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EX-31.2 - EXH 31.2 - BLACK HILLS POWER INCbhpexhibit312q22012.htm


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, 2012
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 1-7978

Black Hills Power, Inc.
Incorporated in South Dakota
 
 IRS Identification Number 46-0111677
                                                        
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 has submitted electronically and posted on its corporate website, if any, 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 or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
o
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
x
 
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

As of July 31, 2012, 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

 
 
Page
 
GLOSSARY OF TERMS AND ABBREVIATIONS
 
 
 
PART 1.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
Condensed Statements of Income and Comprehensive Income - unaudited
 
  Three and Six Months Ended June 30, 2012 and 2011
 
 
 
 
 
Condensed Balance Sheets - unaudited
 
  June 30, 2012 and December 31, 2011
 
 
 
 
 
Cash Flow Statements - unaudited
 
  Six Months Ended June 30, 2012 and 2011
 
 
 
 
 
Notes to Condensed Financial Statements - unaudited
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 
 
Exhibit Index


2



GLOSSARY OF TERMS AND ABBREVIATIONS

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

AFUDC
Allowance for Funds Used During Construction
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
BHC
Black Hills Corporation, the Parent Company
Black Hills Energy
The name used to conduct the business activities of Black Hills Utility Holdings, Inc., a direct, wholly-owned subsidiary of the Parent Company
Black Hills Service Company
Black Hills Service Company, LLC, a direct, wholly-owned subsidiary of the Parent Company
Black Hills Wyoming
Black Hills Wyoming, LLC, an indirect, wholly-owned subsidiary of the Parent Company
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of the Parent Company
CPCN
Certificate of Public Convenience and Necessity
Enserco
Enserco Energy, Inc., an indirect, wholly-owned subsidiary of the Parent Company, which was sold by the Parent Company to an unrelated third party on February 29, 2012
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FERC
Federal Energy Regulatory Commission
GAAP
Generally Accepted Accounting Principles of the United States
IFRS
International Financial Reporting Standards
LIBOR
London Interbank Offered Rate
MW
Megawatts
MWh
Megawatt-hours
SEC
U.S. Securities and Exchange Commission
WPSC
Wyoming Public Service Commission
WRDC
Wyodak Resources Development Corp., an indirect, wholly-owned subsidiary of the Parent Company


3





BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(in thousands)
 
 
 
 
 
 
 
 
Revenue
$
58,372

 
$
56,098

 
$
120,642

 
$
115,292

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Fuel and purchased power
19,768

 
22,764

 
44,483

 
44,324

Operations and maintenance
16,776

 
16,195

 
33,319

 
34,185

Depreciation and amortization
6,823

 
6,761

 
13,773

 
13,323

Taxes - property
1,146

 
1,197

 
2,466

 
2,362

Total operating expenses
44,513

 
46,917

 
94,041

 
94,194

 
 
 
 
 
 
 
 
Operating income
13,859

 
9,181

 
26,601

 
21,098

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(4,410
)
 
(4,533
)
 
(8,700
)
 
(8,753
)
AFUDC - borrowed
56

 
88

 
113

 
268

Interest income
220

 
360

 
244

 
370

AFUDC - equity
113

 
155

 
229

 
442

Other income (expense), net
71

 
(256
)
 
459

 
(152
)
Total other income (expense)
(3,950
)
 
(4,186
)
 
(7,655
)
 
(7,825
)
 
 
 
 
 
 
 
 
Income before income taxes
9,909

 
4,995

 
18,946

 
13,273

Income tax expense
(3,182
)
 
(1,254
)
 
(6,166
)
 
(3,651
)
Net income
6,727

 
3,741

 
12,780

 
9,622

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification adjustments of cash flow hedges
11

 
10

 
21

 
21

 
 
 
 
 
 
 
 
Comprehensive income
$
6,738

 
$
3,751

 
$
12,801

 
$
9,643


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

4



BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
(unaudited)

 
June 30,
2012
 
December 31,
2011
 
(in thousands, except common stock par value and share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,933

 
$
2,812

Receivables - customers, net
20,981

 
24,668

Receivables - affiliates
7,015

 
6,998

Other receivables, net
830

 
786

Money pool notes receivable, net
3,215

 
50,477

Materials, supplies and fuel
20,586

 
22,074

Regulatory assets, current
6,336

 
6,605

Other, current assets
5,089

 
4,255

Total current assets
66,985

 
118,675

 
 
