10-Q 1 form10q1st_qtr-01.txt BHP 1ST QUARTER 10-Q United States 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 March 31, 2001. OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from _______________ to _______________. Commission File Number 1-7978 Black Hills Power, Inc. Incorporated in South Dakota IRS Identification Number 46-0111677 625 Ninth Street Rapid City, South Dakota 57701 Registrant's telephone number (605)-721-1700 Former name, former address, and former fiscal year if changed since last report NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---------- ---------- As of April 30, 2001, there were issued and outstanding 23,416,396 shares of the Registrant's common stock, $1.00 par value, all of which were held beneficially and of record by Black Hills Corporation. Reduced Disclosure The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. 1 BLACK HILLS POWER, INC. I N D E X Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income- 3 Three Months Ended March 31, 2001 and 2000 Consolidated Balance Sheets- 4-5 March 31, 2001 and December 31, 2000 Consolidated Statements of Cash Flows- 6 Three Months Ended March 31, 2001 and 2000 Notes to Consolidated Financial Statements 7-12 Item 2. Results of Operations 12-13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2 BLACK HILLS POWER, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months March 31 2001 2000 ---- ---- (in thousands) Operating revenues $88,625 $33,299 ------- ------- Operating expenses: Fuel and purchased power 30,090 7,970 Operations and maintenance 6,946 5,005 Administrative and general 7,453 966 Depreciation and amortization 6,871 3,909 Taxes, other than income taxes 3,035 1,806 ------- ------- 54,395 19,656 ------- ------- Operating income 34,230 13,643 ------- ------- Other income and (expense): Interest expense (10,767) (4,535) Investment income 1,943 1,324 Other, net 1,221 182 ------- ------- (7,603) (3,029) ------- ------- Income from continuing operations before minority interest and income taxes 26,627 10,614 Minority interest (1,960) - Income taxes (8,418) (3,389) ------- ------- Income from continuing operations 16,249 7,225 Discontinued operation, net of income taxes (Note 2) 4,832 1,836 ------- ------- Net income $21,081 $9,061 ======= =======
See accompanying notes to consolidated financial statements. 3
BLACK HILLS POWER, INC. CONSOLIDATED BALANCE SHEETS (unaudited) March 31 December 31 2001 2000 ---- ---- (in thousands) Assets Current assets: Cash and cash equivalents $ 27,109 $ 12,697 Receivables (net of allowance for doubtful accounts of $1,961 and $3,631, respectively) Customers 18,395 19,339 Related party 112,827 89,203 Other 16,114 19,653 Materials, supplies and fuel 10,148 10,703 Prepaid expenses 6,748 6,788 Assets of discontinued operations (Note 2) - 247,548 -------- ---------- 191,341 405,931 -------- ---------- Investment in affiliates 58,980 56,225 -------- ---------- Property and equipment 834,584 817,728 Less accumulated depreciation (214,989) (207,805) -------- ---------- Net property and equipment 619,595 609,923 -------- ---------- Other assets: Regulatory asset 4,134 4,133 Other 32,650 31,714 -------- ---------- 36,784 35,847 -------- ---------- Total $906,700 $1,107,926 ======== ==========
See accompanying notes to consolidated financial statements 4 BLACK HILLS POWER, INC. CONSOLIDATED BALANCE SHEETS (unaudited)
March 31 December 31 2001 2000 ---- ---- (in thousands) Liabilities and Stockholder's Equity Current liabilities: Current maturities of long-term debt $ 13,133 $ 13,961 Notes payable 97,129 86,000 Notes payable - related party 111,608 95,222 Accounts payable 20,605 15,232 Accounts payable - related party 3,450 1,258 Accrued liabilities 27,074 23,746 Derivatives at market value 12,435 - Liabilities of discontinued operations (Note 2) - 163,661 ---------- ---------- 285,434 399,080 ---------- ---------- Long-term debt, net of current maturities 305,463 307,090 ---------- ---------- Deferred credits: Federal income taxes 53,049 54,706 Investment tax credits 2,410 2,530 Regulatory liability 4,551 4,673 Other 10,602 9,459 --------- ---------- 70,612 71,368 --------- ---------- Minority interest in subsidiaries 35,415 37,963 --------- ---------- Stockholder's equity: Common stock $1 par value; 50,000,000 shares authorized; Issued: 23,416,396 and 23,416,396 shares, respectively 23,416 23,416 Additional paid-in capital 77,326 77,326 Retained earnings 117,371 191,683 Accumulated other comprehensive income (loss) (8,337) - --------- ---------- Total stockholder's equity 209,776 292,425 --------- ---------- Total $ 906,700 $1,107,926 ========= ==========
See accompanying notes to consolidated financial statements. 5 BLACK HILLS POWER, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three Months March 31 2001 2000 ---- ---- (in thousands) Cash flows from operations $15,323 $16,137 ------- ------- Investing activities: Property additions (16,543) (3,353) Available for sale securities sold - 4,315 Increase in investments (2,755) (15,867) -------- ------- (19,298) (14,905) -------- ------- Financing activities Dividends paid (6,673) (5,872) Common stock issued - 160 Increase (decrease) in short-term borrowings 27,515 5,000 Long-term debt payments (2,455) (526) ------- ------- 18,387 (1,238) ------- ------- Increase (decrease) in cash and cash equivalents 14,412 (6) Cash and cash equivalents: Beginning of period 12,697 3,798 ------- ------- End of period $27,109 $ 3,792 ======= ======= Supplemental disclosure of cash flow information Cash paid during the period for: Interest $ 7,831 $ 5,470 Stock dividend distribution to Black Hills Corporation, the parent company of Black Hills Power, Inc. (Note 2) $89,643 $ -
