Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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
| Metric (in thousands, except per share) | Q1 2003 | Q1 2002 |
|---|---|---|
| Operating Revenues | $299,332 | $170,635 |
| Operating Income | $39,224 | $32,540 |
| Net Income | $14,178 | $14,064 |
| Net Income Available for Common Stock | $14,121 | $14,008 |
| Diluted EPS (Total) | $0.52 | $0.52 |
| Cash and Cash Equivalents | $68,341 | $66,096 |
| Total Debt (Short-term + Long-term) | $978,328 | $896,440 |
| Stockholders' Equity | $555,652 | $525,692 |
Note: Total Debt calculated as Current maturities of long-term debt ($24,916) + Notes payable ($336,517) + Long-term debt ($616,895) for Q1 2003.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 75% to $299.3 million, driven by a 126% increase in Energy Marketing revenues (due to higher crude oil and natural gas volumes and prices) and a 53% increase in Power Generation revenues.
- Accounting Changes: Net income was impacted by a $2.7 million charge ($0.10 per share) due to changes in accounting principles. This included a $2.9 million charge for adopting EITF 02-3 (energy trading contracts) and a $0.2 million benefit from adopting SFAS 143 (asset retirement obligations).
- Acquisition: Completed the acquisition of Mallon Resources Corporation on March 10, 2003, for approximately $51.2 million, adding oil and gas reserves primarily in the San Juan Basin.
- Discontinued Operations: No loss from discontinued operations in Q1 2003, compared to a $1.7 million loss in Q1 2002 related to the disposal of the coal marketing subsidiary.
Guidance, Outlook, Risks, and Unusual Items
- Guidance: Management reaffirmed a long-term EPS growth target of 8% to 10% annually. However, due to the dilutive effect of a common stock offering completed on April 30, 2003, 2003 EPS from continuing operations is expected to approximate 2002 results.
- Subsequent Events: On April 30, 2003, the company issued 4.6 million shares of common stock at $27 per share, raising approximately $118 million in net proceeds to repay debt. On May 13, 2003, the corporate credit rating was downgraded to "BBB-" by Standard & Poor's.
- Legal Proceedings:
- Forest Fires: Litigation pending regarding the Hell Canyon (2001) and Grizzly Gulch (2002) fires, alleging power line contact caused the fires. Management believes potential claims will not have a material adverse effect.
- FERC Investigation: Ongoing investigation into the Las Vegas Cogeneration I Facility regarding "qualifying facility" status under PURPA, originally owned by an Enron affiliate. Potential liabilities include refunds, fines, or penalties.
- CFTC Investigation: Ongoing investigation into natural gas and electricity trading reporting practices. The company identified instances where former employees provided inaccurate reports to trade publications.
- Unusual Items: Adoption of EITF 02-3 resulted in a shift from mark-to-market accounting to historical cost for certain energy trading contracts, impacting reported earnings.
Investor Verification Checklist
- Verify the impact of the April 30, 2003, common stock offering on future earnings per share dilution.
- Monitor the outcome of the CFTC investigation regarding trading reporting inaccuracies and potential fines.
- Assess the financial exposure from the FERC investigation into the Las Vegas Cogeneration I Facility and the viability of indemnification claims against the former Enron affiliate.
- Review the status of litigation regarding the Hell Canyon and Grizzly Gulch forest fires.
- Confirm the company's compliance with debt covenants, particularly the liquidity covenant requiring $30 million in liquid assets, following the recent credit rating downgrade.