 
 
Investments
4,315

 
4,592

 
 
 
 
Property, plant and equipment
1,005,461

 
995,772

Less accumulated depreciation and amortization
(316,043
)
 
(313,581
)
Total property, plant and equipment, net
689,418

 
682,191

 
 
 
 
Other assets:
 
 
 
Regulatory assets, non-current
46,524

 
45,160

Other, non-current assets
3,826

 
3,812

Total other assets
50,350

 
48,972

TOTAL ASSETS
$
811,068

 
$
854,430

 
 
 
 
LIABILITIES AND STOCKHOLDER'S EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$

 
$
37

Accounts payable
11,927

 
12,560

Accounts payable - affiliates
13,745

 
18,598

Accrued liabilities
15,792

 
16,448

Regulatory liabilities, current
36

 
853

Deferred income tax liabilities, current
1,576

 
848

Total current liabilities
43,076

 
49,344

 
 
 
 
Long-term debt, net of current maturities
269,942

 
276,390

 
 
 
 
Deferred credits and other liabilities:
 
 
 
Deferred income tax liability, non-current
120,944

 
113,320

Regulatory liabilities, non-current
41,979

 
39,621

Benefit plan liabilities
26,128

 
31,097

Other deferred credits and other liabilities
3,696

 
8,172

Total deferred credits and other liabilities
192,747

 
192,210

 
 
 
 
Commitments and contingencies (Notes 6, 7, 9 and 11)
 
 
 
 
 
 
 
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
243,581

 
274,785

Accumulated other comprehensive loss
(1,269
)
 
(1,290
)
Total stockholder's equity
305,303

 
336,486

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$
811,068

 
$
854,430


5




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

6



BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)

 
Six Months Ended June 30,
 
2012
 
2011
 
(in thousands)
Operating activities:
 
 
 
Net income
$
12,780

 
$
9,622

Adjustments to reconcile net income to net cash provided by operating activities-
 
 
 
Depreciation and amortization
13,773

 
13,323

Deferred income tax
6,184

 
4,026

Employee benefits
1,914

 
1,202

AFUDC - equity
(229
)
 
(442
)
Other adjustments, net
1,185

 
514

Change in operating assets and liabilities -
 
 
 
Accounts receivable and other current assets
5,442

 
11,224

Accounts payable and other current liabilities
(8,161
)
 
866

Regulatory assets
(809
)
 
166

Regulatory liabilities
(336
)
 
(2,358
)
Contributions to employee benefit plans
(6,835
)
 

Other operating activities, net
(2,973
)
 
(1,552
)
Net cash provided by operating activities
21,935

 
36,591

 
 
 
 
Investing activities:
 
 
 
Property, plant and equipment additions
(18,882
)
 
(24,183
)
Change in money pool notes receivable, net
3,278

 
(9,965
)
Other investing activities
277

 
(139
)
Net cash provided by (used in) investing activities
(15,327
)
 
(34,287
)
 
 
 
 
Financing activities:
 
 
 
Long-term debt - repayments
(6,487
)
 
(37
)
Net cash provided by (used in) financing activities
(6,487
)
 
(37
)
 
 
 
 
Net change in cash and cash equivalents
121

 
2,267

 
 
 
 
Cash and cash equivalents, beginning of period
2,812

 
2,045

Cash and cash equivalents, end of period
$
2,933

 
$
4,312


See Note 9 for supplemental cash flow information.

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

7



BLACK HILLS POWER, INC.

Notes to Condensed Financial Statements
(unaudited)
(Reference is made to Notes to Financial Statements
included in our 2011 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 2011 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 condensed financial statements reflects all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the June 30, 2012, December 31, 2011 and June 30, 2011 financial information and are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2012 and June 30, 2011, and our financial condition as of June 30, 2012 and December 31, 2011 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.
 

(2)
RECENTLY ADOPTED ACCOUNTING STANDARDS

Other Comprehensive Income: Presentation of Other Comprehensive Income ASU 2011-05 and ASU 2011-12

FASB issued an accounting standards update amending ASC 220, Comprehensive Income, to improve the comparability, consistency and transparency of reporting of comprehensive income. It amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. In December 2011, FASB issued ASU 2011-12 which indefinitely deferred the provisions of ASU 2011-05 requiring the presentation of reclassification adjustments for items reclassified from other comprehensive income to net income.

