ASSET IMPAIRMENT
The Las Vegas I plant is a 53 megawatt, natural gas-fired,
combined-cycle turbine operating under a contract as a qualifying
facility as defined by the Public Utility Regulatory Policies
Act of 1978. Fuel for this plant is not externally hedged
and was provided at index-set prices under a long-term supply
arrangement. Due to significant increases in long-term forecasts
for natural gas prices during the third quarter of 2005,
its operation became uneconomic. Therefore, an asset impairment
test was performed in connection with the preparation of
September 30, 2005 interim financial statements, in accordance
with Statement of Financial Accounting Standards (SFAS)
No. 144, "Accounting for the Impairment of Long-lived
Assets." The test resulted in the determination of
a write-down of $50.3 million (approximately 83 percent
of the plant's book value). The non-cash after-tax earnings
impact of the impairment charge is expected to be $(0.99)
per share and will be reported in the results for the three-month
period ended September 30, 2005.
David R. Emery, Chairman, President and Chief
Executive Officer of Black Hills Corporation, said, "The
recent dramatic run-up in current and forecasted natural
gas prices necessitated an evaluation of the likely impact
of high, long-term natural gas prices on Las Vegas I operations.
We concluded that, at sustained high gas prices, we would
not recover our capital investment. Las Vegas I is the only
facility in our non-regulated power generation fleet where
our power sales contracts have an exposure to long-term
gas price increases. Our other non-regulated gas-fired power
plants, which are operating normally and profitably, are
under tolling arrangements whereby the power purchaser assumes
the fuel price risk.
"We have commenced preliminary negotiations
regarding future operations of the Las Vegas I plant with
Nevada Power Company, with whom we currently have a contract
to provide 45 megawatts of capacity and energy from the
plant," Emery continued. "We are exploring alternatives
to the existing power supply agreement, which expires in
2024."
Emery said, "Overall, Black Hills benefits
from the current strong natural gas and oil price environment,
with an increased earnings contribution from production,
and a significant increase in the value of our gas and oil
reserves. In addition, our coal reserves are of tremendous
importance to our regulated utility operations, as we expand
our mine-mouth, coal-fired power generation fleet. Construction
of the 90 megawatt Wygen II is under way, and we have commenced
the permitting process for another 90 megawatt plant, Wygen
III, which we hope to construct in the future. As indicated
in our guidance, we expect normalized, historical results
in the final quarter of 2005 with growth opportunity in
2006."
EXPENSING OF DEVELOPMENT COSTS
In the third quarter of 2005, the Company expensed $8.9
million of certain capitalized costs for various energy
development projects that were determined less likely to
advance, and costs related to unsuccessfully bid projects
during the third quarter. On an after-tax basis, the expensed
costs amounted to a charge of $(0.18) per share. The Company
determined these projects were less likely to advance, due
to the reduced economic feasibility of gas-fired power generation
in the expected sustained high-priced natural gas price
environment, increased expectations of reliance on renewable
or coal-fired generation, and the perceived preference of
utilities in certain regions to acquire existing merchant
generation at significant discounts as an alternative to
entering into contracts for capacity and energy from new
generation.
SETTLEMENT AGREEMENT IN PRINCIPLE
The Company's natural gas marketing subsidiary, Enserco
Energy, Inc., has been one of several defendants in the
class action entitled In re Natural Gas Commodity Litigation,
03 CV 6186 (VM), United States District Court, Southern
District of New York. Although the Company believes that
the Class Plaintiffs present a flawed theory to recover
actual damages, events in the third quarter, including settlements
by other defendant companies and mounting joint defense
costs, prompted the Company to make a business decision
to seek a settlement of claims made against it. Accordingly,
during the third quarter of 2005, the Company accrued approximately
$2.5 million, or an after-tax amount of $(0.05) per share,
to reflect the tentative settlement.
FOURTH QUARTER 2005 EARNINGS EXPECTATIONS
For the fourth quarter of 2005, the Company expects income
from continuing operations to approximate
$0.55 to $0.60 per share. Compared to fourth quarter 2004
results, the Company anticipates strong oil and gas performance,
based on increased production at strong product prices received;
and decreased earnings from power generation due to the
cost of terminating a gas supply agreement, from energy
marketing due to lower pipeline revenues under a new contract,
from Black Hills Power due to the impact of higher gas prices,
and from higher corporate costs.
2006 EARNINGS GUIDANCE
The Company anticipates 2006 income from continuing operations
to approximate $2.10 to $2.25 per share, due to continued
production increases in oil and gas operations, and improved
earnings at Cheyenne Light, Fuel & Power operations,
due primarily to a rate increase effective January 1, 2006
as approved by the Wyoming Public Service Commission. Partially
offsetting the expected improved results in 2006 are lower
earnings at our electric utility and coal mining operations,
both relating primarily to a planned major maintenance outage
at the Wyodak coal-fired power plant in the spring of 2006.
Projected strong oil and gas results are based on anticipated
production-weighted average NYMEX prices of $10.11 per MMBtu
of natural gas and $56.44 per barrel of oil, or average
received prices (net of hedges) of $7.94 per Mcf and $40.14
per barrel, both based on current forward strips.
DIVIDEND ANNOUNCED
At a meeting held today, the Company's Board of Directors
declared quarterly dividends on the common stock. Common
shareholders will receive 32 cents per share, equivalent
to an annual dividend rate of $1.28. Dividends will be payable
December 1, 2005, to all shareholders of record at the close
of business on November 17, 2005.
