Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998.
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from _______________ to _______________.
Commission File Number 1-7978
Black Hills Corporation
Incorporated in South Dakota IRS Identification Number 46-0111677
625 Ninth Street
Rapid City, South Dakota 57709
Registrant's telephone number (605)-348-1700
Former name, former address, and former fiscal year if changed since last
report
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the last practicable date.
Class Outstanding at October 31, 1998
Common stock, $1.00 par value 21,570,990 shares
BLACK HILLS CORPORATION
I N D E X
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets- 3-4
September 30, 1998, December 31, 1997
and September 30, 1997
Consolidated Statements of Income- 5
Three, Nine and Twelve Months
Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows- 6
Three, Nine and Twelve Months
Ended September 30, 1998 and 1997
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of 11-15
Financial Position and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
BLACK HILLS CORPORATION
<TABLE>
Consolidated Balance Sheets
<CAPTION>
Unaudited Unaudited
September 30 December 31 September 30
1998 1997 1997
(in thousands)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 12,015 $ 16,774 $11,200
Securities available for sale 23,951 13,969 14,579
Receivables, net
Customers 58,830 39,639 43,696
Other 3,267 3,414 3,471
Materials, supplies, and fuel 9,936 8,642 8,219
Prepaid expenses 2,307 1,571 1,125
110,306 84,009 82,290
Property and investments:
Electric 493,727 487,424 485,787
Coal mining 53,460 52,804 52,843
Oil and gas 60,178 52,412 50,943
Other 6,755 5,666 4,988
614,120 598,306 594,561
Less accumulated depreciation
and depletion (213,990) (197,179) (193,764)
Net property and investments 400,130 401,127 400,797
Other assets:
Federal income taxes 8,068 8,061 8,268
Regulatory asset 4,042 3,776 3,626
Other 13,626 11,768 12,645
25,736 23,605 24,539
Total $536,172 $508,741 $507,626
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
BLACK HILLS CORPORATION
Consolidated Balance Sheets
<CAPTION>
Unaudited Unaudited
September 30 December 31 September 30
1998 1997 1997
(in thousands)
Liabilities and Capitalization
<S> <C> <C> <C>
Current liabilities:
Current maturities of
long-term debt $ 1,330 $ 1,331 $ 1,331
Notes payable 1,502 23 1,528
Accounts payable 50,996 32,622 36,048
Accrued liabilities-
Taxes 9,325 8,040 8,837
Interest 2,983 3,991 2,996
Other 8,035 7,800 7,103
74,171 53,807 57,843
Deferred credits:
Federal income taxes 54,765 53,010 50,792
Investment tax credits 3,639 4,014 4,139
Reclamation costs 17,192 16,664 16,793
Regulatory liability 5,785 6,152 6,277
Other 6,826 6,331 6,327
88,207 86,171 84,328
Capitalization:
Common stock equity-
Common stock 21,717 21,705 14,466
Additional paid-in
capital 40,238 39,995 47,158
Retained earnings 153,105 143,703 140,471
Treasury stock (3,296) - -
Total common stock equity 211,764 205,403 202,095
Long-term debt 162,030 163,360 163,360
373,794 368,763 365,455
Total $536,172 $508,741 $507,626
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
BLACK HILLS CORPORATION
Consolidated Statements of Income
(unaudited)
<CAPTION>
Three Months Nine Months Twelve Months
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Electric $ 34,982 $ 33,358 $ 96,810 $ 94,738 $128,569 $125,099
Coal mining 8,185 8,178 23,956 24,005 31,030 31,572
Oil and gas 3,199 3,029 9,675 9,958 13,012 13,165
Energy marketing 97,803 53,617 286,304 53,617 375,476 53,617
144,169 98,182 416,745 182,318 548,087 223,453
Operating expenses:
Fuel and purchased
