UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006.
OR
o | 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 | o |
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer | o | Accelerated filer | o | Non-accelerated filer | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | o | No | x |
As of October 31, 2006, 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.
TABLE OF CONTENTS
|
| Page |
|
|
|
PART 1. | FINANCIAL INFORMATION |
|
|
|
|
Item 1. | Financial Statements |
|
|
|
|
| Condensed Statements of Income – |
|
| Three and Nine Months Ended September 30, 2006 and 2005 | 3 |
|
|
|
| Condensed Balance Sheets – |
|
| September 30, 2006 and December 31, 2005 | 4 |
|
|
|
| Condensed Statements of Cash Flows – |
|
| Nine Months Ended September 30, 2006 and 2005 | 5 |
|
|
|
| Notes to Condensed Financial Statements | 6-13 |
|
|
|
Item 2. | Results of Operations | 14-19 |
|
|
|
Item 4. | Controls and Procedures | 19 |
|
|
|
PART II. | OTHER INFORMATION |
|
|
|
|
Item 1. | Legal Proceedings | 20 |
|
|
|
Item 1A. | Risk Factors | 20 |
|
|
|
Item 6. | Exhibits | 20 |
|
|
|
| Signatures | 21 |
|
|
|
| Exhibit Index | 22 |
2
BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF INCOME
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||
| September 30, | September 30, | |||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||
| (in thousands) | ||||||||||
|
|
|
|
|
|
|
|
| |||
Operating revenue | $ | 53,190 | $ | 49,274 | $ | 144,194 | $ | 134,682 | |||
|
|
|
|
|
|
|
|
| |||
Operating expenses: |
|
|
|
|
|
|
|
| |||
Fuel and purchased power |
| 23,908 |
| 24,495 |
| 60,544 |
| 55,289 | |||
Operations and maintenance |
| 5,505 |
| 5,277 |
| 18,907 |
| 17,247 | |||
Administrative and general |
| 4,110 |
| 7,026 |
| 14,936 |
| 18,048 | |||
Depreciation and amortization |
| 5,060 |
| 4,905 |
| 14,672 |
| 14,602 | |||
Taxes, other than income taxes |
| 1,840 |
| 2,108 |
| 5,780 |
| 6,417 | |||
|
| 40,423 |
| 43,811 |
| 114,839 |
| 111,603 | |||
|
|
|
|
|
|
|
|
| |||
Operating income |
| 12,767 |
| 5,463 |
| 29,355 |
| 23,079 | |||
|
|
|
|
|
|
|
|
| |||
Other income (expense): |
|
|
|
|
|
|
|
| |||
Interest expense |
| (2,971) |
| (3,122) |
| (8,902) |
| (9,483) | |||
Interest income |
| 2 |
| 2 |
| 74 |
| 45 | |||
Other income, net |
| 16 |
| 30 |
| 199 |
| 303 | |||
|
| (2,953) |
| (3,090) |
| (8,629) |
| (9,135) | |||
|
|
|
|
|
|
|
|
| |||
Income before income taxes |
| 9,814 |
| 2,373 |
| 20,72 6 |
| 13,944 | |||
Income taxes |
| (4,050) |
| (485) |
| (7,627) |
| (4,325) | |||
|
|
|
|
|
|
|
|
| |||
Net income | $ | 5,764 | $ | 1,888 | $ | 13,099 | $ | 9,619 | |||
The accompanying notes to condensed financial statements are an integral part of these condensed financial statements.
