BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 8-K (Current Report)
Date of Filing: November 25, 2002
Reporting Period: Reissuance of audited financial statements for the years ended December 31, 2001, 2000, and 1999.

This filing announces the completion of an audit by Deloitte & Touche LLP, replacing the original auditor, Arthur Andersen LLP. The reissued statements reflect presentation changes regarding discontinued operations (disposal of Black Hills Coal Network) and energy trading results (net basis reporting per EITF requirements), as well as updated disclosures for subsequent events in 2002. Net income and earnings per share remain unchanged from previously reported amounts.

Key Financial Metrics (Year Ended Dec 31, 2001)

Material Changes and Restatements

• Discontinued Operations: Results for the coal marketing subsidiary (Black Hills Coal Network) have been reclassified as discontinued operations following the sale finalized in July 2002. This change affects the presentation of revenues and income but does not alter net income.
• Energy Trading Reclassification: In accordance with EITF requirements, energy trading revenues and expenses are now presented on a net basis. This reduced reported total revenues by approximately $1.0 billion in 2001, $1.3 billion in 2000, and $0.6 billion in 1999, with a corresponding reduction in fuel and purchased power costs. Operating income and net income were unaffected.
• Subsequent Events: Updated disclosures include the $1.0 million after-tax charge related to the disposal of the coal marketing business and the $4.4 million after-tax charge in 2001 related to financial exposure to Enron Corporation.

Outlook, Risks, and Management Commentary

Management Commentary: Record earnings in 2001 were driven by strong natural gas marketing activity, increased fuel production, and expanded power generation, benefiting from unusual energy market conditions (gas/electricity shortages) in the West. The Integrated Energy group contributed 66% of net income from continuing operations. The Communications group continued to incur losses ($12.3 million in 2001) as the company builds its broadband network, with profitability expected by 2004.

Key Risks and Contingencies:

• Enron Exposure: A $4.4 million after-tax charge was recognized in 2001 due to Enron's bankruptcy. The company is seeking to net obligations to recover the value of fuel swaps.
• Market Volatility: Results are heavily influenced by commodity prices and trading margins. Future earnings could be impacted by changes in western power markets and regulatory actions.
• Communications Investment: Significant capital investment ($125 million as of 2001) in the communications network carries the risk of asset write-downs if customer acquisition targets are not met or technology becomes obsolete.
• Acquisitions: The company entered a definitive agreement in October 2002 to acquire Mallon Resources Corporation for an estimated $52 million, expected to double proven oil and gas reserves.

Investor Verification Checklist

• Enron Recovery Status: Verify the outcome of efforts to net obligations with Enron to determine if the $4.4 million charge is fully recoverable.
• Communications Profitability Timeline: Monitor customer acquisition rates and capital expenditure burn to assess if the 2004 profitability target remains realistic.
• Debt Covenants: Review the impact of credit rating triggers on the $400 million committed lines of credit, noting that rating triggers were amended in Q2 2002.
• Mallon Acquisition Integration: Track the closing of the Mallon Resources acquisition and the subsequent impact on oil and gas production volumes and reserves.
• Discontinued Operations: Confirm that the coal marketing business has been fully divested and that no further liabilities remain associated with the Black Hills Coal Network.