power 105,857 62,557 308,905 80,840 405,512 89,254
Operations and
maintenance 8,113 8,511 24,168 23,596 32,313 31,847
Administrative and
general 3,194 2,936 9,348 7,478 13,136 9,523
Depreciation, depletion,
and amortization 6,093 5,439 18,463 16,731 24,044 22,196
Taxes, other than
income taxes 3,122 3,097 9,394 9,430 11,948 12,383
126,379 82,540 370,278 138,075 486,953 165,203
Operating income (loss):
Electric 14,436 12,141 37,493 32,427 49,678 42,460
Coal mining 3,433 3,198 9,737 9,731 12,224 12,362
Oil and gas 267 494 959 2,276 1,591 3,619
Energy marketing (346) (191) (1,722) (191) 2,359) (191)
17,790 15,642 46,467 44,243 61,134 58,250
Other income and (expense):
Interest expense (3,656) (3,559) (10,860) (10,516) (14,470) (14,032)
Investment income 771 585 2,077 1,412 2,799 1,805
Allowance for funds used
during construction 54 44 148 152 184 141
Other, net (513) (197) (96) (409) (112) 553
(3,344) (3,127) (8,731) (9,361) (11,599) (11,533)
Income before income
taxes 14,446 12,515 37,736 34,882 49,535 46,717
Income taxes (4,830) (3,871) (12,079) (10,898) (15,508) (14,600)
Net income available
for common stock $ 9,616 $ 8,644 $25,657 $23,984 $34,027 $32,117
Weighted average common shares
outstanding (Basic): 21,577 21,696 21,639 21,689 21,655 21,685
(Diluted): 21,633 21,707 21,676 21,698 21,684 21,690
Earnings per share
(Basic): $0.45 $0.40 $1.19 $1.11 $1.57 $1.48
(Diluted): $0.44 $0.40 $1.18 $1.11 $1.57 $1.48
Dividends paid per share
of common stock $0.250 $0.237 $0.750 $0.710 $0.987 $0.940
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
BLACK HILLS CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Three Months Nine Months Twelve Months
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income $ 9,616 $ 8,644 $25,657 $23,984 $34,027 $32,117
Principal non-cash items-
Depreciation, depletion,
and amortization 6,093 5,439 18,463 16,731 24,044 22,196
Deferred income taxes and
investment tax credits 295 37 767 865 2,165 1,775
Allowance for other funds
used during construction (33) (21) (90) (80) (108) (41)
(Increase) decrease in
receivables, inventories,
and other current
assets (8,363) (33,701) (21,074) (30,312) (17,829) (26,077)
Increase (decrease)
in other current
liabilities 3,332 31,089 18,886 28,546 16,355 31,943
Other, net (1,218) (668) (2,135) (1,267) (323) (833)
9,722 10,819 40,474 38,467 58,331 61,080
Investing activities:
Property additions, excluding
allowance for other
funds used during
construction (5,902) (6,325) (16,104) (15,463) (22,431) (25,362)
Available for sale
securities sold 586 11,764 11,810 17,743 12,317 44,623
Available for sale
securities purchased (1,108) (8,132) (21,792) (20,864) (21,689) (48,517)
Energy marketing assets - (6,810) - (6,810) - (6,810)
(6,424) (9,503) (26,086) (25,394) (31,803) (36,066)
Financing activities:
Dividends paid (5,395) (5,140) (16,255) (15,397) (21,392) (20,392)
Treasury stock, net (4) - (3,296) - (3,296) -
Common stock issued 60 98 255 333 331 415
Net short-term
borrowings 1,490 1,505 1,479 1,385 (26) 180
Long-term debt retired (514) (783) (1,330) (1,534) (1,330) (1,546)
(4,363) (4,320) (19,147) (15,213) (25,713) (21,343)
Increase (decrease) in
cash and cash
equivalents (1,065) (3,004) (4,759) (2,140) 815 3,671
Cash and cash equivalents:
Beginning of period 13,080 14,204 16,774 13,340 11,200 7,529
End of period $12,015 $11,200 $12,015 $11,200 $12,015 $11,200
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 4,593 $ 4,566 $ 8,183 $11,555 $14,393 $14,047
Income taxes $ 3,450 $ 2,140 $ 9,250 $ 8,640 $12,450 $11,840
Assumption of Clovis Point
reclamation liability $ - $ - $ - $ - $ - $ 7,957
</TABLE>
See accompanying notes to consolidated financial statements.
