Company Quick10K Filing
Quick10K
Black Hills Power
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$74.25 60 $4,480
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2018-01-30 Amend Bylaw, Exhibits
SAFM Sanderson Farms 3,330
GEL Genesis Energy 2,610
CTRE Caretrust REIT 2,310
SNBR Sleep Number 1,060
FRAC Keane Group 999
NGD New Gold 465
DSX Diana Shipping 335
AINC Ashford 132
NURO Neurometrix 6
ABFF Ceres Abingdon 0
BKH 2019-06-30
Item 2. Management's Discussion and Analysis of Financial Condition And
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 6. Exhibits
EX-31.1 bhpex-311q22019.htm
EX-31.2 bhpex-312q22019.htm
EX-32.1 bhpex-321q22019.htm
EX-32.2 bhpex-322q22019.htm

Black Hills Power Earnings 2019-06-30

BKH 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2019
OR
 
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
1-7978
Black Hills Power, Inc.
Incorporated in
South Dakota
IRS Identification Number
46-0111677
7001 Mount Rushmore Road
 
Rapid City
 
South Dakota
 
57702
 
 
 
 
 
 
 
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 has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes
x
No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
o
 
Accelerated Filer
o
 
 
 
 
 
Non-accelerated Filer
x
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
Smaller Reporting Company
 
 
 
 
 
 
 
 
Emerging Growth Company

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No x
Securities registered pursuant to Section 12(b) of the Act:  None


As of July 31, 2019, there were issued and outstanding 23,416,396 shares of the Registrant’s common stock, $1.00 par value, all of which were held beneficially and of record by Black Hills Corporation.

Reduced Disclosure

The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.


Table of Contents

TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1.
 
Item 6.
 
 
 
 
 
 
 


2

Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

The following terms and abbreviations appear in the text of this report and have the definitions described below:

AFUDC
Allowance for Funds Used During Construction
ASC
Accounting Standards Codification
ASU
Accounting Standards Update issued by the FASB
BHC
Black Hills Corporation; the Parent Company
Black Hills Energy
The name used to conduct the business of BHC utility companies
Black Hills Service Company
Black Hills Service Company, LLC, a direct, wholly-owned subsidiary of BHC
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy and providing electric service)
Cooling degree day (CDD)
A cooling degree day is equivalent to each degree that the average of the high and low temperature for a day is above 65 degrees. The warmer the climate, the greater the number of cooling degree days. Cooling degree days are used in the utility industry to measure the relative warmth of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations.
CPCN
Certificate of Public Convenience and Necessity
FASB
Financial Accounting Standards Board
FERC
United States Federal Energy Regulatory Commission
Fitch
Fitch Ratings
GAAP
Accounting principles generally accepted in the United States of America
Happy Jack
Happy Jack Wind Farms, LLC, a subsidiary of Duke Energy Generation Services
Heating degree day (HDD)
A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. Heating degree days are used in the utility industry to measure the relative coldness of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations.
Horizon Point
BHC Corporate headquarters building in Rapid City, South Dakota, which was completed in 2017.
LIBOR
London Interbank Offered Rate
Moody’s
Moody’s Investors Service, Inc.
MW
Megawatts
MWh
Megawatt-hours
Parent
Black Hills Corporation
SDPUC
South Dakota Public Utilities Commission
SEC
U. S. Securities and Exchange Commission
Silver Sage
Silver Sage Windpower, LLC, a subsidiary of Duke Energy Generation Services
South Dakota Electric
Black Hills Power, which includes operations in South Dakota, Wyoming and Montana
S&P
Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.
TCJA
Tax Cuts and Jobs Act enacted December 22, 2017
WPSC
Wyoming Public Service Commission
WRDC
Wyodak Resources Development Corp., an indirect, wholly-owned subsidiary of BHC
Wygen III
110 MW mine-mouth coal-fired power plant in which BHP owns a 52% interest, MDU owns a 25% interest and the City of Gillette owns the remaining 23% interest. BHP operates the plant.
Wyodak Plant
Wyodak, a 362 MW mine-mouth coal-fired plant in Gillette, Wyoming, owned 80% by Pacificorp and 20% by Black Hills Energy South Dakota. Our WRDC mine supplies all of the fuel for the plant.
Wyoming Electric
Includes Cheyenne Light’s electric utility operations



