United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000.
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE 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)-721-1700
Former name, former address, and former fiscal year if changed since last report
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the last practicable date.
Class Outstanding at October 31, 2000
Common stock, $1.00 par value 22,938,955 shares
<PAGE>
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, 2000, December 31, 1999
and September 30, 1999
Consolidated Statements of Income 5
Three, Nine and Twelve Months
Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows- 6
Three, Nine and Twelve Months
Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements- 7-17
September 30, 2000 and 1999
Item 2. Management's Discussion and Analysis of 18-23
Financial Position and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24-25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes In Securities and Use of Proceeds 27
Item 6. Exhibits and Reports of Form 8-K 27
Signatures 28
<PAGE>
<TABLE>
<CAPTION>
BLACK HILLS CORPORATION
Consolidated Balance Sheets
(unaudited and in thousands)
September 30 December 31 September 30
2000 1999 1999
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 12,102 $ 16,482 $ 13,928
Securities available for sale 3,493 7,586 11,417
Receivables, net
Customers 174,167 84,331 124,724
Other 11,585 55,694 4,736
Materials, supplies, and fuel 13,816 14,278 16,056
Prepaid expenses 6,570 2,828 3,563
221,733 181,199 174,424
Property and investments:
Electric utility 547,905 526,945 512,393
Independent energy 343,857 132,331 128,307
Communications 100,073 50,621 33,543
Other 413 591 297
992,248 710,488 674,540
Less accumulated depreciation
and depletion (265,226) (246,299) (245,607)
Net property and investments 727,022 464,189 428,933
Other assets:
Federal income taxes 18,095 11,472 11,736
Regulatory asset 3,944 3,944 3,978
Other, principally goodwill 32,827 14,002 14,846
54,866 29,418 30,560
Total $1,003,621 $674,806 $633,917
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BLACK HILLS CORPORATION
Consolidated Balance Sheets
(unaudited and in thousands)
<TABLE>
<CAPTION>
September 30 December 31 September 30
2000 1999 1999
Liabilities and Capitalization
<S> <C> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 7,052 $ 1,330 $ 1,330
Notes payable 170,775 97,579 25,291
Accounts payable 161,712 80,355 121,125
Accrued liabilities-
Taxes 10,438 8,357 9,597
Interest 3,078 4,119 2,989
Other 16,220 13,612 9,079
369,275 205,352 169,411
Deferred credits:
Federal income taxes 75,056 59,140 57,257
Investment tax credits 2,653 3,022 3,145
Reclamation costs 17,792 17,315 17,513
Regulatory liability 4,796 5,179 5,302
Other 12,583 7,492 7,334
112,880 92,148 90,551
Minority interest 35,463 - -
Capitalization:
Common stock equity-
Preferred stock 4,000 - -
Common stock 23,294 21,739 21,736
Additional paid-in
capital 73,276 40,658 40,588
Retained earnings 177,610 162,239 157,343
Treasury stock (7,460) (8,030) (6,412)
Accumulated other comprehensive income 569 - -
Total common stock equity 271,289 216,606 213,255
Long-term debt 214,714 160,700 160,700
486,003 377,306 373,955
Total $1,003,621 $674,806 $633,917
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BLACK HILLS CORPORATION
Consolidated Statements of Income
(unaudited, and in thousands, except per share amounts)
Three Months Nine Months Twelve Months
September 30 September 30 September 30
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
Operating revenues:
Independent energy $402,061 $183,354 $915,964 $473,945 $1,100,394 $635,444
Electric utility 48,607 36,425 117,805 100,231 150,796 132,657
Communications 2,563 - 4,422 - 4,700 -
453,231 219,779 1,038,191 574,176 1,255,890 768,101
Operating expenses:
Fuel and purchased power 373,613 178,575 878,660 460,470 1,055,491 615,806
Operations and maintenance 13,859 8,594 31,483 24,567 40,221 33,173
Administrative and general 10,468 5,017 20,231 14,145 27,535 19,122
Depreciation, depletion, and amortization 8,978 7,632 22,465 19,454 28,092 25,015
Oil and gas ceilings test write-down - - - - - 13,546
Taxes, other than income taxes 3,794 3,286 10,678 9,116 14,442 12,177
410,712 203,104 963,517 527,752 1,165,781 718,839
Operating income 42,519 16,675 74,674 46,424 90,109 49,262
Other income and (expense):
Interest expense (9,608) (3,605) (19,886) (11,059) (23,917) (14,516)
Investment income 1,681 913 5,685 2,254 6,851 2,894
Other, net 578 (125) (524) (365) 573 (723)
(7,349) (2,817) (14,725) (9,170) (16,493) (12,345)
Minority interest (10,276) 464 (10,211) 979 (9,255) 979
Income before income taxes 24,894 14,322 49,738 38,233 64,361 37,896
Income taxes (8,572) (4,597) (16,294) (11,714) (20,364) (11,227)
Net income 16,322 9,725 33,444 26,519 43,997 26,669
Preferred stock dividends (37) - (37) - (37) -
Net income available for common stock $ 16,285 $ 9,725 $ 33,407 $ 26,519 $ 43,960 $ 26,669
Weighted average common shares
outstanding (Basic): 22,835 21,442 21,872 21,465 21,809 21,492
(Diluted): 23,067 21,494 21,977 21,506 21,926 21,523
Earnings per share (Basic): $0.71 $0.45 $1.53 $1.24 $2.02 $1.24
(Diluted): $0.71 $0.45 $1.52 $1.23 $2.01 $1.24
Dividends paid per share of
common stock $0.27 $0.26 $0.81 $0.78 $1.07 $1.03
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BLACK HILLS CORPORATION
Consolidated Statements of Cash Flows
(unaudited, and in thousands)
Three Months Nine Months Twelve Months
September 30 September 30 September 30
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
Operating activities:
Net income $16,285 $ 9,725 $33,407 $26,519 $43,960 $26,669
Principal non-cash items-
Depreciation, depletion, and amortization 8,978 7,632 22,465 19,454 28,092 38,561
Deferred income taxes and
investment tax credits 564 (85) 1,309 (156) 2,908 (3,386)
Increase in receivables, inventories,
and other current assets (41,373) (38,389) (96,766) (46,038) (52,499) (65,967)
Increase in other current liabilities 28,640 32,103 79,846 46,628 43,499 61,656
Other (7,346) (4,443) (1,688) (4,387) (822) (5,750)
5,748 6,543 38,573 42,020 65,138 51,783
Investing activities:
Property and investment additions,
including allowance for other funds
used during construction (38,954) (23,063) (104,997) (53,055) (145,606) (62,142)
Available for sale securities-sold 1,140 3,381 7,587 16,839 12,011 18,683
Available for sale securities-purchased - (2,098) - (5,581) (593) (6,149)
(37,814) (21,780) (97,410) (41,797) (134,188) (49,608)
Financing activities:
Dividends paid (6,290) (5,651) (18,036) (16,950) (23,693) (22,380)
Treasury stock 96 119 570 (3,331) (1,048) (3,116)
Common stock issued 3,417 101 3,680 351 3,753 369
Net borrowings (repayments) on
line of credit (26,176) 19,678 8,507 20,201 28,476 23,789
Long-term debt-borrowings 60,000 - 61,075 - 61,075 -
Long-term debt-repayments (523) (514) (1,339) (1,330) (1,339) (1,330)
30,524 13,733 54,457 (1,059) 67,224 (2,668)
Increase (decrease) in
cash and cash equivalents (1,542) (1,504) (4,380) (836) (1,826) (493)
Cash and cash equivalents:
Beginning of period 13,644 15,432 16,482 14,764 13,928 14,421
End of period $12,102 $13,928 $12,102 $ 13,928 $12,102 $13,928
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $10,905 $ 4,642 $20,927 $12,026 $23,828 $14,723
Income taxes $ 4,368 $ 2,150 $12,118 $ 9,322 $15,969 $13,183
Noncash net assets acquired through
issuance of common and
preferred stock (See Note 6) $34,493 - $34,493 - $34,493 -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
BLACK HILLS CORPORATION
Notes to Consolidated Financial Statements
September 30, 2000 and 1999 (unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company's Annual Report and Form 10-K)
(1) Management's Statement
The financial statements included herein have been prepared by Black Hills
Corporation (the Company) without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the footnotes adequately disclose the information
presented. These financial statements should be read in conjunction with the
financial statements and the notes thereto, included in the Company's 1999
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, 2000, December 31, 1999
and September 30, 1999, financial information and are of a normal recurring
nature. The results of operations for the three, nine and twelve months ended
September 30, 2000, are not necessarily indicative of the results to be expected
for the full year.
