BKH 093011 10Q


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, 2011.
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 
EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________.
 
 
 
Commission File Number 001-31303

Black Hills Corporation
Incorporated in South Dakota
IRS Identification Number 46-0458824
625 Ninth Street
Rapid City, South Dakota 57701
 
 
Registrant's telephone number (605) 721-1700
 
 
Former name, former address, and former fiscal year if changed since last report
NONE

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x
 
No o
 

Indicate by check mark whether the Registrant 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 x
 
Accelerated filer o
 
 
Non-accelerated filer o
 
Smaller reporting company o
 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o
 
No x
 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
Class
Outstanding at October 31, 2011
 
 
Common stock, $1.00 par value
39,468,273 shares




TABLE OF CONTENTS
 
 
 
Page
 
Glossary of Terms and Abbreviations and Accounting Standards
 
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Condensed Consolidated Statements of Income - unaudited
 
 
 
   Three and Nine Months Ended September 30, 2011 and 2010
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - unaudited
 
 
 
   September 30, 2011, December 31, 2010 and September 30, 2010
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows - unaudited
 
 
 
   Nine Months Ended September 30, 2011 and 2010
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements - unaudited
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
Signatures
 
 
 
 
 
 
Exhibit Index
 



2


GLOSSARY OF TERMS AND ABBREVIATIONS
AND ACCOUNTING STANDARDS

The following terms and abbreviations and accounting standards appear in the text of this report and have the definitions described below:
AFUDC
Allowance for Funds Used During Construction
AOCI
Accumulated Other Comprehensive Income (Loss)
ASC
Accounting Standards Codification
ASC 220
ASC 220, "Comprehensive Income"
ASC 350
ASC 350, "Intangibles - Goodwill and Other"
ASC 820
ASC 820, "Fair Value Measurements and Disclosures"
ASU
Accounting Standards Update
Bbl
Barrel
Bcf
Billion cubic feet
Bcfe
Billion cubic feet equivalent
BHC
Black Hills Corporation
BHCRPP
Black Hills Corporation Risk Policies and Procedures
BHEP
Black Hills Exploration and Production, Inc., representing our Oil and Gas segment, a direct, wholly-owned subsidiary of Black Hills Non-regulated Holdings
Black Hills Electric Generation
Black Hills Electric Generation, LLC, representing our Power Generation segment, a direct wholly-owned subsidiary of Black Hills Non-regulated Holdings
Black Hills Energy
The name used to conduct the business activities of Black Hills Utility Holdings
Black Hills Non-regulated Holdings
Black Hills Non-regulated Holdings, LLC, a direct, wholly-owned subsidiary of the Company
Black Hills Power
Black Hills Power, Inc., a direct, wholly-owned subsidiary of the Company
Black Hills Service Company
Black Hills Service Company, a direct wholly-owned subsidiary of the Company
Black Hills Utility Holdings
Black Hills Utility Holdings, Inc., a direct, wholly-owned subsidiary of the Company
Black Hills Wyoming
Black Hills Wyoming, LLC, a direct, wholly-owned subsidiary of Black Hills Electric Generation
Btu
British thermal unit
CFTC
United States Commodities Futures Trading Commission
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of the Company
Colorado Electric
Black Hills Colorado Electric Utility Company, LP (doing business as Black Hills Energy), an indirect, wholly-owned subsidiary of Black Hills Utility Holdings
Colorado Gas
Black Hills Colorado Gas Utility Company, LP (doing business as Black Hills Energy), an indirect, wholly-owned subsidiary of Black Hills Utility Holdings
Colorado IPP
Black Hills Colorado IPP, a direct wholly-owned subsidiary of Black Hills Electric Generation
CPCN
Certificate of Public Convenience and Necessity
CPUC
Colorado Public Utilities Commission
CT
Combustion Turbine
 
 