3

Table of Contents




BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30,
Six Months Ended June 30,
(unaudited)
2019
2018
2019
2018
 
(in thousands)
Revenue
$
69,246

$
70,676

$
148,287

$
144,491

 
 
 
 
 
Operating expenses:
 
 
 
 
Fuel and purchased power
18,381

20,753

41,114

43,193

Operations and maintenance
21,128

18,428

40,685

37,579

Depreciation and amortization
10,357

9,866

20,434

19,750

Taxes - property
2,070

2,134

4,102

4,110

Total operating expenses
51,936

51,181

106,335

104,632

 
 
 
 
 
Operating income
17,310

19,495

41,952

39,859

 
 
 
 
 
Other income (expense):
 
 
 
 
Interest charges -
 
 
 
 
Interest expense incurred (including amortization of debt issuance costs, premiums, and discounts)
(5,876
)
(5,654
)
(11,706
)
(11,241
)
Allowance for funds used during construction - borrowed
427

152

710

200

Interest income
172

123

287

238

Other income (expense), net
291

(242
)
(84
)
(359
)
Total other income (expense), net
(4,986
)
(5,621
)
(10,793
)
(11,162
)
 
 
 
 
 
Income before income taxes
12,324

13,874

31,159

28,697

Income tax expense
(2,176
)
(2,749
)
(5,514
)
(5,812
)
Net income
10,148

11,125

25,645

22,885

 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
Reclassification of net realized (gains) losses on settled/amortized interest rate swaps (net of tax of $(7), $(5), $(7) and $(11), respectively)
25

11

25

21

Reclassification adjustment of benefit plan liability - net gain (loss) (net of tax of $(2), $(9), $(6) and $(18), respectively)
14

17

26

34

Other comprehensive income (loss), net of tax
39

28

51

55

 
 
 
 
 
Comprehensive income
$
10,187

$
11,153

$
25,696

$
22,940


The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.

4

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BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS

 
As of
(unaudited)
June 30, 2019
December 31, 2018
 
(in thousands)
ASSETS
 
 
Current assets:
 
 
Cash
$
5

$
112

Accounts receivable, net
25,882

28,431

Accounts receivable from affiliates
5,102

8,119

Materials, supplies and fuel
25,313

24,853

Regulatory assets, current
22,339

19,052

Other current assets
4,460

4,538

Total current assets
83,101

85,105

 
 
 
Investments
4,846

4,889

 
 
 
Property, plant and equipment
1,428,721

1,381,045

Less: accumulated depreciation and amortization
(390,570
)
(376,160
)
Total property, plant and equipment, net
1,038,151

1,004,885

 
 
 
Other assets:
 
 
Regulatory assets, non-current
53,364

56,680

Other assets, non-current
26,284

9,729

Total other assets, non-current
79,648

66,409

 
 
 
TOTAL ASSETS
$
1,205,746

$
1,161,288


The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.

5

Table of Contents


BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
(Continued)
 
As of
(unaudited)
June 30, 2019
December 31, 2018
 
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
22,730

$
25,122

Accounts payable to affiliates
24,737

25,804

Accrued liabilities
38,159

34,193

Money pool notes payable
13,071

38,690

Notes payable to Parent
25,000


Regulatory liabilities, current
2,392

2,574

Total current liabilities
126,089

126,383

 
 
 
Long-term debt
340,105

340,035

 
 
 
Deferred credits and other liabilities:
 
 
Deferred income tax liabilities, net
117,272

114,009

Regulatory liabilities, non-current
162,104

160,642

Benefit plan liabilities
14,568

14,606

Other deferred credits and other liabilities
15,672

1,368

Total deferred credits and other liabilities
309,616

290,625

 
 
 
Commitments and contingencies (Notes 5, 6 and 9)


 
 
 
Stockholder’s equity:
 
 
Common stock $1 par value; 50,000,000 shares authorized; 23,416,396 shares issued
23,416

23,416

Additional paid-in capital
39,575

39,575

Retained earnings
367,785

342,145

Accumulated other comprehensive loss
(840
)
(891
)
Total stockholder’s equity
429,936

404,245

 
 
 
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
1,205,746

$
1,161,288


The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.


