UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

 

EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 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 July 31, 2008

 

 

Common stock, $1.00 par value

38,405,259 shares

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

Glossary of Terms

3-4

 

 

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Income –

 

 

Three and Six Months Ended June 30, 2008 and 2007

5

 

 

 

 

Condensed Consolidated Balance Sheets –

 

 

June 30, 2008, December 31, 2007 and June 30, 2007

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows –

 

 

Six Months Ended June 30, 2008 and 2007

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8-32

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operations

33-63

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

64-67

 

 

 

Item 4.

Controls and Procedures

67

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

68

 

 

 

Item 1A.

Risk Factors

68

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

69

 

 

 

Item 6.

Exhibits

70

 

 

 

 

Signatures

71

 

 

 

 

Exhibit Index

72

 

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 Non-regulated Holdings, LLC

Black Hills Non-regulated Holdings

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

 

subsidiary of the Company, formerly Black Hills Energy, Inc.

Black Hills Power

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

 

Company

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

CT

Combustion turbine

Dth

Dekatherm

Enserco

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

 

Non-regulated Holdings, LLC

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”

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

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

Las Vegas II

Las Vegas II gas-fired power plant

LVC

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

 

subsidiary of Black Hills Non-regulated Holdings, LLC, recently sold

 

as part of our July 11, 2008 IPP asset sale

Mcf

One thousand cubic feet

Mcfe

One thousand cubic feet equivalent

 

 

3

 

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

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 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, an indirect, wholly-owned subsidiary of Black

 

Hills Non-regulated Holdings, LLC, recently sold as part of our

 

July 11, 2008 IPP asset sale

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

 

 

4

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

 

 

Three Months Ended

Six Months Ended

 

June 30,

June 30,

 

2008

2007

2008

2007

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

Operating revenues

$

153,273

$

133,526

$

306,123

$

291,023

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Fuel and purchased power

 

46,948

 

33,095

 

99,343

 

80,417

Operations and maintenance

 

24,320

 

16,557

 

46,285

 

33,062

Administrative and general

 

25,222

 

25,381

 

49,281

 

50,318

Depreciation, depletion and amortization

 

20,788

 

17,618

 

40,174

 

34,315

Taxes, other than income taxes

 

10,472

 

9,049

 

19,980

 

17,578

 

 

127,750

 

101,700

 

255,063

 

215,690

 

 

 

 

 

 

 

 

 

Operating income

 

25,523

 

31,826

 

51,060

 

75,333

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

(9,564)

 

(5,520)

 

(18,758)

 

(11,778)

Interest income

 

373

 

692

 

799

 

1,416

Allowance for funds used during

 

 

 

 

 

 

 

 

construction – equity

 

617

 

1,206

 

898

 

3,040

Other income, net

 

65

 

(10)

 

400

 

325

 

 

(8,509)

 

(3,632)

 

(16,661)

 

(6,997)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

 

 

 

 

 

 

before equity in earnings of

 

 

 

 

 

 

 

 

unconsolidated subsidiaries, minority

 

 

 

 

 

 

 

 

interest and income taxes

 

17,014

 

28,194

 

34,399

 

68,336

Equity in earnings of unconsolidated

 

 

 

 

 

 

 

 

subsidiaries

 

2,064

 

673

 

2,297

 

1,518

Minority interest

 

(53)

 

(95)

 

(130)

 

(188)

Income tax expense

 

(5,875)

 

(9,293)

 

(11,676)

 

(22,515)

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

13,150

 

19,479

 

24,890

 

47,151

Income from discontinued operations,

 

 

 

 

 

 

 

 

net of taxes

 

9,046

 

5,619

 

14,098

 

10,400

 

 

 

 

 

 

 

 

 

Net income

$

22,196

$

25,098

$

38,988

$

57,551

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

outstanding:

 

 

 

 

 

 

 

 

Basic

 

38,299

 

37,588

 

38,062

 

36,387

Diluted

 

38,425

 

38,007

 

38,412

 

36,793

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic–

 

 

 

 

 

 