EEI FINANCIAL CONFERENCE PRESENTATION WEBCAST
In conjunction with the Edison Electric Institute's Annual
Financial Conference, the Company will make a webcast presentation
on Tuesday, November 8, 2005 at 9:00 a.m. Eastern Time.
The presentation can be accessed at the following Web site
address: http://www.talkpoint.com/viewer/starthere.asp?pres=111339
QUARTERLY CONFERENCE CALL SCHEDULED
The Company will issue its third quarter 2005 earnings release
and file its quarterly report on Form 10-Q on November 9,
2005. A conference call will be conducted on Thursday, November
10, 2005 beginning at 11:00 a.m. Eastern Time to discuss
recent financial and operating performance. The conference
call will be open to the public. The call can be accessed
by dialing, toll-free, (800) 762-6067. When prompted, indicate
that you wish to participate in the "Black Hills Quarterly
Earnings Conference Call." A replay of the conference
call will be available through November 17, 2005 by dialing
(800) 475-6701 (USA) or (320) 365-3844 (international).
The access code is 802168.
ABOUT BLACK HILLS CORPORATION
Black Hills Corporation is a diversified energy company.
Black Hills Energy, our wholesale energy business unit,
generates electricity, produces natural gas, oil and coal,
and markets energy. Our retail businesses are Black Hills
Power, an electric utility serving western South Dakota,
northeastern Wyoming and southeastern Montana; and Cheyenne
Light, Fuel & Power, an electric and gas distribution
utility serving the Cheyenne, Wyoming vicinity. More information
is available at our Internet web site: www.blackhillscorp.com.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This news release includes "forward-looking statements"
as defined by the Securities and Exchange Commission, or
SEC. We make these forward-looking statements in reliance
on the safe harbor protections provided under the Private
Securities Litigation Reform Act of 1995. All statements,
other than statements of historical facts, included in this
release that address activities, events or developments
that we expect, believe or anticipate will or may occur
in the future are forward-looking statements. These forward-looking
statements are based on assumptions which we believe are
reasonable based on current expectations and projections
about future events and industry conditions and trends affecting
our business. However, whether actual results and developments
will conform to our expectations and predictions is subject
to a number of risks and uncertainties that, among other
things, could cause actual results to differ materially
from those contained in the forward-looking statements,
including the risk factors described in Items 1 and 2 of
our 2004 Annual Report on Form 10-K and in Item 2 of Part
I of our quarterly reports on Form 10-Q filed with the SEC,
and the following:
-
The amount and timing of capital deployment
in new investment opportunities or for the repurchase
of debt or stock;
-
The volumes of our production from oil
and gas development properties, which may be dependent
upon issuance by federal, state, and tribal governments,
or agencies thereof, of drilling, environmental and other
permits, and the availability of specialized contractors,
work force, and equipment;
-
The extent of our success in connecting
natural gas supplies to gathering, processing and pipeline
systems;
-
The possibility that we may be required
to take impairment charges to reduce the carrying value
of some of our long-lived assets when indicators of impairment
exist;
-
Our ability to successfully integrate
CLF&P into our operations;
-
Unfavorable rulings in the periodic applications
to recover costs for fuel and purchased power;
-
Changes in business and financial reporting
practices arising from the repeal of the Public Utilities
Holding Company Act and other provisions of the recently
enacted Energy Policy Act of 2005.
-
Our ability to remedy any deficiencies
that may be identified in the periodic review of our internal
controls;
-
The timing and extent of changes in energy-related
and commodity prices, interest rates, energy and commodity
supply or volume, the cost of transportation of commodities,
and demand for our services, all of which can affect our
earnings, liquidity position and the underlying value
of our assets;
-
The timing and extent of scheduled and
unscheduled outages of power generation facilities;
-
General economic and political conditions,
including tax rates or policies and inflation rates;
-
Our use of derivative financial instruments
to hedge commodity, currency exchange rate and interest
rate risks;
-
The creditworthiness of counterparties
to trading and other transactions, and defaults on amounts
due from counterparties;
-
The amount of collateral required to be
posted from time to time in our transactions;
-
Changes in or compliance with laws and
regulations, particularly those relating to taxation,
safety and protection of the environment;
-
Changes in state laws or regulations that
could cause us to curtail our independent power production;
-
Weather and other natural phenomena;
-
Industry and market changes, including
the impact of consolidations and changes in competition;
-
The effect of accounting policies issued
periodically by accounting standard-setting bodies;
-
The cost and effects on our business,
including insurance, resulting from terrorist actions
and natural disasters or responses to such actions and
events;
-
Capital market conditions, which may affect
our ability to raise capital on favorable terms;
-
Price risk due to marketable securities
held as investments in benefit plans;
-
Obtaining adequate cost recovery for our
retail operations through regulatory proceedings; and
-
Other factors discussed from time to time
in our other filings with the SEC.
New factors that could cause actual results
to differ materially from those described in forward-looking
statements emerge from time to time, and it is not possible
for us to predict all such factors, or the extent to which
any such factor or combination of factors may cause actual
results to differ from those contained in any forward-looking
statement. We assume no obligation to update publicly any
such forward-looking statements, whether as a result of new
information, future events, or otherwise.