(2) Reclassifications
Certain 2000 and 1999 amounts in the financial statements have been
reclassified to conform to the 2000 presentation. These reclassifications did
not have an effect on the Company's stockholders' investment or results of
operations.
(3) New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's 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.
<PAGE>
In June 1999, the FASB issued SFAS No. 137, which deferred the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. In June
2000, the FASB issued SFAS No. 138, which amended certain guidance within SFAS
No. 133. The Company plans to adopt the provisions of SFAS No. 133 (as amended)
effective January 1, 2001. Management is currently assessing the financial
statement impact of the adoption; however, such impact is not determinable at
this time.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101,"Revenue Recognition" (SAB No. 101), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. On June 26, 2000, the Securities and Exchange Commission delayed the
adoption date of SAB No. 101. SAB No. 101 is effective for the Company no later
than October 1, 2000. SAB No. 101 is not expected to have a material effect on
the Company's financial position or results of operations.
(4) Net Income 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 and conversion of convertible preferred stock. 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
2000 1999 2000 1999 2000 1999
<S> <C> <C> <C> <C> <C> <C>
Net income available for common
stock (Basic): $16,285 $ 9,725 $33,407 $26,519 $43,960 $26,669
Plus: Preferred stock dividends 37 - 37 - 37 -
Net income available to common
stock plus assumed conversions
(Diluted) $16,322 $ 9,725 $33,444 $26,519 $43,997 $26,669
Weighted average common
shares outstanding:
Basic 22,835 21,442 21,872 21,465 21,809 21,492
Dilutive effect of option plan 126 52 69 41 90 31
Dilutive effect on conversion of
preferred shares 106 - 36 - 27 -
Diluted 23,067 21,494 21,977 21,506 21,926 21,523
Earnings per share (Basic): $0.71 $0.45 $1.53 $1.24 $2.02 $1.24
(Diluted): $0.71 $0.45 $1.52 $1.23 $2.01 $1.24
</TABLE>
<PAGE>
(5) Summary of Information Relating to Segments of the Company's Business
Black Hills Corporation's business segments include: Electric which
supplies electric utility service to western South Dakota, northeastern Wyoming
and southeastern Montana; Independent Energy consisting of: Mining which engages
in the mining and sale of coal from its mine near Gillette, Wyoming; Oil and Gas
which produces, explores and operates oil and gas interests located in the Rocky
Mountain region, Texas, California and other states; Fuel Marketing which
markets natural gas, oil, coal and related services to customers in the East
Coast, Midwest, Southwest, Rocky Mountain, West Coast and Northwest Regions
markets and Independent Power activities with plants in California, New York,
Massachusetts, Colorado and Idaho; and Communications and Others which primarily
markets communications and software development services.
Financial data for the business segments are as follows (in thousands):
<TABLE>
<CAPTION>
ASSETS Independent Energy
--------------------------------------------
Oil Fuel Independent Communications
At September 30, 2000 Electric Mining And Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
Current assets $75,651 $164,323 $3,030 $157,137 $13,132 $ 7,741 $(199,281) $ 221,733
Total assets $566,851 $245,994 $37,212 $173,265 $240,033 $114,657 $(374,391) $1,003,621
At December 31, 1999
Current assets $93,837 $57,393 $1,988 $79,709 $52,471 $ 9,732 $(113,931) $ 181,199
Total assets $528,164 $137,762 $32,724 $94,692 $52,690 $ 72,785 $(244,011) $ 674,806
At September 30, 1999
Current assets $56,666 $ 50,876 $1,468 $ 122,819 $ 60 $ 11,663 $ (69,128) $ 174,424
Total assets $473,118 $126,605 $31,503 $ 137,216 $ 106 $ 56,424 $(191,055) $ 633,917
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Independent Energy
------------------------------------------------
Quarter to date Oil Fuel Independent Communications
September 30, 2000 Electric Mining And Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
Electric revenues $48,607 $ - $ - $ - $ - $ - $ - $48,607
-
Coal revenues - 8,536 - 9,979 - - 18,515
Gas revenues - - 2,178 227,032 - - - 229,210
Oil revenues - - 1,990 124,100 - - - 126,090
Other revenues - - 1,091 - 27,155 3,467 (904) 30,809
-------------- ---------- ---------- ------------- ------------- ------------------ ------------------ ----------------
Total revenues $48,607 $8,536 $5,259 $361,111 $27,155 $ 3,467 $(904) $453,231
-------------- --------- ---------- ------------- ------------- ------------------ ------------------ ----------------
Depreciation,
depletion
& amortization $ 3,909 $ 879 $ 801 $ 163 $ 1,523 $ 1,703 $ - $ 8,978
Operating income
(loss) 18,613 3,223 2,396 3,320 17,799 (2,832) - 42,519
Interest expense 4,599 2,836 95 215 4,418 2,777 (5,332) 9,608
Income tax expense
(benefit) 5,148 1,024 708 1,481 1,817 (1,606) - 8,572
Net income (loss) 10,060 2,375 1,634 2,319 2,878 (2,981) - 16,285
Property additions 6,357 240 2,312 54 12,312* 17,679 - 38,954
</TABLE>
*Excludes the non-cash acquisition of Indeck Capital, Inc. as described in
Footnote 6.
