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EX-31.2 - EXHIBIT 31.2 - BLACK HILLS POWER INCbhpex-312q32015.htm
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EX-32.1 - EXHIBIT 32.1 - BLACK HILLS POWER INCbhpex-321q32015.htm
EX-31.1 - EXHIBIT 31.1 - BLACK HILLS POWER INCbhpex-311q32015.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 September 30, 2015
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 October 31, 2015, 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 Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
Condensed Balance Sheets - unaudited
 
September 30, 2015 and December 31, 2014
 
 
 
 
 
Condensed Statements of Cash Flows - unaudited
 
Nine Months Ended September 30, 2015 and 2014
 
 
 
 
 
Notes to Condensed Financial Statements - unaudited
 
 
 
Item 2.
Managements’ 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
ASU
Accounting Standards Update
BHC
Black Hills Corporation, the Parent Company
Black Hills Energy
The name used to conduct the business of Black Hills Utility Holdings, Inc., and its subsidiaries
Black Hills Utility Holdings
Black Hills Utility Holdings, Inc. a direct, wholly-owned subsidiary of BHC
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 BHC
Cheyenne Prairie
Cheyenne Prairie Generating Station is a 132 MW natural gas-fired generating facility in Cheyenne, Wyoming, jointly owned by Cheyenne Light and Black Hills Power. Cheyenne Prairie was placed into commercial operations on October 1, 2014.
Cooling degree day
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 over a 30-year average.
CPCN
Certificate of Public Convenience and Necessity
CT
Combustion Turbine
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Fitch
Fitch Ratings
GAAP
Generally Accepted Accounting Principles in the United States of America
Global Settlement
Settlement with a utilities commission where the dollar figure is agreed upon, but the specific adjustments used by each party to arrive at the figure are not specified in public rate orders.

Happy Jack
Happy Jack Wind Farms, LLC, a subsidiary of Duke Energy Generation Services
Heating degree day
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 over a 30-year average.
kV
Kilovolt
LIBOR
London Interbank Offered Rate
Moody’s
Moody’s Investor Services, Inc.
MW
Megawatts
MWh
Megawatt-hours
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
S&P
Standard & Poor’s Rating Services
WPSC
Wyoming Public Service Commission
WRDC
Wyodak Resources Development Corp., an indirect, wholly-owned subsidiary of BHC


3






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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(unaudited)
2015
 
2014
 
2015
 
2014
 
(in thousands)
Revenue
$
72,111

 
$
67,729

 
$
210,432

 
$
199,736

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Fuel, purchased power and natural gas
21,983

 
23,919

 
63,440

 
72,242

Operations and maintenance
16,979

 
16,261

 
52,191

 
51,709

Depreciation and amortization
8,248

 
7,090

 
24,215

 
20,949

Taxes - property
1,445

 
1,452

 
4,497

 
4,502

Total operating expenses
48,655

 
48,722

 
144,343

 
149,402

 
 
 
 
 
 
 
 
Operating income
23,456

 
19,007

 
66,089

 
50,334

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest expense
(5,542
)
 
(4,992
)
 
(16,914
)
 
(14,923
)
AFUDC - borrowed
239

 
76

 
322

 
205

Interest income
269

 
201

 
434

 
470

AFUDC - equity
434

 
165

 
584

 
427

Other income (expense), net
21

 
5

 
119

 
100

Total other income (expense)
(4,579
)
 
(4,545
)
 
(15,455
)
 
(13,721
)
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
18,877

 
14,462

 
50,634

 
36,613

Income tax expense
(6,590
)
 
(4,546
)
 
(17,397
)
 
(11,824
)
Net income
12,287

 
9,916

 
33,237

 
24,789

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Reclassification adjustments of cash flow hedges settled and included in net income (net of tax (expense) benefit of $(5) and $(6) for the three months ended September 30, 2015 and 2014 and $325 and $(17) for the nine months ended September 30, 2015 and 2014, respectively)
11