At December 31, 2011, we elected to early adopt the provisions of ASU 2011-05 as amended by ASU 2011-12. The adoption changed the presentation of certain financial statements and provided additional details in notes to the financial statements, but did not have any other impact on our financial statements.

Fair Value Measurements: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, ASU 2011-04

FASB issued an accounting standards update amending ASC 820, Fair Value Measurements and Disclosures, to achieve common fair value measurement and disclosure requirements between GAAP and IFRS. Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements - quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity's use of a non-financial asset that is different from the asset's highest and best use - the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required - the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 was effective for fiscal years, and interim periods within those years, beginning after December 31, 2011. The amendment required additional details in the notes to financial statements, but did not have any other impact on our condensed financial statements. Additional disclosures are included in Note 7.



8



(3)
ACCOUNTS RECEIVABLE

Accounts receivable consist of sales to residential, commercial, industrial, municipal and other customers all of which do not bear interest. These accounts receivable balances are stated at billed and unbilled amounts net of an allowance for doubtful accounts.
We maintain an allowance for doubtful accounts which reflects our best estimate of probable uncollectible trade receivables. We regularly review our trade receivable allowance by considering such factors as historical experience, credit worthiness, the age of the receivable balances and current economic conditions that may affect our ability to collect.

The allowance for doubtful accounts represents our best estimate of existing accounts receivable that will ultimately be uncollected. The allowance is calculated by applying estimated write-off factors to various classes of outstanding receivables, including unbilled revenue. The write-off factors used to estimate uncollectible accounts are based upon consideration of both historical collections experience and management's best estimate of future collection success given the existing collections environment.
Following is a summary of accounts receivable balances (in thousands):
 
June 30,
2012
 
December 31,
2011
Accounts receivable trade
$
11,767

 
$
16,447

Unbilled revenues
9,321

 
8,364

Allowance for doubtful accounts
(107
)
 
(143
)
Receivables - customers, net
$
20,981

 
$
24,668



(4)
REGULATORY ASSETS AND LIABILITIES

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):
 
Recovery Period (in years)
June 30,
2012
 
December 31,
2011
Regulatory assets:
 
 
 
 
Unamortized loss on reacquired debt
14
$
2,622

 
$
2,765

AFUDC
45
8,552

 
8,552

Employee benefit plans
13
27,602

 
27,602

Deferred energy costs
1
7,412

 
6,605

Flow through accounting
35
6,153

 
5,789

Other
 
519

 
452

Total regulatory assets
 
$
52,860

 
$
51,765


Regulatory liabilities:
 
 
 
 
Cost of removal for utility plant
53
$
25,144

 
$
23,347

Employee benefit plans
13
15,282

 
15,282

Other
 
1,589

 
1,845

Total regulatory liabilities
 
$
42,015

 
$
40,474



9



Regulatory assets represent items we expect to recover from customers through probable future rates. Regulatory assets are included in Regulatory assets, current and Regulatory assets, non-current on the accompanying Condensed Balance Sheets.

Unamortized Loss on Reacquired Debt - The early redemption premium on reacquired bonds is being amortized over the remaining term of the original bonds.

AFUDC - The equity component of AFUDC is considered a permanent difference for tax purposes with the tax benefit being flowed through to customers as prescribed or allowed by regulators. If, based on a regulator's action, it is probable the utility will recover the future increase in taxes payable represented by this flow-through treatment through a rate revenue increase, a regulatory asset is recognized. This regulatory asset itself is a temporary difference for which a deferred tax liability must be recognized. Accounting standards for income taxes specifically address AFUDC-equity, and require a gross-up of such amounts to reflect the revenue requirement associated with a rate-regulated environment.

Employee Benefit Plans - Employee benefit plans include the unrecognized prior service costs and net actuarial loss associated with our defined benefit pension plans and post-retirement benefit plans in regulatory assets rather than in accumulated other comprehensive income.

Deferred Energy Costs - Deferred energy and fuel cost adjustments represent the cost of electricity delivered to our electric utility customers in excess of current rates which will be recovered in future rates. Deferred energy and fuel cost adjustments are recorded and recovered or amortized as approved by the appropriate state commission.