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Table of Contents


BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)
Six Months Ended
June 30,
 
2019
2018
 
(in thousands)
Operating activities:
 
 
Net income
$
25,645

$
22,885

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
20,434

19,750

Deferred income tax
2,004

(1,407
)
Employee benefits
389

760

Other adjustments, net
1,767

1,091

Change in operating assets and liabilities:
 
 
Accounts receivable and other current assets
4,841

(1,494
)
Accounts payable and other current liabilities
47

2,170

Regulatory assets - current
(2,037
)
2,797

Regulatory liabilities - current
(131
)
5,709

Other operating activities, net
(2,372
)
(458
)
Net cash provided by (used in) operating activities
50,587

51,803

 
 
 
Investing activities:
 
 
Property, plant and equipment additions
(49,387
)
(27,399
)
Proceeds from sale of assets

4,994

Other investing activities
(688
)
(4,961
)
Net cash provided by (used in) investing activities
(50,075
)
(27,366
)
 
 
 
Financing activities:
 
 
Change in money pool notes payable, net
(619
)
(24,448
)
Net cash provided by (used in) financing activities
(619
)
(24,448
)
 
 
 
Net change in cash
(107
)
(11
)
 
 
 
Cash, beginning of period
112

16

Cash, end of period
$
5

$
5


See Note 8 for supplemental cash flow information.

The accompanying Notes to Condensed Financial Statements are an integral part of these Condensed Financial Statements.

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Table of Contents


BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY

 
Common Stock
 
 
 
 
(in thousands, except share amounts)
Shares
Value
Additional Paid in Capital
Retained Earnings
AOCI
Total
December 31, 2018
23,416,396

$
23,416

$
39,575

$
342,145

$
(891
)
$
404,245

Net income (loss) available for common stock



15,497


15,497

Other comprehensive income (loss), net of tax




12

12

Cumulative effect of ASC 842 implementation



(7
)

(7
)
Other adjustments



1


1

March 31, 2019
23,416,396

$
23,416

$
39,575

$
357,636

$
(879
)
$
419,748

Net income (loss) available for common stock



10,148


10,148

Other comprehensive income (loss), net of tax




39

39

Other adjustments



1


1

June 30, 2019
23,416,396

$
23,416

$
39,575

$
367,785

$
(840
)
$
429,936

 
 
 
 
 
 
 


 
Common Stock
 
 
 
 
(in thousands except share amounts)
Shares
Value
Additional Paid in Capital
Retained Earnings
AOCI
Total
December 31, 2017
23,416,396

$
23,416

$
39,575

$
332,499

$
(1,258
)
$
394,232

Net income (loss) available for common stock



11,760


11,760

Other comprehensive income (loss), net of tax




27

27

Dividend to Parent company



(16,000
)

(16,000
)
Other adjustments



1


1

March 31, 2018
23,416,396

$
23,416

$
39,575

$
328,260

$
(1,231
)
$
390,020

Net income (loss) available for common stock



11,125


11,125

Other comprehensive income (loss), net of tax




28

28

Dividend to Parent company



(10,000
)

(10,000
)
June 30, 2018
23,416,396

$
23,416

$
39,575

$
329,385

$
(1,203
)
$
391,173


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Table of Contents

BLACK HILLS POWER, INC.

Notes to Condensed Financial Statements
(unaudited)
(Reference is made to Notes to Financial Statements
included in our 2018 Annual Report on Form 10-K)

(1)    MANAGEMENT’S STATEMENT

The unaudited condensed financial statements included herein have been prepared by Black Hills Power, Inc. (the “Company,” “we,” “us,” or “our”), 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, we believe that the footnotes adequately disclose the information presented. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto, included in our 2018 Annual Report on Form 10-K filed with the SEC.

The information furnished in the accompanying condensed financial statements reflects certain estimates required and all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the June 30, 2019, December 31, 2018 and June 30, 2018 financial information and are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2019 and June 30, 2018, and our financial condition as of June 30, 2019 and December 31, 2018 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.