 
10

 
373

 
31

Reclassification adjustment of benefit plan liability - net gain (loss) (net of tax (expense) benefit of $(9) and $(4) for the three months ended September 30, 2015 and 2014 and $(25) and $(12) for the nine months ended September 30, 2015 and 2014, respectively)
15

 
8

 
46

 
22

Other comprehensive income
26

 
18

 
419

 
53

 
 
 
 
 
 
 
 
Comprehensive income
$
12,313

 
$
9,934

 
$
33,656

 
$
24,842


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)
September 30, 2015
December 31, 2014
 
(in thousands)
ASSETS
 
 
Current assets:
 
 
Cash and cash equivalents
$
30,076

$
6,620

Receivables - customers, net
25,858

34,684

Receivables - affiliates
8,499

5,350

Other receivables, net
205

259

Money pool notes receivable, net
64,820

68,626

Materials, supplies and fuel
22,858

20,965

Deferred income tax assets, net, current
6,049

13,661

Regulatory assets, current
12,193

10,257

Other, current assets
36,546

4,954

Total current assets
207,104

165,376

 
 
 
Investments
4,698

4,584

 
 
 
Property, plant and equipment
1,138,500

1,115,061

Less accumulated depreciation and amortization
(321,467
)
(309,767
)
Total property, plant and equipment, net
817,033

805,294

 
 
 
Other assets:
 
 
Regulatory assets, non-current
73,075

68,427

Other, non-current assets
4,003

11,708

Total other assets
77,078

80,135

TOTAL ASSETS
$
1,105,913

$
1,055,389


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

5




BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS

(unaudited)
September 30, 2015
December 31, 2014
 
(in thousands, except common stock par value and share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY
 
 
Current liabilities:
 
 
Accounts payable
$
20,726

$
30,543

Accounts payable - affiliates
20,118

19,242

Accrued liabilities
58,967

16,415

Regulatory liabilities, current

3,073

Total current liabilities
99,811

69,273

 
 
 
Long-term debt, net of current maturities
342,755

342,752

 
 
 
Deferred credits and other liabilities:
 
 
Deferred income tax liability, net, non-current
194,657

193,042

Regulatory liabilities, non-current
52,966

51,916

Benefit plan liabilities
22,345

20,981

Other, non-current liabilities
3,430

2,631

Total deferred credits and other liabilities
273,398

268,570

 
 
 
Commitments and contingencies (Notes 4, 5 and 8)


 
 
 
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
328,358

313,622

Accumulated other comprehensive loss
(1,400
)
(1,819
)
Total stockholders’ equity
389,949

374,794

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY
$
1,105,913

$
1,055,389


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)
Nine Months Ended September 30,
 
2015
2014
 
(in thousands)
Operating activities:
 
 
Net income
$
33,237

$
24,789

Adjustments to reconcile net income to net cash provided by operating activities-
 
 
Depreciation and amortization
24,215

20,949

Deferred income tax
8,161

11,803

Employee benefits
1,802

971

AFUDC - equity
(584
)
(427
)
Other adjustments, net
139

(55
)
Change in operating assets and liabilities -
 
 
Accounts receivable and other current assets
1,291

(11,368
)
Accounts payable and other current liabilities
5,638

12,787

Contributions to defined benefit pension plan

(1,696
)
Other operating activities, net
3,692

(6,851
)
Net cash provided by (used in) operating activities
77,591

50,902

 
 
 
Investing activities:
 
 
Property, plant and equipment additions
(39,338
)
(72,460
)
Change in money pool notes receivable, net
(14,694
)
17,292

Other investing activities
(103
)
(123
)
Net cash provided by (used in) investing activities
(54,135
)
(55,291
)
 
 
 
Financing activities:
 
 
Change in money pool notes payable, net

19,433

Long-term debt - repayments

(12,200
)
Other financing activities

(462
)
Net cash provided by (used in) financing activities

6,771

 
 
 
Net change in cash and cash equivalents
23,456

2,382

 
 
 
Cash and cash equivalents, beginning of period
6,620

2,259

Cash and cash equivalents, end of period
$
30,076

$
4,641


See Note 7 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 2014 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 2014 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 September 30, 2015, December 31, 2014 and September 30, 2014 financial information and are of a normal recurring nature. The results of operations for the three months and nine months ended September 30, 2015 and September 30, 2014, and our financial condition as of September 30, 2015 and December 31, 2014 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.

