10-Q 1 form10q_1stqtr-2008.htm 1ST QTR 10Q 2008

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 March 31, 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 April 30, 2008

 

 

Common stock, $1.00 par value

38,405,402 shares

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

Glossary of Terms

3-4

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Income –

 

 

Three Months Ended March 31, 2008 and 2007

5

 

 

 

 

Condensed Consolidated Balance Sheets –

 

 

March 31, 2008, December 31, 2007 and March 31, 2007

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows –

 

 

Three Months Ended March 31, 2008 and 2007

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-30

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operations

31-53

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

53-56

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

57

 

 

 

Item 1A.

Risk Factors

57

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

Item 5.

Other Information

58

 

 

 

Item 6.

Exhibits

58

 

 

 

 

Signatures

59

 

 

 

 

Exhibit Index

60

 

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

ARB

Accounting Research Bulletin

ARB 51

ARB 51 “Consolidated Financial Statements”

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 Power

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

Btu

British thermal unit

CFIUS

Committee on Foreign Investment in the United States

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

Dth

Dekatherm

Enserco

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

 

Energy, Inc.

FASB

Financial Accounting Standards Board

FSP

FASB Staff Position

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

Effective Date of FASB Statement No. 157

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

Great Plains

Great Plains Energy Incorporated

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.

IPP

Independent Power Production

LIBOR

London Interbank Offered Rate

LOE

Lease Operating Expense

Las Vegas I

Las Vegas I gas-fired power plant

LVC

Las Vegas Cogeneration Limited Partnership, an indirect, wholly-owned

 

subsidiary of Black Hills Energy, Inc.

Mcf

Thousand cubic feet

Mcfe

One thousand cubic feet equivalent

MMBtu

One million British thermal units

Moody’s

Moody’s Investor Services, Inc.

MW

Megawatt

 

 

3

 

MWh

Megawatt-hour

Nevada Power

Nevada Power Company

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”

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 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, 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

 

March 31,

 

2008

2007

 

(in thousands, except per share amounts)

 

 

 

 

 

Operating revenues

$

179,211

$

186,533

 

 

 

 

 

Operating expenses:

 

 

 

 

Fuel and purchased power

 

54,615

 

51,289

Operations and maintenance

 

26,203

 

20,559

Administrative and general

 

25,549

 

25,663

Depreciation, depletion and amortization

 

25,644

 

23,168

Taxes, other than income taxes

 

10,636

 

9,899

 

 

142,647

 

130,578

 

 

 

 

 

Operating income

 

36,564

 

55,955

 

 

 

 

 

Other income (expense):

 

 

 

 

Interest expense

 

(12,333)

 

(11,109)

Interest income

 

433

 

733

Allowance for funds used during

 

 

 

 

construction – equity

 

281

 

1,834

Other income, net

 

344

 

349

 

 

(11,275)

 

(8,193)

 

 

 

 

 

Income from continuing operations

 

 

 

 

before equity in earnings of

 

 

 

 

unconsolidated subsidiaries, minority

 

 

 

 

interest and income taxes

 

25,289

 

47,762

Equity in earnings of unconsolidated

 

 

 

 

subsidiaries

 

232

 

845

Minority interest

 

(77)

 

(94)

Income tax expense

 

(8,872)

 

(16,013)

 

 

 

 

 

Income from continuing operations

 

16,572

 

32,500

Income (loss) from discontinued operations,

 

 

 

 

net of taxes

 

219

 

(47)

 

 

 

 

 

Net income

$

16,791

$

32,453

 

 

 

 

 

Weighted average common shares

 

 

 

 

outstanding:

 

 

 

 

Basic

 

37,826

 

35,173

Diluted

 

38,399

 

35,577

 

 

 

 

 

Earnings per share:

 

 

 

 

Basic–

 

 

 

 

Continuing operations

$

0.43

$

0.92

Discontinued operations

 

0.01

 

Total

$

0.44

$

0.92

 

 

 

 

 

Diluted–

 

 

 

 

Continuing operations

$

0.43

$

0.91

Discontinued operations

 

0.01

 

Total

$

0.44

$

0.91

 

 

 

 

 

Dividends paid per share of common stock

$

0.35

$

0.34

 

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)

 

March 31,

December 31,

March 31,

 

2008

2007*

2007*

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

75,605

$

80,960

$

77,836

Restricted cash

 

5,484

 

5,443

 

2,032

Short-term investments

 

7,290

 

 

Receivables (net of allowance for doubtful accounts of $4,213;

 

 

 

 

 

 

$4,588 and $3,647, respectively)

 

270,763

 

289,244

 

223,179

Materials, supplies and fuel

 

87,937

 

95,968

 

110,129

Derivative assets

 

46,337

 

35,921

 

38,263

Deferred income taxes

 

14,011

 

4,512

 

Other assets

 

16,048

 

14,569

 

8,876

Assets of discontinued operations

 

1,106

 

1,052

 

1,444

 

 

524,581

 

527,669

 

461,759

 

 

 

 

 

 

 

Investments

 

16,745

 

19,216

 

23,613

 

 

 

 

 

 

 

Property, plant and equipment

 

2,564,259

 

2,490,565

 

2,297,519

Less accumulated depreciation and depletion

 

(689,997)

 

(667,031)

 

(615,597)

 

 

1,874,262

 

1,823,534

 

1,681,922

Other assets:

 

 

 

 

 

 

Derivative assets

 

1,360

 

2,492

 

1,321

Goodwill

 

40,501

 

29,577

 

30,563

Intangible assets (net of accumulated amortization of

 

 

 

 

 

 

$28,865; $28,114 and $26,632, respectively)

 

20,275

 

21,026

 

23,650

Other

 

47,343

 

46,120

 

63,299

 

 

109,479

 

99,215

 

118,833

 