BLACK HILLS CORPORATION
Notes to Consolidated Financial Statements
(Reference is made to Notes to Consolidated Financial Statements
included in the Companys Annual Report and Form 10-K)
(1) Managements Statement
The financial statements included herein have been prepared
by Black Hills Corporation (the Company) without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles 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 Companys 1997 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, 1998, December 31, 1997 and
September 30, 1997, financial information and are of a normal
recurring nature. The results of operations for the three, nine
and twelve months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the full fiscal
year.
(2) Capital Stock
In January, 1998, the Board of Directors declared a 3-for-2
Common Stock Split effected in the form of a stock dividend. The
stock dividend was distributed March 10, 1998 to shareholders of
record on February 13, 1998. The common stock share and per
share information in the accompanying consolidated financial
statements and notes have been restated to reflect the stock
distribution.
In April 1998, the Board of Directors authorized the
acquisition of up to 300,000 shares of the Companys Common Stock
on the open market to fund possible future acquisitions and for
other corporate purposes. At September 30, 1998, the Company has
acquired 146,400 shares for such purposes and is reflected as
treasury stock on the accompanying consolidated balance sheets.
(3) Net Income Per Share
The Company adopted the Financial Accounting Standards Board
(FASB) Statement No. 128 Earnings Per Share in 1997 which
requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing net
income available to common shareholders by the weighted average
number of common shares outstanding during each year. Diluted
earnings per share is computed under the treasury stock method
and is calculated to compute the dilutive effect of outstanding
stock options. A reconciliation of these amounts is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Net Income $9,616 $8,644 $25,657 $23,984 $34,027 $32,117
Weighted average common
shares outstanding:
Basic 21,577 21,696 21,639 21,689 21,655 21,685
Dilutive
effect of
option plan 56 11 37 9 29 5
Diluted 21,633 21,707 21,676 21,698 21,684 21,690
Earnings per share
(Basic): $0.45 $0.40 $1.19 $1.11 $1.57 $1.48
(Diluted): $0.44 $0.40 $1.18 $1.11 $1.57 $1.48
<TABLE/>
(4) Comprehensive Income
The Company adopted FASB Statement No. 130, Reporting
Comprehensive Income, effective January 1, 1998. Statement No.
130 establishes standards for reporting and display of
comprehensive earnings and its components in financial
statements; however, the adoption of this Statement had no impact
on the Companys net earnings or shareholders equity. Statement
No. 130 requires minimum pension liability adjustments,
unrealized gains or losses on the Companys available-for-sale
securities and foreign currency translation adjustments, which
prior to adoption were reported separately in shareholders
equity, to be included in other comprehensive earnings. There
were no material differences between net earnings and
comprehensive earnings for any periods presented in the
accompanying financial statements.
(5) Accounting Pronouncements
FASB Statement No. 131 Disclosures about Segments of an
Enterprise and Related Information requires that a publicly-held
company report financial and descriptive information about its
operating segments in financial statements issued to shareholders
for interim and annual periods. The Statement also requires
additional disclosures with respect to products and services,
geographic areas of operation, and major customers. The Company
has historically presented segment information in the
consolidated financial statements and related notes and as such
does not expect adoption of the disclosures requirements of this
pronouncement will have a material impact on its financial
statements. The Company will adopt this Statement in the fourth
quarter of 1998.
FASB Statement No. 132 Employers Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88, and 106 requires revised disclosures
about pension and other postretirement benefit plans. The
Company does not expect that adoption of the disclosure
requirements of this pronouncement will have a material impact on
its financial statements. The Company will adopt this Statement
in the fourth quarter of 1998.
In March, 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The
Statement is effective for fiscal years beginning after December
15, 1998. Earlier application is encouraged in fiscal years for
which annual financial statements have not been issued. The
statement defines which costs of computer software developed or
obtained for internal use are capitalized and which costs are
expensed. The Company has not yet determined when they will
adopt the new Statement. The effect of adoption is not expected
to materially affect the Companys financial position or results
of operations.
In May 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities. The Statement is effective for fiscal
years beginning after December 15, 1998. The Statement defines
one-time start up costs and requires such costs to be expensed as
incurred. The Company has not yet determined when they will
adopt the new statement. The effect of adoption is not expected
to materially affect the Companys financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities.
