Business Context and Reporting Period
Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2001
Business Overview: A diversified energy holding company operating in the United States. Key segments include a regulated electric utility (Black Hills Power), an Independent Energy group (mining, oil & gas, fuel marketing, independent power), and a communications group.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | 3 Months Ended Sept 30, 2001 |
9 Months Ended Sept 30, 2001 |
12 Months Ended Sept 30, 2001 |
|---|---|---|---|
| Operating Revenues | $302,398 | $1,283,140 | $1,868,869 |
| Operating Income | $29,439 | $155,161 | $195,300 |
| Net Income (Available to Common) | $16,235 | $82,838 | $102,037 |
| Earnings Per Share (Diluted) | $0.61 | $3.28 | $4.12 |
| Cash and Equivalents | $51,735 | - | - |
| Long-Term Debt (Net of Current) | $434,993 | - | - |
| Notes Payable (Short-Term) | $320,037 | - | - |
Material Changes vs. Prior Period
- Revenue Volatility: Operating revenues for the three months ended Sept 30, 2001, declined significantly to $302.4 million from $453.2 million in the prior year quarter. This decrease was primarily driven by a sharp drop in energy commodity prices (natural gas and electricity) in the third quarter of 2001. Conversely, nine-month and twelve-month revenues increased due to high prices earlier in the year and increased marketing volumes.
- Earnings Growth: Despite the quarterly revenue drop, net income for the nine months ended Sept 30, 2001, surged to $82.8 million compared to $33.4 million in the prior year. This was driven by strong performance in wholesale natural gas marketing and increased off-system electricity sales.
- Segment Performance:
- Independent Energy: Earnings increased 29% year-over-year for the quarter, aided by a $3.4 million after-tax gain from a coal contract settlement with PacifiCorp.
- Electric Utility: Earnings decreased due to a 32% drop in prices received for off-system wholesale sales.
- Communications: Continued to report losses ($2.7 million for the quarter) as the group invests in network build-out.
- Acquisitions: The company acquired the Fountain Valley facility (240 MW) and the Las Vegas co-generation project (273 MW) from Enron, adding significant capacity to the Independent Power segment.
Guidance, Outlook, and Risks
- Outlook: Management expects earnings growth to be driven by expansion in independent power production. The electric utility is expected to see modest growth due to a rate freeze extended until January 1, 2005. The Communications group is not expected to achieve net income until 2004, with estimated 2001 losses of approximately $12 million.
- Capital Resources: The company completed a $400 million revolving credit facility in Q3 2001. It also raised approximately $163 million via a common stock offering in Q2 2001, proceeds of which were used to pay down short-term debt and fund construction.
- Risks and Contingencies:
- Market Volatility: Earnings are sensitive to extreme volatility in western energy markets. High prices in 2000 and early 2001 were attributed to shortages that may not recur.
- Legal Proceedings: Litigation with PacifiCorp regarding coal supply was settled in April 2001, resulting in new long-term agreements and a one-time payment of $7.3 million.
- Accounting Changes: The company is evaluating the impact of new FASB standards (SFAS 141, 142, 143, 144) regarding business combinations, goodwill, asset retirement obligations, and impairment, with adoption dates ranging from 2002 to 2003.
Investor Verification Checklist
- Energy Price Sensitivity: Verify the sustainability of earnings given the sharp decline in Q3 2001 commodity prices compared to the record highs of 2000/early 2001.
- Communications Segment Losses: Monitor the trajectory of losses in the Communications group and the timeline for profitability (projected 2004).
- Debt Structure: Review the terms of the new $400 million revolving credit facility and the non-recourse project financing for the Las Vegas and Fountain Valley acquisitions.
- Acquisition Integration: Assess the operational status and revenue contribution of the newly acquired Enron power plants (Fountain Valley and Las Vegas).
- Derivative Exposure: Examine the fair value of derivative instruments ($67.3 million assets vs. $68.2 million liabilities) and the impact of SFAS 133 on earnings volatility.