See accompanying notes to consolidated financial statements. 6 BLACK HILLS POWER, INC. Notes to Consolidated Financial Statements (unaudited) (Reference is made to Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K) (1) MANAGEMENT'S STATEMENT The financial statements included herein have been prepared by Black Hills Power, Inc. (the Company) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the footnotes adequately disclose the information presented. These financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company's 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the March 31, 2001, December 31, 2000 and March 31, 2000, financial information and are of a normal recurring nature. The results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results to be expected for the full year. (2) NON-CASH DIVIDEND AND DISCONTINUED OPERATIONS During the quarter ended March 31, 2001, the Company distributed a non-cash dividend to its parent company, Black Hills Corporation (Parent). The dividend consisted of 50,000 common shares of Wyodak Resources Development Corporation (Wyodak), which represents 100 percent ownership of Wyodak. The Company therefore no longer operates in the coal production segment, oil and natural gas production segment, fuel marketing segment or communications as the Company had indirectly owned the companies operating in these segments through its ownership of Wyodak. As a result the Company's only subsidiary is Black Hills Energy Capital and its subsidiaries. The Company's investment in Wyodak at the time of the distribution was $89.6 million. 7 The consolidated financial statements and notes to consolidated financial statements have been restated to reflect the continuing operations of the Company for all periods presented. The assets and liabilities of Wyodak are shown in the Consolidated Balance Sheets under the captions "Assets of discontinued operations" and "Liabilities of discontinued operations". The net operating results of discontinued operations are included in the Consolidated Statements of Income under the caption "Discontinued operations, net of income taxes" and are summarized as follows: Three Months Ended Three Months Ended March 31, 2001 March 31, 2000 -------------- -------------- (in thousands) Revenue $197,274 $215,583 Income before income taxes 7,849 3,190 Federal income taxes 3,017 643 Net income 4,832 1,836 (3) RECLASSIFICATIONS Certain 2000 amounts in the financial statements have been reclassified to conform to the 2001 presentation. These reclassifications did not have an effect on the Company's stockholders' investment or results of operations as previously reported. (4) CHANGE IN ACCOUNTING PRINCIPLE In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133 allows special hedge accounting for fair value and cash flow hedges. The Statement provides that the gain or loss on a derivative instrument designated and qualifying as a fair value hedging instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk be recognized currently in earnings in the same accounting period. SFAS 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. 8 The remaining gain or loss on the derivative instrument, if any, must be recognized currently in earnings. SFAS 133 requires that on date of initial adoption, an entity shall recognize all freestanding derivative instruments in the balance sheet as either assets or liabilities and measure them at fair value. The difference between a derivative's previous carrying amount and its fair value shall be reported as a transition adjustment. The transition adjustment resulting from adopting this Statement shall be reported in net income or other comprehensive income, as appropriate, as the effect of a change in accounting principle in accordance with paragraph 20 of Accounting Principles Board Opinion No. 20 (APB 20), "Accounting Changes." On January 1, 2001, the Company adopted SFAS 133. The Company had certain interest rate swaps documented as cash flow hedges, which upon adoption resulted in a cumulative decrease to accumulated other comprehensive income of $7.5 million. (5) COMPREHENSIVE INCOME The following table presents the components of the Company's comprehensive income:
Three Months Ended March 31 2001 2000 ---- ---- (in thousands) Net income $21,081 $9,061 Other comprehensive income: Fair value adjustment on derivatives designated as cash flow hedges, net of minority interest (8,337) - ------- ------ Comprehensive income $12,744 $9,061 ======= ======