Recently Issued and Adopted Accounting Standards

We have implemented all new accounting pronouncements that are in effect and may impact our financial statements. We are currently assessing the impact any other new accounting pronouncements that have been issued may have on our financial position, results of operations, or cash flows.

Simplifying the Presentation of Debt Issuance Costs, ASU 2015-03

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts, rather than as an asset. Amortization of these costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact of adoption that ASU 2015-03 will have on our financial position, results of operations, or cash flows.

Revenue from Contracts with Customers, ASU 2014-09

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The core principle of the model is to recognize revenue when control of the goods or services transfers to the customer, as opposed to recognizing revenue when the risks and rewards transfer to the customer under the existing revenue guidance. On July 9, 2015, FASB voted to defer the effective date of ASU 2014-09 by one year. The proposed guidance would be effective for annual and interim reporting periods beginning after December 15, 2018 and early adoption is permitted. We are currently evaluating the impact of adoption, if any, that ASU 2014-09 will have on our financial position, results of operations or cash flows.


8



(2)
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Following is a summary of Receivables - customers, net included in the accompanying Condensed Balance Sheets (in thousands) as of:
 
September 30, 2015
December 31, 2014
Accounts receivable trade
$
14,698

$
24,946

Unbilled revenues
11,366

9,999

Allowance for doubtful accounts
(206
)
(261
)
Receivables - customers, net
$
25,858

$
34,684


(3)
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:
 
Recovery/Amortization Period
(in years)
September 30, 2015
 
December 31, 2014
Regulatory assets:
 
 
 
 
Unamortized loss on reacquired debt (a)
10
$
2,165

 
$
2,377

AFUDC (b)
45
8,463

 
8,365

Employee benefit plans (c)
12
24,418

 
24,418

Deferred energy and fuel cost adjustments - current (a)
Less than 1 year
17,764

 
14,696

Flow through accounting (a)
35
11,622

 
11,171

Decommissioning costs, net of amortization(d)
10
13,304

 
11,786

Other
10
7,532

 
5,871

Total regulatory assets
 
$
85,268

 
$
78,684


Regulatory liabilities:
 
 
 
 
Cost of removal for utility plant (a)
53
$
37,325

 
$
35,510

Employee benefit plans (c)
12
14,538

 
14,538

Other
13
1,103

 
4,941

Total regulatory liabilities
 
$
52,966

 
$
54,989

____________________
(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 of costs, we are allowed a return on a portion of this amount or a reduction in rate base, respectively.
(d)
Approximately $13 million of decommissioning costs are allowed a rate of return, in addition to recovery of costs.



9



(4)
RELATED-PARTY TRANSACTIONS

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:
 
September 30, 2015
 
December 31, 2014
Receivables - affiliates
$
8,499

 
$
5,350

Accounts payable - affiliates
$
20,118

 
$
19,242


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. We are the administrator of the Money Pool. Under the Agreement, we may borrow from BHC; however the Agreement restricts us 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 and advances under the Agreement bear interest at the weighted average daily cost of our parent company’s credit facility 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 September 30, 2015, the average cost of borrowing under the Utility Money Pool was 1.39%.