$

2,525,067

$

2,469,634

$

2,286,127

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

242,048

$

239,581

$

237,789

Accrued liabilities

 

104,808

 

116,197

 

91,217

Derivative liabilities

 

72,526

 

39,380

 

16,360

Deferred income taxes

 

 

 

1,352

Notes payable

 

73,000

 

37,000

 

Current maturities of long-term debt

 

143,187

 

143,183

 

38,822

Accrued income taxes

 

303

 

833

 

12,489

Liabilities of discontinued operations

 

757

 

1,551

 

1,858

 

 

636,629

 

577,725

 

399,887

 

 

 

 

 

 

 

Long-term debt, net of current maturities

 

561,136

 

564,372

 

602,870

 

 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes

 

209,272

 

207,735

 

197,937

Derivative liabilities

 

16,516

 

9,375

 

3,973

Other

 

131,032

 

135,405

 

126,411

 

 

356,820

 

352,515

 

328,321

 

 

 

 

 

 

 

Minority interest in subsidiaries

 

5,244

 

5,167

 

5,252

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock equity –

 

 

 

 

 

 

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

 

 

 

 

 

 

Issued 38,425,006; 37,842,221 and 37,701,238 shares,

 

 

 

 

 

 

respectively

 

38,425

 

37,842

 

37,701

Additional paid-in capital

 

578,742

 

560,475

 

554,040

Retained earnings

 

400,909

 

397,393

 

369,997

Treasury stock at cost – 29,400; 45,916 and 37,128

 

 

 

 

 

 

shares, respectively

 

(1,050)

 

(1,347)

 

(984)

Accumulated other comprehensive loss

 

(51,788)

 

(24,508)

 

(10,957)

 

 

965,238

 

969,855

 

949,797

 

 

 

 

 

 

 

 

$

2,525,067

$

2,469,634

$

2,286,127

__________________________

 

*

As adjusted (see Note 2)

 

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)

 

Three Months Ended

 

March 31,

 

2008

2007*

 

(in thousands)

Operating activities:

 

 

 

 

Net income

$

16,791

$

32,453

(Income) loss from discontinued operations, net of taxes

 

(219)

 

47

 

 

 

 

 

Income from continuing operations

 

16,572

 

32,500

Adjustments to reconcile income from continuing operations

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

Depreciation, depletion and amortization

 

25,644

 

23,168

Net change in derivative assets and liabilities

 

7,745

 

(20,982)

Deferred income taxes

 

8,830

 

13,842

Distributed earnings in associated companies

 

1,241

 

472

Allowance for funds used during construction – equity

 

(281)

 

(1,834)

Change in operating assets and liabilities:

 

 

 

 

Materials, supplies and fuel

 

22,374

 

11,838

Accounts receivable and other current assets

 

(17,972)

 

41,121

Accounts payable and other current liabilities

 

(6,233)

 

4,682

Other operating activities

 

(4,435)

 

(10,705)

Net cash provided by operating activities of continuing operations

 

53,485

 

94,102

Net cash provided by (used in) operating activities of discontinued operations

 

196

 

(1,387)

Net cash provided by operating activities

 

53,681

 

92,715

 

 

 

 

 

Investing activities:

 

 

 

 

Property, plant and equipment additions

 

(74,289)

 

(38,558)

Increase in short-term investments

 

(7,290)

 

Other investing activities

 

951

 

(305)

Net cash used in investing activities of continuing operations

 

(80,628)

 

(38,863)

Net cash provided by investing activities of discontinued operations

 

 

1,200

Net cash used in investing activities

 

(80,628)

 

(37,663)

 

 

 

 

 

Financing activities:

 

 

 

 

Dividends paid

 

(13,275)

 

(11,377)

Common stock issued

 

1,998

 

146,638

Increase (decrease) in short-term borrowings, net

 

36,000

 

(145,500)

Long-term debt – repayments

 

(3,232)

 

(3,753)

Other financing activities

 

297

 

(350)

Net cash provided by (used in) financing activities of continuing operations

 

21,788

 

(14,342)

Net cash provided by (used in) financing activities of discontinued operations

 

 

Net cash provided by (used in) financing activities

 

21,788

 

(14,342)

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(5,159)

 

40,710

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

Beginning of period

 

81,255(b)

 

37,530(d)

End of period

$

76,096(a)

$

78,240(c)

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

Non-cash investing and financing activities-

 

 

 

 

Property, plant and equipment acquired with accrued liabilities

$

25,480

$

25,892

Cash paid during the period for-

 

 

 

 

Interest (net of amounts capitalized)

$

7,864

$

9,282

Income taxes paid (net of amounts refunded)

$

1,500

$

6,538

_________________________

*

As adjusted (see Note 2)

 

(a)

Includes approximately $0.5 million of cash included in the assets of discontinued operations.

(b)

Includes approximately $0.3 million of cash included in the assets of discontinued operations.

(c)

Includes approximately $0.4 million of cash included in the assets of discontinued operations.

(d)

Includes approximately $0.6 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.

 

7

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 March 31, 2008, December 31, 2007 and March 31, 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. The results of operations for the three months ended March 31, 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.

 

(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.

 

8

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 Revenues on the accompanying Condensed Consolidated Statement of Income. SFAS 157 also required new disclosures regarding the level of pricing observability associated with instruments carried at fair value. This additional disclosure is provided in Note 12.

 

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 adopted FSP FAS 157-1 effective 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.

 

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.

 

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.