Recently Issued Accounting Standards

Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial Instruments, ASU 2018-19

In June 2016, the FASB issued ASU 2016-13, Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial Instruments, which was subsequently amended by ASU 2018-19 in November 2018. The standard introduces new accounting guidance for credit losses on financial instruments within its scope, including trade receivables. This new guidance adds an impairment model that is based on expected losses rather than incurred losses. It is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the impacts of adopting this standard.

Recently Adopted Accounting Standards

Leases, ASU 2016-02

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet for most leases, whereas previously only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

We adopted the standard effective January 1, 2019. We elected the option to not recast comparative periods presented with transitioning to the new lease standard and will report these comparative periods as presented under previous lease guidance. In addition, we elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment of existing land easement agreements.

Adoption of the new standard resulted in the recording of an operating lease right-of-use asset and an off-setting operating lease obligation liability of $14 million as of January 1, 2019. The lease standard did not materially impact our net earnings and had no impact on cash flows.





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Table of Contents

(2)    REVENUE

Revenue Recognition

As of January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments (collectively known as ASC 606). Revenue is recognized in an amount that reflects the consideration we expect to receive in exchange for goods or services, when control of the promised goods or services is transferred to our customers. The following table depicts the disaggregation of revenue, from contracts with customers by customer type and timing of revenue recognition for the three and six months ended June 30, 2019 and 2018. Sales tax and other similar taxes are excluded from revenues.
 
Three Months Ended June 30, 2019
Three Months Ended June 30, 2018
Six Months Ended June 30, 2019
Six Months Ended June 30, 2018
 
(in thousands)
Customer types:
 
 
 
 
Retail
$
46,809

$
46,525

$
99,885

$
97,166

Wholesale
6,780

8,191

15,123

17,241

Market - off-system sales
2,393

3,449

7,063

5,724

Transmission/Other
13,083

12,372

25,914

24,090

Revenue from contracts with customers
69,065

70,537

147,985

144,221

Other revenues
181

139

302

270

Total revenues
$
69,246

$
70,676

$
148,287

$
144,491

 
 
 
 
 
Timing of revenue recognition:
 
 
 
 
Services transferred over time
$
69,065

$
70,537

$
147,985

$
144,221

Revenue from contracts with customers
$
69,065

$
70,537

$
147,985

$
144,221



Contract Balances

The nature of our primary revenue contracts provides an unconditional right to consideration upon service delivery; therefore, no customer contract assets or liabilities exist. The unconditional right to consideration is represented by the balance in our Accounts receivable and is further discussed in Note 3. We do not typically incur costs that would be capitalized, to obtain or fulfill a revenue contract.


(3)
ACCOUNTS RECEIVABLE

Following is a summary of Accounts receivable, net included in the accompanying Condensed Balance Sheets (in thousands) as of:
 
June 30, 2019
December 31, 2018
Accounts receivable trade
$
15,972

$
16,236

Unbilled revenues
10,110

12,333

Allowance for doubtful accounts
(200
)
(138
)
Accounts receivable, net
$
25,882

$
28,431




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Table of Contents

(4)
REGULATORY ACCOUNTING

Our regulated electric operations are subject to regulation by various state and federal agencies. The accounting policies followed are generally subject to the Uniform System of Accounts of the FERC.

Our regulatory assets and liabilities were as follows (in thousands) as of:
 
June 30, 2019
 
December 31, 2018
Regulatory assets:
 
 
 
Loss on reacquired debt (a)
$
1,124

 
$
1,259

Deferred taxes on AFUDC (b)
4,955

 
5,020

Employee benefit plans and related deferred taxes (c)

20,022

 
19,868

Deferred energy and fuel cost adjustments (b)
22,195

 
20,334

Deferred taxes on flow through accounting (c)
9,201

 
8,749

Decommissioning costs (a)
7,168

 
8,196

Vegetation management (a)
9,214

 
10,366

Other regulatory assets (a)
1,824

 
1,940

Total regulatory assets
$
75,703

 
$
75,732

Less current regulatory assets
(22,339
)
 
(19,052
)
Regulatory assets, non-current
$
53,364

 
$
56,680



Regulatory liabilities:
 
