UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
|
EXCHANGE ACT OF 1934 |
|
For the quarterly period ended June 30, 2007. |
|
|
OR |
|
|
|
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
|
EXCHANGE ACT OF 1934 |
|
For the transition period from __________ to __________. |
|
|
|
Commission File Number 001-31303 |
Black Hills Corporation | |
Incorporated in South Dakota |
IRS Identification Number 46-0458824 |
625 Ninth Street | |
Rapid City, South Dakota 57701 | |
|
|
Registrants telephone number (605) 721-1700 | |
|
|
Former name, former address, and former fiscal year if changed since last report | |
NONE |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes |
x |
|
No |
o |
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer |
x |
|
Accelerated filer |
o |
|
Non-accelerated filer |
o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes |
o |
|
No |
x |
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the latest practicable date.
Class |
Outstanding at July 31, 2007 |
|
|
Common stock, $1.00 par value |
37,750,250 shares |
TABLE OF CONTENTS
|
|
Page |
|
|
|
|
Glossary of Terms |
3-4 |
|
|
|
PART I. |
FINANCIAL INFORMATION |
|
|
|
|
Item 1. |
Financial Statements |
|
|
|
|
|
Condensed Consolidated Statements of Income |
|
|
Three and Six Months Ended June 30, 2007 and 2006 |
5 |
|
|
|
|
Condensed Consolidated Balance Sheets |
|
|
June 30, 2007, December 31, 2006 and June 30, 2006 |
6 |
|
|
|
|
Condensed Consolidated Statements of Cash Flows |
|
|
Six Months Ended June 30, 2007 and 2006 |
7 |
|
|
|
|
Notes to Condensed Consolidated Financial Statements |
8-27 |
|
|
|
Item 2. |
Managements Discussion and Analysis of Financial Condition and |
|
|
Results of Operations |
28-51 |
|
|
|
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk |
52-55 |
|
|
|
Item 4. |
Controls and Procedures |
55 |
|
|
|
PART II. |
OTHER INFORMATION |
|
|
|
|
Item 1. |
Legal Proceedings |
56 |
|
|
|
Item 1A. |
Risk Factors |
56 |
|
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
57 |
|
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
58 |
|
|
|
Item 6. |
Exhibits |
59 |
|
|
|
|
Signatures |
60 |
|
|
|
|
Exhibit Index |
61 |
2
GLOSSARY OF TERMS
The following terms and abbreviations appear in the text of this report and have the definitions described below:
AFUDC |
Allowance for Funds Used During Construction |
Aquila |
Aquila, Inc. |
Bbl |
Barrel |
BHEP |
Black Hills Exploration and Production, Inc., a direct, wholly-owned |
|
subsidiary of Black Hills Energy, Inc. |
BHER |
Black Hills Energy Resources, Inc., a direct, wholly-owned subsidiary of |
|
Black Hills Energy, Inc. |
Black Hills Energy |
Black Hills Energy, Inc., a direct, wholly-owned subsidiary of the Company |
Black Hills Generation |
Black Hills Generation, Inc., a direct, wholly-owned subsidiary of |
|
Black Hills Energy, Inc. |
Black Hills Power |
Black Hills Power, Inc., a direct, wholly-owned subsidiary of the Company |
Black Hills Wyoming |
Black Hills Wyoming, Inc., an indirect, wholly-owned subsidiary of Black |
|
Hills Energy, Inc. |
Btu |
British thermal unit |
Cheyenne Light |
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned |
|
subsidiary of the Company |
Cheyenne Light Pension Plan |
The Cheyenne Light, Fuel and Power Company Pension Plan |
Dth |
Dekatherms |
EITF |
Emerging Issues Task Force |
Enserco |
Enserco Energy Inc., a direct, wholly-owned subsidiary of Black Hills |
|
Energy, Inc. |
FASB |
Financial Accounting Standards Board |
FERC |
Federal Energy Regulatory Commission |
FIN 48 |
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes |
|
an Interpretation of FASB Statement 109 |
GAAP |
Generally Accepted Accounting Principles |
GECC |
General Electric Capital Corporation |
Great Plains |
Great Plains Energy Incorporated |
Indeck |
Indeck Capital, Inc. |
LIBOR |
London Interbank Offered Rate |
LOE |
Lease Operating Expense |
Las Vegas I |
Las Vegas I gas-fired power plant |
Las Vegas II |
Las Vegas II gas-fired power plant |
LVC |
Las Vegas Cogeneration Limited Partnership, an indirect, wholly-owned |
|
subsidiary of Black Hills Energy, Inc. |
Mbbl |
One thousand barrels |
Mcf |
One thousand cubic feet |
Mcfe |
One thousand cubic feet equivalent |
MMBtu |
One million British thermal units |
MMcf |
One million cubic feet |
MMcfe |
One million cubic feet equivalent |
Moodys |
Moodys Investor Services, Inc. |
MW |
Megawatt |
MWh |
Megawatt-hour |
Nevada Power |
Nevada Power Company |
PNM |
PNM Resources, Inc. |
PPA |
Power Purchase Agreement |
3
SAB |
SEC Staff Accounting Bulletin |
SAB 108 |
SAB 108, Effects of Prior Year Misstatement on Current Year Financial |
|
Statements |
SEC |
U. S. Securities and Exchange Commission |
SFAS |
Statement of Financial Accounting Standards |
SFAS 71 |
SFAS 71, Accounting for the Effects of Certain Types of Regulation |
SFAS 109 |
SFAS 109, Accounting for Income Taxes |
SFAS 133 |
SFAS 133, Accounting for Derivative Instruments and Hedging Activities |
SFAS 144 |
SFAS 144, Accounting for the Impairment of Long-lived Assets |
SFAS 157 |
SFAS 157, Fair Value Measurements |
SFAS 158 |
SFAS 158, Employers Accounting for Defined Benefit Pension and Other |
|
Postretirement Plans, an Amendment of FASB Statements No. 87, 88 |
|
106 and 132(R) |
SFAS 159 |
SFAS 159, The Fair Value Option for Financial Assets and Financial |
|
Liabilities |
S&P |
Standard & Poors Rating Services |
Valencia |
Valencia Power, LLC, an indirect, wholly-owned subsidiary of Black Hills |
|
Energy, Inc. |
WPSC |
Wyoming Public Service Commission |
WRDC |
Wyodak Resources Development Corp., a direct, wholly-owned subsidiary |
|
of Black Hills Energy, Inc. |
4
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
|
Three Months Ended |
Six Months Ended | ||||||
|
June 30, |
June 30, | ||||||
|
2007 |
2006 |
2007 |
2006 | ||||
|
(in thousands, except per share amounts) | |||||||
|
|
|
|
|
|
|
|
|
Operating revenues |
$ |
163,943 |
$ |
153,813 |
$ |
350,476 |
$ |
325,704 |
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Fuel and purchased power |
|
36,598 |
|
49,280 |
|
87,886 |
|
103,409 |
Operations and maintenance |
|
20,718 |
|
22,073 |
|
41,278 |
|
44,077 |
Administrative and general |
|
26,306 |
|
20,105 |
|
51,969 |
|
45,056 |
Depreciation, depletion and amortization |
|
24,914 |
|
22,378 |
|
48,082 |
|
43,266 |
Taxes, other than income taxes |
|
10,091 |
|
7,546 |
|
19,990 |
|
18,097 |
|
|
118,627 |
|
121,382 |
|
249,205 |
|
253,905 |
|
|
|
|
|
|
|
|
|
Operating income |
|
45,316 |
|
32,431 |
|
101,271 |
|
71,799 |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
(9,977) |
|
(12,910) |
|
(21,086) |
|
(24,910) |
Interest income |
|
705 |
|
346 |
|
1,439 |
|
1,014 |
Allowance for funds used during |
|
|
|
|
|
|
|
|
construction equity |
|
1,206 |
|
|
|
3,040 |
|
|
Other (expense) income, net |
|
(2) |
|
123 |
|
346 |
|
412 |
|
|
(8,068) |
|
(12,441) |
|
(16,261) |
|
(23,484) |
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
|
|
|
|
|
|
before equity in earnings of |
|
|
|
|
|
|
|
|
unconsolidated subsidiaries, minority |
|
|
|
|
|
|
|
|
interest and income taxes |
|
37,248 |
|
19,990 |
|
85,010 |
|
48,315 |
Equity in earnings (loss) of unconsolidated |
|
|
|
|
|
|
|
|
subsidiaries |
|
673 |
|
(1,145) |
|
1,518 |
|
(632) |
Minority interest |
|
(95) |
|
(91) |
|
(188) |
|
(177) |
Income tax expense |
|
(12,595) |
|
(6,386) |
|
(28,608) |
|
(16,577) |