 

 

Continuing operations

$

0.34

$

0.52

$

0.65

$

1.29

Discontinued operations

 

0.24

 

0.15

 

0.37

 

0.29

Total

$

0.58

$

0.67

$

1.02

$

1.58

 

 

 

 

 

 

 

 

 

Diluted–

 

 

 

 

 

 

 

 

Continuing operations

$

0.34

$

0.51

$

0.65

$

1.28

Discontinued operations

 

0.24

 

0.15

 

0.36

 

0.28

Total

$

0.58

$

0.66

$

1.01

$

1.56

 

 

 

 

 

 

 

 

 

Dividends paid per share of common stock

$

0.35

$

0.34

$

0.70

$

0.68

 

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

 

5

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

June 30,

December 31,

June 30,

 

2008

2007*

2007*

 

(in thousands, except share amounts)

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

36,912

$

76,889

$

35,685

Restricted cash

 

5,498

 

5,443

 

5,341

Short-term investments

 

7,309

 

 

Receivables (net of allowance for doubtful accounts of $3,417;

 

 

 

 

 

 

$4,588 and $4,735, respectively)

 

252,508

 

268,462

 

244,284

Materials, supplies and fuel

 

147,169

 

88,580

 

125,484

Derivative assets

 

70,769

 

35,921

 

55,591

Deferred income taxes

 

20,674

 

4,512

 

Other assets

 

15,685

 

12,698

 

8,200

Assets of discontinued operations

 

598,294

 

573,601

 

564,786

 

 

1,154,818

 

1,066,106

 

1,039,371

 

 

 

 

 

 

 

Investments

 

18,782

 

19,216

 

23,506

 

 

 

 

 

 

 

Property, plant and equipment

 

1,972,489

 

1,846,565

 

1,759,704

Less accumulated depreciation and depletion

 

(544,018)

 

(509,187)

 

(490,104)

 

 

1,428,471

 

1,337,378

 

1,269,600

Other assets:

 

 

 

 

 

 

Derivative assets

 

14,042

 

2,492

 

5,351

Goodwill

 

14,000

 

11,482

 

12,170

Other

 

32,121

 

32,960

 

52,903

 

 

60,163

 

46,934

 

70,424

 

$

2,662,234

$

2,469,634

$

2,402,901

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

269,095

$

239,177

$

229,464

Accrued liabilities

 

90,964

 

100,986

 

82,187

Derivative liabilities

 

89,790

 

39,380

 

17,069

Deferred income taxes

 

 

 

4,769

Notes payable

 

283,000

 

37,000

 

84,000

Current maturities of long-term debt

 

2,070

 

130,326

 

130,519

Accrued income taxes

 

4,601

 

833

 

30,306

Liabilities of discontinued operations

 

77,202

 

91,233

 

119,612

 

 

816,722

 

638,935

 

697,926

 

 

 

 

 

 

 

Long-term debt, net of current maturities

 

501,301

 

503,301

 

401,894

 

 

 

 

 

 

 

Deferred credits and other liabilities:

 

 

 

 

 

 

Deferred income taxes

 

218,104

 

207,735

 

192,492

Derivative liabilities

 

23,158

 

9,375

 

2,707

Other

 

134,232

 

135,266

 

132,757

 

 

375,494

 

352,376

 

327,956

 

 

 

 

 

 

 

Minority interest in subsidiaries

 

132

 

5,167

 

4,978

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock equity –

 

 

 

 

 

 

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

 

 

 

 

 

 

Issued 38,439,339; 37,842,221 and 37,768,792 shares,

 

 

 

 

 

 

respectively

 

38,439

 

37,842

 

37,769

Additional paid-in capital

 

579,725

 

560,475

 

556,981

Retained earnings

 

409,651

 

397,393

 

382,254

Treasury stock at cost – 31,604; 45,916 and 42,209

 

 

 

 

 

 

shares, respectively

 

(1,132)

 

(1,347)

 

(1,189)

Accumulated other comprehensive loss

 

(58,098)

 

(24,508)

 