Flow-through Accounting - Under flow-through accounting, the income tax effects of certain tax items are reflected in our cost of service for the customer in the year in which the tax benefits are realized and result in lower utility rates. This regulatory treatment was applied to the tax benefit generated by repair costs that were previously capitalized for tax purposes in a rate case settlement that was reached with respect to Black Hills Power in 2010. In this instance, the agreed upon rate increase was less than it would have been absent the flow-through treatment. A regulatory asset established to reflect the future increases in income taxes payable will be recovered from customers as the temporary differences reverse.

Regulatory liabilities represent items we expect to refund to customers through probable future decreases in rates. Regulatory liabilities are included in Regulatory liabilities, current and Regulatory liabilities, non-current on the accompanying Condensed Balance Sheets.

Cost of Removal - Cost of removal for utility plant represents the estimated cumulative net provisions for future removal costs included in depreciation expense for which there is no legal obligation for removal.

Employee Benefit Plans - Employee benefit plans represent the cumulative excess of pension costs recovered in rates over pension expense recorded in accordance with accounting standards for compensation - retirements. In addition, this regulatory liability includes the income tax effect of the adjustment required under accounting for compensation - defined benefit plans, to record the full pension and post-retirement benefit obligations. Such income tax effect has been grossed-up to account for the revenue requirement aspect of a rate regulated environment.



10



(5)
RELATED-PARTY TRANSACTIONS

Non Cash Dividend to Parent

We have recorded a non cash dividend to BHC of $44.0 million and decreased the utility money pool note receivable, net for the amount of $44.0 million.

Receivables and Payables

We have accounts receivable and accounts payable balances related to transactions with other BHC subsidiaries. The balances were as follows as of (in thousands):
 
June 30,
2012
 
December 31,
2011
Receivables - affiliates
$
7,015

 
$
6,998

Accounts payable - affiliates
$
13,745

 
$
18,598


Money Pool Notes Receivable and Notes Payable

We have entered into a Utility Money Pool Agreement (the "Agreement") with BHC, Cheyenne Light and Black Hills Energy. Under the Agreement, we may borrow from BHC however the Agreement restricts us from loaning funds to our BHC or to any of our BHC's non-utility subsidiaries. The Agreement does not restrict us from making dividends to BHC. Borrowings under the Agreement bear interest at the daily cost of external funds 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%.

We had the following balances with the Utility Money Pool as of (in thousands):
 
June 30,
2012
 
December 31,
2011
Money pool notes receivable, net
$
3,215

 
$
50,477


Advances under the Utility Money Pool notes bear interest at 1.5% above the daily average LIBOR (which equates to 1.74% at June 30, 2012). Net interest income (expense) relating to balances for the Utility Money Pool was as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
2011
2012
2011
Net interest income (expense)
$
129

$
343

$
412

$
660


Other Balances and Transactions

Sales and purchases with related parties were as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
2011
2012
2011
Revenues:
 
 
 
 
Energy sold to Cheyenne Light
$
750

$
63

$
1,276

$
248

 
 
 
 
 
Purchases:
 
 
 
 
Purchase of coal from WRDC
$
4,426

$
5,758

$
10,421

$
10,645

Purchase of excess energy from Cheyenne Light
$
683

$
2,375

$
1,425

$
2,482

Purchase of renewable wind energy from Cheyenne Light
$
1,289

$
1,285

$
3,037

$
2,985

Purchase of natural gas from Enserco
$

$
62

$
7

$
223

Corporate support services from Parent, Black Hills Service Company and Black Hills Utilities Holdings Inc.
$
5,787

$
4,509

$
10,592

$
9,683



11




(6)
EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

We have a noncontributory defined benefit pension plan (the "Pension Plan") covering employees who meet certain eligibility requirements.

The components of net periodic benefit cost for the Pension Plan were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Service cost
$
191

 
$
199

 
$
382

 
$
398

Interest cost
742

 
773

 
1,484

 
1,546

Expected return on plan assets
(785
)
 
(905
)
 
(1,570
)
 
(1,810
)
Prior service cost
14

 
16

 
28

 
32

Net loss (gain)
650

 
372

 
1,300

 
744

Net periodic benefit cost
$
812

 
$
455

 
$
1,624

 
$
910


Non-pension Defined Benefit Postretirement Healthcare Plans

Employees who are participants in the Postretirement Healthcare Plans (the "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 were as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
 
2011
2012
 
2011
Service cost
$
53

 
$
52

$
106

 
$
104

Interest cost
86

 
91

172

 
182

Amortization of prior service cost
(69
)
 
(78
)
(138
)
 
(156
)
Net loss (gain)
35

 
41

70

 
82

Net periodic benefit cost
$
105

 
$
106

$
210

 
$
212


Supplemental Non-qualified Defined Benefit Plans

We have various supplemental retirement plans for key executives (the "Supplemental Plans"). The Supplemental Plans are non-qualified defined benefit plans.