We had the following balances with the Utility Money Pool (in thousands) as of:
 
September 30, 2015
 
December 31, 2014
Money pool notes receivable, net
$
64,820

 
$
68,626


Our net interest income (expense) relating to balances with the Utility Money Pool was as follows (in thousands):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
2014
2015
2014
Net interest income (expense)
$
309

$
(3
)
$
855

$
81



10



Other related party activity was as follows (in thousands):

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
2014
2015
2014
Revenue:
 
 
 
 
Energy sold to Cheyenne Light
$
553

$
391

$
1,258

$
1,467

Rent from electric properties
$
1,158

$
1,126

$
3,614

$
3,200

 
 
 
 
 
Fuel and purchased power:
 
 
 
 
Purchases of coal from WRDC
$
4,580

$
4,854

$
12,724

$
13,886

Purchase of excess energy from Cheyenne Light
$
111

$
1,117

$
800

$
2,330

Purchase of renewable wind energy from Cheyenne Light - Happy Jack
$
268

$
264

$
1,097

$
1,393

Purchase of renewable wind energy from Cheyenne Light - Silver Sage
$
476

$
430

$
1,910

$
2,274

 
 
 
 
 
Gas transportation service agreement:
 
 
 
 
Gas transportation service agreement with Cheyenne Light for firm and interruptible gas transportation
$
103

$

$
310

$

 
 
 
 
 
Corporate support:
 
 
 
 
Corporate support services and fees from Parent, Black Hills Service Company and Black Hills Utility Holdings
$
6,213

$
6,274

$
19,873

$
20,433


(5)
EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

The components of net periodic benefit cost for the Defined Benefit Pension Plan were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
199

 
$
176

 
$
597

 
$
528

Interest cost
739

 
748

 
2,217

 
2,244

Expected return on plan assets
(984
)
 
(925
)
 
(2,952
)
 
(2,776
)
Prior service cost
11

 
11

 
33

 
32

Net loss (gain)
549

 
235

 
1,647

 
705

Net periodic benefit cost
$
514

 
$
245

 
$
1,542

 
$
733



11



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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Service cost
$
59

 
$
56

 
$
176

 
$
168

Interest cost
53

 
60

 
160

 
180

Prior service cost (benefit)
(84
)
 
(84
)
 
(252
)
 
(252
)
Net periodic benefit cost
$
28

 
$
32

 
$
84

 
$
96


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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest cost
$
35

 
$
36

 
$
107

 
$
109

Net loss (gain)
23

 
11

 
69

 
33

Net periodic benefit cost
$
58

 
$
47

 
$
176

 
$
142


Contributions

We anticipate we will make contributions to the benefit plans during 2015 and 2016. Contributions to the Defined Benefit Pension Plan are cash contributions made directly to the Pension Plan Trust accounts. Contributions to the Healthcare and Supplemental Plans are made in the form of benefit payments. Contributions and anticipated contributions are as follows (in thousands):
 
Contributions Nine Months Ended September 30, 2015
Remaining Anticipated Contributions for 2015
Anticipated Contributions for 2016
Defined Benefit Pension Plan
$

$

$
1,657

Defined Benefit Postretirement Healthcare Plan
$
390

$
130

$
577

Supplemental Non-qualified Defined Benefit Plans
$
163

$
54

$
184



12



(6)
FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance on fair value measurements establishes a hierarchy for grouping assets and liabilities, based on significance of inputs. For additional information see Note 1 included in our 2014 Annual Report on Form 10-K filed with the SEC.

The estimated fair values of our financial instruments were as follows (in thousands) as of:
 
September 30, 2015
 
December 31, 2014
 
Carrying Amount
Fair Value
 
Carrying Amount
Fair Value
Cash and cash equivalents (a)
$
30,076

$
30,076

 
$
6,620

$
6,620

Long-term debt, including current maturities (b)
$
342,755

$
412,707

 
$
342,752

$
430,497

_________________
(a)
Carrying value approximates fair value due to either short-term length of maturity or variable interest rates that approximate prevailing market rates and therefore is classified in Level 1 in the fair value hierarchy.
(b)
Long-term debt is valued using the market approach based on observable inputs of quoted market prices and yields available for debt instruments either directly or indirectly for similar maturities and debt ratings in active markets and therefore is classified in Level 2 in the fair value hierarchy. The carrying amount of our variable rate debt approximates fair value due to the variable interest rates with short reset periods.