(5,668)

 

 

968,585

 

969,855

 

970,147

 

 

 

 

 

 

 

 

$

2,662,234

$

2,469,634

$

2,402,901

__________________________

 

*

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)

 

Six Months Ended

 

June 30,

 

2008

2007*

 

(in thousands)

Operating activities:

 

 

 

 

Net income

$

38,988

$

57,551

Income from discontinued operations, net of taxes

 

(14,098)

 

(10,400)

Income from continuing operations

 

24,890

 

47,151

Adjustments to reconcile income from continuing operations

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

Depreciation, depletion and amortization

 

40,174

 

34,315

Net change in derivative assets and liabilities

 

(515)

 

(15,260)

Deferred income taxes

 

14,827

 

8,052

(Undistributed) distributed earnings in associated companies

 

(655)

 

500

Allowance for funds used during construction – equity

 

(898)

 

(3,040)

Change in operating assets and liabilities:

 

 

 

 

Materials, supplies and fuel

 

(42,490)

 

(14,963)

Accounts receivable and other current assets

 

(32,520)

 

(15,647)

Accounts payable and other current liabilities

 

22,963

 

15,176

Other operating activities

 

(7,629)

 

11,629

Net cash provided by operating activities of continuing operations

 

18,147

 

67,913

Net cash provided by operating activities of discontinued operations

 

23,113

 

17,232

Net cash provided by operating activities

 

41,260

 

85,145

 

 

 

 

 

Investing activities:

 

 

 

 

Property, plant and equipment additions

 

(127,036)

 

(97,337)

Increase in short-term investments

 

(7,475)

 

Other investing activities

 

994

 

(3,535)

Net cash used in investing activities of continuing operations

 

(133,517)

 

(100,872)

Net cash used in investing activities of discontinued operations

 

(33,375)

 

(11,317)

Net cash used in investing activities

 

(166,892)

 

(112,189)

 

 

 

 

 

Financing activities:

 

 

 

 

Dividends paid

 

(26,730)

 

(24,218)

Common stock issued

 

2,384

 

148,663

Increase (decrease) in short-term borrowings, net

 

246,000

 

(61,500)

Long-term debt – repayments

 

(130,256)

 

(26,247)

Other financing activities

 

215

 

(555)

Net cash provided by financing activities of continuing operations

 

91,613

 

36,143

Net cash used in financing activities of discontinued operations

 

(6,428)

 

(6,429)

Net cash provided by financing activities

 

85,185

 

29,714

 

 

 

 

 

(Decrease) increase in cash and cash equivalents

 

(40,447)

 

2,670

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

Beginning of period

 

81,255(b)

 

37,530(d)

End of period

$

40,808(a)

$

40,200(c)

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

Non-cash investing and financing activities-

 

 

 

 

Property, plant and equipment acquired with accrued liabilities

$

20,053

$

22,571

Cash paid during the period for-

 

 

 

 

Interest (net of amounts capitalized)

$

18,665

$

20,229

Income taxes paid (net of amounts refunded)

$

2,293

$

7,483

_________________________

*

As adjusted (see Note 2)

 

(a)

Includes approximately $3.9 million of cash included in the assets of discontinued operations.

(b)

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

(c)

Includes approximately $4.5 million of cash included in the assets of discontinued operations.

(d)

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.

 

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 June 30, 2008, December 31, 2007 and June 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. The results of operations for the six months ended June 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.

 

(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 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 12.

 

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 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.