The components of net periodic benefit cost for the Supplemental Plans were as follows (in thousands):
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
 
2011
2012
 
2011
Interest cost
$
26

 
$
28

$
52

 
$
56

Net loss (gain)
14

 
12

28

 
24

Net periodic benefit cost
$
40

 
$
40

$
80

 
$
80



12



Contributions

We anticipate that we will make contributions to each of the benefit plans during 2012 and 2013. Contributions to the Pension Plan will be made in cash and contributions to the Healthcare Plans and the Supplemental Plans are expected to be made in the form of benefit payments. Contributions are as follows (in thousands):
 
Six Months Ended June 30, 2012
Remaining Anticipated Contributions for 2012
Anticipated Contributions for 2013
Defined Benefit Pension Plan
$
6,835

$

$

Non-Pension Defined Benefit Postretirement Healthcare Plans
$
328

$
328

$
702

Supplemental Non-qualified Defined Benefit Plans
$
78

$
78

$
113



(7)
FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of our financial instruments were as follows as of (in thousands):

 
June 30, 2012
 
December 31, 2011
 
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Cash and cash equivalents(a)
$
2,933

$
2,933

 
$
2,812

$
2,812

Money pool notes receivable (a)
$
3,215

$
3,215

 
$
50,477

$
50,477

Long-term debt, including current maturities(b)
$
269,942

$
356,222

 
$
276,427

$
362,055

___________________
(a)
Fair value approximates carrying value due to the short term maturities and therefore is classified in Level 1 in the fair value hierarchy.
(b)
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.

The following methods and assumptions were used to estimate the fair value of each class of our financial instruments.

Cash and Cash Equivalents

Included in cash and cash equivalents are overnight repurchase agreement accounts and money market funds. As part of our cash management process, excess operating cash is invested in overnight repurchase agreements with our bank.  Repurchase agreements are not deposits and are not insured by the U.S. government, the FDIC or any other government agency and involve investment risk including possible loss of principal.  We believe however, the market risk arising from holding these financial instruments is minimal.  The carrying amount for cash and cash equivalents approximates fair value due to the short maturity of these instruments.

Money Pool Notes Receivable

The fair value of Money pool notes receivable approximates fair value due to the variable interest rate with short reset periods.

Long-term Debt

Our debt instruments are marked to fair value using the market valuation approach. The fair value for our fixed rate debt instruments is estimated based on quoted market prices and yields for debt instruments having similar maturities and debt ratings. The carrying amounts of our variable rate debt approximate fair value due to the variable interest rates with short reset periods.

The first mortgage bonds are either currently not callable or are subject to make-whole provisions which would eliminate any economic benefits if we were to call these bonds.



13



(8)
LONG TERM DEBT

Pollution Control Refund Revenue Bonds

On May 15, 2012, we repaid in full $6.5 million principal and interest on the 4.8% Pollution Control Refund Revenue Bonds which were originally due to mature on October 1, 2014.


(9)
SUPPLEMENTAL CASH FLOWS INFORMATION

 
Six Months Ended June 30,
 
2012
 
2011
 
(in thousands)
Non-cash investing and financing activities -
 
 
 
Property, plant and equipment acquired with accrued liabilities
$
2,217

 
$
2,974

Non-cash (decrease) to money pool notes receivable, net
$
(43,984
)
 
$

Non-cash dividend to Parent
$
43,984

 
$

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash (paid) refunded during the period for -
 
 
 
Interest (net of amounts capitalized)
$
(8,312
)
 
$
(8,183
)
Income taxes
$
(150
)
 
$
15



(10)
COMMITMENTS AND CONTINGENCIES

There have been no significant changes to commitments and contingencies from those previously disclosed in Note 12 of our Notes to the Financial Statements in our 2011 Annual Report on Form 10-K.