3
BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
(unaudited)
| September 30, | December 31, | ||
| 2006 | 2005 | ||
| (in thousands) | |||
ASSETS |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents | $ | 1,632 | $ | 685 |
Receivables (net of allowance for doubtful accounts |
|
|
|
|
of $261 and $830, respectively) |
| 20,057 |
| 20,293 |
Receivables – affiliates |
| 1,059 |
| 1,964 |
Money pool note receivable – affiliates |
| 5,894 |
| — |
Materials, supplies and fuel |
| 16,874 |
| 14,236 |
Deferred income taxes |
| 78 |
| 835 |
Other current assets |
| 1,886 |
| 820 |
|
| 47,480 |
| 38,833 |
|
|
|
|
|
Investments |
| 3,509 |
| 3,340 |
|
|
|
|
|
Property, plant and equipment |
| 671,802 |
| 653,679 |
Less accumulated depreciation |
| (263,199) |
| (250,583) |
|
| 408,603 |
| 403,096 |
Other assets: |
|
|
|
|
Regulatory assets |
| 6,999 |
| 6,941 |
Other |
| 9,215 |
| 11,448 |
|
| 16,214 |
| 18,389 |
| $ | 475,806 | $ | 463,658 |
LIABILITIES AND STOCKHOLDER’S EQUITY |
|
|
|
|
Current liabilities: |
|
|
|
|
Current maturities of long-term debt | $ | 2,000 | $ | 1,996 |
Accounts payable |
| 7,574 |
| 10,290 |
Accounts payable – affiliates |
| 1,286 |
| 1,624 |
Money pool note payable – affiliates |
| — |
| 1,842 |
Accrued liabilities |
| 15,797 |
| 14,866 |
|
| 26,657 |
| 30,618 |
|
|
|
|
|
Long-term debt, net of current maturities |
| 153,230 |
| 155,219 |
|
|
|
|
|
Deferred credits and other liabilities: |
|
|
|
|
Deferred income taxes |
| 70,195 |
| 67,942 |
Regulatory liabilities |
| 7,082 |
| 5,740 |
Other |
| 16,624 |
| 15,460 |
|
| 93,901 |
| 89,142 |
|
|
|
|
|
Stockholder’s equity: |
|
|
|
|
Common stock $1 par value; 50,000,000 shares authorized; |
|
|
|
|
23,416,396 shares issued |
| 23,416 |
| 23,416 |
Additional paid-in capital |
| 39,575 |
| 39,549 |
Retained earnings |
| 140,184 |
| 127,312 |
Accumulated other comprehensive loss |
| (1,157) |
| (1,598) |
|
| 202,018 |
| 188,679 |
| $ | 475,806 | $ | 463,658 |
The accompanying notes to condensed financial statements are an integral part of these condensed financial statements.
4
BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
| Nine Months Ended | ||||
| September 30, | ||||
| 2006 | 2005 | |||
| (in thousands) | ||||
|
|
|
|
| |
Operating activities: |
|
|
|
| |
Net income | $ | 13,099 | $ | 9,619 | |
Adjustments to reconcile net income to cash |
|
|
|
| |
provided by operating activities: |
|
|
|
| |
Depreciation and amortization |
| 14,672 |
| 14,602 | |
Deferred income tax |
| 2,147 |
| (1,224) | |
Net change in derivative assets and liabilities |
| (192) |
| 78 | |
Change in operating assets and liabilities - |
|
|
|
| |
Accounts receivable and other current assets |
| (1,385) |
| (1,244) | |
Accounts payable and other current liabilities |
| (2,260) |
| 2,380 | |
Other operating activities |
| 2,216 |
| 3,501 | |
|
| 28,297 |
| 27,712 | |
Investing activities: |
|
|
|
| |
Property, plant and equipment additions |
| (17,460) |
| (13,010) | |
Change in note receivable from affiliate, net |
| (5,894) |
| — | |
Other investing activities |
| (169) |
| 3,045 | |
|
| (23,523) |
| (9,965) | |
|
|
|
|
| |
Financing activities: |
|
|
|
| |
Change in note payable to parent company, net |
| (1,842) |
| (13,214) | |
Long-term debt – repayments |
| (1,985) |
| (1,982) | |
|
| (3,827) |
| (15,196) | |
|
|
|
|
| |
Increase in cash and cash equivalents |
| 947 |
| 2,551 | |
|
|
|
|
| |
Cash and cash equivalents: |
|
|
|
| |
Beginning of period |
| 685 |
| 344 | |
End of period | $ | 1,632 | $ | 2,895 | |
|
|
|
|
| |
Supplemental disclosure of cash flow information: |
|
|
|
| |
|
|
|
|
| |
Cash paid during the period for: |
|
|
|
| |
Interest | $ | 11,271 | $ | 9,973 | |
Income taxes paid | $ | 4,655 | $ | 2,122 | |
The accompanying notes to condensed financial statements are an integral part of these condensed financial statements.
5
BLACK HILLS POWER, INC.
Notes to Condensed Financial Statements
(unaudited)
(Reference is made to Notes to Financial Statements
included in the Company’s 2005 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 of America 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 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the September 30, 2006, December 31, 2005 and September 30, 2005, financial information and are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2006, are not necessarily indicative of the results to be expected for the full year.
(2) | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
SFAS No. 157
During September 2006 the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157) and applies under other accounting pronouncements that require or permit fair value measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is currently evaluating the impact SFAS 157 will have on the Company’s financial statements.
