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Black Hills 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2

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 September 30, 2008.

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

 

 

Registrant’s 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, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

 

Large accelerated filer

x

 

Accelerated filer

o

 

 

 

Non-accelerated filer

o

 

Smaller reporting company

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 issuer’s classes of common stock as of the latest practicable date.

 

Class

Outstanding at October 31, 2008

 

 

Common stock, $1.00 par value

38,450,217 shares

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

Glossary of Terms and Abbreviations

3-5

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Income –

 

 

Three and Nine Months Ended September 30, 2008 and 2007

6

 

 

 

 

Condensed Consolidated Balance Sheets –

 

 

September 30, 2008, December 31, 2007 and September 30, 2007

7

 

 

 

 

Condensed Consolidated Statements of Cash Flows –

 

 

Nine Months Ended September 30, 2008 and 2007

8

 

 

 

 

Notes to Condensed Consolidated Financial Statements

9-38

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operations

39-70

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

71-75

 

 

 

Item 4.

Controls and Procedures

76

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

77

 

 

 

Item 1A.

Risk Factors

77-82

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

82

 

 

 

Item 6.

Exhibits

83

 

 

 

 

Signatures

84

 

 

 

 

Exhibit Index

85

 

2

GLOSSARY OF TERMS AND ABBREVIATIONS

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

ARB

Accounting Research Bulletin

ARB 51

ARB 51 “Consolidated Financial Statements”

Aquila

Aquila, Inc.

Aquila Transaction

The July 14, 2008 acquisition of Aquila’s regulated electric utility in

 

Colorado and its regulated gas utilities in Colorado, Kansas,

 

Nebraska and Iowa

Bbl

Barrel

BHEP

Black Hills Exploration and Production, Inc., a direct, wholly-owned

 

subsidiary of Black Hills Non-regulated Holdings

Black Hills Energy

The name used to conduct the business activities of Black Hills Utility

 

Holdings, including the gas and electric utility properties acquired

 

from Aquila

Black Hills Non-regulated Holdings

Black Hills Non-regulated Holdings, LLC, a direct, wholly-owned

 

subsidiary of the Company that was formerly known as Black Hills

 

Energy, Inc.

Black Hills Power

Black Hills Power, Inc., a direct, wholly-owned subsidiary of the

 

Company

Black Hills Utility Holdings

Black Hills Utility Holdings, Inc., a direct, wholly-owned subsidiary of

 

the Company formed to acquire and own the utility properties

 

acquired from Aquila, all which are now doing business as

 

Black Hills Energy

Btu

British thermal unit

Cheyenne Light

Cheyenne Light, Fuel & Power Company, a direct, wholly-owned

 

subsidiary of the Company

Cheyenne Light Pension Plan

The Cheyenne Light, Fuel & Power Company Pension Plan

Colorado Electric

Black Hills Colorado Electric Utility Company, LP, (doing business as

 

Black Hills Energy), an indirect, wholly-owned subsidiary of

 

Black Hills Utility Holdings, formed to hold the Colorado electric

 

utility properties acquired from Aquila

Colorado Gas

Black Hills Colorado Gas Utility Company, LP, (doing business as

 

Black Hills Energy), an indirect, wholly-owned subsidiary of

 

Black Hills Utility Holdings, formed to hold the Colorado gas

 

utility properties acquired from Aquila

CPUC

Colorado Public Utility Commission

CT

Combustion turbine

Dth

Dekatherm. A unit of energy equal to 10 therms or one million British thermal units (MMBtu)

EITF 87-24

EITF 87-24, “Allocation of Interest to Discontinued Operations”

Enserco

Enserco Energy Inc., a direct, wholly-owned subsidiary of Black Hills

 

Non-regulated Holdings

FASB

Financial Accounting Standards Board

FSP

FASB Staff Position

FSP FAS 157-1

FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB

 

Statement No. 13 and Other Accounting Pronouncements that

 

Address Fair Value Measurement for Purposes of Lease Classification

 

or Measurement under Statement 13”

FSP FAS 157-2

FSP FAS 157-2, “Effective Date of FASB Statement No. 157”

 

 

3

 

FSP FIN 39-1

FSP FIN 39-1, “Amendment of FASB Interpretation No. 39”

FERC

Federal Energy Regulatory Commission

FIN 39

FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain

 

Contracts – an Interpretation of APB Opinion No. 10 and FASB

 

Statement No. 105”

GAAP

Generally Accepted Accounting Principles

Hastings

Hastings Funds Management Ltd

IIF

IIF BH Investment LLC, a subsidiary of an investment entity advised by

 

JPMorgan Asset Management

Indeck

Indeck Capital, Inc.

Iowa Gas

Black Hills Iowa Gas Utility Company, LLC, (doing business as

 

Black Hills Energy), a direct, wholly-owned subsidiary of

 

Black Hills Utility Holdings, formed to hold the Iowa gas

 

utility properties acquired from Aquila

IPP

Independent Power Production

IPP Transaction

The July 11, 2008 sale of seven of our IPP plants to affiliates of

 

Hastings and IIF

IUB

Iowa Utility Board

Kansas Gas

Black Hills Kansas Gas Utility Company, LLC, (doing business as

 

Black Hills Energy), a direct, wholly-owned subsidiary of

 

Black Hills Utility Holdings, formed to hold the Kansas gas

 

utility properties acquired from Aquila

KCC

Kansas Corporation Commission

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, a former subsidiary of

 

Black Hills Non-regulated Holdings that was sold as part of our

 

IPP Transaction

Mcf

One thousand cubic feet

Mcfe

One thousand cubic feet equivalent

MDU

MDU Resources Group, Inc.

MEAN

Municipal Energy Agency of Nebraska

MMBtu

One million British thermal units

Moody’s

Moody’s Investor Services, Inc.