<TABLE>
<CAPTION>
Independent Energy
-----------------------------------------
Quarter to date Oil Fuel Independent Communications
September 30, 1999 Electric Mining And Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------
Electric revenues $36,425 $ - $ - $ - $ - $ - $ - $36,425
-
Coal revenues - 8,076 - 12,331 - - - 20,407
Gas revenues - - 1,341 117,427 - - - 118,768
Oil revenues - - 1,273 42,167 - - - 43,440
Other revenues - - 739 - - 791 (791) 739
------------------------------------------------------------------------------------------------------------
Total revenues 36,425 8,076 $3,353 $171,925 $ - 791 $(791) $219,779
------------------------------------------------------------------------------------------------------------
Depreciation,
depletion
& amortization $3,768 $ 871 $ 861 $ 2,097 $ - $ 35 $ - $ 7,632
Operating income
(loss) 15,286 3,122 1,008 (1,424) (40) (1,277) - 16,675
Interest expense 3,279 315 131 197 - 809 (1,126) 3,605
Income tax expense
(benefit) 4,089 1,074 269 (517) (14) (304) - 4,597
Net income (loss) 8,190 2,520 613 (1,006) (26) (566) - 9,725
Property additions 7,887 261 1,267 152 - 13,496 - 23,063
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Independent Energy
------------------------------------------------
Year to Date Oil Fuel Independent Communications
September 30, 2000 Electric Mining And Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------- --------------------------------- ------------- ------------------ ------------------ -------------
Electric revenues $117,805 $ - $ - $ $ $ - $ - $ 117,805
- -
Coal revenues - 22,449 - 28,445 - - - 50,894
Gas revenues - - 5,350 481,297 - - - 486,647
Oil revenues - - 5,354 342,883 - - - 348,237
Other revenues - - 2,789 - 27,397 7,184 (2,762) 34,608
-------------- --------- --------- ------------ -------------- ------------------ ------------------ -------------
Total revenues $117,805 $22,449 $13,493 $852,625 $ 27,397 $ 7,184 $ (2,762) $1,038,191
-------------- --------- --------- ------------ -------------- ------------------ ------------------ -------------
Depreciation,
depletion
& amortization $11,728 $ 2,559 $ 2,272 $ 475 $ 1,523 $ 3,908 $ - $ 22,465
Operating income
(loss) 45,238 8,426 5,448 5,304 17,988 (7,730) - 74,674
Interest expense 12,769 4,804 290 499 7,353 6,648 (12,477) 19,886
Income tax expense
(benefit) 12,060 2,643 1,445 2,222 1,890 (3,966) - 16,294
Net income (loss) 24,352 6,179 3,750 3,482 3,008 (7,364) - 33,407
Property addition 20,108 2,705 5,585 - 27,006* 49,593 - 104,997
</TABLE>
*Excludes the non-cash acquisition of Indeck Capital, Inc. as described in
Footnote 6.
<TABLE>
<CAPTION>
Independent Energy
-------------------------------------------------
Year to date Oil Fuel Independent Communications
September 30, 1999 Electric Mining And Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
----------------------- ---------- ------------- ------------- ------------------ ------------------ -----------
Electric revenues $100,231 $ - $ - $ $ - $ - $ - $100,231
-
Coal revenues - 22,832 - 31,422 - - - 54,254
Gas revenues - - 3,846 289,832 - - - 293,678
Oil revenues - - 3,317 120,462 - - - 123,779
Other revenues - - 2,234 - - 2,171 (2,171) 2,234
------------------------ ---------- ------------- ------------- ------------------ ------------------ -----------
Total revenues $100,231 $22,832 $ 9,397 $441,716 $ - $ 2,171 $ (2,171) $574,176
------------------------ ---------- ------------- ------------- ------------------ ------------------ -----------
Depreciation,
depletion
& amortization $11,664 $2,583 $ 2,589 $ 2,542 $ - $ 76 $ - $19,454
Operating income
(loss) 39,017 9,374 2,321 (1,601) (132) (2,555) - 46,424
Interest expense 10,001 730 414 557 9 1,123 (1,775) 11,059
Income tax expense
(benefit) 9,664 2,779 501 (651) (50) (529) - 11,714
Net income (loss) 19,987 7,444 1,416 (1,252) (92) (984) - 26,519
Property addition 12,577 3,125 5,741 245 - 31,367 - 53,055
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Independent Energy
--------------------------------------------------
12 Months Ended Oil Fuel Independent Communications
September 30, 2000 Electric Mining And Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------- ---------- ---------- ------------- -------------- ---------------- -------------- --------------
Electric revenues $150,796 $ - $ - $ - $ - $ - $ - $ 150,796
Coal revenues - 30,712 - 36,236 - - - 66,948
Gas revenues - - 6,904 557,846 - - - 564,750
Oil revenues - - 6,713 431,055 - - - 437,768
Other revenues - - 3,531 - 27,397 8,436 (3,736) 35,628
----------- -------------------------------------------------------------------------------------------------
Total revenues $150,796 $30,712 $17,148 $1,025,137 $ 27,397 $ 8,436 $ (3,736) $1,255,890
-------------------------------------------------------------------------------------------------------------
Depreciation,
depletion
& amortization $15,616 $ 3,235 $ 2,636 $ 690 1,523 $ 4,392 $ - $ 28,092
Operating income
(loss) 58,507 11,659 7,106 4,622 17,963 (9,748) - 90,109
Interest expense 16,402 5,333 444 682 7,454 8,019 (14,417) 23,917
Income tax expense
(benefit) 14,843 3,302 1,911 2,919 1,882 (4,493) - 20,364
Net income (loss) 31,651 8,145 4,797 4,553 2,992 (8,178) - 43,960
Property additions 34,652 5,003 5,816 659 31,937* 67,539 - 145,606
</TABLE>
*Excludes the non-cash acquisition of Indeck Capital, Inc. as described in
Footnote 6.