6
SFAS No. 158
During September 2006 the FASB issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). This Statement requires the recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position, recognition of changes in the funded status in comprehensive income, measurement of the funded status of a plan as of the date of the year-end statement of financial position, and provides for related disclosures. SFAS 158 is effective for the recognition of the funded status as an asset or liability in the statement of financial position, recognition of changes in the funded status in comprehensive income, and the related disclosures in financial statements issued for fiscal years ending after December 15, 2006. Effective for fiscal years ending after December 15, 2008, SFAS 158 will require the measurement of the funded status of the plan to coincide with the date of the year end statement of financial position. Management is currently evaluating the impact SFAS 158 will have on the Company’s financial statements.
FIN 48
During June 2006 the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes” (FAS 109) and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006 with the impact of adoption to be reported as a cumulative effect of an accounting change. Management is currently evaluating the impact FIN 48 will have on the Company’s financial statements.
SAB No. 108 – Effects of Prior Year Misstatements on Current Year Financial Statements
During September 2006 the staff of the SEC released SAB No. 108 on Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB No. 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction can either be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment made to the opening balance of retained earnings for that year, or by restating prior periods. Appropriate disclosure of the nature and amount of each individual error being corrected in the cumulative adjustment, as well as a disclosure of when and how each error being corrected arose and the fact that the errors had previously been considered immaterial. SAB No. 108 is effective January 1, 2007. Management is currently evaluating the impact this bulletin might have on the Company’s financial statements.
7
(3) | COMPREHENSIVE INCOME |
The following table presents the components of the Company’s comprehensive income (in thousands):
| Three Months Ended | Nine Months Ended | ||||||
| September 30, | September 30, | ||||||
| 2006 | 2005 | 2006 | 2005 | ||||
|
|
|
|
|
|
|
|
|
Net income | $ | 5,764 | $ | 1,888 | $ | 13,099 | $ | 9,619 |
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
Fair value adjustment on derivatives |
|
|
|
|
|
|
|
|
designated as cash flow hedges |
| 220 |
| (435) |
| 466 |
| (494) |
Reclassification adjustments included |
|
|
|
|
|
|
|
|
in net income |
| 10 |
| 11 |
| (25) |
| 33 |
Comprehensive income | $ | 5,994 | $ | 1,464 | $ | 13,540 | $ | 9,158 |
(4) | INCOME TAXES |
The effective tax rate differs from the federal statutory rate during the periods presented, as follows:
| Three Months Ended | Nine Months Ended | ||
| September 30, | September 30, | ||
| 2006 | 2005 | 2006 | 2005 |
|
|
|
|
|
| 35.0% | 35.0% | 35.0% | 35.0% |
State income tax | — | 0.1 | — | 0.1 |
Amortization of excess deferred and |
|
|
|
|
investment tax credits | (1.0) | (4.3) | (1.4) | (2.2) |
IRS exam tax adjustment* | 9.6 | — | 4.6 | — |
Tax return true-up | (1.9) | (7.0) | (0.9) | (1.2) |
Other | (0.4) | (3.4) | (0.5) | (0.7) |
| 41.3% | 20.4% | 36.8% | 31.0% |
________________________
* | As a result of the settlement of an Internal Revenue Service (IRS) exam of the tax years |
2001-2003 with respect to certain tax positions taken by the Company, an increase to income tax expense of approximately $0.9 million was recorded in the third quarter of 2006.
8
(5) | RELATED-PARTY TRANSACTIONS |
Money Pool Notes Receivable and Notes Payable |
In August 2005, the Company entered into a Utility Money Pool Agreement with Black Hills Corporation (the Parent); and Cheyenne Light, Fuel and Power, (Cheyenne Light) an electric and gas utility subsidiary of the Parent. Under the agreement, the Company may borrow from the Parent. The Agreement restricts the Company from loaning funds to the Parent or to any of the Parent’s non-utility subsidiaries; the Agreement does not restrict the Company from making dividends to the Parent. Borrowings under the agreement bear interest at the daily cost of external funds as defined under the Agreement, or if there are no external funds outstanding on that date, then the rate will be the daily one month LIBOR rate plus 100 basis points.
The Company through the Utility Money Pool had a net note receivable balance from Cheyenne Light of $5.9 million on September 30, 2006 and a net note payable balance to the Parent of $1.8 million on December 31, 2005, respectively. Advances under this note bear interest at 0.70 percent above the daily LIBOR rate (6.02 percent at September 30, 2006).
Other Balances and Transactions
The Company purchases coal from Wyodak Resources Development Corp., an indirect subsidiary of the Parent. The amount purchased during the three months ended September 30, 2006 and 2005 was $2.6 million and $2.3 million, respectively; and $7.4 million and $7.1 million for each of the nine month periods ended September 30, 2006 and 2005, respectively.