MW

Megawatt

MWh

Megawatt-hour

Nebraska Gas

Black Hills Nebraska Gas Utility Company, LLC, (doing business as

 

Black Hills Energy), a direct, wholly-owned subsidiary of

 

Black Hills Utility Holdings, formed to hold the Nebraska gas

 

utility properties acquired from Aquila

Nevada Power

Nevada Power Company

NPSC

Nebraska Public Service Commission

PNM

PNM Resources, Inc.

PUCN

Public Utilities Commission of Nevada

SEC

U. S. Securities and Exchange Commission

SFAS

Statement of Financial Accounting Standards

SFAS 13

SFAS 13, “Accounting for Leases”

SFAS 71

SFAS 71, “Accounting for the Effects of Certain Types of Regulation”

 

 

4

 

 

 

SFAS 133

SFAS 133, “Accounting for Derivative Instruments and Hedging

 

Activities”

SFAS 141(R)

SFAS 141(R), “Business Combinations”

SFAS 144

SFAS 144, “Accounting for the Impairment or Disposal of Long-lived

 

Assets”

SFAS 157

SFAS 157, “Fair Value Measurements”

SFAS 159

SFAS 159, “The Fair Value Option for Financial Assets and Financial

 

Liabilities”

SFAS 160

SFAS 160, “Non-controlling Interest in Consolidated Financial

 

Statements – an amendment of ARB 51”

SFAS 161

SFAS 161, “Disclosure about Derivative Instruments and Hedging

 

Activities – an amendment of FASB Statement No. 133”

S&P

Standard & Poor’s Rating Services

Valencia

Valencia Power, LLC, a former subsidiary of Black Hills Non-regulated

 

Holdings that was sold as part of our IPP Transaction

VIE

Variable Interest Entity

WPSC

Wyoming Public Service Commission

WRDC

Wyodak Resources Development Corp., a direct, wholly-owned

 

subsidiary of Black Hills Non-regulated Holdings, LLC

 

 

5

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

 

2008

2007

2008

2007

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

Operating revenues

$

291,892

$

130,167

$

598,015

$

421,190

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Fuel and purchased power

 

131,300

 

39,127

 

230,643

 

119,544

Operations and maintenance

 

34,477

 

17,210

 

80,762

 

50,272

Administrative and general

 

40,993

 

26,272

 

90,273

 

76,590

Depreciation, depletion and amortization

 

30,825

 

19,333

 

70,999

 

53,647

Taxes, other than income taxes

 

11,609

 

7,113

 

31,590

 

24,691

Impairment of long-lived assets

 

 

2,721

 

 

2,721

 

 

249,204

 

111,776

 

504,267

 

327,465

 

 

 

 

 

 

 

 

 

Operating income

 

42,688

 

18,391

 

93,748

 

93,725

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

(16,402)

 

(6,093)

 

(35,160)

 

(18,652)

Interest income

 

628

 

980

 

1,427

 

2,396

Allowance for funds used during

 

 

 

 

 

 

 

 

construction – equity

 

1,390

 

811

 

2,287

 

3,851

Other income, net

 

171

 

73

 

573

 

396

 

 

(14,213)

 

(4,229)

 

(30,873)

 

(12,009)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

before equity in earnings of

 

 

 

 

 

 

 

 

unconsolidated subsidiaries, minority

 

 

 

 

 

 

 

 

interest and income taxes

 

28,475

 

14,162

 

62,875

 

81,716

Equity in earnings of unconsolidated

 

 

 

 

 

 

 

 

subsidiaries

 

1,359

 

574

 

3,656

 

2,092

Minority interest

 

 

(97)

 

(130)

 

(285)

Income tax expense

 

(10,312)

 

(3,510)

 

(21,989)

 

(26,025)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

19,522

 

11,129

 

44,412

 

57,498

Income from discontinued operations,

 

 

 

 

 

 

 

 

net of taxes

 

145,389

 

6,335

 

159,486

 

17,518

 

 

 

 

 

 

 

 

 

Net income

$

164,911

$

17,464

$

203,898

$

75,016

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

outstanding:

 

 

 

 

 

 

 

 

Basic

 

38,307

 

37,643

 

38,145

 

36,810

Diluted

 

38,425

 

38,078

 

38,430

 

37,226

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic–

 

 

 

 

 

 

 

 

Continuing operations

$

0.51

$

0.30

$

1.16

$

1.56

Discontinued operations

 

3.79

 

0.17

 

4.18

 

0.48

Total

$

4.30

$

0.47

$

5.34

$

2.04

 

 

 

 

 

 

 

 

 

Diluted–

 

 

 

 

 

 

 

 

Continuing operations

$

0.51

$

0.29

$

1.16

$

1.55

Discontinued operations

 

3.78

 

0.17

 

4.15

 

0.47

Total

$

4.29

$

0.46

$

5.31

$

2.02

 

 

 

 

 

 

 

 

 

Dividends paid per share of common stock

$

0.35

$

0.34

$

1.05

$

1.02

 

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

 

6

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

September 30,

December 31,

September 30,

 

2008

2007*

2007*

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

152,457

$

76,889

$

76,407

Restricted cash

 

5,514

 

5,443

 

5,394

Short-term investments

 

6,310

 

 

Receivables (net of allowance for doubtful accounts of $6,077;

 

 

 

 

 

 

$4,588 and $5,259, respectively)

 

227,862

 

268,462

 

217,900

Materials, supplies and fuel

 

173,734

 

88,580

 

85,155

Derivative assets

 

84,758

 

35,921

 

31,896

Deferred income taxes

 

 

4,512

 

Other assets

 

32,424

 

12,698

 

10,731

Assets of discontinued operations

 

322

 

573,601

 

565,943

 

 

683,381

 

1,066,106

 

993,426

 

 

 

 

 

 

 

Investments

 

21,911

 

19,216

 

23,886

 

 

 

 

 

 

 

Property, plant and equipment

 

2,615,627

 

1,846,565

 

1,800,625

Less accumulated depreciation and depletion

 

(566,191)

 

(509,187)

 

(500,872)

 

 

2,049,436

 

1,337,378

 

1,299,753

Other assets:

 

 

 

 

 

 

Derivative assets

 

1,500

 