The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded
in the balance sheet as either an asset or liability measured at
its fair value. The Statement requires that changes in the
derivatives fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivatives gains and
losses to offset related results on the hedged item in the income
statement and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting. Statement 133 is effective for fiscal
years beginning after June 15, 1999.The Company has not yet
quantified the impacts of adopting Statement 133 on its financial
statements and has not determined the timing of adoption of
Statement 133. However, the Statement could increase volatility
in earnings and other comprehensive income.
(6) New Business Venture
On September 28, 1998 the Company through Black Hills
FiberCom announced it will build a telecommunications fiber
optic network. The newly formed company will invest
approximately $40,000,000 over the next three years in state-of-
the-art technology.
Managements Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity, Capital Resources, and Commitments
In the past the Company has depended upon internally
generated funds, issuance of short and long-term debt and sales
of common stock to finance its activities. It is expected that
future activities will also be financed by the most appropriate
mix of these various sources of funds.
The Company currently has bank lines of credit totaling $12
million which provide for interim borrowings and the opportunity
for timing of permanent financing. The Company had a $250,000
balance at September 30, 1998. There are no compensating balance
requirements associated with these lines of credit.
In addition to the above lines of credit, Black Hills Energy
Resources, Inc. has an uncommitted demand credit facility for up
to $65 million. This facility allows $50 million for a
transactional line of credit and $15 million overdraft line of
credit. This facility is used to support the issuance of letters
of credit. At September 30, 1998, Black Hills Energy Resources
has approximately $33 million of outstanding letters of credit.
In addition to the above lines of credit, Wyodak Resources
Development Corp. has guaranteed a $15 million line of credit for
Enserco Energy, Inc. to use to guarantee letters of credit. At
September 30, 1998, there were no balances outstanding on this
line of credit.
In September, 1998, the Company announced that it will invest
approximately $40 million over the next three years in state-of-
the-art technology that will offer local and long distance
telephone service, expanded cable television service, Internet
access and high-speed data and video services. Such investment
is expected to come from the appropriate mix of internally
generated funds and short-term debt.
Black Hills FiberCom will experience operating losses over
the next two to four years as it develops and constructs its
network infrastructure, builds its customer base and internal
staffing, and develops its systems. Management believes Black
Hills FiberComs operating losses will be offset by growth in the
Companys other business segments and overall the Company should
have stable or slight growth during this start up phase.
Results of Operations
Black Hills Corporation is an energy company consisting of
four principal businesses: electric, coal mining, oil and gas
production, and crude oil and natural gas marketing.
Consolidated net income was $9,616,000, $25,657,000 and
$34,027,000 for the three months, nine months and twelve months
ended September 30, 1998, respectively, representing an increase
of 11 percent, 7 percent and 6 percent, respectively. The
increase in earnings was primarily due to increased electric
sales, lower purchased power expense and strong cost management,
partially offset by lower oil and gas commodity prices, mild
weather and weak market conditions in the areas served by the
energy marketing companies. Consolidated revenues and fuel and
purchased power expense increased for the three months, nine
months and twelve months ended September 30, 1998 primarily due
to oil and natural gas purchases and sales from the energy
marketing operations.