<TABLE>
<CAPTION>
Independent Energy
---------------------------------------------------
12 months ended Oil Fuel Independent Communications
September 30, 1999 Electric Mining and Gas Marketing Power & Others Eliminations Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------- ---------- ---------- -------------- -------------- ------------------ ---------------- ---------
Electric revenues $132,657 $ - $ - $ $ - $ - $ - $132,657
Coal revenues - 30,289 - 41,388 - - - 71,677
Gas revenues - - 4,690 400,996 - - - 405,686
Oil revenues - - 4,534 150,487 - - - 155,021
Other revenues - - 3,060 - - - - 3,060
---------------------------------------------------------------------------------------------------------------
Total revenues $132,657 $30,289 $ 12,284 $592,871 $ - $ - $ - $768,101
----------------------------------------------------------------------------------------------------------------
Depreciation,
depletion
& amortization $15,154 $3,271 $17,274* $ 2,760** $ - $ 102 $ - $38,561
Operating income
(loss) 51,420 12,360 (10,978) (268) (222) (3,050) - 49,262
Interest expense 13,311 733 538 758 16 1,129 (1,969) 14,516
Income tax expense
(benefit) 12,791 3,621 (4,229) (178) (83) (695) - 11,227
Net income (loss) 26,338 9,453 (7,279) (487) (155) (1,201) - 26,669
Property additions 16,590 3,886 8,144 505 6 33,011 - 62,142
</TABLE>
*Includes the impact of a $13.5 million pretax write down of certain oil
and natural gas properties
**Includes the impact of a $1.9 million pretax write down of certain
intangible assets
(6) Acquisitions
On July 7, 2000, the Company completed its acquisition of Indeck Capital,
Inc., merging it into Black Hills Energy Capital, Inc. The new entity owns
varying interests in 14 operating independent power plants in California, New
York, Massachusetts, Colorado and Idaho totaling approximately 350 megawatts
(MW), and also manages fund equity of approximately $750 million in six
power-related funds. The power funds have investments in over 35 power projects
throughout the United States and various foreign countries.
On July 7, 2000, in conjunction with the closing of this acquisition, Black
Hills' Independent Energy business unit closed a new revolving credit facility.
ABN AMRO N.V. and Scotia Bank acted in concert to provide a $115,000,000 credit
facility with three participating banks to provide flexibility in financing
future growth in the independent energy business unit. In addition, on August
31, 2000, Scotia Bank acted as Agent bank for a $60,000,000 non-recourse project
financing in conjunction with the Black Hills/Arapahoe (80 MW) and Black
Hills/Valmont (40 MW) projects which were recently declared commercial.
The acquisition was a stock transaction with the Company issuing 1,536,747
shares of common stock to the shareholders of Indeck priced at $21.98 per share
(approximately 7 percent of the Company's common stock after the transaction),
along with $4,000,000 in preferred stock, resulting in a purchase price of
approximately $37,800,000. Additional consideration, consisting of common and
preferred stock, may be paid in the form of an earn-out over a four-year period.
The earn-out consideration will be based on the acquired company's earnings
during the next four years and cannot exceed $35,000,000 in total.
The 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. Fair values in the allocation include assets acquired of
approximately $151,100,000 (excluding goodwill) and liabilities assumed of
approximately $134,400,000. The estimated purchase price allocations are subject
to adjustment, generally within one year of the date of the acquisition. Should
new or additional facts about the acquisitions become available within one year
of the date of acquisition, any changes to the preliminary estimates will be
reflected as an adjustment to goodwill. The purchase price and related
acquisition costs exceeded the fair values assigned to net tangible assets by
approximately $21,100,000, which was recorded as goodwill and is being amortized
over 30 years on a straight-line basis.
Operating activities of the acquired company have been included in the
accompanying consolidated financial statements since the acquisition date. The
following unaudited pro forma condensed results of operations presents the
effect of the acquisition as if it had occurred on January 1, 1999. The pro
forma financial data is provided for informational purposes only and does not
purport to be indicative of the results that would have been obtained if the
acquisition had been effected on January 1, 1999. The pro forma financial
information reflects the amortization of the excess purchase price over the fair
value of net assets acquired and the income tax effect thereof for the
nine-month periods ended September 30, 2000 and 1999 as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
September 30 September 30
2000 1999
<S> <C> <C>
Revenues $ 1,061,805,000 $ 582,108,000
Operating income $ 86,425,000 $ 46,236,000
Net income $ 37,795,000 $ 24,357,000
Net income per share $ 1.65 $ 1.06
</TABLE>
The common and preferred shares issued in the acquisition are exempt from
registration under Section 4(2) of the Securities Act. Except for certain
permitted transfers, the common stock issued may not be sold, transferred,
assigned or otherwise disposed of for a period of two years.
The preferred shares issued are non-voting, cumulative, no par shares with
a dividend rate equal to 1% per annum, per share computed on the basis of $1,000
per share plus an amount equal to any dividend declared payable with respect to
the common stock multiplied by the number of shares of common stock into which
each share of preferred stock is convertible. The record and payment dates shall
be the same as the record and payment dates with respect to the payment of
dividends on common stock. No dividend shall be declared or paid with respect to
common stock unless such a dividend is declared and paid with respect to the
preferred stock.
The Company may redeem the preferred stock in whole or in part, at any
time. The redemption price per share for the preferred stock shall be $1,000 per
share plus all accrued and unpaid dividends. Each share of the preferred stock
is convertible at the option of the holder into validly issued, fully paid and
nonassessable shares of Common Stock at any time prior to July 7, 2005 and
automatically converted into validly issued, fully paid and nonassessable shares
of Common Stock on July 7, 2005. Each share of preferred stock is convertible
into 28.57 shares (the liquidation preference amount of $1,000 divided by the
conversion price of $35). If the Company delivers a notice of redemption, the
conversion price shall be adjusted to equal the lesser of (i) the conversion
price then in effect and (ii) the current market price on the redemption notice
date.
(7) Legal Proceedings
On August 14, 2000, Wyodak Resources Development Corp. ("Wyodak") initiated
an action against PacifiCorp as it concerns the Further Restated and Amended
Coal Supply Agreement, dated as of May 5, 1987 ("Coal Supply Agreement"). The
action has been filed in the United States District Court for the District of
Wyoming as Case No. 00CV 155-B. Wyodak alleges that PacifiCorp has failed and
refused to make complete payment to Wyodak for coal sold under the Coal Supply
Agreement, and there was at that time approximately $5,000,000 outstanding and
allegedly due Wyodak from PacifiCorp. Wyodak alleged that PacifiCorp's actions
constitute a breach of contract and asked for the appropriate monetary relief.
On August 31, 2000, PacifiCorp answered the Wyodak Complaint and
additionally brought a counterclaim against Wyodak and Black Hills Corporation.
In its action, PacifiCorp alleged that as a result of Wyodak's actions as it
concerns its billings under the Coal Supply Agreement, PacifiCorp was entitled
to cancel and terminate the Coal Supply Agreement and Coal Handling Agreement,
as well as the recovery of damages. PacifiCorp alleged that Wyodak had not
properly adjusted upward and downward the components which make up the coal
price under the Coal Supply Agreement, and as a result PacifiCorp had been
overbilled approximately $35,000,000 to $40,000,000 and that Wyodak continued to
overcharge PacifiCorp under the Coal Supply Agreement and the Coal Handling
Agreement. PacifiCorp further alleged that the overcharges would result in
additional overcharges of approximately $150,000,000 through the balance of the
term of the Coal Supply Agreement, which expires in June of 2013. In its action,
PacifiCorp sought not only to cancel and terminate the contract but also to
discharge and excuse any further obligation under the same, as well as recovery
of damages as set forth above.