 
 
Cost of removal for utility plant (a)
$
54,947

 
$
52,366

Employee benefit plan costs and related deferred taxes (c)
7,518

 
7,518

Excess deferred income taxes (c)
99,417

 
100,276

TCJA revenue reserve
2,392

 
2,523

Other regulatory liabilities (c)
222

 
533

Total regulatory liabilities
$
164,496

 
$
163,216

Less current regulatory liabilities
(2,392
)
 
(2,574
)
Regulatory liabilities, non-current
$
162,104

 
$
160,642


____________________
(a)
We are allowed a recovery of costs, but we are not allowed a rate of return.
(b)
In addition to recovery of costs, we are allowed a rate of return.
(c)
In addition to recovery or repayment of costs, we are allowed a return on a portion of this amount or a reduction in rate base.

Regulatory Matters

There have been no significant changes to our Regulatory Matters from those previously disclosed in Note 1 of the Notes to the Financial Statements in our 2018 Annual Report on Form 10-K except as reported below.

Renewable Ready Service Tariffs and Corriedale Wind Energy Project

South Dakota Electric and Wyoming Electric received approvals for the Renewable Ready Service Tariffs and related jointly-filed CPCN to construct the $57 million, 40 MW Corriedale Wind Energy Project. The wind project will be jointly owned by the two electric utilities to deliver renewable energy for large commercial and industrial customers and governmental agencies. The project is expected to be in service in 2020.



11

Table of Contents

(5)
RELATED-PARTY TRANSACTIONS

Dividend to Parent

We did not record any dividends for the six months ended June 30, 2019. We recorded non-cash dividends to our Parent of $26 million and decreased the utility Money pool note receivable by $26 million for the six months ended June 30, 2018.

Receivables and Payables

We have accounts receivable and accounts payable balances related to transactions with other BHC subsidiaries. The balances were as follows (in thousands) as of:
 
June 30, 2019
December 31, 2018
Accounts receivable from affiliates
$
5,102

$
8,119

Accounts payable to affiliates
$
24,737

$
25,804



Money Pool Notes Receivable and Notes Payable

We participate in the Utility Money Pool Agreement (the Agreement). Under the Agreement, we may borrow from the pool; however the Agreement restricts the pool from loaning funds to BHC or to any of BHC’s non-utility subsidiaries. The Agreement does not restrict us from paying dividends to BHC. Borrowings under the Agreement bear interest at the weighted average daily cost of our parent company’s external borrowings as defined under the Agreement, or if there are no external funds outstanding on that date, then the rate will be the daily one-month LIBOR plus 1.0%. At June 30, 2019, the average cost of borrowing under the Utility Money Pool was 2.78%.

We had the following balances with the Utility Money Pool (in thousands) as of:
 
June 30, 2019
December 31, 2018
Money pool notes payable
$
13,071

$
38,690



Our net interest income (expense) relating to balances with the Utility Money Pool was as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
2018
2019
2018
Net interest income (expense)
$
(198
)
$
(96
)
$
(471
)
$
(132
)



Notes payable to Parent
 
June 30, 2019
December 31, 2018
Notes payable to Parent (a)
$
25,000

$


(a) Note bears interest at 4.51%, expires December 31, 2019, and is eligible for annual renewal. Interest payable related to this note was $0.2 million as of June 30, 2019.


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Table of Contents

Other related party activity was as follows (in thousands):
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2019
2018
2019
2018
Revenue:
 
 
 
 
Energy sold to Cheyenne Light
$
340

$
501

$
914

$
1,204

Rent from electric properties
$
895

$
908

$
1,791

$
1,817

Horizon Point shared facility revenues
$
3,006

$
2,783

$
6,013

$
5,552

 
 
 
 
 
Fuel and purchased power:
 
 
 
 
Purchases of coal from WRDC
$
3,216

$
4,249

$
7,873

$
8,316

Purchase of excess energy from Cheyenne Light
$
41

$
82

$
173

$
168

Purchase of renewable wind energy from Cheyenne Light - Happy Jack
$
342

$
381

$
877

$
1,022

Purchase of renewable wind energy from Cheyenne Light - Silver Sage
$
611

$
696

$
1,594

$
1,789

Gas transportation service agreement with Cheyenne Light for firm and interruptible gas transportation
$
75

$
96

$
151

$
192

 
 
 
 
 
Operations and maintenance:
 
 
 
 
Corporate support services and fees from Black Hills Service Company (a)
$
9,451

$
7,604

$
19,642

$
15,210

Wygen III ground lease with WRDC
$
247

$
241

$
493

$
481



(a) Increase in 2019 was primarily due to higher outside service expenses and higher employee costs driven by labor and benefits.