2,492

 

2,746

Goodwill

 

400,959

 

11,482

 

12,076

Other

 

69,512

 

32,960

 

32,346

 

 

471,971

 

46,934

 

47,168

 

$

3,226,699

$

2,469,634

$

2,364,233

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

234,647

$

239,177

$

201,313

Accrued liabilities

 

144,768

 

100,986

 

89,952

Derivative liabilities

 

62,409

 

39,380

 

24,904

Deferred income taxes

 

592

 

 

Notes payable

 

627,800

 

37,000

 

67,500

Current maturities of long-term debt

 

2,074

 

130,326

 

130,523

Accrued income taxes

 

48,360

 

833

 

17,620

Liabilities of discontinued operations

 

124

 

91,233

 

120,000

 

 

1,120,774

 

638,935

 

651,812

 

 

 

 

 

 

 

Long-term debt, net of current maturities

 

501,277

 

503,301

 

401,851

 

 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes

 

240,654

 

207,735

 

191,451

Derivative liabilities

 

6,792

 

9,375

 

2,941

Other

 

207,841

 

135,266

 

143,539

 

 

455,287

 

352,376

 

337,931

 

 

 

 

 

 

 

Minority interest in subsidiaries

 

132

 

5,167

 

5,075

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock equity –

 

 

 

 

 

 

Common stock $1 par value; 100,000,000 shares authorized;

 

 

 

 

 

 

Issued 38,490,315; 37,842,221 and 37,802,087 shares,

 

 

 

 

 

 

respectively

 

38,490

 

37,842

 

37,802

Additional paid-in capital

 

580,601

 

560,475

 

558,935

Retained earnings

 

561,102

 

397,393

 

386,869

Treasury stock at cost – 40,059; 45,916 and 42,935

 

 

 

 

 

 

shares, respectively

 

(1,419)

 

(1,347)

 

(1,219)

Accumulated other comprehensive loss

 

(29,545)

 

(24,508)

 

(14,823)

 

 

1,149,229

 

969,855

 

967,564

 

 

 

 

 

 

 

 

$

3,226,699

$

2,469,634

$

2,364,233

__________________________

 

*

As adjusted (see Note 2)

 

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

7

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

Nine Months Ended

 

September 30,

 

2008

2007*

 

(in thousands)

Operating activities:

 

 

 

 

Net income

$

203,898

$

75,016

Income from discontinued operations, net of taxes

 

(159,486)

 

(17,518)

Income from continuing operations

 

44,412

 

57,498

Adjustments to reconcile income from continuing operations

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

Depreciation, depletion and amortization

 

70,999

 

53,647

Net change in derivative assets and liabilities

 

(26,853)

 

(10,300)

Deferred income taxes

 

76,546

 

10,008

(Undistributed) distributed earnings in associated companies

 

(1,988)

 

177

Allowance for funds used during construction – equity

 

(2,287)

 

(3,851)

Change in operating assets and liabilities:

 

 

 

 

Materials, supplies and fuel

 

(47,382)

 

24,960

Accounts receivable and other current assets

 

111,595

 

23,374

Accounts payable and other current liabilities

 

(118,369)

 

9,038

Other operating activities

 

(44,772)

 

11,704

Net cash provided by operating activities of continuing operations

 

61,901

 

176,255

Net cash provided by operating activities of discontinued operations

 

18,184

 

29,476

Net cash provided by operating activities

 

80,085

 

205,731

 

 

 

 

 

Investing activities:

 

 

 

 

Property, plant and equipment additions

 

(219,350)

 

(143,316)

Proceeds from sale of business operations

 

835,316

 

Payment for acquisition of net assets, net of cash acquired

 

(937,606)

 

Increase in short-term investments

 

(6,525)

 

Other investing activities

 

(698)

 

(3,304)

Net cash used in investing activities of continuing operations

 

(328,863)

 

(146,620)

Net cash used in investing activities of discontinued operations

 

(28,966)

 

(13,693)

Net cash used in investing activities

 

(357,829)

 

(160,313)

 

 

 

 

 

Financing activities:

 

 

 

 

Dividends paid

 

(40,189)

 

(37,068)

Common stock issued

 

2,611

 

149,860

Increase (decrease) in short-term borrowings, net

 

590,800

 

(78,000)

Long-term debt – repayments

 

(130,276)

 

(26,286)

Other financing activities

 

(72)

 

(585)

Net cash provided by financing activities of continuing operations

 

422,874

 

7,921

Net cash used in financing activities of discontinued operations

 

(73,928)

 

(9,643)

Net cash provided by (used in) financing activities

 

348,946

 

(1,722)

 

 

 

 

 

Increase in cash and cash equivalents

 

71,202

 

43,696

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

Beginning of period

 

81,255(a)

 

37,530(c)

End of period

$

152,457

$

81,226(b)

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

Non-cash investing and financing activities-

 

 

 

 

Property, plant and equipment acquired with accrued liabilities

$

25,549

$

56,274

Cash paid during the period for-

 

 

 

 

Interest (net of amounts capitalized)

$

29,748

$

30,160

Income taxes paid (net of amounts refunded)

$

2,984

$

7,627

_________________________

*

As adjusted (see Note 2)

(a)

Includes approximately $4.4 million of cash included in the assets of discontinued operations.

(b)

Includes approximately $4.8 million of cash included in the assets of discontinued operations.

(c)

Includes approximately $5.0 million 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.

8

BLACK HILLS CORPORATION

 

Notes to Condensed Consolidated Financial Statements

(unaudited)

(Reference is made to Notes to Consolidated Financial Statements

included in the Company’s 2007 Annual Report on Form 10-K)

 

(1)

MANAGEMENT’S STATEMENT

 

The condensed consolidated 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 Company’s 2007 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 September 30, 2008, December 31, 2007 and September 30, 2007 financial information and are of a normal recurring nature. Some of the Company’s 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. In particular, the normal peak usage season for our gas utilities is November through March and significant earnings variances can be expected between the Gas Utilities segment’s peak and off-peak seasons. The results of operations for the nine months ended September 30, 2008, 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.