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
25,231 |
|
12,368 |
|
57,732 |
|
30,929 |
(Loss) income from discontinued operations, |
|
|
|
|
|
|
|
|
net of taxes |
|
(133) |
|
(611) |
|
(181) |
|
6,979 |
|
|
|
|
|
|
|
|
|
Net income |
$ |
25,098 |
$ |
11,757 |
$ |
57,551 |
$ |
37,908 |
|
|
|
|
|
|
|
|
|
Weighted average common shares |
|
|
|
|
|
|
|
|
outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
37,588 |
|
33,164 |
|
36,387 |
|
33,142 |
Diluted |
|
38,007 |
|
33,506 |
|
36,793 |
|
33,493 |
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
Continuing operations |
$ |
0.67 |
$ |
0.37 |
$ |
1.59 |
$ |
0.93 |
Discontinued operations |
|
|
|
(0.02) |
|
(0.01) |
|
0.21 |
Total |
$ |
0.67 |
$ |
0.35 |
$ |
1.58 |
$ |
1.14 |
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
Continuing operations |
$ |
0.66 |
$ |
0.37 |
$ |
1.57 |
$ |
0.92 |
Discontinued operations |
|
|
|
(0.02) |
|
(0.01) |
|
0.21 |
Total |
$ |
0.66 |
$ |
0.35 |
$ |
1.56 |
$ |
1.13 |
|
|
|
|
|
|
|
|
|
Dividends paid per share of common stock |
$ |
0.34 |
$ |
0.33 |
$ |
0.68 |
$ |
0.66 |
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
5
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
|
June 30, |
December 31, |
June 30, | |||
|
2007 |
2006 |
2006 | |||
|
(in thousands, except share amounts) | |||||
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
40,172 |
$ |
36,939 |
$ |
42,234 |
Restricted cash |
|
5,341 |
|
2,004 |
|
|
Receivables (net of allowance for doubtful accounts of $4,735; |
|
|
|
|
|
|
$4,202 and $4,077, respectively) |
|
277,552 |
|
263,109 |
|
195,090 |
Materials, supplies and fuel |
|
132,986 |
|
92,560 |
|
96,871 |
Derivative assets |
|
40,138 |
|
69,244 |
|
29,204 |
Other assets |
|
9,400 |
|
9,221 |
|
8,353 |
Assets of discontinued operations |
|
1,135 |
|
1,424 |
|
6,058 |
|
|
506,724 |
|
474,501 |
|
377,810 |
|
|
|
|
|
|
|
Investments |
|
23,506 |
|
23,808 |
|
23,244 |
|
|
|
|
|
|
|
Property, plant and equipment |
|
2,383,561 |
|
2,242,396 |
|
2,093,519 |
Less accumulated depreciation and depletion |
|
(635,651) |
|
(596,029) |
|
(554,167) |
|
|
1,747,910 |
|
1,646,367 |
|
1,539,352 |
Other assets: |
|
|
|
|
|
|
Derivative assets |
|
5,413 |
|
2,871 |
|
3,149 |
Goodwill |
|
30,171 |
|
30,563 |
|
30,563 |
Intangible assets (net of accumulated amortization of |
|
|
|
|
|
|
$27,411; $25,852 and $24,293, respectively) |
|
22,870 |
|
24,429 |
|
25,989 |
Other |
|
66,369 |
|
42,137 |
|
40,993 |
|
|
124,823 |
|
100,000 |
|
100,694 |
|
$ |
2,402,963 |
$ |
2,244,676 |
$ |
2,041,100 |
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
$ |
229,979 |
$ |
224,009 |
$ |
159,207 |
Accrued liabilities |
|
91,594 |
|
95,020 |
|
66,775 |
Derivative liabilities |
|
17,069 |
|
24,041 |
|
14,959 |
Deferred income taxes |
|
4,769 |
|
1,215 |
|
1,450 |
Notes payable |
|
112,500 |
|
145,500 |
|
98,500 |
Current maturities of long-term debt |
|
143,376 |
|
17,106 |
|
11,125 |
Accrued income taxes |
|
30,306 |
|
19,561 |
|
8,311 |
Liabilities of discontinued operations |
|
724 |
|
2,526 |
|
5,979 |
|
|
630,317 |
|
528,978 |
|
366,306 |
|
|
|
|
|
|
|
Long-term debt, net of current maturities |
|
469,394 |
|
628,340 |
|
660,147 |
|
|
|
|
|
|
|
Deferred credits and other liabilities: |
|
|
|
|
|
|
Deferred income taxes |
|
192,492 |
|
174,332 |
|
149,129 |
Derivative liabilities |
|
2,769 |
|
1,530 |
|
1,249 |
Other |
|
132,866 |
|
116,297 |
|
98,309 |
|
|
328,127 |
|
292,159 |
|
248,687 |
|
|
|
|
|
|
|
Minority interest in subsidiaries |
|
4,978 |
|
5,158 |
|
5,103 |
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
Common stock equity |
|
|
|
|
|
|
Common stock $1 par value; 100,000,000 shares authorized; |
|
|
|
|
|
|
Issued 37,768,792; 33,404,902 and 33,294,945 shares, |
|
|
|
|
|
|
respectively |
|
37,769 |
|
33,405 |
|
33,295 |
Additional paid-in capital |
|
556,981 |
|
409,826 |
|
406,196 |
Retained earnings |
|
382,254 |
|
348,245 |
|
327,135 |
Treasury stock at cost 42,209; 35,700 and 36,245 |
|
|
|
|
|
|
shares, respectively |
|
(1,189) |
|
(920) |
|
(931) |
Accumulated other comprehensive loss |
|
(5,668) |
|
(515) |
|
(4,838) |
|
|
970,147 |
|
790,041 |
|
760,857 |
|
|
|
|
|
|
|
|
$ |
2,402,963 |
$ |
2,244,676 |
$ |
2,041,100 |
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
6
BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
Six Months Ended | |||
|
June 30, | |||
|
2007 |
2006 | ||
|
(in thousands) | |||
Operating activities: |
|
|
|
|
Net income |
$ |
57,551 |
$ |
37,908 |
Loss (income) from discontinued operations, net of taxes |
|
181 |
|
(6,979) |
|
|
|
|
|
Income from continuing operations |
|
57,732 |
|
30,929 |
Adjustments to reconcile income from continuing operations |
|
|
|
|
to net cash provided by operating activities: |
|
|
|
|
Depreciation, depletion and amortization |
|
48,082 |
|
43,266 |
Net change in derivative assets and liabilities |
|
(12,382) |
|
(3,138) |
Deferred income taxes |
|
8,052 |
|
11,809 |
Distributed earnings in associated companies |
|
500 |
|
4,818 |
Allowance for funds used during construction equity |
|
(3,040) |
|
|
Change in operating assets and liabilities: |
|
|
|
|
Materials, supplies and fuel |
|
(14,944) |
|
14,672 |
Accounts receivable and other current assets |
|
(15,111) |
|
70,079 |
Accounts payable and other current liabilities |
|
11,645 |
|
(77,541) |
Other operating activities |
|
7,517 |
|
12,417 |
Net cash provided by operating activities of continuing operations |
|
88,051 |
|
107,311 |
Net cash used in operating activities of discontinued operations |
|
(2,906) |
|
(665) |
Net cash provided by operating activities |
|
85,145 |
|
106,646 |
|
|
|
|
|
Investing activities: |
|
|
|
|
Property, plant and equipment additions |
|
(111,389) |
|
(150,201) |
Proceeds from the sale of business operations |
|
|
|
40,735 |
Other investing activities |
|
(3,143) |
|
(505) |
Net cash used in investing activities of continuing operations |
|
(114,532) |
|
(109,971) |
Net cash provided by investing activities of discontinued operations |
|
2,343 |
|
2,939 |
Net cash used in investing activities |
|
(112,189) |
|
(107,032) |
|
|
|
|
|
Financing activities: |
|
|
|
|
Dividends paid |
|
(24,218) |
|
(21,959) |
Common stock issued |
|
148,663 |
|
2,233 |
(Decrease) increase in short-term borrowings, net |
|
(61,500) |
|
43,500 |
Long-term debt repayments |
|
(32,676) |
|
(10,692) |
Other financing activities |
|
(555) |
|
(5) |
Net cash provided by financing activities of continuing operations |
|
29,714 |
|
13,077 |
Net cash provided by financing activities of discontinued operations |
|
|
|
|
Net cash provided by financing activities |
|
29,714 |
|
13,077 |
|
|
|
|
|
Increase in cash and cash equivalents |
|
2,670 |
|
12,691 |
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
Beginning of period |
|
37,530 (a) |
|
34,198 (c) |
End of period |
$ |
40,200 |
$ |
46,889 (b) |
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
Non-cash investing and financing activities- |
|
|
|
|
Property, plant and equipment acquired with accrued liabilities or |
|
|
|
|
short-term debt |
$ |
51,071 |
$ |
20,801 |
Cash paid during the period for- |
|
|
|
|
Interest (net of amounts capitalized) |
$ |
20,229 |
$ |
26,095 |
Income taxes paid (net of amounts refunded) |
$ |
7,483 |
$ |
12,514 |
_________________________
(a) |
Includes approximately $0.6 million at December 31, 2006 of cash included in the assets of discontinued operations. |
(b) |