14




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


The following tables provide certain financial information and operating statistics (dollars in thousands):

 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
2011
Variance
2012
2011
Variance
Revenue
$
58,372

$
56,098

$
2,274

$
120,642

$
115,292

$
5,350

Fuel and purchased power
19,768

22,764

(2,996
)
44,483

44,324

159

Gross margin
38,604

33,334

5,270

76,159

70,968

5,191

 
 
 
 
 
 
 
Operating expenses
24,745

24,153

592

49,558

49,870

(312
)
Operating income
13,859

9,181

4,678

26,601

21,098

5,503

 
 
 
 
 
 
 
Interest income (expense), net
(4,134
)
(4,085
)
(49
)
(8,343
)
(8,115
)
(228
)
Other income (expense), net
184

(101
)
285

688

290

398

Income tax expense
(3,182
)
(1,254
)
(1,928
)
(6,166
)
(3,651
)
(2,515
)
Net income
$
6,727

$
3,741

$
2,986

$
12,780

$
9,622

$
3,158



 
Electric Revenue by Customer Type
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
Percentage Change
 
2011
 
2012
 
Percentage Change
 
2011
Commercial
$
18,804

 
6
 %
 
$
17,759

 
$
35,612

 
2
 %
 
$
35,073

Residential
12,633

 
(1
)%
 
12,773

 
28,109

 
(6
)%
 
29,943

Industrial
7,063

 
9
 %
 
6,464

 
13,083

 
7
 %
 
12,228

Municipal
887

 
13
 %
 
783

 
1,585

 
4
 %
 
1,517

Total retail revenue
39,387

 
4
 %
 
37,779

 
78,389

 
 %
 
78,761

Contract wholesale
4,370

 
 %
 
4,370

 
9,275

 
3
 %
 
8,990

Off-system wholesale
6,459

 
(13
)%
 
7,442

 
17,732

 
23
 %
 
14,395

Other revenue
8,156

 
25
 %
 
6,507

 
15,246

 
16
 %
 
13,146

Total revenue
$
58,372

 
4
 %
 
$
56,098

 
$
120,642

 
5
 %
 
$
115,292



15



 
Megawatt Hours Sold by Customer Type
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
Percentage Change
 
2011
 
2012
 
Percentage Change
 
2011
Commercial
181,281

 
8
 %
 
167,649

 
351,374

 
2
 %
 
345,886

Residential
106,557

 
(1
)%
 
107,683

 
256,985

 
(9
)%
 
282,083

Industrial
115,024

 
9
 %
 
105,861

 
210,759

 
8
 %
 
194,610

Municipal
8,843

 
14
 %
 
7,739

 
16,411

 
2
 %
 
16,041

Total retail quantity sold
411,705

 
6
 %
 
388,932

 
835,529

 
 %
 
838,620

Contract wholesale
72,006

 
(12
)%
 
82,253

 
161,054

 
(6
)%
 
172,212

Wholesale off-system
295,149

 
6
 %
 
278,086

 
753,379

 
45
 %
 
520,242

Total megawatt hours sold
778,860

 
4
 %
 
749,271

 
1,749,962

 
14
 %
 
1,531,074

Losses and company use
29,128

 
(26
)%
 
39,100

 
72,715

 
1
 %
 
71,771

Total energy
807,988

 
2
 %
 
788,371

 
1,822,677

 
14
 %
 
1,602,845



 
Electric Utility Power Plant Availability
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Coal-fired plants
76.4
%
(a) 
83.6
%
(b) 
86.9
%
(a) 
86.9
%
(b) 
Other plants
99.5
%
 
86.9
%
(c) 
99.7
%
 
92.8
%
 
Total availability
85.5
%
 
84.8
%
 
91.9
%
 
89.2
%
 
___________________________            
(a)
Reflects an unplanned outage at Neil Simpson II due to a transformer failure.
(b)
Reflects a planned major outage at the PacifiCorp-operated Wyodak plant.
(c)
Reflects a planned major overhaul at Neil Simpson CT.
 