 

The Company completed its sale of IPP assets on July 11, 2008. For all periods presented, amounts associated with the IPP plants divested in the IPP Transaction have been reclassified as discontinued operations. See Note 16 for additional information.

 

The Company completed the Aquila Transaction on July 14, 2008. Effective as of that date, the assets and liabilities, results of operations, and cash flows of the acquired utilities are included in our Condensed Consolidated Financial Statements. See Note 15 for additional information.

 

As a result of these transactions, the asset and earnings profile of our company have changed significantly. As of June 30, 2008, regulated utilities properties comprised approximately 38 percent of our consolidated assets and generated approximately 45 percent of our revenues for the quarter ending June 30, 2008. As of September 30, 2008, regulated utility properties comprised approximately 66 percent of our consolidated assets and generated approximately 76 percent of our revenues for the quarter ending September 30, 2008. In order to more appropriately reflect the manner in which we are managing our newly acquired businesses, we have changed our business reporting segments relating to our utility businesses. See Note 11 for additional information.

 

9

(2)

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

SFAS 157

 

During September 2006, the FASB issued SFAS 157. This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 does not expand the application of fair value accounting to any new circumstances, but applies the framework to other accounting pronouncements that require or permit fair value measurement. The Company applies fair value measurements to certain assets and liabilities, primarily commodity derivatives within our Energy Marketing and Oil and Gas business segments, interest rate swap instruments, and other miscellaneous derivatives.

 

SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of January 1, 2008, the Company adopted the provisions of SFAS 157 for all assets and liabilities measured at fair value except for non-financial assets and liabilities measured at fair value on a non-recurring basis, as permitted by FSP FAS 157-2. As a result of the Company’s adoption of SFAS 157, the Company discontinued its use of a “liquidity reserve” in valuing the total forward positions within its energy marketing portfolio. This impact was accounted for prospectively as a change in accounting estimate and resulted in a $1.2 million after-tax benefit being recorded within our unrealized marketing margins. Unrealized margins are presented as a component of Operating revenues on the accompanying Condensed Consolidated Statements of Income. SFAS 157 also requires new disclosures regarding the level of pricing observability associated with instruments carried at fair value. This additional disclosure is provided in Note 13.

 

SFAS 159

 

SFAS 159 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 was adopted on January 1, 2008 and did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

FSP FAS 157-1

 

In February 2008, the FASB issued FSP FAS 157-1, which excludes SFAS 13 and other accounting pronouncements that address fair value for purposes of lease classification and measurement under SFAS 13 from SFAS 157 except when applying SFAS 157 to assets acquired and liabilities assumed in a business combination. The Company applied the provisions of FSP FAS 157-1 from the date of initial adoption of SFAS 157 on January 1, 2008. Accordingly, the provisions of SFAS 157 will not be applied to lease transactions under SFAS 13 except when applying SFAS 157 to business combinations recorded by the Company.

 

10

FSP FAS 157-2

 

In February 2008, the FASB issued FSP FAS 157-2, which permits a one-year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted FSP FAS 157-2 effective January 1, 2008. Accordingly, the provisions of SFAS 157 will not be applied to non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. Management is currently evaluating the impact, if any, that the deferred provisions of SFAS 157 will have on the Company’s consolidated financial statements.

 

FSP FIN 39-1

 

FSP FIN 39-1 amends certain paragraphs of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. The Company adopted FSP FIN 39-1 effective January 1, 2008. This standard changed our method of netting certain balance sheet amounts. The Company applied FSP FIN 39-1 as a change in accounting principle through retrospective application. Each Condensed Consolidated Balance Sheet herein reflects the offsetting of net derivative positions with fair value amounts for cash collateral with the same counterparty when management believes a legal right of offset exists. Accordingly, December 31, 2007 and September 30, 2007 amounts have been reclassified to conform to this presentation as follows (in thousands):

 

December 31, 2007

 

 

 

As Reported

 

As Reported

 

Discontinued

for the

Balance Sheet

for the

FSP FIN 39-1

Operations

September

Line Description

2007 10-K

Reclassification

Reclassification

2008 10-Q

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Receivables

$

291,189

$

(1,945)

$

(20,782)

$

268,462

Derivative assets

$

37,208

$

(1,287)

$

$

35,921

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

$

242,813

$

(3,232)

$

(404)

$

239,177

 

September 30, 2007

As Reported

 

 

As Reported

 

for the

 

Discontinued

for the

Balance Sheet

September

FSP FIN 39-1

Operations

September

Line Description

2007 10-Q

Reclassification

Reclassification

2008 10-Q

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Receivables

$

238,662

$

(2,511)

$

(18,251)

$

217,900

Derivative assets

$

29,385

$

2,511

$

$

31,896

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

Derivative assets

$

3,420

$

(674)

$

$

2,746

 

 

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Derivative liabilities

$

3,615

$

(674)

$

$

2,941

 

11

The affect on the Cash Flow Statement for 2007 due to the reclassification is as follows (in thousands):

 

 

As Reported

 

 

As Reported

Cash Flow Statement

for the

 

Discontinued

for the

Operating Activities

September

FSP FIN 39-1

Operations

September

Line Description

2007 10-Q

Reclassification

Reclassification

2008 10-Q

 

 

 

 

 

Accounts receivable and

 

 

 

 

 

 

 

 

other current assets

$

21,099

$

2,511

$

(236)

$

23,374

 

 

 

 

 

 

 

 

 

Net change in derivative

 

 

 

 

 

 

 

 

assets and liabilities

$

(4,911)

$

(5,389)

$

$

(10,300)

 

 

 

 

 

 

 

 

 

Accounts payable and

 

 

 

 

 

 

 

 

other current liabilities

$

4,662

$

2,878

$

1,498

$

9,038

 

As of December 31, 2007 and September 30, 2007, the Company offset fair value cash collateral receivables and payables against net derivative positions in the amounts of $(1.3) million and $2.5 million, respectively.