(6)
EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost for the Defined Benefit Pension Plan were as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
2018
2019
2018
Service cost
$
92

$
129

$
183

$
258

Interest cost
602

549

1,205

1,097

Expected return on plan assets
(852
)
(887
)
(1,703
)
(1,773
)
Prior service cost
3

11

5

22

Net loss (gain)
305

516

610

1,032

Net periodic benefit cost
$
150

$
318

$
300

$
636



Defined Benefit Postretirement Healthcare Plan

The components of net periodic benefit cost for the Defined Benefit Postretirement Healthcare Plan were as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
2018
2019
2018
Service cost
$
37

$
49

$
74

$
97

Interest cost
46

44

93

89

Prior service cost (benefit)
(84
)
(84
)
(168
)
(168
)
Net periodic benefit cost
$
(1
)
$
9

$
(1
)
$
18




13

Table of Contents

Supplemental Non-qualified Defined Benefit Plans

The components of net periodic benefit cost for the Supplemental Non-qualified Defined Benefit Plans were as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
2018
2019
2018
Interest cost
$
28

$
27

$
57

$
54

Net loss (gain)
17

26

33

52

Net periodic benefit cost
$
45

$
53

$
90

$
106



Contributions

Contributions to the Defined Benefit Pension Plan are cash contributions made directly to the Pension Plan Trust account. Contributions to the Postretirement Healthcare and Supplemental Plans are made in the form of benefit payments. Contributions made for 2019 and anticipated contributions for 2019 and 2020 are as follows (in thousands):
 
Contributions
Six Months Ended
June 30, 2019
Remaining Anticipated Contributions for 2019
Anticipated Contributions for 2020
Defined Benefit Pension Plan
$

$
1,753

$
1,841

Defined Benefit Postretirement Healthcare Plan
$
233

$
233

$
466

Supplemental Non-qualified Defined Benefit Plans
$
115

$
115

$
240



14

Table of Contents

(7)
FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments for which the carrying amount did not equal the fair value were as follows (in thousands) as of:
 
June 30, 2019
December 31, 2018
 
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Long-term debt, including current maturities (a) (b)
$
340,105

$
447,036

$
340,035

$
412,894

_________________

(a)
Long-term debt is valued based on observable inputs available either directly or indirectly for similar liabilities in active markets and therefore is classified in Level 2 in the fair value hierarchy.
(b)
Carrying amount of long-term debt is net of deferred financing costs.


(8)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 
Six Months Ended June 30,
 
2019
2018
 
(in thousands)
Non-cash investing and financing activities -
 
 
Property, plant and equipment acquired with accrued liabilities
$
15,316

$
7,477

Non-cash (decrease) to money pool notes receivable, net
$

$
(26,000
)
Non-cash dividend to Parent
$

$
26,000

 
 
 
Cash (paid) refunded during the period for -
 
 
Interest (net of amounts capitalized)
$
(11,342
)
$
(10,930
)


(9)
COMMITMENTS AND CONTINGENCIES

There have been no significant changes to commitments and contingencies from those previously disclosed in Note 11 of our Notes to the Financial Statements in our 2018 Annual Report on Form 10-K.