  
 
Megawatt Hours Generated and Purchased
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Generated -
2012
 
Percentage Change
 
2011
 
2012
 
Percentage Change
 
2011
Coal-fired
369,049

 
(4
)%
 
386,006

 
868,841

 
5
%
 
823,844

Gas-fired
6,216

 
442
 %
 
1,147

 
6,579

 
203
%
 
2,171

Total generated
375,265

 
(3
)%
 
387,153

 
875,420

 
6
%
 
826,015

 
 
 
 
 
 
 
 
 
 
 
 
Total purchased
432,723

 
8
 %
 
401,218

 
947,257

 
22
%
 
776,830

Total generated and purchased
807,988

 
2
 %
 
788,371

 
1,822,677

 
14
%
 
1,602,845




16



 
Degree Days
Degree Days
 
Three Months Ended June 30,
Six Months Ended June 30,
 
2012
2011
2012
2011
Heating and cooling degree days:
 
 
 
 
Actual -
 
 
 
 
Heating degree days
748

1,190

3,459

4,897

Cooling degree days
206

56

206

56

 
 
 
 
 
Variance from normal -
 
 
 
 
Heating degree days
(27
)%
19
 %
(18
)%
14
 %
Cooling degree days
108
 %
(45
)%
108
 %
(45
)%


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

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011. Net income was $6.7 million compared to $3.7 million for the same period in the prior year primarily due to the following:

Gross margin increased primarily due to an increase of $1.6 million of retail margins on higher quantities sold mainly as a result of warmer weather, an increase of $0.5 million from the Environmental Improvement Cost Recovery Adjustment rider and increases of $2.2 million in wholesale and transmission margins due to an increase in pricing.

Operations and maintenance increased primarily due to higher benefit costs, partially offset by lower maintenance cost and property taxes than in the same period in the prior year.

Interest expense, net was comparable to the same period in the prior year.

Other income, net was comparable to the same period in the prior year.

Income tax expense The effective tax rate increased due to a favorable prior year true-up related to flow through of the tax benefit attributable to costs deducted as repairs and maintenance for tax purposes.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011. Net income was $12.8 million compared to $9.6 million for the same period in the prior year primarily due to the following:

Gross margin increased primarily due to an increase of $1.2 million from the Environmental Improvement Cost Recovery Adjustment rider, an increase of $0.5 million in off-system sales, and increases of $2.7 million in wholesale and transmission margins due to an increase in pricing.

Operations and maintenance decreased primarily due to lower benefit costs and maintenance costs, partially offset by higher depreciation expense from a higher asset base.

Interest expense, net was comparable to the same period in the prior year.

Other income, net was comparable to the same period in the prior year.

Income tax expense The effective tax rate increased due to the favorable impact in the prior year for research and development credits and a true up related to flow through of the tax benefit attributable to costs deducted as repair and maintenance for tax purposes.



17



Significant Events

Approved CPCN

On July 31, 2012, Cheyenne Light and Black Hills Power received approval from the WPSC for a CPCN authorizing the construction, operation and maintenance of a new $237 million, 132 megawatt natural gas-fired electric generating facility and related gas and electric transmission in Cheyenne, Wyoming. On July 13, 2012, a Stipulation and Agreement among the joint applicants and the intervenor was filed with the WPSC including provisions for a construction work-in-progress rate rider. Use of the CWIP rider would allow a rate of return during construction, eliminating the usual allowance for funds used during construction, and reducing the total construction cost from $237 million to $222 million. The WPSC noted the Stipulation and Agreement in the CPCN hearing on July 31, 2012, without approving the CWIP rider and indicating its preference to consider the rider and total construction cost in a separate proceeding.

Power Plant Suspension/Retirements

On August 6, 2012, we announced that in order to comply with environmental standards, including the new U.S. EPA Industrial & Commercial Boiler Regulations for Area Sources of Hazardous Air Pollutants regulations, operations at our 25 MW coal-fired Ben French power plant will be suspended as of August 31, 2012 and would be retired on March 21, 2014. Additionally, our 22 MW coal-fired Neil Simpson I and our 35 MW coal-fired Osage power plants would be retired on March 21, 2014.


Financing Transactions and Short-term Liquidity

Repayment of Long-term Debt

On May 15, 2012, we repaid in full $6.5 million principal and interest on the 4.8% Pollution Control Refund Revenue Bonds which were originally due to mature on October 1, 2014.