Includes approximately $4.7 million at June 30, 2006 of cash included in the assets of discontinued operations. |
(c) |
Includes approximately $2.4 million at December 31, 2005 of cash included in the assets of discontinued operations. |
The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.
7
BLACK HILLS CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Companys 2006 Annual Report on Form 10-K)
(1) |
MANAGEMENTS STATEMENT |
The financial statements included herein have been prepared by Black Hills Corporation (the Company) without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the footnotes adequately disclose the information presented. These financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Companys 2006 Annual Report on Form 10-K filed with the SEC.
Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the June 30, 2007, December 31, 2006 and June 30, 2006 financial information and are of a normal recurring nature. Some of the Companys operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Demand for electricity and natural gas is sensitive to seasonal cooling, heating and industrial load requirements, as well as changes in market price. The results of operations for the three and six months ended June 30, 2007, are not necessarily indicative of the results to be expected for the full year. All earnings per share amounts discussed refer to diluted earnings per share unless otherwise noted.
(2) |
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS |
FIN 48
The Company adopted FIN 48 on January 1, 2007 (see Note 8). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS 109 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
8
SAB 108
During September 2006, the staff of the SEC released SAB 108. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current year misstatement. Prior practice allowed the evaluation of materiality on the basis of (1) the error quantified as the amount by which the current year income statement was misstated (rollover method) or (2) the cumulative error quantified as the cumulative amount by which the current year balance sheet was misstated (iron curtain method). Reliance on either method in prior years could have resulted in misstatement of the financial statements. The guidance provided in SAB 108 requires both methods to be used in evaluating materiality. Immaterial prior year errors may be corrected with the first filing of prior year financial statements after adoption. The cumulative effect of the correction can either be reported in the carrying amounts of assets and liabilities as of the beginning of that fiscal year, and the offsetting adjustment made to the opening balance of retained earnings for that year, or by restating prior periods. Disclosure requirements include the nature and amount of each individual error being corrected in the cumulative adjustment, as well as a disclosure of when and how each error being corrected arose and the fact that the errors had previously been considered immaterial. SAB 108 was effective January 1, 2007. SAB 108 did not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
(3) |
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
SFAS 157
During September 2006, the FASB issued SFAS 157, which applies to other accounting pronouncements that require or permit fair value measurements. This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Management is currently evaluating the impact SFAS 157 will have on the Companys consolidated financial statements.
SFAS 159
During February 2007, the FASB issued SFAS 159, which establishes a fair value option under which entities can elect to report certain financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS 159 will have on the Companys consolidated financial statements.
9
(4) |
|
MATERIALS, SUPPLIES AND FUEL |
The amounts of materials, supplies and fuel included on the accompanying Condensed Consolidated Balance Sheets, by major classification, are provided as follows (in thousands):
Major Classification |
June 30, 2007 |
December 31, 2006 |
June 30, 2006 | |||
|
|
|
|
|
|
|
Materials and supplies |
$ |
35,067 |
$ |
31,946 |
$ |
28,077 |
Fuel |
|
6,444 |
|
9,663 |
|
8,580 |
Gas and oil held by Energy |
|
|
|
|
|
|
marketing* |
|
91,475 |
|
50,951 |
|
60,214 |
|
|
|
|
|
|
|
Total materials, supplies and fuel |
$ |
132,986 |
$ |
92,560 |
$ |
96,871 |
___________________________
* As of June 30, 2007, December 31, 2006 and June 30, 2006, market adjustments related to natural gas held by Energy marketing and recorded in inventory were $(6.4) million, $(31.5) million and $(4.3) million, respectively (see Note 12 for further discussion of Energy marketing trading activities).
The inventory held by the Companys Energy marketing subsidiary primarily consists of gas held in storage and gas imbalances held on account with pipelines. Such gas is being held in inventory to capture the price differential between the time at which it was purchased and a sales date in the future. A substantial majority of the gas was economically hedged at the time of purchase either through a fixed price physical or financial forward sale.
(5) |
LONG-TERM DEBT, NOTES PAYABLE AND GUARANTEES |
Note Payable
During June 2007, the Company entered into a short-term, non-interest bearing, secured promissory note payable to Public Service Company of New Mexico in connection with the purchase of certain equipment and related assets for the Company's Valencia project in New Mexico. The secured promissory note payable is due December 2007, and is secured by the purchased equipment and related assets. The Company recorded the promissory note payable at the stated amount of the debt of $30.0 million, less interest imputed at a rate of 6 percent totaling $0.9 million, for a net amount of $29.1 million.
During the first quarter of 2007, the Company repaid the then existing $145.5 million borrowing balance outstanding on its revolving credit facility with proceeds from the Companys February 22, 2007 equity issuance (see Note 9).
Long-term Debt
On April 30, 2007, the Company called its outstanding debt with GE Capital in the amount of $23.5 million. In conjunction with this, the Company expensed $0.1 million in unamortized deferred finance costs. The associated payment guarantees provided by the Company were also terminated.
The Company has classified the $128.3 million Wygen I project debt to current maturities as the debt has a maturity date of June 2008. The Company intends to refinance this debt with other long-term financing prior to its maturity.
10
Amendments to Revolver
On March 13, 2007, the Company entered into a second amendment to its revolving credit facility. The second amendment (i) increased the limit for borrowings or other credit accommodations for the separate credit facility for the Companys energy marketing subsidiary from $260 million to $300 million, (ii) increased the allowed total commitments under the facility without requiring amendment of the facility from $500 million to $600 million, (iii) effective with the acquisition of certain electric and gas utility assets from Aquila, will increase the recourse leverage ratio limit from 0.65 to 1.00 to 0.70 to 1.00 for the first year after completion of the Aquila asset acquisition, reverting to 0.65 to 1.00 thereafter, and (iv) allowed for other modifications to enable the Company to complete the Aquila asset acquisition.