(7)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Nine months ended September 30,
2015
 
2014
 
(in thousands)
Non-cash investing and financing activities -
 
 
 
Property, plant and equipment acquired with accrued liabilities
$
2,074

 
$
9,534

Non-cash (decrease) to money pool notes receivable, net
$
(18,500
)
 
$

Non-cash dividend to Parent
$
18,500

 
$

 
 
 
 
Cash (paid) refunded during the period for -
 
 
 
Interest (net of amounts capitalized)
$
(14,192
)
 
$
(13,301
)
Income taxes, net
$

 
$



13



(8)
COMMITMENTS AND CONTINGENCIES

Other than the item discussed below, 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 2014 Annual Report on Form 10-K.

Oil Creek Fire

On June 29, 2012, a forest and grassland fire occurred in the western Black Hills of Wyoming. A fire investigator retained by the Weston County Fire Protection District concluded that the fire was caused by the failure of a transmission structure owned, operated and maintained by us. On April 16, 2013, a large group of private landowners filed suit in the United States District Court for the District of Wyoming. There are approximately 36 Plaintiff groups (including property jointly owned by multiple family members or entities), or approximately 73 individually named private plaintiffs. In addition, the State of Wyoming intervened in the lawsuit. These parties asserted claims seeking recovery for fire suppression, reclamation and rehabilitation costs, damage to fencing and other personal property, alleged injury to timber, grass or hay, livestock and related operations, and diminished value of real estate. On September 30, 2015, we agreed to a settlement with the State of Wyoming. The settlement amount is not material to the Company. We have recorded a corresponding receivable as we believe our settlement costs are reimbursable and probable of recovery under our insurance coverage. A trial for the private landowners’ suit has been scheduled to commence in February 2016.

The private landowners’ claims for damages against us include allegations of negligence, negligence per se, common law nuisance and trespass. In addition to claims for compensatory damages, the lawsuit sought recovery of punitive damages; however, in October 2015, the court dismissed the claim for punitive damages. At that time, the court also ruled on a motion regarding the measure of damages to be applied to this matter. Based on that standard, we estimate the current total private claims to be approximately $55 million; however, the actual amount of allowed claims and any loss will depend on the resolution of certain factual and legal issues. We have denied and continue to vigorously defend these claims. However, civil litigation of this kind is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. We believe such negotiations would effect a settlement of all claims. Regardless of whether the litigation is determined at trial or through settlement, we expect to incur significant investigation, legal and expert services expenses associated with the litigation. We maintain insurance coverage to limit our exposure to losses due to civil liability claims, and related litigation expense, and we will pursue recoveries to the maximum extent available under the policies. The deductible applicable to some types of claims arising out of this fire is $1.0 million. Based upon information currently available, we believe that a loss associated with settlement of pending claims is probable. Accordingly, we recorded a loss contingency liability related to these claims and we recorded a receivable for costs we believe are reimbursable and probable of recovery under our insurance coverage. Both of these entries reflect our reasonable estimate of probable future litigation expense and settlement costs; we did not base these contingencies on any determination that it is probable we would be found liable for these claims were they to be litigated.

Given the uncertainty of litigation, however, a loss related to the fire, the litigation and related claims in excess of the loss we have determined to be probable is reasonably possible. We cannot reasonably estimate the amount of such possible loss because our review of damage claim documentation and related expert opinions is ongoing, and there are significant factual and legal issues to be resolved relating to potential damage claims. Further claims may be presented by other parties. We are not yet able to reasonably estimate the amount of any reasonable possible losses in excess of the amount we have accrued. Based upon information currently available, however, management does not expect the outcome of the claims to have a material adverse effect upon our financial condition, results of operations or cash flows.