 

9

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 March 31, 2007 amounts have been reclassified to conform to this presentation as follows (in thousands):

 

 

 

 

As Reported for

Balance Sheet

As Reported for

FSP FIN 39-1

the March 2008

Line Description

the 2007 10-K

Reclassification

10-Q

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Receivables

$

291,189

$

(1,945)

$

289,244

Derivative assets

$

37,208

$

(1,287)

$

35,921

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

242,813

$

(3,232)

$

239,581

 

 

 

As Reported for

 

As Reported for

Balance Sheet

the March 2007

FSP FIN 39-1

the March 2008

Line Description

10-Q

Reclassification

10-Q

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Receivables

$

237,335

$

(14,156)

$

223,179

Derivative assets

$

25,906

$

12,357

$

38,263

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Derivative liabilities

$

18,159

$

(1,799)

$

16,360

 

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

 

Cash Flow Statement

As Reported for

 

As Reported for

Operating Activities

the March 2007

FSP FIN 39-1

the March 2008

Line Description

10-Q

Reclassification

10-Q

 

 

 

 

 

 

 

Net change in derivative assets

 

 

 

 

 

 

and liabilities

$

(3,948)

$

(17,034)

$

(20,982)

 

 

 

 

 

 

 

Accounts receivable and other

 

 

 

 

 

 

current assets

$

26,965

$

14,156

$

41,121

 

 

 

 

 

 

 

Accounts payable and other

 

 

 

 

 

 

current liabilities

$

1,804

$

2,878

$

4,682

 

 

10

As of March 31, 2008, December 31, 2007 and March 31, 2007, the Company offset fair value cash collateral receivables and payables against net derivative positions in the amounts of $32.9 million, $(1.3) million and $14.2 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. Management is currently evaluating the impact SFAS 141(R) will have on the Company’s consolidated financial statements.

 

SFAS 160

 

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

 

     ownership interests in subsidiaries held by other 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 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.

 

11

(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):

 

 

March 31,

December 31,

March 31,

Major Classification

2008

2007

2007

 

 

 

 

 

 

 

Materials and supplies

$

35,788

$

35,037

$

33,303

Fuel

 

1,749

 

5,025

 

6,096

Gas and oil held by Energy

 

 

 

 

 

 

marketing*

 

50,400

 

55,906

 

70,730

 

 

 

 

 

 

 

Total materials, supplies and fuel

$

87,937

$

95,968

$

110,129

___________________________

* As of March 31, 2008, December 31, 2007 and March 31, 2007, market adjustments related to natural gas held by Energy marketing and recorded in inventory were $4.6 million, $(9.8) million and $2.4 million, respectively (see Note 11 for further discussion of Energy marketing trading activities).

 

The inventory held by the Company’s Energy marketing subsidiary 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)

LONG-TERM DEBT

 

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 initially intends to refinance this debt through borrowings on the revolving credit facility until permanent financing is completed.

 

12

(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 March 31, 2008

Three Months

 

 

Average

 

Income

Shares

 

 

 

 

Income from continuing operations

$

16,572

 

 

 

 

 

Basic earnings

 

16,572

37,826

Dilutive effect of:

 

 

 

Stock options

 

80

Estimated contingent shares issuable

 

 

 

for prior acquisition

 

397

Others

 

96

Diluted earnings

$

16,572

38,399

 

 

Period ended March 31, 2007

Three Months

 

 

Average

 

Income

Shares

 

 

 

 

Income from continuing operations

$

32,500

 

 

 

 

 

Basic earnings

 

32,500

35,173

Dilutive effect of:

 

 

 

Stock options

 

102

Estimated contingent shares issuable

 

 

 

for prior acquisition

 

158

Others

 

144

Diluted earnings

$

32,500

35,577

 

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 8 and 13 for discussion of the March 21, 2008 share issuance).

 

13

(7)

OTHER COMPREHENSIVE INCOME

 

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

(in thousands):

 

 

Three Months Ended

 

March 31,

 

2008

2007

 

 

 

 

 

Net income

$

16,791

$

32,453

Other comprehensive income (loss),

 

 

 

 

net of tax:

 

 

 

 

Fair value adjustment on derivatives

 

 

 

 

designated as cash flow hedges

 

 

 

 

(net of tax of $14,951 and $2,499,

 

 

 

 

respectively)

 

(27,433)

 

(4,691)

Reclassification adjustments on cash

 

 

 

 

flow hedges settled and included in

 

 

 

 

net income (net of tax of $(152)

 

 

 

 

and $3,065, respectively)

 

273

 

(5,751)

Unrealized loss on available for sale

 

 

 

 

securities (net of tax of $65)

 

(120)

 

 

 

 

 

 

Other comprehensive (loss) income

$

(10,489)

$

22,011

 

Other comprehensive loss on fair value adjustments on derivatives designated as cash flow hedges in the three months ended March 31, 2008 is primarily attributable to higher gas prices affecting the fair value of natural gas swaps at the oil and gas segment and a decrease in interest rates affecting the fair value of interest rate swaps on variable rate debt.

 

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 March 31, 2008

$

(45,379)

$

(6,115)

$

(174)

$

(120)

$

(51,788)

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

$

(18,178)

$

(6,115)

$

(215)

$

$

(24,508)

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2007

$

(2,352)

$

(8,404)

$

(201)

$

$

(10,957)

 

 

14

(8)

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 13).

 

Equity Compensation Plans

 

    Effective January 1, 2008, 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. 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 three months ended March 31, 2008. Pre-tax compensation cost related to the award was approximately $1.2 million, which was accrued for in 2007.

 

    The Company granted 35,157 restricted common shares during the three months ended March 31, 2008. The pre-tax compensation cost related to the awards of restricted stock and restricted stock units of approximately $1.5 million will be recognized over the three-year vesting period.

 

    70,547 stock options were exercised during the three months ended March 31, 2008, at a weighted-average exercise price of $25.01 per share providing $1.8 million of proceeds to the Company.

 

    Total compensation expense recognized for all equity compensation plans for the three months ended March 31, 2008 and 2007 was $0.2 million and $1.0 million, respectively.