Guarantees
During the six months ended June 30, 2007, the Company had the following changes to its guarantees:
Extinguished two guarantees totaling $24.2 million at December 31, 2006 related to the payment and performance under our GE Capital debt obligations. Our outstanding debt obligations with GE Capital were paid on April 30, 2007; |
|
The $0.3 million guarantee for the payments of Black Hills Power under various transactions with Idaho Power Company expired on March 1, 2007; |
|
The $3.0 million guarantee for the payments of Cheyenne Light under various transactions with Questar Energy Trading Company expired on March 31, 2007; |
|
Issued a guarantee for obligations and damages, if any, due by Valencia under a power purchase agreement with Public Service Company of New Mexico for up to $12.0 million and expiring in 2028; and |
|
Issued a guarantee for up to $7.0 million related to the obligations of Enserco under an agency agreement whereby Enserco provides services to structure up to $100.0 million of certain transactions involving the buying, selling, transportation and storage of natural gas on behalf of another energy company and which expires in 2008. |
11
(6) |
EARNINGS PER SHARE |
Basic earnings per share from continuing operations is computed by dividing income from continuing operations by the weighted-average number of common shares outstanding during the period. Diluted earnings per share from continuing operations gives effect to all dilutive common shares potentially outstanding during a period. A reconciliation of Income from continuing operations and basic and diluted share amounts is as follows (in thousands):
Period ended June 30, 2007 |
Three Months |
Six Months | ||||
|
|
Average |
|
Average | ||
|
Income |
Shares |
Income |
Shares | ||
|
|
|
|
|
|
|
Income from continuing operations |
$ |
25,231 |
|
$ |
57,732 |
|
|
|
|
|
|
|
|
Basic earnings |
|
25,231 |
37,588 |
|
57,732 |
36,387 |
Dilutive effect of: |
|
|
|
|
|
|
Stock options |
|
|
112 |
|
|
107 |
Estimated contingent shares issuable |
|
|
|
|
|
|
for prior acquisition |
|
|
159 |
|
|
159 |
Others |
|
|
148 |
|
|
140 |
Diluted earnings |
$ |
25,231 |
38,007 |
$ |
57,732 |
36,793 |
Period ended June 30, 2006 |
Three Months |
Six Months | ||||
|
|
Average |
|
Average | ||
|
Income |
Shares |
Income |
Shares | ||
|
|
|
|
|
|
|
Income from continuing operations |
$ |
12,368 |
|
$ |
30,929 |
|
|
|
|
|
|
|
|
Basic earnings |
|
12,368 |
33,164 |
|
30,929 |
33,142 |
Dilutive effect of: |
|
|
|
|
|
|
Stock options |
|
|
79 |
|
|
81 |
Estimated contingent shares issuable |
|
|
|
|
|
|
for prior acquisition |
|
|
159 |
|
|
159 |
Others |
|
|
104 |
|
|
111 |
Diluted earnings |
$ |
12,368 |
33,506 |
$ |
30,929 |
33,493 |
12
(7) |
COMPREHENSIVE INCOME |
The following table presents the components of the Companys comprehensive income
(in thousands):
|
Three Months Ended | |||
|
June 30, | |||
|
2007 |
2006 | ||
|
|
|
|
|
Net income |
$ |
25,098 |
$ |
11,757 |
Other comprehensive income (loss), |
|
|
|
|
net of tax: |
|
|
|
|
Fair value adjustment on derivatives |
|
|
|
|
designated as cash flow hedges |
|
|
|
|
(net of tax of $(5,686) and $(1,028), |
|
|
|
|
respectively) |
|
10,087 |
|
1,297 |
Reclassification adjustments on cash |
|
|
|
|
flow hedges settled and included in |
|
|
|
|
net income (net of tax of $2,700 |
|
|
|
|
and $(96), respectively) |
|
(4,798) |
|
121 |
|
|
|
|
|
Comprehensive income |
$ |
30,387 |
$ |
13,175 |
|
Six Months Ended | |||
|
June 30, | |||
|
2007 |
2006 | ||
|
|
|
|
|
Net income |
$ |
57,551 |
$ |
37,908 |
Other comprehensive income (loss), |
|
|
|
|
net of tax: |
|
|
|
|
Fair value adjustment on derivatives |
|
|
|
|
designated as cash flow hedges |
|
|
|
|
(net of tax of $(1,794) and $(3,318), |
|
|
|
|
respectively) |
|
3,723 |
|
5,162 |
Reclassification adjustments on cash |
|
|
|
|
flow hedges settled and included in |
|
|
|
|
net income (net of tax of $4,372 |
|
|
|
|
and $109, respectively) |
|
(8,876) |
|
(170) |
|
|
|
|
|
Comprehensive income |
$ |
52,398 |
$ |
42,900 |
13
Balances by classification included within Accumulated Other Comprehensive Loss on the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):
|
Derivatives |
Employee |
Amount from |
| ||||
|
Designated as |
Benefit |
Equity |
| ||||
|
Cash Flow Hedges |
Plans |
Investees |
Total | ||||
|
|
|
|
|
|
|
|
|
As of June 30, 2007 |
$ |
2,892 |
$ |
(8,404) |
$ |
(156) |
$ |
(5,668) |
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
$ |
8,119 |
$ |
(8,404) |
$ |
(230) |
$ |
(515) |
|
|
|
|
|
|
|
|
|
As of June 30, 2006 |
$ |
(1,699) |
$ |
(2,936) |
$ |
(203) |
$ |
(4,838) |
(8) |
INCOME TAXES |
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an approximate $0.7 million benefit from a decrease in the liability for unrecognized tax benefits. This benefit was accounted for as an adjustment to the January 1, 2007 balance of retained earnings.
The total gross amount of unrecognized tax benefits at January 1, 2007 was approximately $72.6 million. The total amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate is approximately $2.0 million (net of the federal benefit on state tax items and interest) at the date of adoption.
It is the Companys continuing practice to recognize penalties and/or interest related to income tax matters in income tax expense. The Company had no penalties accrued and approximately $0.4 million for the accrual of interest income at the date of adoption of FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and Canada. The Company is no longer subject to U.S. federal examination for tax years before 2004. However, the Company is under examination by a state taxing authority for tax years 2001 through 2003 and remains subject to examination by Canadian income tax authorities for tax years as early as 1999.
The Company does not anticipate that total unrecognized tax benefits will significantly change due to the settlement of any audits or the expiration of statute of limitations prior to June 30, 2008.
(9) |
COMMON STOCK |
Other than the following transactions, the Company had no other material changes in its common stock, as reported in Note 9 of the Notes to Consolidated Financial Statements in the Companys 2006 Annual Report on Form 10-K.
Private Placement of Common Stock
On February 22, 2007, the Company completed the issuance and sale of approximately 4.17 million shares of common stock at a price of $36.00 per share in a private placement offering. The Company used the approximate $145.6 million of net proceeds from this offering for debt reduction.
14
These shares were not initially registered under the Securities Act of 1933, therefore restricting the purchasers ability to offer or sell the shares. The offering agreements required the Company to register the related securities with the SEC within a specified period of time, and the Company has performed this obligation. In addition, the Company must maintain an effective shelf registration statement with the SEC, allowing resale of the restricted shares, until all related shares have been resold or cease to be restricted. If the Company fails to maintain an effective shelf registration statement in accordance with the terms of the offering agreements, it may be required to pay damages to the purchasers at a per thirty-day rate of 1.0 percent of the related share purchase price until the default is cured. The total damage payments under the agreements are limited to 10.0 percent of the related share purchase price. The Company believes the likelihood of making any payments under the damage provisions is remote and accordingly has not recognized any liability within its consolidated financial statements.