 

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 June 30, 2007 amounts have been reclassified to conform to this presentation as follows (in thousands):

 

 

 

 

 

As Reported

 

As Reported

 

Discontinued

for the

Balance Sheet

for the

FSP FIN 39-1

Operations

June 2008

Line Description

2007 10-K

Reclassification

Reclassification

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

 

 

 

As Reported

 

 

As Reported

 

for the

 

Discontinued

for the

Balance Sheet

June 2007

FSP FIN 39-1

Operations

June 2008

Line Description

10-Q

Reclassification

Reclassification

10-Q

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Receivables

$

277,552

$

(15,453)

$

(17,815)

$

244,284

Derivative assets

$

40,138

$

15,453

$

$

55,591

 

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

Derivative assets

$

5,413

$

(62)

$

$

5,351

 

 

 

 

 

 

 

 

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Derivative liabilities

$

2,769

$

(62)

$

$

2,707

 

 

10

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

June 2007

FSP FIN 39-1

Operations

June 2008

Line Description

10-Q

Reclassification

Reclassification

10-Q

 

 

 

 

 

 

 

 

 

Net change in derivative

 

 

 

 

 

 

 

 

assets and liabilities

$

(12,382)

$

(2,878)

$

$

(15,260)

 

 

 

 

 

 

 

 

 

Accounts payable and

 

 

 

 

 

 

 

 

other current liabilities

$

11,645

$

2,878

$

(9,263)

$

5,260

 

As of June 30, 2008, December 31, 2007 and June 30, 2007, the Company offset fair value cash collateral receivables and payables against net derivative positions in the amounts of $47.8 million, $(1.3) million and $15.5 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.

 

11

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.

 

12

(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):

 

 

June 30,

December 31,

June 30,

Major Classification

2008

2007

2007

 

 

 

 

 

 

 

Materials and supplies

$

28,350

$

27,649

$

27,565

Fuel

 

6,098

 

5,025

 

6,444

Gas and oil held by Energy

 

 

 

 

 

 

marketing*

 

112,721

 

55,906

 

91,475

 

 

 

 

 

 

 

Total materials, supplies and fuel

$

147,169

$

88,580

$

125,484

___________________________

* As of June 30, 2008, December 31, 2007 and June 30, 2007, market adjustments related to natural gas held by Energy marketing and recorded in inventory were $6.3 million, $(9.8) million and $(6.4) 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)

NOTES PAYABLE AND LONG-TERM DEBT

 

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.

 

13

(6)

EARNINGS PER SHARE

 

Basic earnings per share from continuing operations is computed by dividing income from continuing operations by the weighted-average number of common shares outstanding during the period. Diluted earnings per share from continuing operations gives effect to all dilutive common shares potentially outstanding during a period. A reconciliation of “Income from continuing operations” and basic and diluted share amounts is as follows (in thousands):

 

Period ended June 30, 2008

Three Months

Six Months

 

 

Average

 

Average

 

Income

Shares

Income

Shares

 

 

 

 

 

 

 

Income from continuing operations

$

13,150

 

$

24,890

 

 

 

 

 

 

 

 

Basic earnings

 

13,150

38,299

 

24,890

38,062

Dilutive effect of:

 

 

 

 

 

 

Stock options

 

62

 

71

Estimated contingent shares issuable

 

 

 

 

 

 

for prior acquisition

 

 

198

Others

 

64

 

81

Diluted earnings

$

13,150

38,425

$

24,890

38,412

 

 

Period ended June 30, 2007

Three Months

Six Months

 

 

Average

 

Average

 

Income

Shares

Income

Shares

 

 

 

 

 

 

 

Income from continuing operations

$

19,479

 

$

47,151

 

 

 

 

 

 

 

 

Basic earnings

 

19,479

37,588

 

47,151

36,387

Dilutive effect of:

 

 

 

 

 

 

Stock options

 

112

 

107

Estimated contingent shares issuable

 

 

 

 

 

 

for prior acquisition

 

159

 

159

Others

 

148

 

140

Diluted earnings

$

19,479

38,007

$

47,151

36,793

 

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).