 

 

15

(9)

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 Company’s 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

 

March 31,

 

2008

2007

 

 

 

 

 

Service cost

$

754

$

687

Interest cost

 

1,230

 

1,129

Expected return on plan assets

 

(1,573)

 

(1,374)

Prior service cost

 

41

 

38

Net loss

 

 

127

 

 

 

 

 

Net periodic benefit cost

$

452

$

607

 

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.

 

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

 

March 31,

 

2008

2007

 

 

 

 

 

Service cost

$

112

$

103

Interest cost

 

311

 

289

Prior service cost

 

3

 

3

Net loss

 

142

 

178

 

 

 

 

 

Net periodic benefit cost

$

568

$

573

 

The Company anticipates that it will need to 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.

 

16

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

 

March 31,

 

2008

2007

 

 

 

 

 

Service cost

$

125

$

135

Interest cost

 

217

 

207

Net transition obligation

 

15

 

15

Net gain/loss

 

(20)

 

(4)

 

 

 

 

 

Net periodic benefit cost

$

337

$

353

 

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 $0.1 million for each of the three month periods ended March 31, 2008 and 2007.

 

17

(10)

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 March 31, 2008, substantially all of the Company’s operations and assets are located within the United States.

 

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

 

 

Utilities group –

 

     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.

 

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 with power 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.

 

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 electric utilities are not eliminated.

 

18

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

 

 

 

 

 

 

March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric utility

$

57,326

$

306

$

5,576

Electric and gas utility

 

41,976

 

 

4,591

Non-regulated energy:

 

 

 

 

 

 

Oil and gas

 

26,122

 

 

2,551

Power generation

 

28,674

 

6,551

 

4,316

Coal mining

 

7,889

 

5,358

 

1,629

Energy marketing

 

6,119

 

 

299

Corporate

 

 

 

(2,390)

Inter - segment eliminations

 

 

(1,110)

 

 

 

 

 

 

 

 

Total

$

168,106

$

11,105

$

16,572

 

 

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Three Month Period Ended

 

 

 

 

 

 

March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric utility

$

47,356

$

411

$

6,699

Electric and gas utility

 

36,363

 

 

3,072

Non-regulated energy:

 

 

 

 

 

 

Oil and gas

 

25,843

 

 

3,591

Power generation

 

39,566

 

 

4,979

Coal mining

 

6,217

 

3,528

 

1,615

Energy marketing

 

28,437

 

 

12,659

Corporate

 

1

 

 

(115)

Inter - segment eliminations

 

 

(1,189)

 

 

 

 

 

 

 

 

Total

$

183,783

$

2,750

$

32,500

 

During 2008, the Company added assets of approximately $24.4 million on the ongoing construction of the Wygen III power plant within the Electric utility segment; approximately $8.3 million for development costs related to the Aquila asset acquisition; and approximately $18.0 million on assets related to the construction of the Valencia project, expected to be in commercial operation in the second quarter of 2008, in the Power generation segment. Other than these significant additions 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 Company’s 2007 Annual Report on Form 10-K.

 

19

(11)

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

 

March 31, 2008

December 31, 2007

March 31, 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

 

187,068

33

 

125,577

36

 

169,341

21

Natural gas basis

 

 

 

 

 

 

 

 

 

swaps sold

 

191,738

33

 

128,892

36

 

178,563

21

Natural gas fixed for float

 

 

 

 

 

 

 

 

 

swaps purchased

 

53,738

24

 

42,326

24

 

40,323

24

Natural gas fixed for float

 

 

 

 

 

 

 

 

 

swaps sold

 

67,910

24

 

59,253

24

 

61,880

24

Natural gas physical

 

 

 

 

 

 

 

 

 

purchases

 

132,559

12

 

90,583

15

 

104,393

19

Natural gas physical sales

 

136,687

24

 

98,888

27

 

109,593

31

Natural gas options

 

 

 

 

 

 

 

 

 

purchased

 

11,311

12

 

3,472

10

 

33,839

9

Natural gas options sold

 

11,311

12

 

3,472

10

 

33,839

9

 

 

20

 

Outstanding at

Outstanding at

Outstanding at

 

March 31, 2008

December 31, 2007

March 31, 2007

 

 

Latest

 

Latest

 

Latest

 

Notional

Expiration

Notional

Expiration

Notional

Expiration

 

Amounts

(months)

Amounts

(months)

Amounts

(months)

 

 

 

 

 

 

 

 

 

 

(in thousands of Bbls)

 

 

 

 

 

 

 

 

 

Crude oil physical

 

 

 

 

 

 

 

 

 

purchases

 

3,737

9

 

4,991

12

 

1,806

6

Crude oil physical sales

 

2,903

9

 

3,800

12

 

1,557

6

Crude oil swaps purchased

 

495

9

 

495

12

 

450

12

Crude oil swaps sold

 

545

9

 

495

12

 

450

12

 

 

 

 

 

 

 

 

 

 

(Dollars, in thousands)

 

 

 

 

 

 

 

 

 

Canadian dollars

 

 

 

 

 

 

 

 

 

purchased

$

27,000

1

$

28,000

2

$

13,817

1

 

Derivatives and certain natural gas and crude oil marketing activities were marked to fair value on March 31, 2008, December 31, 2007 and March 31, 2007, 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):

 

 

 

 

 

 

Cash

 

 

 

 

 

 

Collateral

 

 

 

 

 

 

Included in

 

 

Current

Non-current

Current

Non-current

Derivative

 

 

Derivative

Derivative

Derivative

Derivative

Assets/

Unrealized

 

Assets

Assets

Liabilities

Liabilities

Liabilities

(Loss) Gain

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2008

$

45,542

$

1,246

$

21,393

$

994

$

(32,876)

$

(8,475)

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

$

30,999

$

1,901

$

16,908

$

2,482

$

1,287

$

14,797

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2007

$

32,447

$

149

$

12,897

$

514

$

(14,156)

$

5,029

 

FSP FIN 39-1 permits 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. 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 March 31, 2007 amounts have been reclassified to conform to this presentation.