Equity Compensation Plans
Effective January 1, 2007, the Company granted 35,026 target performance shares to certain officers and business unit leaders of the Company for the January 1, 2007 through December 31, 2009 performance period. Performance shares are awarded based on the Companys total shareholder return over the designated performance period as measured against a selected peer group. In addition, the Companys stock price must also increase during the performance period. |
|
Participants may earn additional performance shares if the Companys total shareholder return exceeds the 50th percentile of the selected peer group. The final value of the performance shares will vary according to the number of shares of common stock that are ultimately granted based upon the actual level of attainment of the performance criteria. The performance awards are paid 50 percent in the form of cash and 50 percent in the form of common stock. The grant date fair value was $34.17 per share. |
|
The Company issued 33,143 shares of common stock under the short-term incentive compensation plan during the six months ended June 30, 2007. Pre-tax compensation cost related to the award was approximately $1.2 million, which was accrued for in 2006. |
|
The Company granted 43,556 restricted common shares during the six months ended June 30, 2007. The pre-tax compensation cost related to the awards of restricted stock and restricted stock units of approximately $1.6 million will be recognized over the three-year vesting period. |
|
122,954 stock options were exercised during the six months ended June 30, 2007, at a weighted-average exercise price of $28.94 per share providing $3.6 million of proceeds to the Company. |
|
Total compensation expense recognized for all equity compensation plans for the three months ended June 30, 2007 and 2006 was $2.0 million and $0.9 million, respectively, and for the six month periods ended June 30, 2007 and 2006 was $3.0 million and $1.7 million, respectively. |
15
(10) |
EMPLOYEE BENEFIT PLANS |
Defined Benefit Pension Plan
The Company has two non-contributory defined benefit pension plans (Plans). One Plan covers employees of the Company and the following subsidiaries who meet certain eligibility requirements: Black Hills Service Company, Black Hills Power, WRDC and BHEP. The other Plan covers employees of the Companys subsidiary, Cheyenne Light, who meet certain eligibility requirements.
The components of net periodic benefit cost for the two Plans are as follows (in thousands):
|
Three Months Ended |
Six Months Ended | ||||||
|
June 30, |
June 30, | ||||||
|
2007 |
2006 |
2007 |
2006 | ||||
|
|
|
|
|
|
|
|
|
Service cost |
$ |
687 |
$ |
649 |
$ |
1,374 |
$ |
1,298 |
Interest cost |
|
1,129 |
|
1,041 |
|
2,258 |
|
2,082 |
Expected return on plan assets |
|
(1,374) |
|
(1,247) |
|
(2,748) |
|
(2,494) |
Prior service cost |
|
38 |
|
38 |
|
76 |
|
76 |
Net loss |
|
127 |
|
227 |
|
254 |
|
454 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
$ |
607 |
$ |
708 |
$ |
1,214 |
$ |
1,416 |
The Company made a $0.5 million contribution to the Cheyenne Light Pension Plan in the first quarter of 2007; no additional contributions are anticipated to be made to the Plans during the 2007 fiscal year.
Supplemental Non-qualified Defined Benefit Plans
The Company has various supplemental retirement plans for key executives of the Company (Supplemental Plans). The Supplemental Plans are non-qualified defined benefit plans.
The components of net periodic benefit cost for the Supplemental Plans are as follows (in thousands):
|
Three Months Ended |
Six Months Ended | ||||||
|
June 30, |
June 30, | ||||||
|
2007 |
2006 |
2007 |
2006 | ||||
|
|
|
|
|
|
|
|
|
Service cost |
$ |
103 |
$ |
87 |
$ |
206 |
$ |
174 |
Interest cost |
|
289 |
|
270 |
|
578 |
|
540 |
Prior service cost |
|
3 |
|
3 |
|
6 |
|
6 |
Net loss |
|
178 |
|
199 |
|
356 |
|
398 |
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
$ |
573 |
$ |
559 |
$ |
1,146 |
$ |
1,118 |
The Company anticipates that it will need to make contributions to the Supplemental Plans for the 2007 fiscal year of approximately $0.7 million. The contributions are expected to be made in the form of benefit payments.
16
Non-pension Defined Benefit Postretirement Healthcare Plans
Employees who are participants in the Companys Postretirement Healthcare Plans (Healthcare Plans) and who meet certain eligibility requirements are entitled to postretirement healthcare benefits.
The components of net periodic benefit cost for the Healthcare Plans are as follows (in thousands):
|
Three Months Ended |
Six Months Ended | ||||||
|
June 30, |
June 30, | ||||||
|
2007 |
2006 |
2007 |
2006 | ||||
|
|
|
|
|
|
|
|
|
Service cost |
$ |
135 |
$ |
164 |
$ |
270 |
$ |
328 |
Interest cost |
|
207 |
|
203 |
|
414 |
|
406 |
Net transition obligation |
|
15 |
|
38 |
|
30 |
|
76 |
Prior service cost |
|
|
|
(6) |
|
|
|
(12) |
Net gain/loss |
|
(4) |
|
|
|
(8) |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
$ |
353 |
$ |
399 |
$ |
706 |
$ |
798 |
The Company anticipates that it will make contributions to the Healthcare Plans for the 2007 fiscal year of approximately $0.3 million. The contributions are expected to be made in the form of benefits payments.
It has been determined that the Companys post-65 retiree prescription drug plans are actuarially equivalent and qualify for the Medicare Part D subsidy. The decrease in net periodic postretirement benefit cost due to the subsidy was approximately $0.1 million for each of the three and six month periods ended June 30, 2007 and 2006.
(11) |
SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANYS BUSINESS |
The Companys reportable segments are those that are based on the Companys method of internal reporting, which generally segregates the strategic business groups due to differences in products, services and regulation. As of June 30, 2007, substantially all of the Companys operations and assets are located within the United States.
The Company conducts its operations through the following six reporting segments: Retail Services group consisting of the following segments: Electric utility, which supplies electric utility service to western South Dakota, northeastern Wyoming and southeastern Montana; and Electric and gas utility, which supplies electric and gas utility service to Cheyenne, Wyoming and vicinity; and Wholesale Energy group, consisting of the following segments: Oil and gas, which produces, explores and operates oil and natural gas interests located in the Rocky Mountain region, Texas, California and other states; Power generation, which produces and sells power and capacity to wholesale customers with plants concentrated in Colorado, Nevada, Wyoming and California; Coal mining, which engages in the mining and sale of coal from its mine near Gillette, Wyoming; and Energy marketing, which markets natural gas, crude oil and related services primarily in the western and central regions of the United States and Canada.
17
Segment information follows the same accounting policies as described in Note 20 of the Notes to Consolidated Financial Statements in the Companys 2006 Annual Report on Form 10-K. In accordance with the provisions of SFAS 71, intercompany fuel sales to the electric utility are not eliminated.