 

(3)

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

SFAS 141(R)

 

In December 2007, the FASB issued SFAS 141(R). SFAS 141(R) requires an acquiring entity to recognize the assets acquired, the liabilities assumed and any non-controlling interests in the acquiree at the acquisition date to be measured at their fair values as of the acquisition date, with limited exceptions specified in the statement. This replaces the cost allocation process in SFAS 141, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. Acquisition-related costs will be expensed in the periods in which the costs are incurred or services are rendered. Costs to issue debt or equity securities shall be accounted for under other applicable GAAP. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. We expect SFAS 141(R) will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of any acquisitions we consummate after the effective date. If income tax liabilities are settled for an amount other than as previously recorded prior to the adoption of SFAS 141(R), the reversal of any remaining liability will affect goodwill. If such liabilities reverse subsequent to the adoption of SFAS 141(R), such reversals will affect expense including income tax expense in the period of reversal. The Company is assessing the full impact SFAS 141(R) would have on future consolidated financial statements.

 

12

SFAS 160

 

In December 2007, the FASB issued SFAS 160. SFAS 160 amends ARB 51 and requires:

 

     ownership interests in subsidiaries held by parties other than the parent be clearly identified on the consolidated statement of financial position within equity, but separate from the parent’s equity;

 

     consolidated net income attributable to the parent and to the non-controlling interest be clearly identified on the face of the consolidated statement of income;

 

     changes in a parent’s ownership interest while the parent retains a controlling financial interest be accounted for consistently as equity transactions;

 

     when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value; and

 

     sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners.

 

SFAS 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Management does not expect the adoption of SFAS 160 to have a significant effect on the Company’s consolidated financial statements.

 

SFAS 161

 

In March 2008, the FASB issued SFAS 161, which requires enhanced disclosures about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adoption of SFAS 161.

 

13

(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):

 

 

September 30,

December 31,

September 30,

Major Classification

2008

2007

2007

 

 

 

 

 

 

 

Materials and supplies

$

32,565

$

27,649

$

28,092

Fuel – Electric Utilities

 

11,497

 

5,025

 

7,401

Gas Supply – Gas Utilities

 

74,407

 

 

Gas and oil held by Energy

 

 

 

 

 

 

Marketing*

 

55,265

 

55,906

 

49,662

 

 

 

 

 

 

 

Total materials, supplies and fuel

$

173,734

$

88,580

$

85,155

___________________________

* As of September 30, 2008, December 31, 2007 and September 30, 2007, market adjustments related to natural gas held by Energy Marketing and recorded in inventory were $(15.1) million, $(9.8) million and $(6.5) million, respectively (see Note 12 for further discussion of Energy Marketing trading activities).

 

The increase in gas is due to additions of natural gas storage inventory for the gas utilities acquired in July 2008.

 

The inventory held by Energy Marketing primarily consists of gas held in storage. 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.

 

(5)

NOTES PAYABLE AND LONG-TERM DEBT

 

Wygen I

 

During June 2008, the Company repaid the $128.3 million Wygen I project debt. Borrowings on the revolving credit facility were used to fund the repayment.

 

We had previously been the lessee of the Wygen I Plant under a synthetic lease arrangement and under GAAP we consolidated the plant, the related project debt and all its operating and financial activities into our financial statements. In conjunction with the repayment of the project debt, the synthetic lease structure was terminated and the Company assumed direct ownership of the plant. Since the plant and its financial activities were previously consolidated into our financial statements, the transaction had minimal impact on our consolidated financial statements.

 

Acquisition Credit Facility

 

On July 14, 2008, in conjunction with the closing of the Aquila Transaction, the Company borrowed $383 million under its $1 billion acquisition credit facility dated May 7, 2007. The LIBOR-based borrowing is bearing interest at 3.74 percent as of September 30, 2008. The loan matures in February 2009.

 

Black Hills Colorado

 

In conjunction with the sale of IPP assets, the $67.5 million project financing debt for our Black Hills Colorado facilities was paid off.

 

14

 

(6)

GUARANTEES

 

During the nine months ended September 30, 2008, the Company had the following changes to its guarantees:

 

    Extinguished the $111.0 million guarantee to Wygen Funding, Limited Partnership on June 20, 2008 when the Wygen I project debt was repaid and the Company assumed direct ownership of the plant;

 

    Extinguished the $30.0 million guarantee in favor of The Bank of Nova Scotia in July 2008 when the Black Hills Colorado project debt was repaid in conjunction with the IPP Transaction;

 

    Extinguished the $12.0 million guarantee in favor of Public Service Company of New Mexico for obligations and damages, if any, due by Valencia under a power purchase agreement in conjunction with the IPP Transaction in July 2008;

 

    Extinguished the $5.0 million guarantee in favor of Nevada Power Company for payments due by Las Vegas II under the Western Systems Power Pool Confirmation Agreement in conjunction with the IPP Transaction in July 2008;

 

    Issued a guarantee for up to $0.4 million to The Industrial Company for payment obligations arising from a construction contract with Black Hills Non-regulated Holdings. It is a continuing guarantee which terminates upon 45 days written notice to the counterpart;

 

    Extended the expiration of 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 to July 31, 2009; and

 

    Issued the following guarantees for payment obligations arising from commodity-related physical and financial transactions by Black Hills Utility Holdings, Inc. These commodity transactions secure natural gas supply for our gas utilities. Each guarantee is a continuing guarantee that may be terminated upon 30 days written notice to the counterparty.

 

§     Up to $25.0 million to BP Energy Company and/or BP Canada Energy Marketing Corp.

 

§     Up to $25.0 million to Public Service Company of Colorado.

 

§     Up to $10.0 million to Northern Natural Gas Company.

