BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2004
Business Overview: A diversified energy holding company operating in the United States through two primary groups: Wholesale Energy (Power Generation, Oil & Gas, Mining, Energy Marketing) and Retail Services (Electric Utility, Communications).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 5.9% to $274.3 million, driven by lower crude oil marketing volumes and decreased off-system electric sales.
• Profitability Drop: Net income available for common stock fell 31.3% to $9.7 million. Diluted EPS dropped from $0.52 to $0.30. This decline is attributed to lower wholesale energy margins, increased fuel costs at the Las Vegas facility, and a higher share count (5.4 million increase) due to a 2003 stock offering.
• Segment Performance:
  • Power Generation: Income from continuing operations swung to a loss of $2.1 million from a profit of $3.4 million, primarily due to lower market-based revenues and higher fuel/depreciation costs.
  • Oil & Gas: Income increased 110% to $3.7 million, driven by a 60% volume increase from the Mallon Resources acquisition and higher gas prices.
  • Electric Utility: Income decreased 25% to $5.0 million due to an 18% drop in off-system sales and higher purchased power costs.
• Balance Sheet Shifts: Cash and cash equivalents increased significantly to $191.5 million (from $63.1 million), aided by an $18.8 million federal income tax refund. Long-term debt increased to $822.3 million, reflecting the consolidation of the Wygen plant Variable Interest Entity (VIE) in late 2003.

Guidance, Outlook, and Risks

• 2004 Guidance: Management expects 2004 income from continuing operations to approximate $2.00 to $2.15 per share. This range is narrower than prior expectations due to delays in deploying excess cash for capital investments and the timing of new development projects.
• Outlook: Strong performance is expected from the Oil & Gas segment due to production increases and favorable prices. Energy marketing volumes are also expected to rise.
• Pending Acquisition: On January 13, 2004, the company agreed to acquire Cheyenne Light, Fuel & Power Company from Xcel Energy Inc. for cash and debt assumption. Closing is expected before December 31, 2004, subject to regulatory approval.
• Discontinued Operations: The Pepperell power plant (40 MW) is held for sale and classified as discontinued operations. The company sold its hydroelectric assets in New York in September 2003.
• Risks: Key risks include volatility in energy commodity prices, creditworthiness of trading counterparties, regulatory changes, and the timing of capital deployment. The company maintains significant guarantees totaling $187.2 million, primarily related to the Wygen plant lease.

Investor Verification Checklist

• Wygen Plant Consolidation: Verify the impact of the December 2003 consolidation of the Wygen VIE on debt levels and depreciation/interest expense recognition.
• CheYenne Acquisition: Monitor regulatory approval status and closing timeline for the Cheyenne Light, Fuel & Power acquisition.
• Capital Deployment: Assess the company's ability to deploy its $191.5 million cash balance into accretive projects within the 2004 fiscal year to meet earnings guidance.
• Energy Marketing Volatility: Review the impact of EITF 02-3 accounting rules on reported earnings volatility regarding natural gas marketing derivatives versus physical inventory.
• Dividend Sustainability: Confirm the ability to maintain the increased quarterly dividend of $0.31 per share given the lower Q1 earnings.