Segment information included in the accompanying Condensed Consolidated Statements of Income is as follows (in thousands):
|
External |
Inter-segment |
Income (Loss) from | |||
|
Operating |
Operating |
Continuing | |||
|
Revenues |
Revenues |
Operations | |||
Three Month Period Ended |
|
|
|
|
|
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail services: |
|
|
|
|
|
|
Electric utility |
$ |
44,387 |
$ |
585 |
$ |
4,881 |
Electric and gas utility |
|
21,652 |
|
|
|
1,043 |
Wholesale energy: |
|
|
|
|
|
|
Oil and gas |
|
25,814 |
|
|
|
4,376 |
Power generation |
|
39,962 |
|
|
|
5,433 |
Coal mining |
|
6,424 |
|
3,578 |
|
1,379 |
Energy marketing |
|
22,909 |
|
|
|
8,938 |
Corporate |
|
|
|
|
|
(819) |
Inter-segment eliminations |
|
|
|
(1,368) |
|
|
|
|
|
|
|
|
|
Total |
$ |
161,148 |
$ |
2,795 |
$ |
25,231 |
|
External |
Inter-segment |
Income (Loss) from | |||
|
Operating |
Operating |
Continuing | |||
|
Revenues |
Revenues |
Operations | |||
Three Month Period Ended |
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail services: |
|
|
|
|
|
|
Electric utility |
$ |
46,405 |
$ |
631 |
$ |
2,436 |
Electric and gas utility |
|
29,730 |
|
|
|
864 |
Wholesale energy: |
|
|
|
|
|
|
Oil and gas |
|
21,313 |
|
|
|
2,042 |
Power generation |
|
38,697 |
|
|
|
2,379 |
Coal mining |
|
3,854 |
|
2,913 |
|
768 |
Energy marketing |
|
11,624 |
|
|
|
4,264 |
Corporate |
|
16 |
|
|
|
(385) |
Inter-segment eliminations |
|
|
|
(1,370) |
|
|
|
|
|
|
|
|
|
Total |
$ |
151,639 |
$ |
2,174 |
$ |
12,368 |
18
|
External |
Inter-segment |
Income (Loss) from | |||
|
Operating |
Operating |
Continuing | |||
|
Revenues |
Revenues |
Operations | |||
Six Month Period Ended |
|
|
|
|
|
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail services: |
|
|
|
|
|
|
Electric utility |
$ |
91,743 |
$ |
996 |
$ |
11,580 |
Electric and gas utility |
|
58,015 |
|
|
|
4,115 |
Wholesale energy: |
|
|
|
|
|
|
Oil and gas |
|
51,657 |
|
|
|
7,967 |
Power generation |
|
79,528 |
|
|
|
10,412 |
Coal mining |
|
12,641 |
|
7,106 |
|
2,995 |
Energy marketing |
|
51,347 |
|
|
|
21,596 |
Corporate |
|
1 |
|
|
|
(933) |
Inter-segment eliminations |
|
|
|
(2,558) |
|
|
|
|
|
|
|
|
|
Total |
$ |
344,932 |
$ |
5,544 |
$ |
57,732 |
|
External |
Inter-segment |
Income (Loss) from | |||
|
Operating |
Operating |
Continuing | |||
|
Revenues |
Revenues |
Operations | |||
Six Month Period Ended |
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail services: |
|
|
|
|
|
|
Electric utility |
$ |
90,209 |
$ |
795 |
$ |
7,335 |
Electric and gas utility |
|
73,428 |
|
|
|
2,261 |
Wholesale energy: |
|
|
|
|
|
|
Oil and gas |
|
46,550 |
|
|
|
7,432 |
Power generation |
|
72,290 |
|
|
|
4,471 |
Coal mining |
|
9,850 |
|
6,188 |
|
2,183 |
Energy marketing |
|
28,581 |
|
|
|
10,511 |
Corporate |
|
32 |
|
|
|
(3,264) |
Inter-segment eliminations |
|
|
|
(2,219) |
|
|
|
|
|
|
|
|
|
Total |
$ |
320,940 |
$ |
4,764 |
$ |
30,929 |
During 2007, the Company has added approximately $35.6 million on the ongoing construction of the Wygen II power plant within our electric and gas utility segment; approximately $34.7 million on maintenance capital and development drilling within our oil and gas segment; and approximately $39.7 million on assets related to the Valencia project in our power generation segment. Other than these significant additions and changes beyond normal operating activities, the Company had no additional material changes in the assets of its reporting segments, as reported in Note 20 of the Notes to Consolidated Financial Statements in the Companys 2006 Annual Report on Form 10-K.
19
(12) |
RISK MANAGEMENT ACTIVITIES |
The Company actively manages its exposure to certain market risks as described in Note 2 of the Notes to Consolidated Financial Statements in the Companys 2006 Annual Report on Form
10-K. Details of derivative and hedging activities included in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Income are as follows:
Trading Activities
Natural Gas and Crude Oil Marketing
The contract or notional amounts and terms of the Companys natural gas and crude oil marketing activities and derivative commodity instruments are as follows:
|
Outstanding at |
Outstanding at |
Outstanding at | ||||||
|
June 30, 2007 |
December 31, 2006 |
June 30, 2006 | ||||||
|
|
|
Latest |
|
|
Latest |
|
|
Latest |
|
|
Notional |
Expiration |
|
Notional |
Expiration |
|
Notional |
Expiration |
|
|
Amounts |
(months) |
|
Amounts |
(months) |
|
Amounts |
(months) |
(in thousands of MMBtus) |
|
|
|
|
|
|
|
|
|
Natural gas basis |
|
|
|
|
|
|
|
|
|
swaps purchased |
|
179,020 |
18 |
|
138,111 |
22 |
|
110,281 |
16 |
Natural gas basis |
|
|
|
|
|
|
|
|
|
swaps sold |
|
195,952 |
18 |
|
148,720 |
22 |
|
118,342 |
16 |
Natural gas fixed for float |
|
|
|
|
|
|
|
|
|
swaps purchased |
|
33,520 |
24 |
|
38,239 |
16 |
|
29,537 |
17 |
Natural gas fixed for float |
|
|
|
|
|
|
|
|
|
swaps sold |
|
59,401 |
24 |
|
59,061 |
15 |
|
40,604 |
17 |
Natural gas physical |
|
|
|
|
|
|
|
|
|
purchases |
|
81,261 |
18 |
|
87,782 |
22 |
|
80,193 |
28 |
Natural gas physical sales |
|
108,359 |
28 |
|
106,500 |
34 |
|
128,747 |
40 |
Natural gas options |
|
|
|
|
|
|
|
|
|
purchased |
|
9,266 |
9 |
|
22,373 |
15 |
|
18,145 |
18 |
Natural gas options sold |
|
8,832 |
9 |
|
22,373 |
15 |
|
18,145 |
18 |
20
|
Outstanding at |
Outstanding at |
Outstanding at | ||||||
|
June 30, 2007 |
December 31, 2006 |
June 30, 2006 | ||||||
|
|
|
Latest |
|
|
Latest |
|
|
Latest |
|
|
Notional |
Expiration |
|
Notional |
Expiration |
|
Notional |
Expiration |
|
|
Amounts |
(months) |
|
Amounts |
(months) |
|
Amounts |
(months) |
|
|
|
|
|
|
|
|
|
|
(in thousands of Bbls) |
|
|
|
|
|
|
|
|
|
Crude oil physical |
|
|
|
|
|
|
|
|
|
purchases |
|
2,178 |
4 |
|
1,600 |
4 |
|
1,785 (a) |
4 |
Crude oil physical sales |
|
2,092 |
5 |
|
1,367 |
7 |
|
1,568 (a) |
4 |
Crude oil swaps purchased |
|
465 |
15 |
|
240 |
12 |
|
360 |
18 |
Crude oil swaps sold |
|
465 |
15 |
|
240 |
12 |
|
360 |
18 |
|
|
|
|
|
|
|
|
|
|
(Dollars, in thousands) |
|
|
|
|
|
|
|
|
|
Canadian dollars |
|
|
|
|
|
|
|
|
|
purchased |
$ |
41,000 |
2 |
$ |
44,000 |
1 |
$ |
18,000 |
2 |
Canadian dollars sold |
$ |
|
|
$ |
|
|
$ |
11,000 |
5 |
_________________________
(a) |
The Company began marketing crude oil in the Rocky Mountain region during May 2006. |
Derivatives and certain natural gas and crude oil marketing activities were marked to fair value on June 30, 2007, December 31, 2006 and June 30, 2006, and the related gains and/or losses recognized in earnings. The amounts included in the accompanying Condensed Consolidated Balance Sheets and Statements of Income are as follows (in thousands):
|
Current |
Non-current |
Current |
Non-current |
| |||||
|
Derivative |
Derivative |
Derivative |
Derivative |
Unrealized | |||||
|
Assets |
Assets |
Liabilities |
Liabilities |
Gain | |||||
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
$ |
32,722 |
$ |
184 |
$ |
15,235 |
$ |
470 |
$ |
17,201 |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
$ |
53,728 |
$ |
4 |
$ |
23,296 |
$ |
377 |
$ |
30,059 |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
$ |
24,631 |
$ |
697 |
$ |
11,673 |
$ |
70 |
$ |
13,585 |
In addition, certain volumes of natural gas inventory have been designated as the underlying hedged item in a fair value hedge transaction. These volumes are stated at market value using published spot industry quotations. Market adjustments are recorded in inventory on the Condensed Consolidated Balance Sheets and the related unrealized gain/loss on the Condensed Consolidated Statements of Income, effectively offsetting the earnings impact of the unrealized gain/loss recognized on the associated derivative asset or liability described above. As of June 30, 2007, December 31, 2006 and June 30, 2006, the market adjustments recorded in inventory were $(6.4) million, $(31.5) million and $(4.3) million, respectively.