 

 

15

(7)

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 September 30, 2008

Three Months

Nine Months

 

 

Average

 

Average

 

Income

Shares

Income

Shares

 

 

 

 

 

 

 

Income from continuing operations

$

19,522

 

$

44,412

 

 

 

 

 

 

 

 

Basic earnings

 

19,522

38,307

 

44,412

38,145

Dilutive effect of:

 

 

 

 

 

 

Stock options

 

42

 

62

Estimated contingent shares issuable

 

 

 

 

 

 

for prior acquisition

 

 

132

Others

 

76

 

91

Diluted earnings

$

19,522

38,425

$

44,412

38,430

 

 

Period ended September 30, 2007

Three Months

Nine Months

 

 

Average

 

Average

 

Income

Shares

Income

Shares

 

 

 

 

 

 

 

Income from continuing operations

$

11,129

 

$

57,498

 

 

 

 

 

 

 

 

Basic earnings

 

11,129

37,643

 

57,498

36,810

Dilutive effect of:

 

 

 

 

 

 

Stock options

 

111

 

108

Estimated contingent shares issuable

 

 

 

 

 

 

for prior acquisition

 

159

 

159

Others

 

165

 

149

Diluted earnings

$

11,129

38,078

$

57,498

37,226

 

Basic average shares include the weighted-average effect of the issuance of 451,465 common shares on March 21, 2008 and 4,170,891 common shares on February 27, 2007 (see Notes 9 and 14 for discussion of the March 21, 2008 share issuances).

 

16

(8)

OTHER COMPREHENSIVE INCOME

 

The following table presents the components of the Company’s other comprehensive income

(in thousands):

 

 

Three Months Ended

 

September 30,

 

2008

2007

 

 

 

 

 

Net income

$

164,911

$

17,464

Other comprehensive income (loss),

 

 

 

 

net of tax:

 

 

 

 

Fair value adjustment on derivatives

 

 

 

 

designated as cash flow hedges

 

 

 

 

(net of tax of $(14,030) and $3,558,

 

 

 

 

respectively)

 

25,824

 

(6,749)

Reclassification adjustments on cash

 

 

 

 

flow hedges settled and included in

 

 

 

 

net income (net of tax of $(1,539)

 

 

 

 

and $1,296, respectively)

 

2,761

 

(2,406)

Unrealized loss on available for sale

 

 

 

 

securities (net of tax of $17)

 

(32)

 

 

 

 

 

 

Total comprehensive income

$

193,464

$

8,309

 

 

 

Nine Months Ended

 

September 30,

 

2008

2007

 

 

 

 

 

Net income

$

203,898

$

75,016

Other comprehensive income (loss),

 

 

 

 

net of tax:

 

 

 

 

Fair value adjustment on derivatives

 

 

 

 

designated as cash flow hedges

 

 

 

 

(net of tax of $6,449 and $3,419,

 

 

 

 

respectively)

 

(11,951)

 

(6,521)

Reclassification adjustments on cash

 

 

 

 

flow hedges settled and included in

 

 

 

 

net income (net of tax of $(3,952)

 

 

 

 

and $4,012, respectively)

 

7,071

 

(7,787)

Unrealized loss on available for sale

 

 

 

 

securities (net of tax of $58)

 

(157)

 

 

 

 

 

 

Total comprehensive income

$

198,861

$

60,708

 

Other comprehensive loss from fair value adjustments on derivatives designated as cash flow hedges in the three and nine months ended September 30, 2008 is primarily attributable to fluctuating oil and gas prices affecting the fair value of natural gas and crude oil swaps held in the Oil and Gas segment and a decrease in interest rates affecting the fair value of interest rate swaps on variable rate debt.

 

17

Balances by classification included within Accumulated other comprehensive loss on the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):

 

 

Derivatives

 

 

Unrealized

 

 

Designated as

Employee

Amount from

Loss on

 

 

Cash Flow

Benefit

Equity-method

Available-for-

 

 

Hedges

Plans

Investees

Sale Securities

Total

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2008

$

(23,168)

$

(6,115)

$

(122)

$

(140)

$

(29,545)

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

$

(18,178)

$

(6,115)

$

(215)

$

$

(24,508)

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2007

$

(6,248)

$

(8,404)

$

(171)

$

$

(14,823)

 

 

(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 Company’s 2007 Annual Report on Form 10-K.

 

Issuance of Unregistered Securities

 

On March 21, 2008, the Company issued 451,465 common shares as additional consideration associated with the “Acquisition Earn-out Litigation” previously disclosed in Note 18 of the Company’s 2007 Annual Report on Form 10-K. No additional consideration was received in exchange for the earn-out shares (see Note 14).

 

Equity Compensation Plans

 

    The Company granted 32,371 target performance shares to certain officers and business unit leaders of the Company for the January 1, 2008 through December 31, 2010 performance period. Actual shares are not issued until the end of the Performance Plan period (December 31, 2010). Performance shares are awarded based on the Company’s total shareholder return over the designated performance period as measured against a selected peer group and can range from 0 to 175 percent of target. In addition, the Company’s stock price must also increase during the performance period. 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 $46.00 per share.

 

    The Company issued 32,568 shares of common stock under the 2007 short-term incentive compensation plan during the nine months ended September 30, 2008. Pre-tax compensation cost related to the award was approximately $1.2 million, which was accrued for in 2007.

 

    The Company granted 80,684 restricted common shares during the nine months ended September 30, 2008. The pre-tax compensation cost related to the awards of restricted stock and restricted stock units of approximately $3.0 million will be recognized over the three-year vesting period.

 

 

 

 

18

 

    90,214 stock options were exercised during the nine months ended September 30, 2008, at a weighted-average exercise price of $25.12 per share providing $2.3 million of proceeds to the Company.

 

    Total compensation expense recognized for all equity compensation plans for the three months ended September 30, 2008 and 2007 was $0.3 million and $1.4 million, respectively, and for the nine months ended September 30, 2008 and 2007 was $1.0 million and $4.4 million, respectively.

 

    As of September 30, 2008, total unrecognized compensation expense related to non-vested stock awards was $4.6 million and is expected to be recognized over a weighted-average period of 2.1 years.