(10)
LEASES

We have a ground lease for the Wygen III generating facility with an affiliate and communication tower site and operation center facility leases with third parties. Our leases have remaining terms ranging from less than one year to 30 years.
The components of lease expense were as follows (in thousands):
 
Income Statement Location
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Operating lease cost
Operations and maintenance
$
228

$
456

Variable lease cost
Operations and maintenance
39

82

Total lease cost
 
$
267

$
538




15

Table of Contents

Supplemental balance sheet information related to leases was as follows (in thousands):
 
Balance Sheet Location
As of June 30, 2019
Assets:
 
 
Operating lease assets
Other assets, non-current
$
14,244

Total lease assets
 
$
14,244

 
 
 
Liabilities:
 
 
Current:
 
 
Operating leases
Accrued liabilities
$
268

 
 
 
Noncurrent:
 
 
Operating leases
Other deferred credits and other liabilities
13,993

Total lease liabilities
 
$
14,261



Supplemental cash flow information related to leases was as follows (in thousands):
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
451

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$



 
As of June 30, 2019
Weighted average remaining lease term (years):
 
Operating leases
30 years

 
 
Weighted average discount rate:
 
Operating leases
4.4
%


Scheduled maturities of operating lease liabilities for future years were as follows (in thousands):
 
Total
2019 (a)
$
463

2020
856

2021
856

2022
856

2023
853

Thereafter
21,947

Total lease payments
$
25,831

Less imputed interest
11,570

Present value of lease liabilities
$
14,261


(a)
Includes lease obligations for the remaining six months of 2019.



16

Table of Contents

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Amounts are presented on a pre-tax basis unless otherwise indicated.
Minor differences in amounts may result due to rounding.

Significant Events

On July 23, 2019, Fitch affirmed South Dakota Electric’s credit rating at A.

South Dakota Electric and Wyoming Electric received approvals for the Renewable Ready Service Tariffs and related jointly-filed CPCN to construct the $57 million, 40-megawatt Corriedale Wind Energy Project. The wind project will be jointly owned by the two electric utilities to deliver renewable energy for large commercial and industrial customers and governmental agencies. The project is expected to be in service in 2020.

South Dakota Electric continued construction on a 175-mile electric transmission line from Stegall, Nebraska to Rapid City, South Dakota. The 94-mile final segment of the transmission line is expected to be in service in the fall of 2019.

On April 30, 2019, S&P affirmed South Dakota Electric’s credit rating at A.


Results of Operations

The following discussion includes financial information prepared in accordance with GAAP, as well as another financial measure, gross margin, that is considered a “non-GAAP financial measure.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Gross margin (revenue less cost of sales) is a non-GAAP financial measure due to the exclusion of depreciation and amortization from the measure. The presentation of gross margin is intended to supplement investors’ understanding of our operating performance.

Gross margin is calculated as operating revenue less cost of fuel and purchased power. Our gross margin is impacted by the fluctuations in purchased power, natural gas and other fuel supply costs. However, while these fluctuating costs impact gross margin as a percentage of revenue, they only impact total gross margin if the costs cannot be passed through to our customers.

Our gross margin measure may not be comparable to other companies’ gross margin measure. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.


17

Table of Contents

The following tables provide certain financial information and operating statistics:

 
Three Months Ended June 30,
Six Months Ended June 30,
 
2019
2018
Variance
2019
2018
Variance
 
(in thousands)
Revenue
$
69,246

$
70,676

$
(1,430
)
$
148,287

$
144,491

$
3,796

Fuel and purchased power
18,381

20,753

(2,372
)
41,114

43,193

(2,079
)
Gross margin (non-GAAP)
50,865

49,923

942

107,173

101,298

5,875

 
 
 
 
 
 
 
Operating expenses
33,555

30,428

3,127

65,221

61,439

3,782

Operating income
17,310

19,495

(2,185
)
41,952

39,859

2,093

 
 
 
 
 
 
 
Interest income (expense), net
(5,277
)
(5,379
)
102

(10,709
)
(10,803
)
94

Other income (expense), net
291

(242
)
533

(84
)
(359
)
275

Income tax expense
(2,176
)
(2,749
)
573

(5,514
)
(5,812
)
298

Net income
$
10,148

$
11,125

$
(977
)
$
25,645

$
22,885

$
2,760





Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018. Net income was $26 million compared to $23 million for the same period in the prior year primarily due to the following:

Gross margin increased primarily due to a $3.2 million reduction in the purchased power capacity charges and higher rider revenues of $1.4 million related to transmission investment recovery. Higher power marketing revenue, customer growth, and favorable weather, comprised the remainder of the increase.