21
Activities Other Than Trading
Oil and Gas Exploration and Production
On June 30, 2007, December 31, 2006 and June 30, 2006, the Company had the following derivatives and related balances (in thousands):
|
|
|
|
|
|
|
Pre-tax |
| ||||||
|
|
Maximum |
|
Non- |
|
Non- |
Accumulated |
| ||||||
|
|
Terms |
Current |
current |
Current |
current |
Other |
Pre-tax | ||||||
|
|
in |
Derivative |
Derivative |
Derivative |
Derivative |
Comprehensive |
Income | ||||||
|
Notional* |
Years |
Assets |
Assets |
Liabilities |
Liabilities |
Income (Loss) |
(Loss) | ||||||
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps/options |
465,000 |
1.00 |
$ |
621 |
$ |
17 |
$ |
1,039 |
$ |
542 |
$ |
(1,564) |
$ |
621 |
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
11,247,000 |
1.17 |
|
6,411 |
|
296 |
|
664 |
|
1,757 |
|
4,714 |
|
(428) |
|
|
|
$ |
7,032 |
$ |
313 |
$ |
1,703 |
$ |
2,299 |
$ |
3,150 |
$ |
193 |
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps/options |
240,000 |
1.00 |
$ |
524 |
$ |
|
$ |
362 |
$ |
|
$ |
36 |
$ |
126 |
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
10,588,000 |
1.25 |
|
13,485 |
|
2,000 |
|
309 |
|
175 |
|
15,339 |
|
(338) |
|
|
|
$ |
14,009 |
$ |
2,000 |
$ |
671 |
$ |
175 |
$ |
15,375 |
$ |
(212) |
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude oil |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
360,000 |
1.00 |
$ |
302 |
$ |
|
$ |
3,286 |
$ |
1,179 |
$ |
(4,465) |
$ |
302 |
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
4,485,000 |
0.60 |
|
3,748 |
|
202 |
|
|
|
|
|
3,950 |
|
|
|
|
|
$ |
4,050 |
$ |
202 |
$ |
3,286 |
$ |
1,179 |
$ |
(515) |
$ |
302 |
________________________
*crude in Bbls, gas in MMBtus
Based on June 30, 2007 market prices, a $4.5 million gain would be realized and reported in pre-tax earnings during the next twelve months related to hedges of production. Estimated and actual realized gains will likely change during the next twelve months as market prices change.
22
Fuel in Storage
On June 30, 2007, December 31, 2006 and June 30, 2006, the Company had the following swaps and related balances (in thousands):
|
|
|
|
|
|
|
Pre-tax |
| ||||||
|
|
|
|
Non- |
|
Non- |
Accumulated |
| ||||||
|
|
Maximum |
Current |
current |
Current |
current |
Other |
| ||||||
|
|
Terms in |
Derivative |
Derivative |
Derivative |
Derivative |
Comprehensive |
Unrealized | ||||||
|
Notional* |
Years |
Assets |
Assets |
Liabilities |
Liabilities |
Income (Loss) |
Gain | ||||||
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
455,000 |
0.83 |
$ |
|
$ |
|
$ |
76 |
$ |
|
$ |
(76) |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
380,000 |
0.25 |
$ |
1,220 |
$ |
|
$ |
|
$ |
|
$ |
878 |
$ |
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
155,000 |
0.75 |
$ |
73 |
$ |
|
$ |
|
$ |
|
$ |
73 |
$ |
|
________________________
*gas in MMBtus
Based on June 30, 2007 market prices, a loss of $(0.1) million would be realized and reported in pre-tax earnings during the next twelve months related to the cash flow hedge. Estimated and actual realized losses will likely change during the next twelve months as market prices change.
23
Financing Activities
On June 30, 2007, December 31, 2006 and June 30, 2006, the Companys interest rate swaps and related balances were as follows (in thousands):
|
|
Weighted |
|
|
|
|
|
Pre-tax |
| |||||||
|
|
Average |
|
|
Non- |
|
Non- |
Accumulated |
| |||||||
|
Current |
Fixed |
Maximum |
Current |
current |
Current |
current |
Other |
| |||||||
|
Notional |
Interest |
Terms in |
Derivative |
Derivative |
Derivative |
Derivative |
Comprehensive |
Pre-tax | |||||||
|
Amount |
Rate |
Years |
Assets |
Assets |
Liabilities |
Liabilities |
Income |
Income | |||||||
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
$ |
150,000 |
5.04% |
9.25 |
$ |
384 |
$ |
4,916 |
$ |
55 |
$ |
|
$ |
5,245 |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
$ |
150,000 |
5.04% |
9.75 |
$ |
287 |
$ |
867 |
$ |
74 |
$ |
978 |
$ |
102 |
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
swaps |
$ |
75,000 |
4.93% |
9.50 |
$ |
350 |
$ |
2,250 |
$ |
|
$ |
|
$ |
2,566 |
$ |
34 |
Based on June 30, 2007 market interest rates and balances, a gain of approximately $0.3 million would be realized and reported in pre-tax earnings during the next twelve months. Estimated and realized gains will likely change during the next twelve months as market interest rates change.
(13) |
POWER PLANT PROJECT AND POWER PURCHASE AGEEMENT |
In April 2007, the Company entered into a power purchase agreement to provide electric power to Public Service Company of New Mexico, a regulated electric and natural gas utility subsidiary of PNM.
Under the terms of the agreement, the Company will provide the capacity and energy of a 149 MW, simple-cycle gas turbine generation facility to be located near Albuquerque, New Mexico. The project is expected to cost approximately $101 million, and has a commercial operation in-service date in June 2008. If the Company would fail to meet the June 2008 in-service date, significant penalties could be incurred under the delay damage provisions that are customary within agreements of this nature. The agreement is a customary tolling agreement, where the Company receives variable and fixed fees for the plants availability and operation, and Public Service Company of New Mexico will be responsible for providing fuel for the operation. In addition, the agreement affords the Company favorable change of law and government impositions pass-throughs to Public Service Company of New Mexico. The duration of the power purchase agreement is 20 years. During the term of the agreement, Public Service Company of New Mexico is also provided an option to acquire a 50 percent equity interest in this project for a price equal to the fair market value at the time of the option exercise, with a minimum price equal to book value.
On June 20, 2007, the Company purchased certain equipment and assets related to the Valencia project from Public Service Company of New Mexico. The assets included the power plant turbine, permits, land and other auxiliary equipment. The purchase price was approximately $40.6 million, paid through entering into a $30.0 million short-term promissory note, payable to Public Service Company of New Mexico in December 2007, and $10.6 million in cash.