 

In addition, certain volumes of natural gas inventory have been designated as the underlying hedged item in a “fair value” hedge transaction. These volumes include market adjustments based on published 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 March 31, 2008, December 31, 2007 and March 31, 2007, the market adjustments recorded in inventory were $4.6 million, $(9.8) million and $2.4 million, respectively.

 

21

Activities Other Than Trading

 

Oil and Gas Exploration and Production

 

On March 31, 2008, December 31, 2007 and March 31, 2007, 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)

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps/options

495,000

0.75

$

484

$

$

4,078

$

2,187

$

(6,265)

$

484

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

11,657,000

1.59

 

66

 

114

 

12,653

 

3,328

 

(15,801)

 

 

 

 

$

550

$

114

$

16,731

$

5,515

$

(22,066)

$

484

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps/options

495,000

1.00

$

352

$

$

3,506

$

1,794

$

(5,300)

$

352

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

11,406,000

1.59

 

4,332

 

591

 

507

 

825

 

3,587

 

4

 

 

 

$

4,684

$

591

$

4,013

$

2,619

$

(1,713)

$

356

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps/options

450,000

1.00

$

649

$

$

934

$

546

$

(1,415)

$

584

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

11,613,000

1.17

 

5,049

 

276

 

2,260

 

2,151

 

1,638

 

(724)

 

 

 

$

5,698

$

276

$

3,194

$

2,697

$

223

$

(140)

________________________

*crude in Bbls, gas in MMBtus

 

Based on March 31, 2008 market prices, a $17.1 million loss 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 March 31, 2008, December 31, 2007 and March 31, 2007, 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*

Months

Assets

Assets

Liabilities

Liabilities

Income (Loss)

Gain

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

300,000

1

$

245

$

$

245

$

$

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

610,000

4

$

238

$

$

68

$

$

170

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

455,000

12

$

$

$

161

$

$

(161)

$

________________________

*gas in MMBtus

 

Based on March 31, 2008 market prices, no gain or loss would be realized and reported in pre-tax earnings during the next twelve months related to the cash flow hedges. Estimated and actual realized losses will likely change during the next twelve months as market prices change.

 

23

Financing Activities

 

On March 31, 2008, December 31, 2007 and March 31, 2007, the Company’s 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

 

Amount

Rate

Years

Assets

Assets

Liabilities

Liabilities

(Loss)/Income

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

$

150,000

5.04%

8.50

$

$

$

3,534

$

10,007

$

(13,541)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

$

150,000

5.04%

8.75

$

$

$

1,792

$

4,274

$

(6,066)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

$

150,000

5.04%

9.50

$

118

$

896

$

108

$

762

$

144

 

Based on March 31, 2008 market interest rates and balances, a loss of approximately $3.5 million would be realized and reported in pre-tax earnings during the next twelve months. Estimated and realized losses will likely change during the next twelve months as market interest rates change.

 

In addition to the interest rate swaps above, during the third quarter of 2007, the Company entered into forward starting interest rate swaps with a total notional amount of $250.0 million to hedge the risk of interest rate movement between the hedge dates and the expected pricing date for a portion of the Company’s anticipated 2008 long-term debt financings. The swaps have a mandatory early termination date of June 30, 2008. As of March 31, 2008, the mark-to-market value was $(30.6) million. These swaps are designated as cash flow hedges and accordingly, any resulting gain or loss will be recorded in “Accumulated other comprehensive loss” on the Condensed Consolidated Balance Sheet and amortized into earnings as additional interest income or expense over the life of the related long-term financing.

 

24

(12)

FAIR VALUE MEASUREMENTS

 

Adoption of SFAS 157

 

Effective January 1, 2008, the Company adopted SFAS 157 as discussed in Note 2, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value.

 

SFAS 157 provides a single definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As permitted under SFAS 157, the Company utilizes a mid-market pricing convention (the mid-point price between bid and ask prices) as a practical expedient for valuing a significant portion of its assets and liabilities measured and reported at fair value. SFAS 157 also requires enhanced disclosures and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The Company is able to classify fair value balances based on the observability of inputs.

 

Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

Level 1 – Unadjusted quoted prices available in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. This level primarily consists of financial instruments such as exchange-traded securities and listed derivatives.

 

Level 2 – Pricing inputs include quoted prices for identical or similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

 

The following table sets forth by level within the fair value hierarchy the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2008. As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect their placement within the fair value hierarchy levels.

 

 

25

Recurring Fair Value

At Fair Value as of March 31, 2008

Measures (in thousands)

 

 

 

 

 

Counterparty

 

 

Level 1

Level 2

Level 3

Netting (a)

Total

Assets:

 

 

 

 

 

 

 

 

 

 

Short - term investments

$

$

$

7,290

$

$

7,290

Commodity derivatives

 

32,876

 

89,452

 

12,549

 

(87,180)

 

47,697

Total

$

32,876

$

89,452

$

19,839

$

(87,180)

$

54,987

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

$

126,127

$

5,576

$

(87,180)

$

44,523

Interest rate swaps

 

 

44,164

 

 

 

44,164

Foreign currency

 

 

 

 

 

 

 

 

 

 

derivatives

 

 

355

 

 

 

355

Total

$

$

170,646

$

5,576

$

(87,180)

$

89,042

________________________

 

(a)

FIN 39 permits the netting of receivables and payables when a legally enforceable master netting agreement exists between the Company and a counterparty. A master netting agreement is an agreement between two parties who have multiple contracts with each other that provides for the net settlement of all contracts in the event of default on or termination of any one contract.

