BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: A diversified energy holding company operating regulated electric utilities and unregulated independent energy businesses (mining, oil and gas, fuel marketing, independent power, and communications). Operations are primarily located in the United States.

Key Financial Metrics (Six Months Ended June 30, 2001)

Note: Debt figures include current maturities of long-term debt, notes payable, and long-term debt net of current maturities.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 68% year-over-year for the six-month period, driven by high energy commodity prices (natural gas and electricity) through May 2001 and increased fuel marketing volumes.
• Earnings Surge: Net income available for common stock increased 290% compared to the prior year. Management attributes more than half of the Q2 2001 EPS ($1.34) to high prices and trading margins during April and May.
• Segment Performance:
  • Independent Energy: Revenues up 66%; Net income up 457%. Driven by fuel marketing and wholesale power sales.
  • Electric Utility: Revenues up 91%; Net income up 138%. Driven by off-system wholesale sales at significantly higher prices.
  • Communications: Continued losses ($6.7 million for six months) due to network build-out costs.
• Capital Structure: Issued approximately 3.4 million shares of common stock in Q1/Q2 2001, raising net proceeds of ~$163 million. Proceeds were used to repay ~$163 million in short-term borrowings.

Guidance, Outlook, and Risks

• Market Conditions: Management notes that energy prices decreased substantially in June 2001 following the shortages in the West. Future earnings depend on commodity prices and market demand.
• Communications Outlook: Losses are expected to continue as the group completes its network. Net income is projected for 2004. Estimated net losses for 2001 were revised upward to $12 million.
• Acquisitions & Expansion:
  • Closed acquisition of the Fountain Valley facility (240 MW) in Colorado; expected online Q3 2001.
  • Announced agreement to purchase a 273 MW gas-fired complex in Las Vegas, Nevada, from Enron. Total cost estimated at $330 million, to be financed primarily with non-recourse debt.
• Legal Proceedings: Settled litigation with PacifiCorp regarding coal supply agreements. The settlement includes a new long-term coal supply agreement and a one-time payment of $7.4 million to be recognized over the contract life.
• Accounting Changes: Adopted SFAS 133 (Derivatives) on Jan 1, 2001. Evaluating impact of SFAS 141 and 142 (Business Combinations/Goodwill) effective Jan 1, 2002.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify the sustainability of Q2 earnings given the sharp decline in natural gas and electricity prices noted in June 2001.
• Communications Segment Losses: Monitor the revised 2001 loss estimate ($12 million) and the timeline for profitability (2004).
• Debt Financing: Confirm the terms and closing of the non-recourse financing for the new Las Vegas generation project ($330 million).
• Derivative Exposure: Review the fair value adjustments on energy trading derivatives ($58.8 million assets vs. $51.0 million liabilities) and their impact on volatility.
• Regulatory Environment: Assess risks related to the rate freeze extension for the electric utility (until Jan 1, 2005) and potential regulatory changes in western wholesale markets.