In addition, the Company also pays the Parent for allocated corporate support service cost incurred on its behalf. Corporate costs allocated from the Parent were $2.0 million and $3.2 million for the three months ended September 30, 2006 and 2005, respectively; and $7.3 million and $8.0 million for the nine months ended September 30, 2006 and 2005, respectively.
For the nine months ended September 30, 2006 the Company recorded revenues of $0.6 million, relating to payments received pursuant to a natural gas swap entered into with Enserco Energy, an indirect subsidiary of the Parent.
The Company also received revenues of approximately $0.7 million and $0.9 million for the three months ended September 30, 2006 and 2005, respectively; and $1.5 million and $1.4 million for the nine months ended September 30, 2006 and 2005, respectively, from Black Hills Wyoming, Inc., an indirect subsidiary of Black Hills Corporation, for the transmission of electricity.
Receivables and Payables
The Company has accounts receivable balances related to transactions with other Black Hills Corporation subsidiaries. The balances were $1.1 million and $2.0 million as of September 30, 2006 and December 31, 2005, respectively. The Company also has accounts payable balances related to transactions with other Black Hills Corporation subsidiaries. The balances were $1.3 million and $1.6 million as of September 30, 2006 and December 31, 2005, respectively.
9
(6) | RISK MANAGEMENT |
The Company holds natural gas in storage for use as fuel for generating electricity with its gas-fired combustion turbines. To minimize associated price risk and seasonal storage level requirements, the Company utilizes various derivative instruments in managing these risks. On September 30, 2006 and December 31, 2005, the Company had the following derivatives and related balances (in thousands):
|
|
|
|
|
|
| Pre-tax |
| ||||||
|
|
|
| Non- |
| Non- | Accumulated |
| ||||||
|
| Maximum | Current | current | Current | current | Other | Unrealized | ||||||
|
| Terms in | Derivative | Derivative | Derivative | Derivative | Comprehensive | Gain | ||||||
| Notional* | Years | Assets | Assets | Liabilities | Liabilities | Income/(Loss) | (Loss) | ||||||
Sept. 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps | 455,000 | 0.5 | $ | 1,382 | $ | — | $ | — | $ | — | $ | 411 | $ | 971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps | 275,000 | 0.25 | $ | 192 | $ | — | $ | 219 | $ | — | $ | (219) | $ | 192 |
________________________
*gas in MMbtu’s
Based on September 30, 2006 market prices, a gain of approximately $0.4 million would be realized and reported in pre-tax earnings during the next twelve months related to derivatives designated as “cash flow” hedges. Estimated and actual realized gains will likely change during the next twelve months as market prices change.
In addition, certain volumes of natural gas inventory were designated as the underlying hedged item in a “fair value” hedge transaction. These volumes are stated at market value using published spot industry quotations. Market adjustments are recorded in inventory on the Balance Sheets and the related unrealized gain/loss on the Statements of Income. As of September 30, 2006 and December 31, 2005, the market adjustments recorded in inventory were $(1.0) million and $(0.2) million, respectively.
10
(7) | EMPLOYEE BENEFIT PLANS |
Defined Benefit Pension Plan
The Company has a noncontributory defined benefit pension plan (Plan) covering the employees of the Company who meet certain eligibility requirements.
The components of net periodic benefit cost for the Plan are as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||
| September 30, | September 30, | ||||||
| 2006 | 2005 | 2006 | 2005 | ||||
|
|
|
|
|
|
|
|
|
Service cost | $ | 271 | $ | 248 | $ | 813 | $ | 744 |
Interest cost |
| 680 |
| 675 |
| 2,040 |
| 2,025 |
Expected return on plan assets |
| (889) |
| (870) |
| (2,667) |
| (2,610) |
Amortization of prior service cost |
| 26 |
| 39 |
| 78 |
| 117 |
Amortization of net loss |
| 166 |
| 213 |
| 498 |
| 639 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost | $ | 254 | $ | 305 | $ | 762 | $ | 915 |
The Company does not anticipate that it will need to make a contribution to the Plan in the 2006 fiscal year.
Supplemental Nonqualified Defined Benefit Plan
The Company has various supplemental retirement plans for key executives of the Company (Supplemental Plans). The Supplemental Plans are nonqualified defined benefit plans.