Credit Ratings

Credit ratings impact our ability to obtain short- and long-term financing, the cost of such financing, and vendor payment terms, including collateral requirements. As of June 30, 2012, our first mortgage bonds credit ratings, as assessed by the three major credit rating agencies, were as follows:

Rating Agency
Rating
Outlook
Fitch
A-
Stable
Moody's
A3
Stable
S&P
BBB+
Stable



18



FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q includes "forward-looking statements" as defined by the 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 Form 10-Q 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. Forward-looking statements involve risks and uncertainties, and certain important factors can cause actual results to differ materially from those anticipated. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurances that such indicated results will be realized. The forward-looking statements include the factors discussed above, the risk factors described in Item 1A. of our 2011 Annual Report on Form 10-K, risk factors described in Item 1A. of Part II of this Quarterly Report on Form 10-Q and other reports that we file with the SEC from time to time, and the following:

Our ability to obtain adequate cost recovery for our electric utility operations through regulatory proceedings and receive favorable rulings in periodic applications to recover costs for fuel and purchased power and our ability to add power generation assets into regulatory rate base;

Our ability to successfully maintain or improve our corporate credit rating;

Our ability to obtain from utility commissions any requisite determination of prudency to support resource planning and development programs we propose to implement;

The timing and extent of scheduled and unscheduled outages;

Our ability to complete the permitting, construction, start-up and operation of power generating facilities in a cost-effective and timely manner;

The timing, volatility and extent of changes in energy-related and commodity prices, interest rates, energy and commodity supply or volume, the cost and availability 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;

Our ability to comply, or to make expenditures required to comply with changes in laws and regulations, particularly those relating to taxation, safety and protection of the environment and to recover those expenditures in customer rates, where applicable;

Liabilities related to environmental conditions, including remediation and reclamation obligations under environmental laws;

Federal and state laws concerning climate changes and air emissions, including emission reduction mandates and renewable energy portfolio standards, which may materially increase our generation and production costs and could render some of our generating units uneconomical to operate and maintain;

Weather and other natural phenomena;

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; 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.


19




ITEM 4.
CONTROLS AND PROCEDURES

This section should be read in conjunction with Item 9A, "Controls and Procedures" included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of June 30, 2012
and concluded that, because of the material weakness in our internal control over financial reporting related to accounting for income taxes as previously disclosed in Item 9A, “Controls and Procedures” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, our disclosure controls and procedures were not effective as of June 30, 2012. Additional review, evaluation and oversight have been undertaken to ensure our unaudited Condensed Financial Statements were prepared in accordance with generally accepted accounting principles and as a result, our management, including our Chief Executive Officer and Chief Financial Officer, have concluded that the Condensed Financial Statements in this Form 10-Q fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

As discussed in our 2011 Annual Report on Form 10-K, management concluded that while we had appropriately designed control procedures for income tax accounting and disclosures, the existence of non-routine transactions, insufficient tax resources, and ineffective communications between the tax department and the Controller organization caused us to poorly execute the controls for evaluating and recording income taxes. Management has developed and is implementing a remediation plan to address this material weakness in internal controls surrounding accounting for income taxes. Key aspects of the remediation plan include enhancing resources and skill sets and implementing formal periodic meetings among the Chief Financial Officer, Controller and the tax department.

While we concluded our internal controls surrounding income taxes were not effective as of June 30, 2012, we are remediating the material weakness and will continue to execute our remediation plan and track our performance against the plan.

During the quarter ended June 30, 2012 there have been no other changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


BLACK HILLS POWER, INC.

Part II - Other Information

Item 1.
Legal Proceedings

For information regarding legal proceedings, see Note 12 of Notes to Financial Statements in Item 8 of our 2011 Annual Report on Form 10-K and Note 10 of our Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q, which information from Note 10 is incorporated by reference into this item.


Item 1A.
Risk Factors

There are no material changes to the Risk Factors previously disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2011.

   


20



Item 6.
Exhibits


Exhibit 31.1
Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 31.2
Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

Exhibit 101
Financial Statements for XBRL Format


21



BLACK HILLS POWER, INC.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BLACK HILLS POWER, INC.

        
/S/ DAVID R. EMERY
David R. Emery, Chairman
and Chief Executive Officer    

        
/S/ ANTHONY S. CLEBERG
Anthony S. Cleberg, Executive Vice President
and Chief Financial Officer

Dated: August 10, 2012


22



EXHIBIT INDEX

Exhibit Number
Description

Exhibit 31.1
Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 31.2
Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

Exhibit 101
Financial Statements for XBRL Format

23