 

(10)

EMPLOYEE BENEFIT PLANS

 

On July 14, 2008, as disclosed in Note 15, the Company completed the Aquila Transaction adding an additional defined benefit pension plan, a non-pension defined benefit post-retirement healthcare plan, and a 401K retirement savings plan to cover the employees of the utilities acquired. Benefits under these plans are determined based on each employee’s compensation, years of service, and/or age at retirement.

 

Amounts recognized in the Condensed Consolidated Balance Sheet upon the acquisition are (in thousands):

 

 

 

Non-Pension

 

 

Defined Benefit

 

Defined Benefit

Postretirement

 

Pension Plan

Plan

 

 

 

 

 

Unfunded postretirement benefit obligation – Black Hills Energy

$

16,105

$

16,948

 

Defined Benefit Pension Plan

 

The Company has three 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 second Plan covers employees of the Company’s subsidiary, Cheyenne Light, who meet certain eligibility requirements. The third plan covers employees of the Black Hills Energy utilities.

 

The components of net periodic benefit cost for the three Plans are as follows (in thousands):

 

 

Three Months Ended

Nine Months Ended

 

September 30,

September 30,

 

2008

2007

2008

2007

 

 

 

 

 

 

 

 

 

Service cost

$

1,547

$

687

$

3,055

$

2,061

Interest cost

 

3,165

 

1,129

 

5,625

 

3,387

Expected return on plan assets

 

(3,644)

 

(1,374)

 

(6,790)

 

(4,122)

Prior service cost

 

41

 

38

 

123

 

114

Net loss

 

 

127

 

 

381

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

1,109

$

607

$

2,013

$

1,821

 

 

19

 

 

The Company made a $0.5 million contribution to the Cheyenne Light Pension Plan in the first quarter of 2008; no additional contributions are anticipated to be made to the Plans during the 2008 fiscal year. Total contributions to the Plans for 2009 are expected to be approximately $14.5 million.

 

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

Nine Months Ended

 

September 30,

September 30,

 

2008

2007

2008

2007

 

 

 

 

 

 

 

 

 

Service cost

$

112

$

103

$

336

$

309

Interest cost

 

311

 

289

 

933

 

867

Prior service cost

 

3

 

3

 

9

 

9

Net loss

 

142

 

178

 

426

 

534

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

568

$

573

$

1,704

$

1,719

 

The Company anticipates that it will make contributions to the Supplemental Plans for the 2008 fiscal year of approximately $0.8 million. The contributions are expected to be made in the form of benefit payments.

 

Non-pension Defined Benefit Postretirement Healthcare Plans

 

Employees who are participants in the Company’s 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

Nine Months Ended

 

September 30,

September 30,

 

2008

2007

2008

2007

 

 

 

 

 

 

 

 

 

Service cost

$

226

$

135

$

476

$

405

Interest cost

 

503

 

207

 

937

 

621

Expected return on Plan assets

 

(43)

 

 

(43)

 

Net transition obligation

 

15

 

15

 

45

 

45

Net gain

 

(20)

 

(4)

 

(60)

 

(12)

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

681

$

353

$

1,355

$

1,059

 

 

20

 

The Company anticipates that it will make contributions to the Healthcare Plans for the 2008 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 Company’s 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 $0.2 million for each of the three and nine month periods ended September 30, 2008 and 2007.

 

(11)

SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY’S

 

BUSINESS

 

The Company’s reportable segments are those that are based on the Company’s method of internal reporting, which generally segregates the strategic business groups due to differences in products, services and regulation. As of September 30, 2008, substantially all of the Company’s operations and assets are located within the United States.

 

Prior to the third quarter of 2008, we managed our business in six reporting segments within two business groups: Utilities and Non-regulated Energy. Utilities consisted of two reporting segments, including the Electric Utility segment (Black Hills Power) and the combination Electric and Gas Utility segment (Cheyenne Light). Non-regulated Energy consisted of four reporting segments, including our Coal Mining, Energy Marketing, Power Generation, and Oil and Gas segments.

 

In the third quarter of 2008, we changed the reporting segments within our Utilities Group to reflect the significant change to our utility business resulting from the Aquila Transaction (see Note 15). Effective for the period ending September 30, 2008, the Utilities Group includes two reporting segments: Electric Utilities and Gas Utilities. We manage our electric and gas utility businesses predominantly by state; however, because our electric utilities and our gas utilities have similar economic characteristics, we aggregate our electric (and combination) utility businesses in the Electric Utilities reporting segment and our gas utility businesses in the Gas Utilities reporting segment. Electric Utilities includes the operating results of the regulated electric utility operations of Black Hills Power and Colorado Electric, and the regulated electric and natural gas utility operations of Cheyenne Light. The natural gas operations within our combination utility, Cheyenne Light, provide stable gross margins and overall financial results. Periodic variances are therefore rarely expected to significantly impact the operating results discussions for the Electric Utilities segment. Presentation of prior periods has been adjusted to reflect the combination of Black Hills Power and Cheyenne Light within the Electric Utilities segment. Gas Utilities consists of the operating results of the regulated natural gas utility operations of Colorado Gas, Iowa Gas, Kansas Gas, and Nebraska Gas.

 

On July 11, 2008, the Company sold entities that owned seven of its IPP assets with a total capacity of 974 megawatts. The financial information related to these plants was previously reported in the Power Generation segment and has been reclassified to discontinued operations. The Company’s remaining IPP assets will continue to be reported in the Power Generation segment.

 

21

The Company now conducts its operations through the following six reporting segments:

 

 

Utilities Group –

 

     Electric Utilities, which supply electric utility service to areas in South Dakota, Wyoming, Montana and Colorado and natural gas utility service to Cheyenne, Wyoming and vicinity; and

 

     Gas Utilities, which supply natural gas utility service in Colorado, Iowa, Nebraska and Kansas.

 

Non-regulated Energy Group –

 

     Oil and Gas, which produces, explores and operates oil and natural gas interests located in the Rocky Mountain region and other states;

 

     Power Generation, which produces and sells power and capacity to wholesale customers. Subsequent to the July 11, 2008 sale of seven IPP plants, the remaining segment assets include power plant assets located in Wyoming, California and Idaho;

 

     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.