Management is of the opinion that Wyodak has properly billed PacifiCorp
under the terms of the Coal Supply Agreement and Coal Handling Agreement and
PacifiCorp's withholding of payment constitutes a breach of contract on their
part. Although it is impossible to predict whether or not Black Hills
Corporation and Wyodak will ultimately be successful in defending the claim or,
if not, what the impact might be, management believes it has a strong case and
that disposition of this matter will not have a material adverse effect on the
Company's consolidated results of operations.
In addition, the Company is subject to various legal proceedings and claims
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 consolidated financial position or results of operations
of the company.
(8) Market Risk Disclosures
There has not been any significant changes in market risk since December
31, 1999.
Commodity Risk
The Company is exposed to market risk stemming from changes in commodity
prices. These changes could cause fluctuations in the Company's earnings and
cash flows.
Non-Trading Activities
To reduce risk from fluctuations in the price of oil and natural gas, the
Company enters into futures and swap transactions. The transactions are used to
hedge price risk from sales of the Company's crude oil and natural gas
production. For such transactions, the Company utilizes hedge accounting. At
September 30, 2000 the Company hedged its crude oil production using fixed rate
for floating rate swaps sold for 20,000 barrels per month for the year 2000,
with a fair value of $(630,700), and 10,000 barrels per month for the year 2001
with a fair value of $(975,100). In addition, the Company had a collar for
10,000 barrels per month for the year 2001 with a fair value of $(122,400).
To hedge natural gas production the Company had various swaps expiring in
October 2000 and swaps for 2,000 MMBtus per month through October 2001 with fair
values of $(211,024) and $22,698, respectively.
Trading Activities
The Company, through its independent energy business unit, utilizes
derivatives for its energy marketing services. The notional quantities and
maximum terms of derivative financial instruments held for trading activities at
September 30, 2000 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
Volume Purchased Maximum Term
Natural Gas (MMBtu's) (Years)
Basis swaps purchased 33,644,595 2
Basis swaps sold 30,954,871 2
Fixed float swaps purchased 8,379,581 1
Fixed float swaps sold 9,817,438 1
Volume Purchased Maximum Term
Crude Oil (Bbls) (Years)
Fixed float swaps purchased 180,000 1
Fixed float swaps sold 360,000 1
Options purchased 360,000 1
Options sold 360,000 1
At September 30, 1999
Volume Purchased Maximum Term
Natural Gas (MMBtu's) (Years)
Basis swaps purchased 17,739,000 3
Basis swaps sold 17,846,000 3
Fixed float swaps purchased 12,603,000 2
Fixed float swaps sold 14,326,000 2
Futures purchased 820,000 2
Collars (puts purchased, calls sold) 534,500 2
Collars (calls purchased, puts sold) 534,500 2
Volume Purchased Maximum Term
(Bbls) (Years)
Crude Oil
Puts purchased 24,000 1
Fixed float swaps sold 240,000 2
</TABLE>
Because these contracts are entered into for hedging purposes, the Company
did not have a material gain or loss for the quarter ended September 30, 2000 on
the underlying physical transactions. Such physical transactions are subject to
weather trends, transportation and delivery risks and other factors that the
Company monitors on a regular basis. The notional amounts detailed above are
intended to be indicative of the Company's level of activity in such
derivatives.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's short-term investments, short term debt and long-term
debt obligations. The Company does not use derivative financial instruments in
its available for sale securities.
Due to the short-term duration of the Company's investment portfolio at
September 30, 2000 a 100 basis point increase in interest rates would not have a
material effect on the Company's results of operations or financial results.
Based on the Company's short term debt outstanding at September 30, 2000,
the effect of a 100 basis point increase in interest rates would amount to
approximately a $1,700,000 annual increase in interest expense.
The Company has no cash flow exposure due to rate changes for long-term
debt obligations. The Company primarily enters into debt obligations to support
general corporate purposes including capital expenditures and working capital
needs.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity, Capital Resources, and Commitments
Consolidated cash flows from operations for the three, nine and twelve
month periods ended September 30, 2000 were $5,748,000, $38,573,000 and
$65,138,000, respectively. The Company believes it has adequate liquidity
through the generation of operating cash flows and existing credit facilities,
as well as the ability to access debt and equity markets to support continued
business operations and expansion.
The Company currently has bank lines of credit totaling $206,000,000, which
provide for interim borrowings and the opportunity for timing of permanent
financing. The Company had $170,775,000 in notes and $20,450,000 in letters of
credit outstanding under these lines on September 30, 2000. 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 a $25,000,000, uncommitted, discretionary credit facility. The
transactional line of credit provides credit support for the purchases of crude
oil of Black Hills Energy Resources. The Company and it subsidiaries provide no
guarantee to the Lender. At September 30, 2000, Black Hills Energy Resources had
letters of credit outstanding of $11,627,000.
In addition to the above lines of credit, Enserco Energy, Inc. has a
$45,000,000 uncommitted, discretionary credit facility.
The borrowing base line of credit provides credit support for the purchases
of natural gas of Enserco. The Company and its subsidiaries provide no guarantee
to the Lender. At September 30, 2000, Enserco had letters of credit outstanding
of $40,978,000.
On July 7, 2000, in conjunction with the closing of the Indeck Capital
acquisition, Black Hills' Independent Energy business unit closed a new
revolving credit facility. ABN AMRO N.V. and Scotia Bank acted in concert to
provide a $115,000,000 credit facility with three participating banks to provide
flexibility in financing future growth in the independent energy business unit.
In addition, on August 31, 2000, Scotia Bank acted as Agent bank for a
$60,000,000 non-recourse project financing in conjunction with the Black
Hills/Arapahoe (80 MW) and Black Hills/Valmont (40 MW) projects which were
recently declared commercial.
Consolidated EBITDA (see next paragraph) was $41,799,000, $86,404,000 and
$109,519,000 for the three, nine and twelve month periods ended September 30,
2000 compared to $24,646,000, $66,492,000 and $88,079,000 for the comparable
periods ended September 30, 1999.
EBITDA represents the sum of earnings before interest, taxes, depreciation
and amortization.
EBITDA: o is not intended to be a performance measure that should be
regarded as an alternative either to operating income or net income as an
indicator of operating performance or to cash flows as a measure of liquidity; o
is not intended to represent funds available for debt service, dividends,
reinvestment, or other discretionary uses; and o should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with generally accepted accounting principles.
EBITDA is included because our management believes that EBITDA is a
meaningful measurement commonly used by the investment community. Our definition
of EBITDA may not be identical to similarly titled measures reported by other
companies.
The Company's principal capital requirements included continued funding for
growth of existing business segments; the acceleration of capital expenditures
in the communication business segment; funding maintenance and expansion
programs; funding new corporate investment and development ventures primarily in
the independent energy business segment including the acquisition of Indeck
Capital, Inc.; sinking fund requirements and the payment of dividends.
Results of Operations
Black Hills Corporation is an energy and communications company consisting
of three principal businesses: electric utility, independent energy and
communications.
