BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: A diversified energy holding company operating in the United States with segments including Integrated Energy (Mining, Oil & Gas, Energy Marketing, Power Generation), Electric Utility, and Communications.

Key Financial Metrics (Six Months Ended June 30, 2003)

Note: Total debt for 2002 is not explicitly summed in the provided text, but current maturities were $36,457 and long-term debt was $476,024 as of June 30, 2002.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 39% year-over-year to $599.4 million, driven by higher production volumes and prices across all segments.
• Segment Performance:
  • Power Generation: Revenues up 53% due to increased generating capacity (1,046 MW in service vs. 646 MW in 2002).
  • Oil & Gas: Revenues up 68% due to a 33% production increase (partially from the Mallon Resources acquisition) and higher prices.
  • Energy Marketing: Revenues up 45% due to higher crude oil volumes and prices, though net income was impacted by a regulatory settlement.
  • Electric Utility: Revenues up 10% due to increased off-system sales, though net income declined due to higher fuel and interest costs.
• Acquisitions: Completed the acquisition of Mallon Resources Corporation on March 10, 2003, for approximately $51.2 million, adding significant oil and gas reserves.
• Capital Structure: Issued 4.6 million shares of common stock (net proceeds ~$118 million) and $250 million in 10-year notes to repay short-term debt and credit facilities.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • CFTC Settlement: Recorded a $3.0 million charge ($0.10 per share) in Q2 2003 related to a settlement with the Commodity Futures Trading Commission regarding trade reporting practices by a former subsidiary.
  • Accounting Changes: Adopted EITF 02-3 (energy trading contracts) and SFAS 143 (asset retirement obligations). The net effect was a $2.7 million charge ($0.09 per share) for the six-month period.
• Guidance: Revised long-term average annual earnings per share growth target to approximately 8%. Capital expenditures for 2003 are expected to approximate $110 million.
• Subsequent Event: Announced the sale of seven hydroelectric power plants in New York for approximately $186 million, expected to close in Q3 2003. This sale is anticipated to reduce annual earnings by approximately $0.07 per share.
• Risks:
  • Legal/Regulatory: Ongoing investigations by FERC regarding "anomalous bidding behavior" and potential liability from forest fires (Hell Canyon and Grizzly Gulch) allegedly caused by power line contact.
  • Market Risk: Exposure to commodity price volatility and interest rate fluctuations, managed through derivative instruments.
  • Credit Rating: Downgraded to "BBB-" by Standard & Poor's in May 2003; further downgrades could increase interest expenses.

Investor Verification Checklist

• CFTC Settlement Impact: Verify if the $3.0 million penalty is fully accrued and if there are potential for additional fines or legal proceedings.
• Hydroelectric Asset Sale: Confirm the closing date and final purchase price of the New York hydroelectric assets to assess the impact on future earnings and debt reduction.
• Forest Fire Litigation: Monitor the status of the Hell Canyon and Grizzly Gulch fire lawsuits to evaluate potential liability exposure.
• Debt Covenants: Review compliance with debt covenants, specifically the net worth and leverage ratios, given the recent credit rating downgrade.
• Accounting Policy Changes: Assess the long-term impact of EITF 02-3 adoption on the Energy Marketing segment's volatility and earnings recognition.