BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 (Nine Months Ended Sept 30, 2003)

Note: Total Revenues for 2003 include a one-time $114.0 million contract termination revenue.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 52% year-over-year (excluding contract termination revenue, operating revenues grew 34%). This was driven by higher production volumes in Oil & Gas (due to the Mallon Resources acquisition) and increased power generation capacity.
• Unusual Items Impacting Income:
  • Contract Termination Gain: Received $114.0 million for terminating a 15-year contract with Allegheny Energy Supply Company for the Las Vegas Cogeneration II plant.
  • Asset Impairment Charge: Recorded a $117.2 million non-cash impairment charge related to the Las Vegas Cogeneration II facility following the contract termination.
  • Discontinued Operations: Sold seven hydroelectric power plants in New York for approximately $186 million, resulting in a net gain on disposal. Also adopted a plan to sell the Pepperell power plant.
  • Regulatory Settlement: Paid a $3.0 million civil penalty to the CFTC regarding natural gas trading reporting practices.
• Capital Structure: Issued 4.6 million shares of common stock (April 2003) and $250 million in 10-year notes (May 2003). Proceeds were used to repay significant short-term debt and credit facilities.
• Accounting Changes: Adopted EITF 02-3 (energy trading contracts) and SFAS 143 (asset retirement obligations), resulting in a net charge of approximately $2.7 million to income from continuing operations.

Guidance, Outlook, and Risks

• Earnings Guidance: Management expects earnings from continuing operations in 2004 to be comparable to 2003 results, citing the impact of the Las Vegas plant contract status and the sale of hydroelectric assets.
• Long-Term Growth: Revised long-term average annual earnings per share growth target to approximately 8%.
• Liquidity: Strong liquidity position with $269.8 million in unrestricted cash and $377.3 million in available borrowing capacity under revolving credit facilities. No borrowings were outstanding under these facilities as of September 30, 2003.
• Key Risks:
  • Regulatory Investigations: Ongoing FERC investigations into "anomalous bidding behavior" and the Enron "Qualifying Facility" status of the Las Vegas Cogeneration I facility.
  • Legal Proceedings: Litigation regarding the Hell Canyon and Grizzly Gulch fires (alleged negligence causing forest fires); management believes outcomes will not be material.
  • Market Volatility: Exposure to commodity price fluctuations and potential price limitations in wholesale power markets.
  • Credit Rating: Downgraded to "BBB-" by S&P in May 2003; further downgrades could increase interest expenses.

Investor Verification Checklist

• Impairment vs. Gain Netting: Verify the net impact of the $114 million contract termination gain versus the $117.2 million impairment charge on the Las Vegas Cogeneration II plant.
• Discontinued Operations: Confirm the final tax implications and cash utilization from the $186 million sale of New York hydroelectric assets.
• Debt Covenants: Review compliance with the new net worth and leverage covenants in the $225 million and $200 million revolving credit facilities.
• Legal Exposure: Monitor the status of the Hell Canyon and Grizzly Gulch fire litigation and the FERC investigation into Enron-related qualifying facility status.
• Accounting Adjustments: Assess the long-term impact of adopting EITF 02-3 on the presentation of energy marketing revenues and earnings.