The components of net periodic benefit cost for the Supplemental Plans are as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||
| September 30, | September 30, | ||||||
| 2006 | 2005 | 2006 | 2005 | ||||
|
|
|
|
|
|
|
|
|
Service cost | $ | — | $ | — | $ | — | $ | — |
Interest cost |
| 28 |
| 27 |
| 84 |
| 81 |
Amortization of net loss |
| 16 |
| 12 |
| 48 |
| 36 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost | $ | 44 | $ | 39 | $ | 132 | $ | 117 |
The Company anticipates that it will make contributions to the Supplemental Plans for the 2006 fiscal year of approximately $0.1 million. The contributions are expected to be in the form of benefit payments.
11
Non-pension Defined Benefit Postretirement Plan
Employees who are participants in the Company’s Postretirement Healthcare Plans (Healthcare Plans) and who meet certain eligibility requirements are entitled to postretirement healthcare benefits.
The components of net periodic benefit cost for the Healthcare Plan are as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||
| September 30, | September 30, | ||||||
| 2006 | 2005 | 2006 | 2005 | ||||
|
|
|
|
|
|
|
|
|
Service cost | $ | 62 | $ | 73 | $ | 186 | $ | 219 |
Interest cost |
| 100 |
| 116 |
| 300 |
| 348 |
Amortization of net transition obligation |
| 29 |
| 29 |
| 87 |
| 87 |
Amortization of prior service cost |
| (5) |
| (5) |
| (15) |
| (15) |
Amortization of net loss |
| — |
| 19 |
| — |
| 57 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost | $ | 186 | $ | 232 | $ | 558 | $ | 696 |
The Company anticipates that it will make contributions to the Healthcare Plan for the 2006 fiscal year of approximately $0.2 million. The contributions are expected to be in the form of benefit payments.
It has been determined that the Company’s post-65 retiree prescription drug plans are actuarially equivalent and qualify for the Medicare Part D subsidy. The decrease in net periodic postretirement benefit cost due to the subsidy is as follows (in thousands):
| Three Months | Nine Months | ||
| Ended | Ended | ||
| September 30, | September 30, | ||
| 2006 | 2006 | ||
|
|
|
|
|
Service cost | $ | (11) | $ | (33) |
Interest cost |
| (16) |
| (48) |
Amortization of net loss |
| (9) |
| (27) |
Total decrease to net periodic |
|
|
|
|
postretirement benefit cost | $ | (36) | $ | (108) |
12
(8) | LEGAL PROCEEDINGS |
The Company is subject to various legal proceedings, claims and litigation as described in Note 10 of the Notes to Consolidated Financial Statements in the Company’s 2005 Annual Report on Form 10-K.
Forest Fire Claims
As disclosed in previous filings with the SEC, the Company settled governmental claims related to the Grizzly Gulch Fire and the Hell Canyon Fire. On August 25, 2006, the U.S. District Court approved a full and final settlement of all governmental claims relating to both fires. The settlement agreements provided for the release and dismissal of all claims against the Company. For its part, the Company did not admit liability for the fires, but agreed to make settlement payments for the Grizzly Gulch Fire as follows: (1) Payment of $2.3 million dollars to the State of South Dakota; (2) Payment of $1 million dollars to the State’s “Special Emergency Disaster Revenue Fund” and (3) Payment of $3.6 million dollars to the United States Government. The Company agreed to a settlement payment for the Hell Canyon Fire of $1 million dollars, which was divided between the state and federal governments. The settlements did not have a material adverse effect on the Company’s financial condition or results of operations.
While the governmental case was pending, a number of private claims for damages arising out of the Grizzly Gulch Fire were filed in Lawrence County Circuit Court, South Dakota. Counsel for these litigants had agreed to a stay of the proceedings pending the resolution of governmental claims. As a result of the settlement of the governmental cases, the private claims will now proceed through discovery. No trial date or other scheduling order has been set for these matters. The Company will continue to defend these matters. While the outcome of the remaining private suits is uncertain, it is not expected to have a material impact upon the Company’s financial condition or results of operations.
PPM Energy, Inc. Demand for Arbitration
As disclosed in previous filings with the Securities and Exchange Commission, the Company received a Demand for Arbitration from PPM Energy, Inc. (PPM) on January 2, 2004, that alleged claims for breach of contract and requested a declaration of the parties’ rights and responsibilities under an Exchange Agreement executed in April of 2001. PPM asserted the Exchange Agreement obligated the Company to accept receipt and cause corresponding delivery of electric energy, and to grant access to transmission rights allegedly covered by the Agreement. PPM requested an award of damages in an amount not less than $20.0 million. The Company filed its Response to Demand, including a counterclaim that sought recovery of sums PPM had refused to pay pursuant to the Exchange Agreement. The dispute was presented to the arbitrator in August 2005 and the arbitrator delivered his decision on June 5, 2006.