14



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

Regulatory Matters

On July 23, 2015, we received approval from the WPSC for a CPCN originally filed on July 22, 2014 to construct the Wyoming portion of a $54 million, 230-kV, 144 mile-long transmission line that would connect the Teckla Substation in northeast Wyoming, to the Lange Substation near Rapid City, South Dakota. We received approval on November 6, 2014 from the SDPUC for a permit to construct the South Dakota portion of this line. We plan to commence construction in the fourth quarter of 2015.

On March 2, 2015, the SDPUC issued an order approving a rate stipulation and agreement authorizing an annual electric revenue increase for us of $6.9 million. The agreement was a Global Settlement and did not stipulate return on equity and capital structure. The SDPUC’s decision provides us a return on our investment in Cheyenne Prairie and associated infrastructure, and provides recovery of our share of operating expenses for this natural gas fired facility. We implemented interim rates on October 1, 2014, coinciding with Cheyenne Prairie’s commercial operation date. Final rates were approved on April 1, 2015, effective October 1, 2014.

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 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, purchased power and natural gas. Our gross margin is impacted by the fluctuations in power purchases, 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.


15



The following tables provide certain financial information and operating statistics:

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
2014
Variance
2015
2014
Variance
 
(in thousands)
Revenue
$
72,111

$
67,729

$
4,382

$
210,432

$
199,736

$
10,696

Fuel and purchased power
21,983

23,919

(1,936
)
63,440

72,242

(8,802
)
Gross margin
50,128

43,810

6,318

146,992

127,494

19,498

 
 
 
 
 
 
 
Operating expenses
26,672

24,803

1,869

80,903

77,160

3,743

Operating income
23,456

19,007

4,449

66,089

50,334

15,755

 
 
 
 
 
 
 
Interest income (expense), net
(5,034
)
(4,715
)
(319
)
(16,158
)
(14,248
)
(1,910
)
Other income (expense), net
455

170

285

703

527

176

Income tax expense
(6,590
)
(4,546
)
(2,044
)
(17,397
)
(11,824
)
(5,573
)
Net income
$
12,287

$
9,916

$
2,371

$
33,237

$
24,789

$
8,448



 
Electric Revenue by Customer Type
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
(in thousands)
 
2015
 
Percentage Change
 
2014
 
2015
 
Percentage Change
 
2014
Residential
$
18,471

 
16%
 
$
15,941

 
$
54,081

 
7%
 
$
50,333

Commercial
27,156

 
10%
 
24,747

 
76,330

 
13%
 
67,475

Industrial
8,364

 
23%
 
6,816

 
25,122

 
16%
 
21,685

Municipal
1,024

 
6%
 
964

 
2,741

 
5%
 
2,602

Total retail revenue
55,015

 
14%
 
48,468

 
158,274

 
11%
 
142,095

Contract wholesale
4,563

 
(18)%
 
5,551

 
13,962

 
(11)%
 
15,622

Wholesale off-system
5,417

 
(14)%
 
6,278

 
18,718

 
(10)%
 
20,764

Other revenue
7,116

 
(4)%
 
7,432

 
19,478

 
(8)%
 
21,255

Total revenue
$
72,111

 
6%
 
$
67,729

 
$
210,432

 
5%
 
$
199,736



16




 
Megawatt Hours Sold by Customer Type
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
Percentage Change
 