<PAGE>
Consolidated net income was $16,285,000 for the three months, $33,407,000
for the nine months and $43,960,000 for the twelve months ended September 30,
2000 compared to $9,725,000, $26,519,000 and $36,633,000 (excluding the impact
of a $10.0 million after tax write down of certain oil and natural gas
properties and certain intangible assets) for the same periods in 1999.
Outstanding earnings posted by the electric utility segment and the independent
energy segment offset the development stage losses in the communications
segment. Consolidated revenue and income from continuing operations provided by
the Company's businesses as a percentage of the total were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
<S> <C> <C> <C> <C> <C> <C>
2000 1999 2000 1999 2000 1999
Revenues
Independent energy 89% 83% 88% 82% 88% 83%
Electric utility 11 17 12 18 12 17
Communications - - - - - -
100% 100% 100% 100% 100% 100%
Net Income/(Loss)
Independent energy 56% 30%* 49% 31%* 47% 31%*
Electric utility 62 75 73 72 72 72
Communications and other (18) (5) (22) (3) (19) (3)
100% 100% 100% 100% 100% 100%
</TABLE>
*Excludes $10.0 million (net-of-tax) write down of certain oil and natural
gas properties (December 1998) and certain intangible assets (September 1999)
<PAGE>
Capital expenditures and depreciation, depletion, and amortization by
business segment were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
2000 1999 2000 1999 2000 1999
Capital Expenditures (includes AFDC)
<S> <C> <C> <C> <C> <C> <C>
*Independent energy $14,918 $ 1,680 $35,296 $ 9,111 $43,415 $12,541
Electric utility 6,357 7,887 20,108 12,577 34,652 16,590
Communications and other 17,679 13,496 49,593 31,367 67,539 33,011
$38,954 $23,063 $104,997 $53,055 $145,606 $62,142
</TABLE>
*Excludes the non-cash acquisition of Indeck Capital, Inc. as described in
Footnote 6.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
2000 1999 2000 1999 2000 1999
Depreciation, Depletion,
and Amortization
<S> <C> <C> <C> <C> <C> <C>
Independent energy $3,366 $3,829 $ 6,829 $ 7,714 $ 8,084 $23,305*
Electric utility 3,909 3,768 11,728 11,664 15,616 15,154
Communications and others 1,703 35 3,908 76 4,392 102
$8,978 $7,632 $22,465 $19,454 $28,092 $38,561
</TABLE>
*Includes the impact of a $13.5 million pretax write down of certain oil
and natural gas properties (December 1998) and a $1.9 million pretax write down
of certain intangible assets
Electric Utility Operations
Earnings from electric utility operations increased $1,900,000 or 23
percent, $4,400,000 or 22 percent and $5,300,000 or 20 percent for the three,
nine and twelve month periods ended September 30, 2000, respectively, due to
off-system sales that were three to four times greater than the same periods in
1999, and a moderate increase in residential and commercial sales. Total
kilowatt-hour sales were up 19 percent, 10 percent and 7 percent for the three,
nine and twelve month periods ended September 30, 2000, respectively. These
increases were partially offset by higher purchased power, higher fuel costs and
a planned maintenance outage at the Wyodak power plant in the second quarter.
Degree days, a measure of weather trends, were 12 percent higher for the three
month period, stable for the nine month period and 6 percent lower for the
twelve month period ended September 30, 2000 compared to the prior year. EBITDA
for the electric utility was $23,717,000 for the three month period, $60,862,000
for the nine month period and $78,445,000 for the twelve month periods ended
September 30, 2000 compared to $19,188,000, $50,816,000 and $66,890,000 for the
same periods in the prior year, respectively.
Independent Energy Operations
Earnings from independent energy operations increased $7,105,000,
$8,903,000 and $9,000,000 (excluding the impact of a $10.0 million after-tax
write down of certain oil and natural gas properties and certain intangible
assets) for the three, nine and twelve months ended September 30, 2000 primarily
due to increased energy prices, volumes and strong energy marketing results. The
independent power production operations of newly acquired Black Hills Energy
Capital subsidiary also had a significant impact on earnings. Independent energy
EBITDA was $21,089,000, $33,657,000 and $40,468,000 for the three, nine and
twelve month periods ended September 30, 2000 compared to $6,727,000,
$17,982,000 and $23,841,000 for the same periods in the prior year,
respectively.
Earnings from oil and gas operations increased $1,021,000, $2,334,000 and
$3,300,000 for the three, nine and twelve months ended September 30, 2000
(excluding the impact of a $8.8 million after-tax write down of certain oil and
natural gas properties), as compared to 1999. Increased earnings were primarily
due to higher crude oil and natural gas prices, increased oil and gas production
and lower depletion expense. Oil prices increased 53 percent, 79 percent and 85
percent for the three, nine and twelve month periods, respectively, and gas
prices increased 50 percent, 43 percent and 40 percent for the same periods,
respectively. Production for the three, nine and twelve month periods ended
September 30, 2000 increased 16 percent, 5 percent and 10 percent compared to
the same periods ended September 30, 1999 .
In December 1998, Black Hills Exploration and Production recognized a
$13,546,000 pretax loss related to a write-down of oil and gas properties. The
write-down was primarily due to historically low crude oil prices, lower natural
gas prices and decline in value of certain unevaluated properties. Absent other
factors impacting depletion expense, the Company expects future depletion
expense per unit of production to be reduced because of this write-down.
Earnings from Independent power production relate to the July 2000
acquisition of Indeck Capital and the Colorado projects becoming operational in
May 2000. Results of operations exceeded management's expectations due primarily
to available generation capacity located in Western markets with strong energy
prices and strong emissions credit prices. Earnings from Independent power
production were $2,941,000, $2,967,000 and 2,967,000 for the three, nine and
twelve month periods ended September 30, 2000.
Earnings from fuel marketing operations increased $3,325,000, $4,734,000
and $3,840,000 (excluding the impact of a $1.2 million after-tax write down of
certain intangible assets) for the three, nine and twelve month periods ending
September 30, 2000. The increase was primarily due to increased natural gas and
crude oil margins and volumes marketed partially offset by adverse market
conditions in coal marketing. Natural gas margins increased $4,000,000 for the
three month period, $6,039,000 for the nine month period and $3,790,000 for the
twelve month period ended September 30, 2000. Prices for natural gas increased
70 percent for the three month period, 62 percent for the nine month period and
48 percent for the twelve month period. Crude oil prices increased 3 percent, 19
percent and 44 percent for the September 30, 2000 three, nine and twelve month
periods, respectively. Coal prices decreased 2 percent, 4 percent and 3 percent
for the three, nine and twelve month periods ended September 30, 2000,
respectively and coal margins decreased 19 percent, 66 percent and 60 percent
for the same periods primarily due to a $250,000 inventory write-down.