 

14

(7)

OTHER COMPREHENSIVE INCOME

 

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

(in thousands):

 

 

Three Months Ended

 

June 30,

 

2008

2007

 

 

 

 

 

Net income

$

22,196

$

25,098

Other comprehensive income (loss),

 

 

 

 

net of tax:

 

 

 

 

Fair value adjustment on derivatives

 

 

 

 

designated as cash flow hedges

 

 

 

 

(net of tax of $5,510 and $(5,686),

 

 

 

 

respectively)

 

(10,359)

 

10,087

Reclassification adjustments on cash

 

 

 

 

flow hedges settled and included in

 

 

 

 

net income (net of tax of $(2,261)

 

 

 

 

and $2,700, respectively)

 

4,037

 

(4,798)

Unrealized loss on available for sale

 

 

 

 

securities (net of tax of $(7))

 

12

 

 

 

 

 

 

Total comprehensive income

$

15,886

$

30,387

 

 

 

Six Months Ended

 

June 30,

 

2008

2007

 

 

 

 

 

Net income

$

38,988

$

57,551

Other comprehensive income (loss),

 

 

 

 

net of tax:

 

 

 

 

Fair value adjustment on derivatives

 

 

 

 

designated as cash flow hedges

 

 

 

 

(net of tax of $20,462 and $(1,794),

 

 

 

 

respectively)

 

(37,792)

 

3,723

Reclassification adjustments on cash

 

 

 

 

flow hedges settled and included in

 

 

 

 

net income (net of tax of $(2,413)

 

 

 

 

and $4,372, respectively)

 

4,310

 

(8,876)

Unrealized loss on available for sale

 

 

 

 

securities (net of tax of $58)

 

(108)

 

 

 

 

 

 

Total comprehensive income

$

5,398

$

52,398

 

Other comprehensive loss on fair value adjustments on derivatives designated as cash flow hedges in the six months ended June 30, 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.

 

15

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 June 30, 2008

$

(51,709)

$

(6,115)

$

(166)

$

(108)

$

(58,098)

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2007

$

(18,178)

$

(6,115)

$

(215)

$

$

(24,508)

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2007

$

2,892

$

(8,404)

$

(156)

$

$

(5,668)

 

 

(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 six months ended June 30, 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 six months ended June 30, 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.

 

    84,880 stock options were exercised during the six months ended June 30, 2008, at a weighted-average exercise price of $24.90 per share providing $2.1 million of proceeds to the Company.

 

 

16

 

 

    Total compensation expense recognized for all equity compensation plans for the three months ended June 30, 2008 and 2007 was $0.5 million and $2.0 million, respectively, and for the six months ended June 30, 2008 and 2007 was $0.7 million and $3.0 million, respectively.

 

(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

Six Months Ended

 

June 30,

June 30,

 

2008

2007

2008

2007

 

 

 

 

 

 

 

 

 

Service cost

$

754

$

687

$

1,508

$

1,374

Interest cost

 

1,230

 

1,129

 

2,460

 

2,258

Expected return on plan assets

 

(1,573)

 

(1,374)

 

(3,146)

 

(2,748)

Prior service cost

 

41

 

38

 

82

 

76

Net loss

 

 

127

 

 

254

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

452

$

607

$

904

$

1,214

 

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

Six Months Ended

 

June 30,

June 30,

 

2008

2007

2008

2007

 

 

 

 

 

 

 

 

 

Service cost

$

112

$

103

$

224

$

206

Interest cost

 

311

 

289

 

622

 

578

Prior service cost

 

3

 

3

 

6

 

6

Net loss

 

142

 

178

 

284

 

356

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

568

$

573

$

1,136

$

1,146

 

 

17

 

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

Six Months Ended

 

June 30,

June 30,

 

2008

2007

2008

2007

 

 

 

 

 

 

 

 

 

Service cost

$

125

$

135

$

250

$

270

Interest cost

 

217

 

207

 

434

 

414

Net transition obligation

 

15

 

15

 

30

 

30

Net gain

 

(20)

 

(4)

 

(40)

 

(8)

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

$

337

$

353

$

674

$

706

 

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 and six month periods ended June 30, 2008 and 2007.

 

18

(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 June 30, 2008, substantially all of the Company’s operations and assets are located within the United States. On July 11, 2008, the Company sold 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 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. Subsequent to the July 11, 2008 sale of seven IPP plants, the segment assets include power plants 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.

