factors were partially offset by increased generating capacity,
increased earnings from additional ownership of an energy partnership
and the collection of previously reserved amounts for California
operations.
Consolidated revenues for the nine months ended September 30, 2002 were
$217.7 million compared to $227.4 million for the same period of the
prior year. The decrease in revenues was a result of decreased prices
for off-system sales by our electric utility, partially offset by
expanded power production. Wholesale electricity average peak prices at
Mid-Columbia were approximately $182 per megawatt-hour during the first
nine months of 2001 compared to approximately $21 per megawatt-hour
during the first nine months of 2002.
15
Electric Utility
$ 6,699 $ 7,823
======= =======
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $45,291 $43,518 $120,786 $175,698
Operating income 15,975 15,246 43,655 73,221
Income from
continuing operations 8,304 7,929 22,918 42,053
| The following table provides certain operating statistics: |
Three Months Ended
March 31
2003 2002
---- ----
(in MWh's)
Firm (system) sales 505,482 505,543
Off-system sales 245,727 161,112
| Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(in MWh's)
Firm (system) sales 510,500 537,000 1,466,000 1,527,000
Off-system sales 317,600 211,000 688,700 761,000
|
Three Months Ended September 30, 2002March 31, 2003 Compared to Three Months Ended
September 30, 2001. Electric utility revenues increased 4 percent for
the three-month period ended September 30, 2002, compared to the same
period in the prior year. Net income for the segment increased 5
percent from the same period in the prior year. The increase in
revenues and net income was primarily due to a 51 percent increase in
off-system electric megawatt-hour sales, which was partially offset by
average prices received that were 22 percent lower than the average
prices received in the same period of the prior year. Firm residential
and contracted electricity sales increased, but were offset by a
decline in industrial sales due to the closing of Homestake Gold Mine
at year-end 2001. Fuel and purchased power expense decreased 6 percent
for the three-month period ended September 30, 2002 compared to the
same period in 2001, and total operating expense increased 4 percent
for the same period.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001. Electric utility revenues decreased 31 percent for
the nine-month period ended September 30, 2002, compared to the same
period in the prior year. Net income for the segment decreased 46
percent from the same period in the prior year. The decrease in
revenues and net income was primarily due to a 10 percent decrease in
off-system electric megawatt-hour sales at average prices received that
were 69 percent lower than average prices received in the same period
of the prior year. Firm residential and contracted electricity sales
increased, but were offset by a decline in industrial sales due to the
closing of Homestake Gold Mine at year-end 2001. Fuel and purchased
power expense decreased 41 percent for the nine-month period ended
September 30, 2002 compared to the same period in 2001, and operating
expense decreased 25 percent for the same period.
16
Independent Power Production
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Revenue $32,391 $19,649 $96,958 $51,669
Operating income 11,822 7,670 40,861 24,448
March 31, 2002.Revenues increased 18 percent for the three-month period ended March 31, 2003, compared to the same period in the prior year. The increase in revenue was primarily due to a 53 percent increase in off-system electric megawatt-hour sales, and a 43 percent increase in average prices received. Firm residential and commercial electricity revenues increased 2 percent and 4 percent, respectively, but were offset by a 9 percent decline in industrial revenues primarily due to the closing of Homestake Gold Mine and Federal Beef Processors.
| Electric operating expenses increased 32 percent for the three month period ended March 31, 2003, compared to the same period in the prior year. The increase in operating expenses was primarily due to an increase in fuel and purchased power costs and an increase in administrative and general costs. Fuel and purchased power costs increased $5.3 million due to the increase in off-system electric sales. Administrative and general expenses increased primarily due to a $0.5 million increase in pension expense and a $0.7 million increase in salaries. |
| Interest expense increased $1.3 million for the three month period primarily due to interest associated with the $75 million first mortgage bonds issued in August 2002. |
| Income from continuing operations 2,709 329 8,316 2,425
decreased $1.1 million primarily due to the increase in fuel cost and purchased power, interest expense, pension expense and administrative and general salaries offset by the increase in revenues. |
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001. Independent power revenues increased 65 percent for
Forward Looking Statements | Some of the statements in this Form 10-Q include “forward-looking statements” as defined by the Securities and Exchange Commission, or SEC. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are based on assumptions, which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including: |
the three-month period ended September 30, 2002, compared toeffects on our business resulting from the same
periodfinancial difficulties of other energy companies, including the effects on liquidity in the prior year. The substantial increase in revenues was
offset by a 58 percent increase in operating expense. These increases
can be attributed to additional generating capacityenergy marketing and increased
earnings from additional ownership of an energy partnership. As of
September 30, 2002, we had 657 megawatts of independent power capacity
in service compared to 625 megawatts at September 30, 2001.