The fuel marketing operations marketed 650,000 mmbtus of gas, 45,000
barrels of oil and 2,700 tons of coal per day in the three month period ended
September 30, 2000 and 533,000 mmbtus, 18,400 barrels and 5,500 tons of coal per
day for the three month period ended September 30, 1999. For the nine month
period ended September 30, 2000, 544,000 mmbtus of gas, 45,000 barrels of oil
and 4,400 tons of coal were marketed compared to 513,000 mmbtus, 19,000 barrels
and 4,800 tons marketed during the same periods in 1999. For the twelve month
period ending September 30, 2000, 512,000 mmbtus of gas, 33,400 barrels of oil
and 4,300 tons of coal per day were marketed as compared to 524,000 mmbtus,
20,000 barrels and 4,700 tons per day in 1999.
Communications Operations
Deployment continues on the state of the art communications network in
Rapid City and the northern Black Hills. The construction of the fiber optic
network has reached nearly 9,000 residents and 2,000 businesses in 2000. The
company currently provides broadband services to approximately 6,700 residential
and 480 business customers. The build-out, expected to be completed in mid-2001,
is expected to reach approximately 40,000 residents and the construction is
nearly 65 percent complete. The Communications business unit turned EBITDA
positive in September 2000 after just 15 months of operation. Revenues for the
three, nine and twelve month periods ended September 30, 2000 were $2,563,000,
$4,422,000 and $4,700,000 respectively. Operating expenses at September 30, 2000
for the three, nine and twelve month periods were $4,150,000, $9,609,000 and
$11,346,000, respectively. Losses for the three month and nine month periods
ended September 30, 2000 were higher than expectations due to higher
construction and financing costs. The Company is currently recognizing 100
percent of the operating losses of Black Hills FiberCom LLC and will continue to
do so until such time that an additional equity investment is made by a third
party. The Company is currently seeking such an investor.
Recent Developments and Acquisitions
On July 7, 2000, the Company completed its acquisition of Indeck Capital,
Inc., merging it into Black Hills Energy Capital, Inc. The new entity owns
varying interests in 14 operating independent power plants in California, New
York, Massachusetts, Colorado and Idaho totaling approximately 350 megawatts
(MW), and also manages fund equity of approximately $750,000,000 in six
power-related funds. The power funds have investments in over 35 power projects
throughout the United States and various foreign countries.
The acquisition was a stock transaction with the Company issuing 1,536,747
shares of common stock to the shareholders of Indeck priced at $21.98 per share
(approximately 7 percent of the Company's common stock after the transaction),
along with $4,000,000 in preferred stock, resulting in a purchase price of
approximately $37,800,000. Additional consideration, consisting of common and
preferred stock, may be paid in the form of an earn-out over a four-year period.
The earn-out consideration will be based on the acquired company's earnings
during the next four years and cannot exceed $35,000,000 in total.
The 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. Should new or
additional facts about the acquisitions become available within one year of the
date of acquisition, any changes to the preliminary estimates will be reflected
as an adjustment to goodwill. The purchase price and related acquisition costs
exceeded the fair values assigned to net tangible assets by approximately
$21,100,000 million, which was recorded as goodwill and is being amortized over
30 years on a straight-line basis.
Black Hills Energy Capital, Inc. signed two ten-year contracts with Public
Service of Colorado (PSCo) to supply electricity from the Arapahoe and Valmont
facilities in the Denver and Boulder metropolitan areas. PSCo selected expansion
of these two projects as part of their resource development plan approved
earlier this year by Colorado's Public Service Commission. The projects are
currently operating at approximately 120 megawatts (MW) and will be expanded by
90 MW to approximately 210 MW. The expansion will be staged over the next two
years, with 40 MW becoming operational in the spring of 2001 and the remaining
50 MW going into service in early 2002. The ten-year tolling contracts will run
through May 2012 and will replace the existing seven-year tolling contracts
associated with the current operating facilities. On August 31, 2000,
$60,000,000 of non-recourse project financing was completed to fund the first
phase of the Valmont and Arapahoe facilities and replaced existing short-term
debt. The Independent Energy business unit plans to finance the expansions of
these facilities through additional internally generated funds, short-term debt
and non-recourse financing.
Forward Looking Statements
The above information includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts in this Report 10-Q, which address
activities, events, or developments which the Company expects or anticipates
will or may occur in the future are forward-looking statements, including
without limitation to statements concerning future revenues, earnings, and
performance. Although the Company believes that the expectations and assumptions
reflected in these statements are reasonable, there can be no assurance that
these expectations will prove to be correct. These forward-looking statements
involve a number of risks and uncertainties, and actual results may differ
materially from the results discussed in the forward-looking statements. In
addition to the factors discussed above, the following are among the important
factors that could cause actual results to differ materially from the
forward-looking statements: market demand and prices of electricity, fuel
pricing, weather variations affecting customer energy usage, deployment of the
Company's fiber optic network, customer penetration rates relating to
communications products and services, operating performance of its electric
generation plants, environmental conditions, changes in the U.S. energy
industry, new regulatory developments, economic conditions, competition in power
markets and continued availability of capital and financing. Any such
forward-looking statements should be considered in conjunction with Black Hills
Corporation's 1999 Form 10-K on file with the Securities and Exchange
Commission. New factors that could cause actual results to differ materially
from those described in forward-looking statements emerge from time to time, and
it is not possible for the Company to predict all such factors, or to the extent
to which any such factor or combination of factors may cause actual results to
differ from those contained in any forward-looking statement. The Company
assumes no obligation to update publicly any such forward-looking statements,
whether as a result of new information, future events, or otherwise.
<PAGE>
Quantitative and Qualitative Disclosures about Market Risk
Market Risk Disclosures
There has not been any significant changes in market risk since December
31, 1999.
Commodity Risk
The Company is exposed to market risk stemming from changes in commodity
prices. These changes could cause fluctuations in the Company's earnings and
cash flows.
Non-Trading Activities
To reduce risk from fluctuations in the price of oil and natural gas, the
Company enters into futures and swap transactions. The transactions are used to
hedge price risk from sales of the Company's crude oil and natural gas
production. For such transactions, the Company utilizes hedge accounting. At
September 30, 2000 the Company hedged its crude oil production using fixed rate
for floating rate swaps sold for 20,000 barrels per month for the year 2000,
with a fair value of $(630,700), and 10,000 barrels per month for the year 2001
with a fair value of $(975,100). In addition, the Company had a collar for
10,000 barrels per month for the year 2001 with a fair value of $(122,400).
To hedge natural gas production the Company had various swaps expiring in
October 2000 and swaps for 2,000 MMBtus per month through October 2001 with fair
values of $(211,024) and $22,698, respectively.