The arbitrator concluded both parties failed to perform the Exchange Agreement, in certain respects. The Company has paid PPM a net settlement of $1.1 million in accordance with the decision. The Company does not believe that the decision will have a material impact on its ability to market surplus power in the future.
Except as described above, there have been no material developments in any previously reported proceedings or any new material proceedings that have developed or material proceedings that have terminated during the first nine months of 2006.
13
ITEM 2. | RESULTS OF OPERATIONS |
| Three Months Ended | Nine Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2006 | 2005 | 2006 | 2005 | |||||
| (in thousands) | ||||||||
|
|
|
|
|
|
|
|
| |
Revenue | $ | 53,190 | $ | 49,274 | $ | 144,194 | $ | 134,682 | |
Operating expenses |
| 40,423 |
| 43,811 |
| 114,839 |
| 111,603 | |
Operating income | $ | 12,767 | $ | 5,463 | $ | 29,355 | $ | 23,079 | |
|
|
|
|
|
|
|
|
| |
Net income | $ | 5,764 | $ | 1,888 | $ | 13,099 | $ | 9,619 | |
The following tables provide certain operating statistics for the Company:
| Electric Revenue | |||||||||
| (in thousands) | |||||||||
|
| |||||||||
| Three Months Ended | Nine Months Ended | ||||||||
| September 30, | September 30, | ||||||||
|
| Percentage |
|
| Percentage |
| ||||
Customer Base | 2006 | Change | 2005 | 2006 | Change | 2005 | ||||
|
|
|
|
|
|
|
|
|
|
|
Commercial | $ | 14,499 | 3% | $ | 14,127 | $ | 37,766 | 2% | $ | 37,179 |
Residential |
| 10,886 | 4 |
| 10,441 |
| 30,465 | 3 |
| 29,662 |
Industrial |
| 5,249 | 3 |
| 5,111 |
| 15,448 | 4 |
| 14,874 |
Municipal sales |
| 731 | 5 |
| 693 |
| 1,842 | 6 |
| 1,740 |
Total retail sales |
| 31,365 | 3 |
| 30,372 |
| 85,521 | 2 |
| 83,455 |
Contract wholesale |
| 6,423 | 12 |
| 5,719 |
| 18,451 | 6 |
| 17,377 |
Wholesale off-system |
| 12,607 | 7 |
| 11,766 |
| 31,416 | 8 |
| 29,050 |
Total electric sales |
| 50,395 | 5 |
| 47,857 |
| 135,388 | 4 |
| 129,882 |
Other revenue |
| 2,795 | 97 |
| 1,417 |
| 8,806 | 83 |
| 4,800 |
Total revenue | $ | 53,190 | 8% | $ | 49,274 | $ | 144,194 | 7% | $ | 134,682 |
14
| Megawatt Hours Sold | |||||
|
| |||||
| Three Months Ended | Nine Months Ended | ||||
| September 30, | September 30, | ||||
|
| Percentage |
|
| Percentage |
|
Customer Base | 2006 | Change | 2005 | 2006 | Change | 2005 |
|
|
|
|
|
|
|
Commercial | 191,460 | 2% | 188,481 | 508,099 | 2% | 498,643 |
Residential | 127,100 | 4 | 122,400 | 374,378 | 3 | 363,039 |
Industrial | 110,873 | 2 | 108,445 | 322,233 | 4 | 310,538 |
Municipal sales | 10,365 | 8 | 9,622 | 25,076 | 9 | 22,912 |
Total retail sales | 439,798 | 3 | 428,948 | 1,229,786 | 3 | 1,195,132 |
Contract wholesale | 165,024 | 13 | 145,993 | 481,969 | 5 | 457,990 |
Wholesale off-system | 271,445 | 37 | 198,031 | 719,782 | 20 | 598,105 |
Total electric sales | 876,267 | 13% | 772,972 | 2,431,537 | 8% | 2,251,227 |
| Three Months Ended | Nine Months Ended | ||
| September 30, | September 30, | ||
| 2006 | 2005 | 2006 | 2005 |
Regulated power |
|
|
|
|
plant fleet availability: |
|
|
|
|
Coal-fired plants | 97.5% | 85.8% | 91.8% | 90.2% |
Other plants | 99.8% | 99.4% | 99.6% | 99.4% |
Total availability | 98.5% | 91.7% | 95.2% | 94.2% |
| Three Months Ended | Nine Months Ended | ||||
| September 30, | September 30, | ||||
|
| Percentage |
|
| Percentage |
|
Resources | 2006 | Change | 2005 | 2006 | Change | 2005 |
|
|
|
|
|
|
|
Megawatt-hours generated: |
|
|
|
|
|
|
Coal | 445,984 | 12% | 397,513 | 1,266,938 | 1% | 1,259,822 |
Gas | 26,756 | 21 | 22,065 | 40,449 | 47 | 27,545 |
| 472,740 | 13 | 419,578 | 1,307,387 | 2 | 1,287,367 |
|
|
|
|
|
|
|
Megawatt-hours purchased | 424,209 | 12 | 378,986 | 1,200,715 | 16 | 1,032,091 |
Total resources | 896,949 | 12% | 798,564 | 2,508,102 | 8% | 2,319,458 |
15
| Three Months Ended | Nine Months Ended | ||
| September 30, | September 30, | ||
| 2006 | 2005 | 2006 | 2005 |
Heating and cooling degree days: |
|
|
|
|
Actual |
|
|
|
|
Heating degree days | 250 | 120 | 3,906 | 4,043 |
Cooling degree days | 714 | 673 | 925 | 821 |
|
|
|
|
|
Percent of normal |
|
|
|
|
Heating degree days | 110% | 53% | 86% | 89% |
Cooling degree days | 145% | 136% | 155% | 138% |
Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005. Net income increased $3.9 million primarily due to increased revenues, lower general and administrative costs and lower purchased power costs and operations and maintenance expense, partially offset by a $0.9 million negative impact to income tax expense related to the resolution of federal income tax audits.
Electric utility revenues increased 8 percent for the three month period ended September 30, 2006, compared to the same period in the prior year. Total retail megawatt-hour sales increased 3 percent compared to the three months ended September 30, 2005. Heating degree days, which is a measure of weather trends, were 108 percent higher and cooling degree days were 6 percent higher, than the same period in the prior year. Wholesale off-system sales increased 7 percent due to a 37 percent increase in megawatt-hours sold partially offset by a 22 percent decrease in average price received. Megawatt-hours available for wholesale off-system sales increased over the prior period due to the unscheduled Neil Simpson II plant outage in July and August of 2005.
Electric operating expenses decreased 8 percent for the three month period ended September 30, 2006, compared to the same period in the prior year. Fuel and purchased power costs decreased 2 percent due to a 4 percent decrease in purchased power at average prices that were 14 percent lower than the previous period, partially offset by increased fuel production costs. In addition, 2005 purchase power costs included approximately $2.8 million to cover the Neil Simpson II unscheduled plant outage in July and August of 2005. Megawatt hours generated and purchased increased 13 percent and 12 percent, respectively, for the three months ended September 30, 2006 compared to the same period in 2005. Operating expense for the three months ended September 30, 2006 was also affected by lower corporate allocations and a decrease in power marketing legal costs relative to costs incurred in the third quarter of 2005 (See Notes to Condensed Financial Statements, Note 8 Legal Proceedings, for discussion of power marketing legal settlement).
Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005. Net income increased 36 percent primarily due to increased revenues, lower general and administrative costs and partially offset by increased fuel and purchased power costs, operations and maintenance expense and a $0.9 million negative impact to income tax expense related to the resolution of federal income tax audits.
Electric utility revenues increased 7 percent for the nine month period ended September 30, 2006, compared to the same period in the prior year. Total retail megawatt-hour sales increased 3 percent compared to the nine months ended September 30, 2005. Heating degree days, which is a measure of weather trends, were 3 percent lower and cooling degree days were 13 percent higher, than the same period in the prior year. Wholesale off-system sales increased 8 percent due to a 20 percent increase in megawatt-hours sold partially offset by a 10 percent decrease in average price received.
16
Electric operating expenses increased 3 percent for the nine month period ended September 30, 2006, compared to the same period in the prior year. Fuel and purchased power costs increased 10 percent due to an 8 percent increase in megawatt-hours sold. Megawatt hours generated increased 2 percent at a higher average price and megawatt hours purchased increased 16 percent at a 7 percent decrease in average price. We utilized higher cost gas generation in 2006 to cover scheduled and unscheduled outages at the Wyodak plant. In addition, 2005 purchased power costs include approximately $2.8 million to cover the Neil Simpson II unscheduled plant outage in July and August of 2005. Operating expense for the nine months ended September 30, 2006 was also affected by increased repairs and maintenance expense incurred for the Wyodak Plant maintenance and higher corporate allocations, partially offset by a decrease in power marketing legal costs relative to costs incurred in 2005 (See Notes to Condensed Financial Statements, Note 8 Legal Proceedings, for discussion of power marketing legal settlement).