Approximately 300 megawattsgeneration businesses and markets and perceptions of the 625 megawattsenergy and energy marketing business;
the effects on our business resulting from a lowering of capacity at
September 30, 2001 were placedour credit rating (or actions we may take in service during the third quarter of
2001. Additional partnership equity was earnedresponse to changing credit ratings criteria), including demands for increased collateral by the Companyour current or new counterparties, refusal by our current or potential counterparties or customers to enter into transactions with us and our inability to obtain credit or capital in July
2002 as a result of certain performance measures being met at a
consolidated energy partnership. The earnings impact was approximately
$1.6 million pre-tax and was recorded as a reductionamounts or on terms favorable to "Minority
interest" expense on the accompanying Condensed Consolidated Statement
of Income.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001. Independent power revenues increased 88 percent for
the nine-month period ended September 30, 2002 compared to the same
period in the prior year. Operating income increased 67 percent for the
same period. Income from continuing operations for the nine-month
period was more than three times income from continuing operations for
the prior nine-month period. Additional independent power capacity and
increased earnings from additional ownership of an energy partnership
contributed to the increase in revenue and net income and was partially
offset by increased depreciation and interest expense. As of September
30, 2002, we had 657 megawatts of independent power capacity in service
compared to 625 megawatts at September 30, 2001. Approximately 300
megawatts of the 625 megawatts of capacity at September 30, 2001 were
placed in service during the third quarter of 2001. In addition for the
nine months ended September 30, 2002, $1.9 million after-tax was
collected for previously recorded reserves pertaining to exposure in
the California markets and the adoption of SFAS 142 resulted in a net
income benefit of $0.9 million after tax.
17
Forward Looking Statements
Some of the statements in this Form 10-Q include "forward-looking
statements" as defined by the Securities and Exchange Commission, or
SEC. We make these forward-looking statements in reliance on the safe
harbor protections provided under the Private Securities Litigation
Reform Act of 1995. All statements, other than statements of historical
facts, included in this Form 10-Q that address activities, events or
developments that we expect, believe or anticipate will or may occur in
the future are forward-looking statements. These forward-looking
statements are based on assumptions, which we believe are reasonable
based on current expectations and projections about future events and
industry conditions and trends affecting our business. However, whether
actual results and developments will conform to our expectations and
predictions is subject to a number of risks and uncertainties that
could cause actual results to differ materially from those contained in
the forward-looking statements, including, among other things: (1)
us;
capital market conditions;
unanticipated developments in the western power markets, including unanticipated governmental intervention, deterioration in the financial condition of counterparties, default on amounts due from counterparties, adverse changes in current or future litigation, adverse changes in the tariffs of the California Independent System
Operator, market disruption and adverse changes in energy and commodity supply, volume and pricing and interest rates; (2)
pricing and transportation of commodities;
population changes and demographic patterns;
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; (3)
the continuing efforts by or on behalf of the State of California's effortsCalifornia to reformrestructure its long-term power purchase contracts and efforts by regulators and private parties in several western states to recover refunds for alleged price manipulation; (4)
changes in and compliance with environmental and safety laws and policies; (5)
weather conditions; (6) population growth and demographic
patterns; (7)
competition for retail and wholesale customers; (8)
pricing and transportation of commodities; (9)
market demand, including structural market changes; (10)
changes in tax rates or policies or in rates of inflation; (11)
changes in project costs; (12)
unanticipated changes in operating expenses or capital expenditures; (13) capital
market conditions; (14)
technological advances by competitors; (15)
competition for new energy development opportunities; (16)
the cost and other effects of legal and administrative proceedings that influence our business and
profitability; (17) business;
the effects on our business, including the availability of insurance, resulting from the terrorist actions on
September 11, 2001, or any other terrorist actions or responses to such actions; (18) the effects on our business resulting from the financial
difficulties of Enron and
other energy companies, including their
effects on liquidity in the trading and power industry, and their
effects on the capital markets views of the energy or trading industry,
and our ability to access the capital markets on the same favorable
terms as in the past; (19) the effects on our business in connection
with a lowering of our credit rating (or actions we may take in
response to changing credit ratings criteria), including, increased
collateral requirements to execute our business plan, demands for
increased collateral by our current counterparties, refusal by our
current or potential counterparties or customers to enter into
transactions with us and our inability to obtain credit or capital in
amounts or on terms favorable to us; (20) risk factors discussed from time to time in our filings with the SEC. 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 us to predict all such factors, or 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. We assume
18
no obligation to update publicly any such forward-looking statements,
whether as a result of new information, future events, or otherwise.