Trading Activities
The Company, through its independent energy business unit, utilizes
derivatives for its energy marketing services. The notional quantities and
maximum terms of derivative financial instruments held for trading activities at
September 30, 2000 are presented below:
<TABLE>
<CAPTION>
<S> <C> <C>
Volume Purchased Maximum Term
Natural Gas (MMBtu's) (Years)
Basis swaps purchased 33,644,595 2
Basis swaps sold 30,954,871 2
Fixed float swaps purchased 8,379,581 1
Fixed float swaps sold 9,817,438 1
Volume Purchased Maximum Term
Crude Oil (Bbls) (Years)
Fixed float swaps purchased 180,000 1
Fixed float swaps sold 360,000 1
Options purchased 360,000 1
Options sold 360,000 1
At September 30, 1999
Volume Purchased Maximum Term
Natural Gas (MMBtu's) (Years)
Basis swaps purchased 17,739,000 3
Basis swaps sold 17,846,000 3
Fixed float swaps purchased 12,603,000 2
Fixed float swaps sold 14,326,000 2
Futures purchased 820,000 2
Collars (puts purchased, calls sold) 534,500 2
Collars (calls purchased, puts sold) 534,500 2
Volume Purchased Maximum Term
(Bbls) (Years)
Crude Oil
Puts purchased 24,000 1
Fixed float swaps sold 240,000 2
</TABLE>
Because these contracts are entered into for hedging purposes, the Company
did not have a material gain or loss for the quarter ended September 30, 2000 on
the underlying physical transactions. Such physical transactions are subject to
weather trends, transportation and delivery risks and other factors that the
Company monitors on a regular basis. The notional amounts detailed above are
intended to be indicative of the Company's level of activity in such
derivatives.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's short-term investments, short term debt and long-term
debt obligations. The Company does not use derivative financial instruments in
its available for sale securities.
Due to the short-term duration of the Company's investment portfolio at
September 30, 2000 a 100 basis point increase in interest rates would not have a
material effect on the Company's results of operations or financial results.
Based on the Company's short term debt outstanding at September 30, 2000,
the effect of a 100 basis point increase in interest rates would amount to
approximately a $1,700,000 annual increase in interest expense.
The Company has no cash flow exposure due to rate changes for long-term
debt obligations. The Company primarily enters into debt obligations to support
general corporate purposes including capital expenditures and working capital
needs.
<PAGE>
BLACK HILLS CORPORATION
Part II - Other Information
Item 1. Legal Proceedings
On August 14, 2000, Wyodak Resources Development Corp. ("Wyodak") initiated
an action against PacifiCorp as it concerns the Further Restated and Amended
Coal Supply Agreement, dated as of May 5, 1987 ("Coal Supply Agreement"). The
action has been filed in the United States District Court for the District of
Wyoming as Case No. 00CV 155-B. Wyodak alleges that PacifiCorp has failed and
refused to make complete payment to Wyodak for coal sold under the Coal Supply
Agreement, and there was at that time approximately $5,000,000 outstanding and
allegedly due Wyodak from PacifiCorp. Wyodak alleged that PacifiCorp's actions
constitute a breach of contract and asked for the appropriate monetary relief.
On August 31, 2000, PacifiCorp answered the Wyodak Complaint and
additionally brought a counterclaim against Wyodak and Black Hills Corporation.
In its action, PacifiCorp alleged that as a result of Wyodak's actions as it
concerns its billings under the Coal Supply Agreement, PacifiCorp was entitled
to cancel and terminate the Coal Supply Agreement and Coal Handling Agreement,
as well as the recovery of damages. PacifiCorp alleged that Wyodak had not
properly adjusted upward and downward the components which make up the coal
price under the Coal Supply Agreement, and as a result PacifiCorp had been
overbilled approximately $35,000,000 to $40,000,000 and that Wyodak continued to
overcharge PacifiCorp under the Coal Supply Agreement and the Coal Handling
Agreement. PacifiCorp further alleged that the overcharges would result in
additional overcharges of approximately $150,000,000 through the balance of the
term of the Coal Supply Agreement, which expires in June of 2013. In its action,
PacifiCorp sought not only to cancel and terminate the contract but also to
discharge and excuse any further obligation under the same, as well as recovery
of damages as set forth above.
Management is of the opinion that Wyodak has properly billed PacifiCorp
under the terms of the Coal Supply Agreement and Coal Handling Agreement and
PacifiCorp's withholding of payment constitutes a breach of contract on their
part. Although it is impossible to predict whether or not Black Hills
Corporation and Wyodak will ultimately be successful in defending the claim or,
if not, what the impact might be, management believes it has a strong case and
that disposition of this matter will not have a material adverse effect on the
Company's consolidated results of operations.
In addition, the Company is subject to various legal proceedings and claims
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 consolidated financial position or results of operations
of the company.
Item 2. Changes In Securities and Use of Proceeds
(c) On July 7, 2000, the Company issued 1,536,747 shares of common stock
and 4,000 shares of $1,000 par value preferred stock to the shareholders of
Indeck Capital, Inc. (ICI) in consideration of the acquisition of ICI (See Note
6 to the Consolidated Financial Statements).
The common and preferred shares issued in the acquisition are exempt from
registration under Section 4(2) of the Securities Act. Except for certain
permitted transfers, the common stock issued may not be sold, transferred,
assigned or otherwise disposed of for a period of two years.
The preferred shares issued are non-voting, cumulative, no par shares with
a dividend rate equal to 1% per annum, per share computed on the basis of $1,000
per share plus an amount equal to any dividend declared payable with respect to
the common stock multiplied by the number of shares of common stock into which
each share of preferred stock is convertible. The record and payment dates shall
be the same as the record and payment dates with respect to the payment of
dividends on common stock. No dividend shall be declared or paid with respect to
common stock unless such a dividend is declared and paid with respect to the
preferred stock.
The Company may redeem the preferred stock in whole or in part, at any
time. The redemption price per share for the preferred stock shall be $1,000 per
share plus all accrued and unpaid dividends. Each share of the preferred stock
is convertible at the option of the holder into validly issued, fully paid and
nonassessable shares of Common Stock at any time prior to July 7, 2005 and
automatically converted into validly issued, fully paid and nonassessable shares
of Common Stock on July 7, 2005. Each share of preferred stock is convertible
into 28.57 shares (the liquidation preference amount of $1,000 divided by the
conversion price of $35). If the Company delivers a notice of redemption, the
conversion price shall be adjusted to equal the lesser of (i) the conversion
price then in effect and (ii) the current market price on the redemption notice
date.
Item 6. Exhibits and Reports of Form 8-K
a. Exhibits
None
b. Reports on Form 8-K
On July 7, 2000, the Company filed Form 8-K reporting "Item 5-Other Events"
related to the completion of the Indeck Capital, Inc. acquisition. No financial
statements were included in this filing.
<PAGE>
BLACK HILLS CORPORATION
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BLACK HILLS CORPORATION
/s/ Roxann R. Basham
Roxann R. Basham, Vice President - Controller
(Principal Accounting Officer)
/s/ Mark T. Thies
Mark T. Thies, Senior VP & CFO
(Principal Financial Officer)
Dated: November 14, 2000
<PAGE>
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
Roxann R. Basham, Vice President - Controller
(Principal Accounting Officer)
Mark T. Thies, Senior VP & CFO
(Principal Financial Officer)
Dated: November 14, 2000