 

Segment information follows the same accounting policies as described in Note 20 of the Notes to Consolidated Financial Statements in the Company’s 2007 Annual Report on Form 10-K. In accordance with the provisions of SFAS 71, intercompany fuel sales to the regulated utilities are not eliminated.

 

22

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

 

 

 

 

 

 

September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric Utilities

$

136,644

$

334

$

10,765

Gas Utilities

 

83,937

 

 

(1,854)

Non-regulated Energy:

 

 

 

 

 

 

Oil and Gas

 

25,438

 

 

1,517

Power Generation

 

11,704

 

 

3,197

Coal Mining

 

8,103

 

7,928

 

1,092

Energy Marketing

 

19,196

 

 

 

6,902

Corporate

 

 

 

 

(2,061)

Inter-segment eliminations

 

 

(1,392)

 

(36)

 

 

 

 

 

 

 

Total

$

285,022

$

6,870

$

19,522

 

 

 

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Three Month Period Ended

 

 

 

 

 

 

September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric Utilities

$

72,275

$

645

$

7,189

Non-regulated Energy:

 

 

 

 

 

 

Oil and Gas

 

24,291

 

 

1,979

Power Generation

 

10,048

 

 

(900)

Coal Mining

 

6,818

 

3,628

 

1,358

Energy Marketing

 

13,873

 

 

2,290

Corporate

 

 

 

(787)

Inter-segment eliminations

 

 

(1,411)

 

 

 

 

 

 

 

 

Total

$

127,305

$

2,862

$

11,129

 

 

23

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Nine Month Period Ended

 

 

 

 

 

 

September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric Utilities

$

329,512

$

1,004

$

30,485

Gas Utilities

 

83,937

 

 

(1,854)

Non-regulated Energy:

 

 

 

 

 

 

Oil and Gas

 

85,770

 

 

11,266

Power Generation

 

29,079

 

 

1,698

Coal Mining

 

23,979

 

17,946

 

3,217

Energy Marketing

 

30,465

 

 

 

7,565

Corporate

 

 

 

 

(7,889)

Inter-segment eliminations

 

 

(3,677)

 

(76)

 

 

 

 

 

 

 

Total

$

582,742

$

15,273

$

44,412

 

 

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Nine Month Period Ended

 

 

 

 

 

 

September 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric Utilities

$

222,033

$

1,641

$

22,884

Non-regulated Energy:

 

 

 

 

 

 

Oil and Gas

 

75,948

 

 

9,945

Power Generation

 

30,123

 

 

(1,850)

Coal Mining

 

19,458

 

10,734

 

4,353

Energy Marketing

 

65,220

 

 

23,886

Corporate

 

 

 

(1,720)

Inter-segment eliminations

 

 

(3,967)

 

 

 

 

 

 

 

 

Total

$

412,782

$

8,408

$

57,498

 

During 2008, the Company's assets increased approximately $0.8 billion. The assets increased as a result of the Aquila Transaction (see Note 15), the ongoing construction of the Wygen III power plant within the Electric Utilities segment, and other additions of maintenance and deployment capital (see Capital Requirements on page 67) offset by the IPP Transactions (see Note 16).

 

24

(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 Company’s 2007 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 Company’s natural gas and crude oil marketing activities and derivative commodity instruments are as follows:

 

 

Outstanding at

Outstanding at

Outstanding at

 

September 30, 2008

December 31, 2007

September 30, 2007

 

 

Latest

 

Latest

 

Latest

 

Notional

Expiration

Notional

Expiration

Notional

Expiration

 

Amounts

(months)

Amounts

(months)

Amounts

(months)

(in thousands of MMBtus)

 

 

 

 

 

 

 

 

 

Natural gas basis

 

 

 

 

 

 

 

 

 

swaps purchased

 

184,099

37

 

125,577

36

 

150,499

27

Natural gas basis

 

 

 

 

 

 

 

 

 

swaps sold

 

180,322

37

 

128,892

36

 

158,349

27

Natural gas fixed for float

 

 

 

 

 

 

 

 

 

swaps purchased

 

73,872

24

 

42,326

24

 

51,958

25

Natural gas fixed for float

 

 

 

 

 

 

 

 

 

swaps sold

 

84,786

24

 

59,253

24

 

70,379

25

Natural gas physical

 

 

 

 

 

 

 

 

 

purchases

 

146,273

18

 

90,583

15

 

95,028

18

Natural gas physical sales

 

182,512

24

 

98,888

27

 

93,008

30

Natural gas options

 

 

 

 

 

 

 

 

 

purchased

 

3,958

6

 

3,472

10

 

31,973

6

Natural gas options sold

 

3,958

6

 

3,472

10

 

31,539

6

 

 

25

 

Outstanding at

Outstanding at

Outstanding at

 

September 30, 2008

December 31, 2007

September 30, 2007

 

 

Latest

 

Latest

 

Latest

 

Notional

Expiration

Notional

Expiration

Notional

Expiration

 

Amounts

(months)

Amounts

(months)

Amounts

(months)

 

 

 

 

 

 

 

 

 

 

(in thousands of Bbls)

 

 

 

 

 

 

 

 

 

Crude oil physical

 

 

 

 

 

 

 

 

 

purchases

 

5,994

15

 

4,991

12

 

1,619

7

Crude oil physical sales

 

4,690

15

 

3,800

12

 

1,370

5

Crude oil swaps/options

 

 

 

 

 

 

 

 

 

purchased

 

465

24

 

495

12

 

465

12

Crude oil swaps/options

 

 

 

 

 

 

 

 

 

sold

 

525

24

 

495

12

 

465

12

 

 

 

 

 

 

 

 

 

 

(Dollars, in thousands)

 

 

 

 

 

 

 

 

 

Canadian dollars

 

 

 

 

 

 

 

 

 

purchased

$

25,000

1

$

28,000

2

$

29,000

1

Canadian dollars

 

 

 

 

 

 

 

 

 

sold