 

The following table presents the changes in level 3 recurring fair value for the three months ended March 31, 2008 (in thousands):

 

 

Three Months Ended

 

March 31, 2008

 

 

 

Commodity

Short-term

 

 

Derivatives

Investments

Total

 

 

 

 

 

 

Balance as of January 1, 2008

$

6,422

$

$

6,422

Realized and unrealized gains (losses)

 

1,037

 

(185)

 

852

Purchases, issuance and settlements

 

(486)

 

7,475

 

6,989

Balances as of March 31, 2008

$

6,973

$

7,290

$

14,263

 

 

 

 

 

 

 

Changes in unrealized gains (losses)

 

 

 

 

 

 

relating to instruments still held as of

 

 

 

 

 

 

March 31, 2008

$

(789)

$

(185)

$

(974)

 

Gains and losses (realized and unrealized) for level 3 commodity derivatives are included in operating revenues on the Condensed Consolidated Statement of Income. Short-term investments included in level 3 represent auction rate securities held at March 31, 2008. The Company believes an analysis of commodity derivatives classified as level 3 needs to be undertaken with the understanding that these items may be economically hedged as part of a total portfolio of instruments that may be classified in level 1 or 2, or with instruments that may not be accounted for at fair value. Accordingly, gains and losses associated with level 3 balances may not necessarily reflect trends occurring in the underlying business. Further, unrealized gains and losses for the period from level 3 items may be offset by unrealized gains and losses in positions classified in level 1 or 2, as well as positions that have been realized during the quarter. The unrealized losses for these investments are recognized in Accumulated other comprehensive income on the Condensed Consolidated Balance Sheet.

 

26

(13)

COMMITMENTS AND CONTINGENCIES

 

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

 

Las Vegas I Tolling Agreement

 

As discussed under “Las Vegas Cogeneration/Nevada Power Arbitration” within this Note 13, the Company has entered into an agreement for 50 MW of the output of the 53 MW Las Vegas I plant with Nevada Power. The contract is a tolling agreement whereby Nevada Power is responsible for supplying natural gas. The terms of the contract are for the months of June through September for each of the years beginning in 2008 and ending in 2017. The Las Vegas I plant is included in the pending sale of the power generation assets (see Note 16).

 

LEGAL PROCEEDINGS

 

Earn-Out Litigation

 

As disclosed in previous filings with the SEC, the Company has been defending two litigation proceedings brought by the former Indeck stockholders. The first proceeding is a civil lawsuit that has been pending in federal court in Illinois. The second proceeding is an arbitration process brought under the terms of a Merger Agreement that provided for contingent payment of Earn-Out Consideration to the former Indeck stockholders. On March 21, 2008, the parties settled all claims in the lawsuit. Under the Settlement Agreement the Company agreed to pay additional Earn-Out Consideration to the former Indeck stockholders. The aggregate value of the 451,465 shares of additional Black Hills common stock issued was recorded as additional goodwill. The trial court entered its Order approving the Settlement Agreement on March 27, 2008.

 

The Merger Agreement provides a $35.0 million “cap” or maximum amount of Earn-Out Consideration payable with respect to the Earn-Out provision. With the payment made in settlement of the litigation to date, the Company has paid in common stock an aggregate value of $23.5 million. The Company asserts no additional Earn-Out Consideration is payable with respect to claims pending in arbitration. While any amount that could be awarded in the arbitration would be limited to the difference between the “cap” and the aggregate value paid to date, the former Indeck stockholders may seek additional payment, equivalent to interest and dividends on any such amount. The Company would oppose this claim as well.

 

The Order provides all lawsuit claims are dismissed without prejudice pending completion of the arbitration. The court retains jurisdiction over the parties for the purpose of enforcing the order entered in the pending arbitration. Once the parties submit a final order to the court upon completion of the arbitration, the dismissal of all claims will convert to a dismissal with prejudice.

 

The outcome of the matters remaining in the arbitration is uncertain, as is the amount of any Earn-Out Consideration that could be awarded following arbitration. If any additional consideration is awarded, it would be recorded as additional goodwill, which would be subject to a recoverability analysis under GAAP. An award of interest, if any, would be recorded as a charge to earnings.

 

27

Las Vegas Cogeneration/Nevada Power Company Arbitration

 

As disclosed in previous filings with the SEC, the Company’s wholly-owned subsidiary, LVC has been in an arbitration proceeding with Nevada Power concerning the power purchase agreement at our Las Vegas I facility. On December 4, 2007, the parties reached a settlement. The proposed Settlement Agreement was filed with the PUCN on December 14, 2007. The PUCN approved the settlement on April 4, 2008. The existing structure of LVC as a “qualifying facility” under federal law, together with existing contracts with Nevada Power have been terminated. LVC filed with the FERC to become an “exempt wholesale generator” with authority to sell power at market based rates. FERC granted the Company’s request and issued its Order on March 4, 2008. LVC and Nevada Power reached agreement on the terms of a new Power Purchase Agreement that will replace the existing firm fuel supply and transportation agreements. The new Power Purchase Agreement likewise was approved by the PUCN.

 

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 three months of 2008.

 

(14)

ACQUISITIONS

 

Aquila

 

On February 7, 2007, the Company entered into a definitive agreement with Aquila for the asset acquisition of Aquila’s 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 asset purchase is 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. The Company has obtained state regulatory approval for the transfer of ownership in Iowa, Nebraska, Colorado and Kansas. At the federal level, the FERC has approved the acquisition of the Colorado Electric operation, and antitrust clearance has been obtained from the Federal Trade Commission.

 

The purchase is also conditioned on the completion of the acquisition of the outstanding shares of Aquila by Great Plains immediately following the sale of the assets of the regulated utilities to the Company. During October 2007, Great Plains and Aquila shareholders approved Great Plains’ acquisition of Aquila. Great Plains and Aquila now await final regulatory approval needed from the Missouri Public Service Commission.