24
(14) |
LEGAL PROCEEDINGS |
The Company is subject to various legal proceedings, claims and litigation as described in Note 18 of the Notes to Consolidated Financial Statements in the Companys 2006 Annual Report on Form 10-K.
Earn-Out Litigation
As disclosed in previous filings with the SEC, the Company has ongoing litigation with the former Indeck stockholders. On March 12, 2007, the Court granted, in part, the Companys Motion to Dismiss the Amended Complaint. The Court dismissed Counts 1 and 5 of the Amended Complaint. Count 1 included all claims of fraud against individual defendants. Those individuals were not named in other counts of the Amended Complaint, so they were dismissed as parties to the lawsuit. Count 5 asserted a claim for breach of the covenant of good faith and fair dealing relating to the alleged destruction of evidence. The Court approved the amendment of the complaint on other theories. The Company expects to file pre-trial motions to dismiss some or all of these claims. To the extent motions to dismiss are denied, a trial of this matter is set to commence on February 25, 2008.
The parties retained an arbitrator who will direct the process and decide the Earn-Out issues presently in arbitration, according to the procedure stated in the Merger Agreement. No date for a final decision has been set by the arbitrator.
The outcome of this matter is uncertain, as is the amount of contingent merger consideration that could be awarded following arbitration and/or litigation. If any additional merger consideration is awarded, it would be recorded as additional goodwill, which would be subject to a recoverability analysis under GAAP.
Las Vegas Cogeneration/Nevada Power Company Arbitration
On March 16, 2007, Nevada Power filed a Demand for Arbitration pursuant to a Power Purchase Agreement dated May 27, 1992, (the Agreement) between Nevada Power and LVC. Nevada Power asserts that LVC is in breach of its obligation under the Agreement to maintain a reliable fuel supply throughout the term of the Power Contract. On July 5, 2007, Nevada Power served an Amended Demand for Arbitration. The relief Nevada Power requests include: (1) A determination that the Agreement requires LVC to obtain and maintain firm, long-term fuel supply and transportation agreements for the full term of the Agreement; (2) A determination that LVC failed to honor this obligation; (3) A determination that LVCs failure to obtain and maintain firm fuel supply and transportation agreements constitutes a material breach of the Agreement; and (4) An order of specific performance requiring LVC to enter into long-term fuel supply and transportation agreements to cure the alleged breach.
LVC denies all these claims and filed its response to the Demand for Arbitration, asserting the following defenses: (1) That Nevada Power failed to honor its contractual obligation to properly negotiate in good faith before filing the Demand for Arbitration; (2) That LVC has complied with its obligations relating to fuel supply and transportation; and (3) That numerous other affirmative defenses preclude Nevada Power from receiving the relief requested.
The arbitration demand was filed with the American Arbitration Association, pursuant to its Commercial Arbitration Rules. The parties selected an arbitrator and expect resolution to the matter by the end of 2007. While the Company cannot predict the final timing or outcome of this action, and it is not expected to have a material impact on the Companys consolidated financial position or results of operations.
25
California Price Reporting and Anti-Trust Litigation
As disclosed in previous filings with the SEC, the Companys subsidiary, Enserco, has ongoing litigation in the San Diego Superior Court, in the State of California, under the heading In re Natural Gas Anti-Trust Cases I, II, III, IV and V. The lawsuits have been pending against other marketers, traders, transporters and sellers of natural gas since as early as 2004. The plaintiffs allege the defendants, including Enserco, used various practices to manipulate natural gas prices in California in violation of the Cartwright Act and other California state laws. Enserco had filed motions to dismiss, which were pending before the court. On June 2, 2007, Enserco reached a settlement agreement set forth in a Letter of Intent. Final documentation is expected to be completed by the end of 2007. The Company has previously made accruals sufficient to cover the agreed upon settlement payment, the amount of which is not material to the Companys consolidated financial position, results of operations or cash flows.
Except as described above, there have been no material developments in any previously reported proceedings or any new material proceedings that have developed or material proceedings that have terminated during the first six months of 2007.
(15) |
ACQUISITIONS |
Aquila
On February 7, 2007, the Company entered into a definitive agreement with Aquila for the asset acquisition of Aquilas regulated electric utility in Colorado and its regulated gas utilities in Colorado, Kansas, Nebraska and Iowa. The purchase price of the assets is $940 million, subject to closing adjustments.
The purchase is conditioned on the completion of the acquisition of the outstanding shares of Aquila by Great Plains immediately following the sale of the regulated utilities to the Company. The purchase is also subject to regulatory approvals from the Missouri Public Service Commission, the Kansas Corporation Commission, the Colorado Public Utilities Commission, the Nebraska Public Service Commission, the Iowa Utilities Board and FERC; Hart-Scott-Rodino antitrust review; as well as other customary conditions.
In conjunction with the asset acquisition, on May 7, 2007, the Company entered into a senior unsecured $1.0 billion Acquisition Facility to provide for funding for the Companys pending acquisition of Aquila assets. The Acquisition Facility is a committed facility to fund an acquisition term loan in a single draw in an amount of up to $1.0 billion. The commitment to fund the acquisition term loan terminates on August 5, 2008. Upon funding of the loan, the loan termination date is the earlier of the date which is 364 days from the loan funding date or February 5, 2009.
This transaction would add approximately 93,000 electric utility customers and 523,000 gas utility customers to the Companys utility operations.
The Company is capitalizing certain incremental acquisition costs incurred related to this pending acquisition. Amounts capitalized in the three and six month periods ended June 30, 2007 were approximately $5.1 million and $7.2 million, respectively.
26
(16) |
DISCONTINUED OPERATIONS |
The Company accounts for its discontinued operations under the provisions of SFAS 144. Accordingly, results of operations and the related charges for discontinued operations have been classified as (Loss) income from discontinued operations, net of taxes in the accompanying Condensed Consolidated Statements of Income. Assets and liabilities of the discontinued operations have been reclassified and reflected on the accompanying Condensed Consolidated Balance Sheets as Assets of discontinued operations and Liabilities of discontinued operations. For comparative purposes, all prior periods presented have been restated to reflect the reclassifications on a consistent basis.
Sale of Crude Oil Marketing and Transportation Assets
On March 1, 2006, the Company sold the operating assets of BHER and related subsidiaries, its crude oil marketing and transportation business, for approximately $41 million. Assets sold include the 200-mile Millennium and the 190-mile Kilgore Pipelines, oil marketing contracts and certain other ancillary assets. Following the sale, the Company closed the operations of the Houston, Texas based business. For business segment reporting purposes, BHER was included in the Energy marketing and transportation segment.
Revenues and net (loss) income from the discontinued operations were as follows (in thousands):
|
Three Months Ended |
Six Months Ended | ||||||
|
June 30, |
June 30, | ||||||
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
Operating revenues |
$ |
|
$ |
36 |
$ |
|
$ |
171,905 |
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued |
|
|
|
|
|
|
|
|
operations (including |
|
|
|
|
|
|
|
|
severance payments) |
$ |
(208) |
$ |
(376) |
$ |
(281) |
$ |
(2,218) |
Pre-tax (loss) gain on sale |
|
|
|
|
|
|
|
|
of assets |
|
|
|
(558) |
|
|
|
13,104 |
Income tax benefit (expense) |
|
75 |
|
323 |
|
100 |
|
(3,907) |
Net (loss) income from |
|
|
|
|
|
|
|
|
discontinued operations |
$ |
(133) |
$ |
(611) |
$ |
(181) |
$ |
6,979 |
Losses incurred subsequent to the asset sale resulted from the settlement of certain contract disputes with the purchaser and other costs incurred in closing down the business operations. Assets and liabilities of the crude oil marketing and transportation business subsequent to the sale were not significant.
27
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
We are a diversified energy company operating principally in the United States with two major business groups retail services and wholesale energy. We report our business groups in the following segments:
Business Group |
Financial Segment |
|
|
Retail services group |
Electric utility |