Operating expenses increased primarily due to higher outside services expenses and higher employee costs driven by increased headcount partially offset by a decrease in expenses due to generation outages.


 
Electric Revenue by Customer Type
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
(in thousands)
 
2019
 
Percentage Change
 
2018
 
2019
 
Percentage Change
 
2018
Residential
$
15,570

 
(5)%
 
$
16,426

 
$
36,760

 
(2)%
 
$
37,487

Commercial
22,131

 
(6)%
 
23,538

 
45,275

 
(4)%
 
47,082

Industrial
8,576

 
5%
 
8,170

 
16,933

 
3%
 
16,446

Municipal
776

 
(11)%
 
876

 
1,557

 
(8)%
 
1,687

Total retail revenue
47,053

 
(4)%
 
49,010

 
100,525

 
(2)%
 
102,702

Wholesale (a)
6,780

 
(17)%
 
8,191

 
15,123

 
(12)%
 
17,241

Market - off-system sales (b)
2,393

 
(31)%
 
3,449

 
7,063

 
23%
 
5,724

Other revenue (c)
13,020

 
30%
 
10,026

 
25,576

 
36%
 
18,824

Total revenue
$
69,246

 
(2)%
 
$
70,676

 
$
148,287

 
3%
 
$
144,491

____________________
(a)
Decrease for the six months ended June 30, 2019 was primarily driven by prior year increased volumes on long-term wholesale contracts.
(b)
Increase for the six months ended June 30, 2019 was driven by weather and energy prices.
(c)
Increase for the six months ended June 30, 2019 was primarily due to the prior year reserve to revenue to reflect the reduction of the lower federal income tax rate from the TCJA on our existing rate tariffs.

18

Table of Contents



 
Megawatt Hours Sold by Customer Type
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
Percentage Change
 
2018
 
2019
 
Percentage Change
 
2018
Residential
114,399

 
(1)%
 
115,905

 
284,335

 
2%
 
279,018

Commercial
180,966

 
(3)%
 
186,784

 
375,760

 
(2)%
 
381,715

Industrial
112,623

 
6%
 
106,100

 
220,819

 
5%
 
210,402

Municipal
6,756

 
(10)%
 
7,479

 
14,329

 
(4)%
 
14,982

Total retail quantity sold
414,744

 
—%
 
416,268

 
895,243

 
1%
 
886,117

Wholesale
194,222

 
(11)%
 
218,132

 
417,242

 
(8)%
 
455,836

Market - off-system sales
113,014

 
(20)%
 
141,866

 
212,586

 
(9)%
 
233,968

Total quantity sold
721,980

 
(7)%
 
776,266

 
1,525,071

 
(3)%
 
1,575,921

Losses and Company use (a)
35,660

 
(42)%
 
61,677

 
77,570

 
(14)%
 
90,199

Total energy
757,640

 
(10)%
 
837,943

 
1,602,641

 
(4)%
 
1,666,120

____________________
(a)
Includes company uses, line losses, and excess exchange production.

 
Megawatt Hours Generated and Purchased
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Generated -
2019
 
Percentage Change
 
2018
 
2019
 
Percentage Change
 
2018
Coal-fired (a)
287,201

 
(26)%
 
388,081

 
696,867

 
(11)%
 
787,168

Natural Gas and Oil (b) 
28,724

 
21%
 
23,758

 
76,427

 
107%
 
36,865

Total generated
315,925

 
(23)%
 
411,839

 
773,294

 
(6)%
 
824,033

 

 
 
 
 
 
 
 
 
 
 
Total purchased
441,715

 
4%
 
426,104

 
829,347

 
(2)%
 
842,087

Total generated and purchased
757,640

 
(10)%
 
837,943

 
1,602,641

 
(4)%
 
1,666,120

____________________
(a) Decrease for the six months ended June 30, 2019 is due to planned outages at Neil Simpson II and Wygen III and unplanned outages at Wyodak Plant.
(b) Increase is primarily due to low natural gas prices and the ability to generate at a lower cost than to purchase generation on the open market for the six months ended June 30, 2019.