 

The Company is capitalizing certain incremental acquisition costs incurred related to this pending acquisition. Amounts capitalized at March 31, 2008 and 2007 were approximately $27.4 million and $2.0 million, respectively. In addition, the Company has expensed certain integration-related costs of approximately $4.1 million and $0.2 million for the three month periods ended March 31, 2008 and 2007, respectively.

 

28

(15)

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 “Income (loss) 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.

 

Net income (loss) from the discontinued operations was as follows (in thousands):

 

 

Three Months Ended

 

March 31,

 

 

2008

 

2007

 

 

 

 

 

Pre-tax income (loss) from

 

 

 

 

discontinued operations

$

192

$

(73)

Income tax benefit

 

27

 

26

Net income (loss) from discontinued

 

 

 

 

operations

$

219

$

(47)

 

Income and 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.

 

(16)

SUBSEQUENT EVENTS

 

Definitive Agreement to Sell IPP Plants

 

On April 29, 2008, the Company entered into a definitive agreement to sell seven of its IPP plants to affiliates of Hastings and IIF. Under the agreement, the Company will receive a cash payment of $840 million, subject to certain working capital adjustments. The transaction is subject to regulatory approval from the FERC, antitrust clearance under the Hart-Scott-Rodino Act, and completion of a federal review by the CFIUS, and is expected to be completed late in the second quarter or early third quarter of 2008.

 

Under the terms of the agreement, the Company has the right to retain ownership of the Fountain Valley 240 MW power plant in the event closing conditions for the Company’s planned acquisition of the Aquila utility assets are not met. The purchase price for the Fountain Valley plant represents $240 million of the total $840 million purchase price. The Company is also obligated to complete construction, startup and testing of the Valencia plant prior to the sale.

 

29

Assets and liabilities to be sold under the agreement are currently presented within the Power generation segment of our Non-regulated energy group and include the following (in thousands):

 

 

March 31,

 

2008

 

 

 

Current assets

$

21,990

Property, plant and equipment*

 

367,115

Other non-current assets

 

15,652

Current liabilities

 

(14,495)

Other non-current liabilities

 

(30)

 

 

 

Net assets**

$

390,232

___________________________

 

*

Under the definitive agreement, the Company is required to complete the construction of the Valencia plant and expects associated capital expenditures to approximate $40.7 million.

 

**

The net asset value of the Fountain Valley plant of approximately $143.1 million is excluded from the above table as the sale of the Fountain Valley plant is contingent on the acquisition of the Aquila utility assets. The net assets and operating activity for the Fountain Valley plant will not be recorded as discontinued operations until the contingency is met.

 

30

ITEM 2.

MANAGEMENT’S 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 – utilities and non-regulated energy. We report our business groups in the following segments:

 

Business Group

Financial Segment

 

 

Utilities group

Electric utility

 

Electric and gas utility

 

 

Non-regulated energy group

Oil and gas

 

Power generation

 

Coal mining

 

Energy marketing

 

Our utilities group consists of our electric and gas utility segments. Our electric utility, Black Hills Power, generates, transmits and distributes electricity to an average of approximately 65,100 customers in South Dakota, Wyoming and Montana. Our electric and gas utility, Cheyenne Light, serves approximately 39,400 electric and 33,000 natural gas customers in Cheyenne, Wyoming and vicinity. Our non-regulated energy group engages in the production of coal, natural gas and crude oil primarily in the Rocky Mountain region; the production of electric power through ownership of a diversified portfolio of generating plants and the sale of electric power and capacity primarily under long-term contracts; and the marketing of natural gas, crude oil and related services.

 

Definitive Agreement to Sell IPP Plants

 

On April 29, 2008, we entered into a definitive agreement with affiliates of Hastings and IIF to sell seven IPP gas-fired plants with a total capacity of 974 MW for $840 million cash, subject to certain working capital adjustments.

 

Under the terms of the agreement, we have the right to retain ownership of the Fountain Valley 240 MW power plant in Colorado in the event closing conditions for our planned acquisition of utility assets from Aquila are not met. The purchase price for the 240 MW Fountain Valley plant represents $240 million of the total $840 million purchase price.

 

In order to close, this transaction must receive regulatory approval from FERC, antitrust clearance under the Hart-Scott-Rodino Act, and completion of a federal review by the CFIUS. The closing of the sale, pending customary regulatory approvals, is expected to occur late second quarter or early third quarter of 2008.

 

31

The following power plants are included in the definitive agreement with Hastings and IIF:

 

 

Capacity

Asset (State)

(net megawatts)

 

 

Fountain Valley (Colorado)*

240

Las Vegas II (Nevada)

224

Valencia (New Mexico, under construction)**

149

Arapahoe (Colorado)

130

Harbor Cogeneration (California)

98

Valmont (Colorado)

80

Las Vegas I (Nevada)

53

Total

974

_________________________

 *

We are not obligated to sell the Fountain Valley plant in the event that closing conditions are not met for our pending acquisition of the Aquila utility assets.

**

The definitive agreement requires us to complete the construction of the Valencia plant with the completion considered in the $840 million sale price.

 

The following power plants will remain with the Company in the Power generation business segment of our Non-regulated energy group:

 

 

Capacity

Asset (State)

(net megawatts)

 

 

Wygen I (Wyoming)*

90

Gillette Combustion Turbine (Wyoming)

40

Ontario Cogeneration (California)

12

Rupert and Glenns Ferry Cogeneration (Idaho)**

11

Power fund investments (various locations)

5

Total

158

_________________________

 *

Mine-mouth coal-fired baseload generation

**

Capacity represents the Company’s 50 percent interest in the two power plants

 

Wygen III Power Plant Project

 

In March 2008, the Company received final regulatory approval for Wygen III. Construction began immediately and the 100 MW coal-fired base load electric generating facility is expected to take 24 to 30 months to complete. The expected cost of construction is approximately $255 million, which includes AFUDC. We anticipate that Black Hills Power will have at least 55 MW of the facilities’ capacity and we are considering third-party investors to own the remaining 45 MW. Definitive ownership structuring for the Wygen III plant is expected prior to the end of 2008.