 

19

Segment information included in the accompanying Condensed Consolidated Statements of Income is as follows (in thousands):

 

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Three Month Period Ended

 

 

 

 

 

 

June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric utility

$

57,615

$

363

$

5,251

Electric and gas utility

 

35,952

 

 

4,302

Non-regulated energy:

 

 

 

 

 

 

Oil and gas

 

34,209

 

 

7,197

Power generation

 

2,135

 

6,376

 

(525)

Coal mining

 

7,987

 

4,660

 

496

Energy marketing

 

5,150

 

 

365

Corporate

 

 

 

(3,897)

Inter-segment eliminations

 

 

(1,174)

 

(39)

 

 

 

 

 

 

 

Total

$

143,048

$

10,225

$

13,150

 

 

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Three Month Period Ended

 

 

 

 

 

 

June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric utility

$

44,387

$

585

$

4,881

Electric and gas utility

 

21,652

 

 

1,043

Non-regulated energy:

 

 

 

 

 

 

Oil and gas

 

25,814

 

 

4,376

Power generation

 

9,545

 

 

(319)

Coal mining

 

6,424

 

3,578

 

1,379

Energy marketing

 

22,909

 

 

8,938

Corporate

 

 

 

(819)

Inter-segment eliminations

 

 

(1,368)

 

 

 

 

 

 

 

 

Total

$

130,731

$

2,795

$

19,479

 

 

20

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Six Month Period Ended

 

 

 

 

 

 

June 30, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric utility

$

114,940

$

670

$

10,827

Electric and gas utility

 

77,928

 

 

8,893

Non-regulated energy:

 

 

 

 

 

 

Oil and gas

 

60,331

 

 

9,749

Power generation

 

4,449

 

12,926

 

(1,498)

Coal mining

 

15,876

 

10,018

 

2,124

Energy marketing

 

11,269

 

 

664

Corporate

 

 

 

(5,830)

Inter-segment eliminations

 

 

(2,284)

 

(39)

 

 

 

 

 

 

 

Total

$

284,793

$

21,330

$

24,890

 

 

 

External

Inter-segment

Income (Loss) from

 

Operating

Operating

Continuing

 

Revenues

Revenues

Operations

Six Month Period Ended

 

 

 

 

 

 

June 30, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Utilities:

 

 

 

 

 

 

Electric utility

$

91,743

$

996

$

11,580

Electric and gas utility

 

58,015

 

 

4,115

Non-regulated energy:

 

 

 

 

 

 

Oil and gas

 

51,657

 

 

7,967

Power generation

 

20,075

 

 

(169)

Coal mining

 

12,641

 

7,106

 

2,995

Energy marketing

 

51,347

 

 

21,596

Corporate

 

1

 

 

(933)

Inter-segment eliminations

 

 

(2,558)

 

 

 

 

 

 

 

 

Total

$

285,479

$

5,544

$

47,151

 

During 2008, the Company added assets of approximately $49.6 million on the ongoing construction of the Wygen III power plant within the Electric utility segment and approximately $13.6 million for 2008 capitalized development costs related to the Aquila asset acquisition, consisting of $4.6 million for professional fees and $9.0 million in hardware and software costs. Other than these significant additions and the reclassification to discontinued operations of the IPP assets sold, 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.

 

21

(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

 

June 30, 2008

December 31, 2007

June 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

 

209,344

40

 

125,577

36

 

179,020

18

Natural gas basis

 

 

 

 

 

 

 

 

 

swaps sold

 

212,498

40

 

128,892

36

 

195,952

18

Natural gas fixed for float

 

 

 

 

 

 

 

 

 

swaps purchased

 

50,707

24

 

42,326

24

 

33,520

24

Natural gas fixed for float

 

 

 

 

 

 

 

 

 

swaps sold

 

65,093

24

 

59,253

24

 

59,401

24

Natural gas physical

 

 

 

 

 

 

 

 

 

purchases

 

130,253

22

 

90,583

15

 

81,261

18

Natural gas physical sales

 

168,938

22

 

98,888

27

 

108,359

28

Natural gas options

 

 

 

 

 

 

 

 

 

purchased

 

7,650

9

 