2014
 
2015
 
Percentage Change
 
2014
Residential
128,474

 
7%
 
120,117

 
385,454

 
(3)%
 
398,821

Commercial
218,305

 
2%
 
214,590

 
603,272

 
5%
 
575,579

Industrial
109,725

 
14%
 
96,443

 
324,078

 
7%
 
302,208

Municipal
9,322

 
(1)%
 
9,387

 
24,058

 
(3)%
 
24,781

Total retail quantity sold
465,826

 
6%
 
440,537

 
1,336,862

 
3%
 
1,301,389

Contract wholesale
65,952

 
(21)%
 
83,714

 
215,119

 
(14)%
 
250,941

Wholesale off-system
154,215

 
(10)%
 
171,189

 
646,066

 
8%
 
595,483

Total quantity sold
685,993

 
(1)%
 
695,440

 
2,198,047

 
2%
 
2,147,813

Losses and company use
49,496

 
(26)%
 
67,325

 
123,135

 
(28)%
 
170,279

Total energy
735,489

 
(4)%
 
762,765

 
2,321,182

 
—%
 
2,318,092



 
Megawatt Hours Generated and Purchased
 
 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
Generated -
2015
 
Percentage Change
 
2014
 
 
2015
 
Percentage Change
 
2014
 
Coal-fired
389,784

 
(6)%
 
414,551

 
 
1,166,381

 
—%
 
1,168,641

 
Gas-fired
37,721

 
213%
 
12,054

(a) 
 
57,482

 
238%
 
17,026

(a) 
Total generated
427,505

 
—%
 
426,605

 
 
1,223,863

 
3%
 
1,185,667

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total purchased
307,984

 
(8)%
 
336,160

 
 
1,097,319

 
(3)%
 
1,132,425

 
Total generated and purchased
735,489

 
(4)%
 
762,765

 
 
2,321,182

 
—%
 
2,318,092

 
__________________
(a)
Cheyenne Prairie was placed into commercial operations on October 1, 2014.



17




 
Power Plant Availability
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2015
2014
2015
 
2014
Coal-fired plants (a)
93.6
%
 
96.5
%
 
92.1
%
 
89.8
%
Other plants (b)
93.7
%
 
91.4
%
 
95.3
%
 
91.0
%
Total availability
93.7
%
 
94.2
%
 
93.9
%
 
90.3
%
__________________
(a)
The nine months ended September 30, 2014 reflects a planned annual outage at Neil Simpson II and an unplanned outage for a catalyst repair at Wygen III.
(b)
The nine months ended September 30, 2014 include a planned outage at Ben French CTs #1 and #2 for a controls upgrade.


 
Degree Days
 
Degree Days
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
Actual
Variance from 30-year Average
 
Actual
Variance from 30-year Average
 
Actual
Variance from 30-year Average
 
Actual
Variance from 30-year Average
Heating and cooling degree days:
 
 
 
 
 
 
 
 
 
 
 
Heating degree days
127

(40
)%
 
241

15
 %
 
4,005

(10
)%
 
4,676

6
 %
Cooling degree days
477

(15
)%
 
382

(32
)%
 
573

(14
)%
 
481

(28
)%


Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014. Net income was $12 million compared to $9.9 million for the same period in the prior year primarily due to the following:

Gross margin increased primarily due to a return on capital investment in Cheyenne Prairie which increased gross margin by $2.7 million. Higher commercial and industrial MWh sold increased $1.0 million, and residential margins increased $1.1 million due to increased MWh sold driven by a 25% increase in cooling degree days compared to the same period in the prior year.

Operations and maintenance increased reflecting an increase in depreciation expense primarily due to a higher asset base driven by the addition of Cheyenne Prairie and increased employee costs.

Interest expense, net increased primarily due to interest costs from the $85 million of permanent financing put in place during the fourth quarter of 2014 for Cheyenne Prairie.

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

Income tax expense: The effective tax rate is higher in 2015 primarily due to the reduced impact of an estimated flow-through adjustment.


18



Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014. Net income was $33 million compared to $25 million for the same period in the prior year primarily due to the following:

Gross margin increased primarily due to a return on capital investment in Cheyenne Prairie which increased gross margin by $10.6 million. Wholesale margins increased by $3.0 million, driven by reliability improvements on generation related to unit contingent contracts. Retail margins increased $4.8 million primarily due to commercial and industrial load increases from higher MWh sold. These increases are partially offset by $1.2 million from lower residential MWh sold driven primarily by a 14% decrease in heating degree days compared to the same period in the prior year.