 

32

Valencia Power Plant Project

 

In April 2007, we 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, we will provide the capacity and energy of the Valencia 149 MW, simple-cycle gas turbine generation facility located near Albuquerque, New Mexico. The project is expected to cost approximately $101 million, and has an expected commercial operation in-service date of June 2008. The Valencia plant is included in the pending sale of the power generation assets and the Company is obligated to complete construction, startup and testing of the plant prior to the sale.

 

Pending Acquisition of Assets from Aquila

 

On February 7, 2007, we entered into a definitive agreement with Aquila for the asset acquisition of Aquila’s 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 asset purchase is 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. We have obtained all required regulatory approvals including state regulatory approval for the transfer of ownership in Iowa, Nebraska, Colorado and Kansas. At the federal level, the FERC has approved our acquisition of the Colorado Electric operation, and antitrust clearance has been obtained from the Federal Trade Commission.

 

The purchase is also conditioned on the completion of the acquisition of the outstanding shares of Aquila by Great Plains immediately following the sale of the assets of the regulated utilities to us. During October 2007, Great Plains and Aquila shareholders approved Great Plains’ acquisition of Aquila. Great Plains and Aquila now await the final regulatory approval needed from the Missouri Public Service Commission.

 

We are capitalizing certain incremental acquisition costs incurred related to this pending acquisition. Amounts capitalized at March 31, 2008 and 2007 were approximately $27.4 million and $2.0 million, respectively. In addition, we expensed certain integration-related costs of approximately $4.1 million and $0.2 million for the three month periods ended March 31, 2008 and 2007, respectively.

 

33

Results of Operations

 

Executive Summary

 

Results for the three months ended March 31, 2008 were lower than the same period of the prior year primarily due to lower earnings from the Non-regulated energy business group. Income from continuing operations for the three month period ended March 31, 2008 was $16.6 million, or $0.43 per share, compared to $32.5 million, or $0.91 per share, reported for the same period in 2007. For the three month period ended March 31, 2008, net income was $16.8 million or $0.44 per share, compared to $32.5 million, or $0.91 per share, for the same period in 2007.

 

Utilities earnings were affected by Cheyenne Light benefiting from a 2008 rate increase and the sale of excess generation from the Wygen II plant, partially offset by increased costs related to Wygen II plant operations and depreciation. Black Hills Power earnings decreased due to lower margins on retail sales as higher fuel and purchased power costs were partially offset by increased MWh sold, and higher margins from off-system sales.

 

Earnings from oil and gas operations decreased for the quarter driven by higher LOE and increased depletion expense, partially offset by an overall increase in revenues. Revenues for the quarter were negatively impacted by a $2.1 million pre-tax accrual for a royalty settlement with the Jicarilla Apache Nation. First quarter 2008 production was 4 percent lower than first quarter 2007 primarily due to weather related impacts, federal drilling permit delays and lower production from non-operated properties. Average hedged oil prices increased 46 percent and average hedged gas prices decreased 3 percent exclusive of the impact of the royalty settlement in 2008.

 

Decreased earnings from power generation reflect lower earnings from the Harbor plant due to reduced contract termination payments, the suspension of operations at the Ontario plant and lower earnings from power fund investments. Operating expenses decreased primarily due to lower depreciation expense. The operation of Las Vegas I as a merchant plant until a new tolling contract with Nevada Power begins in June 2008 resulted in a decrease in revenues and fuel costs at that plant. The operations pertaining to the IPP plants to be sold to Hastings and IIF, excluding the Fountain Valley plant, will be reclassified to Discontinued operations beginning in the second quarter of 2008.

 

Earnings from energy marketing reflect lower realized margins received, lower volumes and higher unrealized mark-to-market losses. Margins were impacted by changes in market conditions as lower Rocky Mountain natural gas price basis differentials and calendar spreads contributed to the earnings decline. Lower operating expenses reflect lower incentive compensation related to the decreased earnings from realized gross margins.

 

Discontinued operations in 2008 and 2007 represent the continued close-out of operations related to our crude oil marketing and transportation business. The assets of this business were sold in March 2006.

 

34

Consolidated Results

 

Revenues and Income (Loss) from Continuing Operations provided by each business group were as follows (in thousands):

 

 

Three Months Ended

 

March 31,

 

2008

2007

Revenues

 

 

 

 

 

 

 

 

 

Utilities

$

99,302

$

83,719

Non-regulated energy

 

79,909

 

102,813

Corporate

 

 

1

 

$

179,211

$

186,533

 

 

 

 

 

Income/(loss) from

 

 

 

 

continuing operations

 

 

 

 

 

 

 

 

 

Utilities

$

10,167

$

9,771

Non-regulated energy

 

8,795

 

22,844

Corporate

 

(2,390)

 

(115)

 

$

16,572

$

32,500

 

Income from continuing operations decreased $15.9 million due primarily to the following:

 

     a $12.4 million decrease in Energy marketing earnings;

 

     a $1.1 million decrease in Electric utility earnings;

 

     a $1.0 million decrease in Oil and gas earnings;

 

     a $0.7 million decrease in Power generation earnings; and

 

     a $2.3 million increase in unallocated corporate costs.

 

partially offset by:

 

     a $1.5 million increase in Electric and gas utility earnings.

 

See the following discussion under the captions “Utilities group” and “Non-regulated energy group” for more detail on our results of operations by business segment.

 

35

The following business group and segment information does not include intercompany eliminations or results of discontinued operations.

 

Utilities Group

 

Electric Utility

 

 

Three Months Ended

 

March 31,

 

2008

2007

 

(in thousands)

 

 

 

 

 

Revenue