BKH

Business Context and Reporting Period

Company: Black Hills Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2002
Business Overview: A diversified energy holding company operating in the United States. Key segments include an Electric Utility (regulated), Integrated Energy (unregulated fuel marketing, power generation, oil & gas, coal mining), and Communications. The company serves approximately 59,200 utility customers and operates broadband services in South Dakota.

Key Financial Metrics

Note: Total Debt calculated as Current maturities of long-term debt ($42,115) + Notes payable ($390,196) + Long-term debt ($465,097) = $897,408. However, Notes Payable often includes revolving credit facilities. The text explicitly states $389 million of bank borrowings outstanding under facilities and $42 million current maturities. The balance sheet lists Notes Payable at $390,196 and Long-term debt at $465,097 plus current maturities of $42,115. Total debt leverage is stated as 63%.

Material Changes vs. Prior Period

• Revenue Decline: Q1 2002 revenues dropped 46% to $301.9 million from $561.7 million in Q1 2001. This was driven by a substantial decrease in prevailing prices for natural gas, crude oil, and wholesale electricity. Q1 2001 benefited from unusual market conditions (shortages) in the West.
• Earnings Decline: Net income available for common stock fell 56% to $14.0 million ($0.52/share) from $32.1 million ($1.37/share). The decrease is attributed to lower commodity prices and unrealized losses in the Fuel Marketing segment due to mark-to-market accounting.
• Segment Performance:
  • Fuel Marketing: Revenues and earnings plummeted due to lower margins and commodity prices. Unrealized mark-to-market losses were $3.2 million in Q1 2002 vs. gains of $5.0 million in Q1 2001.
  • Power Generation: Revenues and earnings increased significantly due to additional generating capacity (646 MW in service vs. 250 MW in 2001) and the collection of previously reserved amounts related to California operations.
  • Electric Utility: Revenues and net income decreased 47% and 55% respectively, primarily due to an 81% drop in the average price per megawatt-hour for off-system sales.
  • Communications: Net loss narrowed to $2.2 million from $3.9 million, driven by an 82% increase in the customer base.
• Acquisitions: The company acquired 100% ownership of Millennium Pipeline/Terminal ($11.0 million) and increased its stake in Harbor Cogeneration to 83% ($25.7 million) in March 2002.

Guidance, Outlook, and Risks

• Accounting Changes: Adopted SFAS 142 (Goodwill) on Jan 1, 2002. Goodwill is no longer amortized but tested for impairment. This resulted in a $1.0 million after-tax benefit from negative goodwill write-off and a $1.3 million impairment charge in the coal marketing business.
• Liquidity & Financing:
  • Closed $135 million senior secured financing for Arapahoe and Valmont facilities.
  • Secured a $50 million bridge credit agreement expiring June 30, 2002.
  • Remaining borrowing capacity under bank facilities was $27 million as of March 31, 2002.
  • Management believes capital is sufficient to fund requirements through July 2002.
• Future Projects: Seeking $200-$220 million in non-recourse financing for the Las Vegas Project (277 MW) by June 30, 2002. Planning an $80-$100 million bond offering for the Electric Utility segment.
• Communications Outlook: Expects net losses of approximately $6.5 million for calendar year 2002, with profitability expected by 2004. Risks include inability to attract customers or technological obsolescence.
• Risks: Exposure to volatile energy markets, counterparty credit risk (specifically mentioning Enron exposure in prior periods), regulatory changes, and the ability to secure future financing.

Investor Verification Checklist

• Commodity Price Sensitivity: Verify the impact of current natural gas and electricity spot prices on the Fuel Marketing and Power Generation segments, given the heavy reliance on mark-to-market accounting.
• Debt Covenants: Confirm compliance with bank facility covenants, specifically the consolidated net worth ($375M + 50% of net income) and interest coverage ratios (3.00 to 1.00).
• Financing Execution: Monitor the status of the $200-$220 million financing for the Las Vegas Project and the renewal of the $200 million credit facility expiring August 2002.
• Communications Growth: Track customer acquisition rates to validate the path to profitability by 2004 and assess the risk of asset write-downs.
• Goodwill Impairment: Review the annual impairment testing of goodwill and intangible assets, particularly in the Power Generation and Fuel Marketing segments.