Consolidated revenue and income from continuing operations
provided by the four businesses as a percentage of the total were
as follows:
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Revenues
Electric 24% 34% 23% 52% 23% 56%
Coal mining 6 8 6 13 6 14
Oil and gas 2 3 2 6 2 6
Energy marketing 68 55 69 29 69 24
100% 100% 100% 100% 100% 100%
Net Income/(Loss)
Electric 74% 71% 72% 66% 73% 64%
Coal mining 28 27 29 29 28 30
Oil and gas 2 4 3 7 4 8
Energy marketing
and Other (4) (2) (4) (2) (5) (2)
100% 100% 100% 100% 100% 100%
<TABLE/>
</TABLE>
<TABLE>
Capital expenditures and depreciation, depletion, and
amortization by business segment were as follows (in thousands):
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Capital Expenditures
(includes AFDC)
Electric $2,267 $3,168 $7,569 $7,879 $12,272 $12,036
Coal mining 167 100 686 1,545 647 2,298
Oil and gas 3,288 2,887 7,766 5,993 9,235 10,743
Energy
marketing 22 6,810 112 6,810 258 6,810
Other 191 191 61 126 127 326
$5,935 $13,156 $16,194 $22,353 $22,539 $32,213
Depreciation, Depletion,
and Amortization
Electric $3,797 $3,321 $11,392 $10,963 $15,037 $15,171
Coal mining 859 878 2,564 2,427 3,325 3,434
Oil and gas 1,292 1,142 4,075 3,243 5,107 3,493
Energy
marketing 145 98 432 98 575 98
$6,093 $5,439 $18,463 $16,731 $24,044 $22,196
<TABLE/>
Electric Operations
Electric revenues increased 5 percent, 2 percent and 3
percent for the three, nine and twelve months ended September 30,
1998. Firm kilowatthour sales increased 3 percent for the three
month period primarily due to increased residential, commercial
and wholesale sales, were stable for the nine month period and
increased 2 percent for the twelve month period due to serving
the Montana-Dakota Utilities, Sheridan, Wyoming load beginning
January 1, 1997. Industrial sales for the three month, nine
month and twelve month periods declined primarily due to
Homestake Mining Company. Our low-cost generation allowed the
Company to recapture a portion of the margin loss from Homestake
in the spot energy market. Such spot energy sales result from
additional physical energy available to sell from existing
sources.
Electric expenses decreased 3 percent, 5 percent and 5
percent for the three months, nine months, and twelve months
ended September 30, 1998 due to continued cost containment and
lower purchased power and fuel costs. For the twelve months
ended September 30, 1998, such cost containment and lower
purchased power and fuel costs partially offset additional cost
associated with serving the Sheridan, Wyoming load.
Mining Operations
Mining earnings increased $370,000, $579,000 and $118,000 for
the three month, nine month and twelve month periods ended
September 30, 1998, primarily due to increased non-operating
income and continued cost management. Tons of coal sold were
relatively flat for the three months, nine months and twelve
months ended September 30, 1998 as compared to the prior periods.
Oil and Gas Production Operations
Oil and gas earnings decreased $171,000, $876,000 and
$1,386,000 for the three months, nine months and twelve months
ended September 30, 1998 primarily as a result of decreased
commodity prices partially offset by production increases.
Average oil prices decreased 34 percent, 33 percent and 30
percent and average gas prices decreased 9 percent, 15 percent
and 6 percent for the three months, nine months and twelve months
ended September 30, 1998, respectively. Production increased 30
percent, 17 percent and 14 percent for the three month, nine
month and twelve month periods, respectively.
Energy Marketing Operations
Energy marketing revenues and related fuel and purchased
power expenses represents the crude oil and natural gas purchases
and sales of Black Hills Energy Resources, Inc. which was
acquired on July 25, 1997. Crude oil and natural gas wholesale
marketing operations are high-volume, low margin operations.
Mild weather in the East Coast and Midwest markets served and
high storage levels through the winter depressed margins for the
nine month and twelve month periods. Black Hills Energy
Resources marketed 343,000 mmbtus and 22,700 barrels of oil per
day for the three month period ended September 30, 1998, 331,000
mmbtus and 18,100 barrels of oil per day for the nine month
period and 302,000 mmbtus and 16,800 barrels of oil per day for
the twelve month period. At September 30, 1998, Energy
Marketing activities have occurred in crude oil and natural gas
sales and have not included electricity.
Accounting Pronouncements
FASB Statement No. 131 Disclosures about Segments of an
Enterprise and Related Information requires that a publicly-held
company report financial and descriptive information about its
operating segments in financial statements issued to shareholders
for interim and annual periods. The Statement also requires
additional disclosures with respect to products and services,
geographic areas of operation, and major customers. The Company
has historically presented segment information in the
consolidated financial statements and related notes and as such
does not expect adoption of the disclosures requirements of this
pronouncement will have a material impact on its financial
statements. The Company will adopt this Statement in the fourth
quarter of 1998.
FASB Statement No. 132 Employers Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB
Statements No. 87, 88, and 106 requires revised disclosures
about pension and other postretirement benefit plans. The
Company does not expect that adoption of the disclosure
requirements of this pronouncement will have a material impact on
its financial statements. The Company will adopt this Statement
in the fourth quarter of 1998.