| 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 us to predict all such factors, or 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. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events, or otherwise. |
ITEM 4. CONTROLS AND PROCEDURES
With the participation of management, | Evaluation of Disclosure Controls and Procedures |
| Within 90 days prior to the filing date of Form 10-Q, our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange Act). Based on their evaluation, they have concluded that our disclosure controls and procedures are adequate and effective to ensure that material information relating to us that is included in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods. |
| Changes in Internal Controls |
| Our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation of such controls, and that there were no significant deficiencies or material weaknesses in our internal controls. |
BLACK HILLS POWER, INC. Part II — Other Information
| For information regarding legal proceedings, see Note 11 to the Company’s 2002 Annual Report on Form 10-K and Note 7 of our Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q. |
| Item 6. | | Exhibits and Reports on Form 8-K |
| Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002. |
| We filed no reports on Form 8-K during the three month period ended March 31, 2003. |
BLACK HILLS POWER, 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 POWER, INC.
/s/ Daniel P. Landguth
----------------------------
Chairman and
Chief Executive Officer
/s/ Mark T. Thies
----------------------------
Executive Vice President and
Chief Financial Officer
evaluated ourDated: May 15, 2003
CERTIFICATIONI, Daniel P. Landguth, certify that: | 1. | | I have reviewed this quarterly report on Form 10-Q of Black Hills Power, Inc.; |
| 2. | | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| | | a) | | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| | | b) | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| | | c) | | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| | | a) | | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| | | b) | | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 15, 2003
/s/ Daniel P. Landguth
------------------------
Chairman and
procedures within 90 days of the filing of this quarterly report. Based
on this evaluation, the
Chief Executive Officer
CERTIFICATIONI, Mark T. Thies, certify that: | 1. | | I have reviewed this quarterly report on Form 10-Q of Black Hills Power, Inc.; |
| 2. | | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
| 3. | | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
| 4. | | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: |
| | | a. | | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
| | | b. | | Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and |
| | | c. | | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
| 5. | | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function): |
| | | a. | | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and |
| | | b. | | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
| 6. | | The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
Date: May 15, 2003
/s/ Mark T. Thies
----------------------------
Executive Vice President and
Chief Financial Officer
concluded that the disclosure controls and procedures are
effective in ensuring that information required to be disclosed by us
in the reports filed or submitted by us under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or
other factors that could significantly affect these controls subsequent
to the date of their evaluation, including any significant deficiencies
or material weaknesses of internal controls that would require
corrective action.
19
BLACK HILLS POWER, INC.
Part II
EXHIBIT INDEX
Exhibit Number Description
- Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings, see Note 11 to
the Company's 2001 Annual Report on Form 10-K and Note 12 in
Item 1 of Part I of this Quarterly Report on Form 10-Q, which
information from Note 12 is incorporated by reference into
this item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit 10.1 The First Supplemental Indenture, dated as
of August 13, 2002, between Black Hills
Power, Inc. and JPMorgan Chase Bank, as
Trustee.-------------- -----------
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
We have not filed any Reports on Form 8-K during the
quarter ended September 30, 2002.
20
BLACK HILLS POWER, 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 POWER, INC.
/s/ Daniel P. Landguth
-------------------------------------------
Daniel P. Landguth, Chairman and
Chief Executive Officer
/s/ Mark T. Thies
-------------------------------------------
Mark T. Thies, Senior Vice President and
Chief Financial Officer
Dated: November 14, 2002
21
CERTIFICATION
I, Daniel P. Landguth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Black Hills
Power, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
22
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel P. Landguth
----------------------------
Chairman and
Chief Executive Officer
23
CERTIFICATION
I, Mark T. Thies, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Black Hills
Power, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
24
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Mark T. Thies
----------------------------
Senior Vice President and
Chief Financial Officer
25
EXHIBIT INDEX
Exhibit Number Description
Exhibit 10.1 The First Supplemental Indenture, dated as of
August 13, 2002, between Black Hills
Power, Inc. and JPMorgan Chase Bank, as Trustee.
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
26
|