Operations and maintenance increased, reflecting an increase in depreciation expense primarily due to a higher asset base driven by the addition of Cheyenne Prairie and amortization of regulatory plant decommission assets.
 
Interest expense, net increased primarily due to interest costs from the $85 million of permanent financing put in place during the fourth quarter of 2014 for Cheyenne Prairie.

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

Income tax expense: The effective tax rate is higher in 2015 primarily due to the increase in liability with respect to uncertain tax positions related to research and development credits.

Financing Plans and Activity

On October 1, 2014, in a private placement to provide permanent financing for Cheyenne Prairie, we issued $85 million of 4.43% coupon first mortgage bonds due October 20, 2044.

On September 30, 2014, we repaid in full $12 million in principal on the 5.35% Pollution Control Revenue Bonds originally due to mature on October 1, 2024.

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. The following table represents our credit rating from each agency’s review which were in effect at September 30, 2015:

Rating Agency
Rating
S&P
A-
Moody’s
A1
Fitch
A



19




FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements as defined by the SEC. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words “anticipates”, “estimates”, “expects”, “intends”, “plans”, “predicts” and similar expressions, and include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Item 2 - Management’s Discussion & Analysis of Financial Condition and Results of Operations.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties. Nonetheless, the Company’s expectations, beliefs or projections may not be achieved or accomplished.

Any forward-looking statement contained in this document speaks only as of the date on which the statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements described in Item 1A of our 2014 Annual Report on Form 10-K, including statements contained within Item 1A - Risk Factors and Part II, Item 1A of this Quarterly Report on Form 10Q.

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, 2014.

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) as of September 30, 2015. Based on their evaluation, they have concluded that our disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2015, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.


20



BLACK HILLS POWER, INC.

Part II - Other Information

Item 1.
Legal Proceedings

For information regarding legal proceedings, see Note 11 of Notes to Financial Statements in Item 8 of our 2014 Annual Report on Form 10-K and Note 8 of our Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q, which information from Note 8 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, 2014.

Item 6.
Exhibits

Exhibit 3.1*
Restated Articles of Incorporation of the Registrant dated March 30, 2015 (filed as Exhibit 3.1 to Registrant’s
Form 10-Q for the quarterly period ended March 31, 2015).

Exhibit 3.2*
Amended and Restated Bylaws of the Registrant dated March 30, 2015 (filed as Exhibit 3.2 to Registrant’s
Form 10-Q for the quarterly period ended March 31, 2015).

Exhibit 4.1*
Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as Exhibit 4.19 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and The Bank of New York Mellon (as successor to J.P. Morgan Chase Bank), as Trustee (filed as Exhibit 4.20 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). Second Supplemental Indenture, dated as of October 27, 2009, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 4.21 to the Registration Statement on Form S-3 (No. 333-150669-01)). Third Supplemental Indenture, dated as of October 1, 2014, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 2, 2014).

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
_________________________
*
Previously filed as part of the filing indicated and incorporated by reference herein.



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/ RICHARD W. KINZLEY
Richard W. Kinzley, Senior Vice President
and Chief Financial Officer

Dated: November 9, 2015


22





EXHIBIT INDEX


Exhibit Number
Description

Exhibit 3.1*
Restated Articles of Incorporation of the Registrant dated March 30, 2015 (filed as Exhibit 3.1 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015).

Exhibit 3.2*
Amended and Restated Bylaws of the Registrant dated March 30, 2015 (filed as Exhibit 3.2 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015).

Exhibit 4.1*
Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as Exhibit 4.19 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and The Bank of New York Mellon (as successor to J.P. Morgan Chase Bank), as Trustee (filed as Exhibit 4.20 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)). Second Supplemental Indenture, dated as of October 27, 2009, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 4.21 to the Registration Statement on Form S-3 (No. 333-150669-01)). Third Supplemental Indenture, dated as of October 1, 2014, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 2, 2014).

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
_________________________
*
Previously filed as part of the filing indicated and incorporated by reference herein.


23