(6) RELATED-PARTY TRANSACTIONS Receivables ----------- The Company has an unsecured line of credit extended to Black Hills Fiber Systems, an indirect subsidiary of Black Hills Corporation, which is due on demand. Outstanding advances were $110.8 million and $87.8 million as of March 31, 2001 and December 31, 2000, respectively. Advances under the note bear interest at prime rate (8.0 percent at March 31, 2001) and interest is receivable monthly. Interest income received on the note for the three months ended March 31, 2001 and 2000 was $1.9 million and $0, respectively. In addition, the Company has accounts receivable balances related to transactions with other Black Hills Corporation subsidiaries. The balances were $2.0 million and $1.4 million as of March 31, 2001 and December 31, 2000, respectively. Note Payable ------------ The Company has a unsecured line of credit with Wyodak Resource Development Corporation, an indirect subsidiary of Black Hills Corporation, which is due on demand. Borrowings under the note bear interest at a rate based on LIBOR plus 1.375 and certain 9 adjustments (7.245 percent at March 31, 2001) and interest is payable monthly. Interest expense on the borrowings under the note for the three months ended March 31, 2001 and 2000 was $1.7 million and $0, respectively. Other Balances and Transactions ------------------------------- In addition to the notes described above, the Company purchased natural gas to fuel its combustion turbine from Enserco Energy, an indirect subsidiary of Black Hills Corporation. The amount purchased during the three month period ended March 31, 2001 was approximately $3.6 million and is included in "Fuel and purchased power" on the Consolidated Statements of Income. In the opinion of management, the described related-party transactions have been fair and reasonable to the Company and have been entered into under terms and rates substantially the same as those transactions entered into with unrelated third parties in the ordinary course of business. (7) SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY'S BUSINESS The Company's reportable segments are those that are based on the Company's method of internal reporting, which generally segregates the strategic business groups due to differences in products, services and regulation. Prior to the first quarter of 2001, the Company reported six operating segments consisting of Electric, Mining, Oil and Gas, Fuel Marketing, Independent Power and Communications. Due to the distribution of Wyodak common stock as described in Note 2, the Company no longer has companies operating in the Mining, Oil and Gas, Fuel Marketing and Communications segments. The Company's operations are now conducted through two business segments. As of March 31, 2001, substantially all of the Company's operations and assets are located within the United States. The two segments consist of: Electric, which supplies electric utility service to western South Dakota, northeastern Wyoming and southeastern Montana; and Independent Power, which produces and sells power to wholesale customers. Independent Power's operations were not significant to the Company until the Indeck Capital acquisition in the third quarter of 2000. Segment information follows the same accounting policies as described in Note 1 of the Company's 2000 Annual Report on Form 10-K. Segment information included in the accompanying Consolidated Balance Sheets and Consolidated Statements of Income is as follows (in thousands):
External Inter-segment Operating Revenues Operating Revenues Net Income (loss) (In thousands) Quarter to Date March 31, 2001 Electric $ 70,580 $ - $17,337 Independent power 18,045 - (1,088) -------- ---------- ------- Total $88,625 $ - $16,249 ======== ========== =======
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External Inter-segment Operating Revenues Operating Revenues Net Income (loss) (In thousands) Quarter to Date March 31, 2000 Electric $ 33,299 $ - $7,225 ========= ========= ======
(8) LEGAL PROCEEDINGS On April 3rd, 2001, Wyodak reached a settlement of ongoing litigation with PacifiCorp filed in the United States District Court, District of Wyoming, (File No. 0cv-155B). The litigation concerned the parties' rights and obligations under the Further Restated and Amended Coal Supply Agreement dated May 5, 1987, by which PacifiCorp purchased coal from our coal mine to meet the coal requirements of the Wyodak Power Plant. The Settlement Agreement provided for the dismissal of the litigation, with prejudice, coupled with the execution of several new coal-related agreements between the parties. As discussed in Note 2, the Company has distributed its ownership of Wyodak to its parent company. As a result, the Company is no longer a concerned party to this litigation. (9) PRICE RISK MANAGEMENT Financing Activities -------------------- To reduce risk from fluctuations in interest rates, the Company enters into interest rate swap transactions. These transactions are used to hedge interest rate risk for variable rate debt financing. For such transactions, the Company utilizes hedge accounting per the requirements of SFAS 133. These transactions were identified as cash flow hedges, properly documented, and effectiveness testing established. At quarter-end, these hedges met effectiveness testing criteria and retained their cash flow hedge status. At March 31, 2001, the Company had interest rate swaps with a average balance notional amount of $163.3 million, having a maximum term of six years and a fair value of $(12.4) million. Because these hedges are fully effective (no time value or basis risk), the entire derivative fair value is recorded in other comprehensive income. At March 31, 2001, the Company had $254.5 million of outstanding, floating-rate debt of which $78.3 million was not offset with interest rate swap transactions that effectively convert the debt to a fixed rate. Credit Risk ----------- In addition to the risk associated with price movements, credit risk is also inherent in the Company's risk management activities. Credit risk relates to the risk of loss resulting from non-performance of contractual obligations by a counterparty. While the Company has not experienced significant losses due to the credit risk associated with these arrangements, the Company has off-balance sheet risk to the extent that the counterparties to these transactions may fail to perform as required by the terms of each such contract. 