3,472

10

 

9,266

9

Natural gas options sold

 

7,650

9

 

3,472

10

 

8,832

9

 

 

22

 

Outstanding at

Outstanding at

Outstanding at

 

June 30, 2008

December 31, 2007

June 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

 

6,713

18

 

4,991

12

 

2,178

4

Crude oil physical sales

 

5,084

18

 

3,800

12

 

2,092

5

Crude oil swaps/options

 

 

 

 

 

 

 

 

 

purchased

 

515

6

 

495

12

 

465

15

Crude oil swaps/options

 

 

 

 

 

 

 

 

 

sold

 

565

6

 

495

12

 

465

15

 

 

 

 

 

 

 

 

 

 

(Dollars, in thousands)

 

 

 

 

 

 

 

 

 

Canadian dollars

 

 

 

 

 

 

 

 

 

purchased

$

47,000

1

$

28,000

2

$

41,000

2

Canadian dollars

 

 

 

 

 

 

 

 

 

sold

$

6,000

1

$

$

 

Derivatives and certain natural gas and crude oil marketing activities were marked to fair value on June 30, 2008, December 31, 2007 and June 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2008

$

69,723

$

14,010

$

33,809

$

2,480

$

(49,050)

$

(1,606)

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2007

$

30,999

$

1,901

$

16,908

$

2,482

$

1,287

$

14,797

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2007

$

48,175

$

122

$

15,235

$

408

$

(15,453)

$

17,201

 

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 June 30, 2007 amounts have been reclassified to conform to this presentation.

 

23

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 June 30, 2008, December 31, 2007 and June 30, 2007, the market adjustments recorded in inventory were $6.3 million, $(9.8) million and $(6.4) million, respectively.

 

Activities Other Than Trading

 

Oil and Gas Exploration and Production

 

On June 30, 2008, December 31, 2007 and June 30, 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)

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps/options

465,000

0.50

$

389

$

$

8,931

$

5,996

$

(14,927)

$

389

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

10,474,000

1.34

 

702

 

26

 

25,363

 

11,040

 

(35,675)

 

 

 

 

$

1,091

$

26

$

34,294

$

17,036

$

(50,602)

$

389

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

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps/options

465,000

1.00

$

621

$

17

$

1,039

$

542

$

(1,564)

$

621

Natural gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

11,247,000

1.17

 

6,411

 

296

 

664

 

1,757

 

4,714

 

(428)

 

 

 

$

7,032

$

313

$

1,703

$

2,299

$

3,150

$

193

________________________

*crude in Bbls, gas in MMBtus

 

Based on June 30, 2008 market prices, a $34.0 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.

 

24

Financing Activities

 

On June 30, 2008, December 31, 2007 and June 30, 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

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

$

150,000

5.04%

8.25

$

$

$

2,760

$

3,641

$

(6,401)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

$

150,000

5.04%

8.75

$

$

$

1,792

$

4,274

$

(6,066)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps

$

150,000

5.04%

9.25

$

384

$

4,916

$

55

$

$

5,245

 

Based on June 30, 2008 market interest rates and balances, a loss of approximately $2.8 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 an amended mandatory early termination date of December 15, 2008. As of June 30, 2008, the mark-to-market value was $(18.9) 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.

 

25

(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 June 30, 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.

 

26

Recurring Fair Value

At Fair Value as of June 30, 2008

Measures (in thousands)

 

 

 

 

 

Counterparty

 

 

Level 1

Level 2

Level 3

Netting (a)

Total

Assets:

 

 

 

 

 

 

 

 

 

 

Short-term investments

$

$

$

7,309

$

$

7,309

Commodity derivatives

 

49,050

 

291,848

 

24,424

 

(280,511)

 

84,811

Foreign currency derivative

 

 

318

 

 

 

318

Total

$

49,050

$

292,166

$

31,733

$

(280,511)

$

92,438

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

$

$

355,358

$

13,092

$

(280,511)

$

87,939

Interest rate swaps

 

 

25,327

 

 

 

25,327

Total

$