Request for Rate Increase. On June 30, 2006 our electric utility filed an application with the South Dakota Public Utilities Commission (SDPUC) for an electric rate increase to be effective January 1, 2007. The application requests a 9.5 percent rate increase for all customer classes. In addition, the application proposes annual energy cost adjustments. The proposed cost adjustments would require the Company to absorb a portion of power cost increases, depending in part on earnings on certain short-term wholesale sales of electricity. The current rate structure, in place since 1995, does not contain fuel or purchased power adjustment clauses and only provides the ability to request rate relief from energy costs in certain defined situations. We expect these increases, if approved by the SDPUC, would result in an annual revenue increase of approximately $9.5 million. South Dakota retail customers account for approximately 90 percent of the electric utility’s total retail revenues. A rate freeze has been in place for the electric utility since 1995.
17
SAFE HARBOR FOR FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes “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 risk factors described in Item 1A of our 2005 Annual Report on Form 10-K and in Item 1A. of Part II of this Quarterly Report on Form 10-Q filed with the SEC, and the following:
• Obtaining adequate cost recovery for our operations through regulatory proceedings and receiving unfavorable rulings in the periodic applications to recover costs for fuel and purchased power; |
• The amount and timing of capital deployment in new investment opportunities or for the repurchase of debt or stock; |
• Our ability to successfully maintain or improve our corporate credit rating; |
• The possibility that we may be required to take impairment charges to reduce the carrying value of some of our long-lived assets when indicators of impairment emerge; |
• Changes in business and financial reporting practices arising from the repeal of the Public Utilities Holding Company Act of 1935 and other provisions of the recently enacted Energy Policy Act of 2005. |
• Our ability to remedy any deficiencies that may be identified in the periodic review of our internal controls; |
• The timing, volatility and extent of changes in energy-related and commodity prices, interest rates, energy and commodity supply or volume, the cost of transportation of commodities, and demand for our services, all of which can affect our earnings, liquidity position and the underlying value of our assets; |
• The timing and extent of scheduled and unscheduled outages of power generation facilities; |
• Our effective use of derivative financial instruments to hedge commodity, currency exchange rate and interest rate risks; |
• The creditworthiness of counterparties to trading and other transactions, and defaults on amounts due from counterparties; |
• The amount of collateral required to be posted from time to time in our transactions; |
• Changes in or compliance with laws and regulations, particularly those relating to taxation, safety and protection of the environment; |
• Weather and other natural phenomena; |
• Industry and market changes, including the impact of consolidations and changes in competition; |
• The effect of accounting policies issued periodically by accounting standard-setting bodies; |
• The outcome of any ongoing or future litigation or similar disputes and the impact on any such outcome or related settlements; |
• The cost and effects on our business, including insurance, resulting from terrorist actions or natural disasters and responses to such actions or events; |
• Capital market conditions, which may affect our ability to raise capital on favorable terms; |
• Price risk due to marketable securities held as investments in benefit plans; |
• General economic and political conditions, including tax rates or policies and inflation rates; and |
• Other factors discussed from time to time in our other filings with the SEC. |
18
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 |
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of September 30, 2006. 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 required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods.
Internal Control Over Financial Reporting
During the period covered by this Quarterly Report on Form 10-Q, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
19
BLACK HILLS POWER, INC.
Part II – Other Information
Item 1. | Legal Proceedings |
For information regarding legal proceedings, see Note 10 of Notes to Consolidated Financial Statements in Item 8 of the Company’s 2005 Annual Report on Form 10-K and Note 8 of our Notes to Financial Statements in this Quarterly Report on Form 10-Q, which information from Note 8 is incorporated by reference into this item.
Item 1A. | Risk Factors |
There have been no material changes in our Risk Factors from those reported in Item 1A. of Part I of our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Item 6. | Exhibits |
Exhibit 31.1 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 31.2 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 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/ David R. Emery |
| David R. Emery, Chairman, President and |
| Chief Executive Officer |
|
|
|
|
| /s/ Mark T. Thies |
| Mark T. Thies, Executive Vice President and |
| Chief Financial Officer |
|
|
Dated: November 14, 2006 |
|
21
EXHIBIT INDEX
Exhibit Number | Description |
|
|
|
|
Exhibit 31.1 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 31.2 | Certification pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
|
|
Exhibit 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002. |
22