In March, 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. The
Statement is effective for fiscal years beginning after December
15, 1998. Earlier application is encouraged in fiscal years for
which annual financial statements have not been issued. The
statement defines which costs of computer software developed or
obtained for internal use are capitalized and which costs are
expensed. The Company has not yet determined when they will
adopt the new Statement. The effect of adoption is not expected
to materially affect the Companys financial position or results
of operations.
In May 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities. The Statement is effective for fiscal
years beginning after December 15, 1998. The Statement defines
one-time start up costs and requires such costs to be expensed as
incurred. The Company has not yet determined when they will
adopt the new statement. The effect of adoption is not expected
to materially affect the Companys financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities. The Statement
establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the
derivatives fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivatives gains and
losses to offset related results on the hedged item in the income
statement and requires that a company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting. Statement 133 is effective for fiscal
years beginning after June 15, 1999. The Company has not yet
quantified the impacts of adopting Statement 133 on its financial
statements and has not determined the timing of adoption of
Statement 133. However, the Statement could increase volatility
in earnings and other comprehensive income.
Year 2000 Issues
What is referred to as the Year 2000 problem (Year 2000
problem) is the result of computer programs being written using
two digits rather than four to define the applicable year. Any
of the Companys computer systems and products that have date-
sensitive software may recognize a date using 00 as the Year
1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business
activities. Management has formed a Year 2000 Committee to
establish and ensure the Companys compliance with what is
commonly known as the Year 2000 problem. In addition,
consultants may be engaged to assist with a comprehensive review
of the Companys state of readiness and to assist with any
necessary remedial plans for the Year 2000 date change. The
Companys review encompassed supporting information technology
systems, product generation and distribution systems, and
business supply chain systems and infrastructure. Management
presently believes that with modifications to the CompanYs
existing software and conversions to new software, the Year 2000
problem can be mitigated. However, if such modifications and
conversions are not made, or are not completed on a timely basis,
the Year 2000 problem could have a material adverse effect on the
Companys business, financial condition and results of
operations. Management further believes that the cost of either
repairing or replacing certain business systems to ensure
business continuance beyond Year 2000 should not have a
significant impact on the results of operations. The cost of the
Year 2000 project is currently estimated at less than $1 million
and is being funded through operating cash flows. These costs
are primarily attributable to the purchase of new software and
equipment which will be expensed or capitalized on a basis
consistent with the Companys accounting policies for capital
assets. Other than seeking representations and assurances, the
Company has not made an assessment as to whether any of its
customers, suppliers or service providers will be affected by the
date change. The Companys business, financial condition and
results of operations may be adversely impacted should the
efforts of customers, suppliers or service providers for the
Company to address the Year 2000 issue prove to be inadequate.
The Companys risk management program includes emergency backup
and recovery procedures to be followed in the event of failure of
a business-critical system. These procedures will be expanded to
include specific procedures for potential Year 2000 issues.
Contingency plans to protect the business from Year 2000-related
interruptions are being developed. These plans will be complete
by June 1999 and will include, for example, development of backup
procedures, identification of alternate suppliers and possible
increases in safety inventory levels.
Forward Looking Statements
The above information includes forward-looking statements
that are subject to certain risks, uncertainties and assumptions.
Although management believes that its expectations are based on
reasonable assumptions, it can give no assurances that its goals
will be achieved. Actual results may differ materially from
managements expectations as a result of a variety of factors
including, but not necessarily limited to, technological
changes, regulation, market conditions and marketing success,
general economic conditions, and a changing competitive
environment.
BLACK HILLS CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
There are no legal proceedings to be reported on for the
quarter ending September 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
On September 28, 1998, the Registrant filed a Form 8-
K announcing that it will build a telecommunications
fiber optic network to serve the growing needs of
Rapid City and the Northern Black Hills of South
Dakota.
BLACK HILLS CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BLACK HILLS CORPORATION
/s/ Roxann R. Basham
Roxann R. Basham, Vice President - Finance
(Principal Financial Officer)
/s/ Mark T. Thies
Mark T. Thies, Controller
(Principal Accounting Officer)
Dated: November 12, 1998
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