11 (10) SUBSEQUENT EVENTS Acquisitions ------------ Early in the second quarter of 2001, the Company's independent power subsidiary, Black Hills Energy Capital, closed on the purchase of the Fountain Valley facility, a 240 megawatt generation facility located near Colorado Springs, Colorado, featuring six LM-6000 simple-cycle, gas-fired turbines. The facility is currently under construction and is expected to come on-line early in the third quarter of 2001. The facility was purchased from Enron Corporation for approximately $175 million and was financed primarily with non-recourse financing from Union Bank of California. In addition, the Company has obtained an 11-year contract with Public Service of Colorado to utilize the facility for peaking purposes. The contract is a tolling arrangement in which the Company assumes no fuel risk. ITEM 2. RESULTS OF OPERATIONS Consolidated Results Consolidated earnings for the three months ended March 31, 2001 were $21.1 million compared to $9.1 million in the same period of the prior year. Consolidated earnings from continuing operations for the three month period ended March 31, 2001 were $16.2 million compared to $7.2 million for the same period of the prior year. As discussed in Note 2 of Notes to Consolidated Financial Statements, during the quarter ended March 31, 2001, the Company distributed ownership interest in Wyodak to its parent company, Black Hills Corporation. The consolidated financial statements have been restated to reflect the continuing operations of the Company for all periods presented. The increase in earnings from continuing operations for the three months ended March 31, 2001 were driven by expanded power generation and increased wholesale off-system utility sales. Unusual energy market conditions in the United States continue to contribute to our strong financial performance. The increase in earnings from discontinued operations for the three months ended March 31, 2001 were primarily driven by strong natural gas marketing activity, increased fuel production and expanded power generation partially offset by losses in the communications group. Strong earnings growth for both the continuing and discontinued operations of the Company was partially offset by reserves for exposure to the unstable markets in the western United States. Consolidated revenues from continuing operations for the three months ended March 31, 2001 were $88.6 million compared to $33.3 million for the same period of the prior year. The growth in revenues was a result of high electric energy prices, primarily as a result of extreme price volatility in the western markets, and increases in off-system sales by our electric utility. 12 Electric Utility Three Months Ended March 31 2001 2000 ---- ---- (in thousands) Revenue $70,580 $33,299 Operating income 28,664 13,644 Net income 17,337 7,225 EBITDA 33,167 17,478 Electric utility revenues increased 112 percent for the three month periods ended March 31, 2001 compared to the same period in the prior year. Earnings for the segment increased 141 percent over the same period. The increase in revenues and earnings was primarily due to a 145 percent increase in wholesale off-system sales at average prices that were seven times higher than the average prices in the same periods of the prior year. The increase in off-system sales was driven by high spot market prices for energy, which enabled us to generate more energy from our combustion turbine facilities, including the Neil Simpson combustion turbine which we placed into commercial operation in June 2000. Independent Power Production Our independent power segment produced revenues of $18.0 million and earnings of $(1.1) million for the three month period ended March 31, 2001. Current periods results stem from our acquisition of Indeck Capital in the third quarter of 2000. The net loss for the current three month period is due to credit reserves of $2.5 million being established to offset this segments' direct exposure to the volatile western markets. Early in the second quarter of 2001, we closed on the purchase of the Fountain Valley facility, a 240 megawatt generation facility located near Colorado Springs, Colorado, featuring six LM-6000 simple-cycle, gas-fired turbines. The facility is currently under construction and is expected to come on-line early in the third quarter of 2001. In addition, we obtained an 11-year contract with Public Service of Colorado to utilize the facility for peaking purposes. The contract is a tolling arrangement in which the Company assumes no fuel risk. 13 BLACK HILLS POWER, INC. Part II - Other Information Item 1. Legal Proceedings ----------------- On April 3, 2001, our former subsidiary, Wyodak Resources Development Corporation, reached a settlement of ongoing litigation with PacifiCorp filed in the United States District Court, District of Wyoming (File No. 0cv-155B). For more information on this legal proceeding, see Note 8 - LEGAL PROCEEDINGS - of Notes to Consolidated Financial Statements in this Form 10-Q. Item 6. Exhibits and Reports of Form 8-K -------------------------------- None 14 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) Mark T. Thies ---------------------------------------------- Mark T. Thies, Senior VP & CFO (Principal Financial Officer) Dated: May 21, 2001 15