3


De-designated interest rate swaps
The $250 million notional amount interest rate swaps that were originally designated as cash flow hedges under accounting for derivatives and hedges but subsequently de-designated in December 2008
Dodd-Frank
Dodd-Frank Wall Street Reform and Consumer Protection Act
Dth
Dekatherm. A unit of energy equal to 10 therms or one million British thermal units (MMBtu)
Enserco
Enserco Energy Inc., representing our Energy Marketing segment, a direct, wholly-owned subsidiary of Black Hills Non-regulated Holdings
Equity Forward Agreement
Equity Forward Agreement with J.P. Morgan connected to a public offering of 4,413,519 shares of Black Hills Corporation common stock
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
GAAP
Generally Accepted Accounting Principles of the United States
Global Settlement
Settlement with the 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
IFRS
International Financial Reporting Standards
Iowa Gas
Black Hills Iowa Gas Utility Company, LLC, (doing business as Black Hills Energy), a direct, wholly-owned subsidiary of Black Hills Utility Holdings
IPP
Independent Power Producer
IRS
Internal Revenue Service
IUB
Iowa Utilities Board
Kansas Gas
Black Hills Kansas Gas Utility Company, LLC (doing business as Black Hills Energy), a direct, wholly-owned subsidiary of Black Hills Utility Holdings
LIBOR
London Interbank Offered Rate
LOE
Lease Operating Expense
Mcf
One thousand standard cubic feet
Mcfe
One thousand standard cubic feet equivalent
MMBtu
One million British thermal units
MSHA
Mine Safety and Health Administration
MW
Megawatt
MWh
Megawatt-hour
Nebraska Gas
Black Hills Nebraska Gas Utility Company, LLC (doing business as Black Hills Energy), a direct, wholly-owned subsidiary of Black Hills Utility Holdings
NPSC
Nebraska Public Service Commission
NYMEX
New York Mercantile Exchange
OCA
Office of Consumer Advocate
PGA
Purchase Gas Adjustment
PPA
Power Purchase Agreement
PPACA
Patient Protection and Affordability Care Act
PSCo
Public Service Company of Colorado
Revolving Credit Facility
Our $500 million three-year revolving credit facility which commenced on April 15, 2010 and expires on April 14, 2013
SDPUC
South Dakota Public Utilities Commission
SEC
United States Securities and Exchange Commission
WPSC
Wyoming Public Service Commission
WRDC
Wyodak Resources Development Corp., a direct, wholly-owned subsidiary of Black Hills Non-regulated Holdings


4




BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
2010
 
2011
2010
 
(in thousands, except per share amounts)
Operating revenue:
 
 
 
 
 
Utilities
$
223,714

$
212,193

 
$
834,463

$
821,027

Non-regulated energy
32,746

37,301

 
98,422

111,305

Total operating revenue
256,460

249,494

 
932,885

932,332

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Utilities -
 
 
 
 
 
Fuel, purchased power and cost of gas sold
86,127

86,933

 
400,465

420,747

Operations and maintenance
58,313

57,294

 
184,411

188,357

Gain on sale of operating assets
—

(6,238
)
 
—

(8,921
)
Non-regulated energy operations and maintenance
27,898

26,018

 
85,468

74,084

Depreciation, depletion and amortization
33,374

30,036

 
97,695

88,691

Taxes - property, production and severance
9,050

7,426

 
24,510

20,142

Other operating expenses
259

83

 
562

753

Total operating expenses
215,021

201,552

 
793,111

783,853

 
 
 
 
 
 
Operating income
41,439

47,942

 
139,774

148,479

 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
Interest charges -
 
 
 
 
 
Interest expense incurred (including amortization of debt issuance costs, premium and discount, realized settlements on interest rate swaps)
(29,697
)
(27,827
)
 
(88,418
)
(78,941
)
Allowance for funds used during construction - borrowed
3,520

1,934

 
9,874

7,804

Capitalized interest
2,981

1,614

 
8,198

2,470

Interest rate swaps - unrealized (loss) gain
(38,246
)
(13,710
)
 
(40,608
)
(41,663
)
Interest income
563

199

 
1,598

529

Allowance for funds used during construction - equity
189

375

 
676

2,663

Other income, net
524

539

 
1,761

2,225

Total other income (expense)
(60,166
)
(36,876
)
 
(106,919
)
(104,913
)
 
 
 
 
 
 
Income (loss) before equity in earnings (loss) of unconsolidated subsidiaries and income taxes
(18,727
)
11,066

 
32,855

43,566

Equity in earnings (loss) of unconsolidated subsidiaries
43

(137
)
 
1,076

1,471

Income tax benefit (expense)
8,159

1,461

 
(9,794
)
(9,872
)
 
 
 
 
 
 
Net income (loss)
$
(10,525
)
$
12,390

 
$
24,137

$
35,165

 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
Basic
39,145

38,933

 
39,105

38,895

Diluted
39,145

39,133

 
39,792

39,052

 
 
 
 
 
 
Earnings (loss) per share - basic
$
(0.27
)
$
0.32

 
$
0.62

$
0.90

 
 
 
 
 
 
Earnings (loss) per share - diluted
$
(0.27
)
$
0.32

 
$
0.61

$
0.90

 
 
 
 
 
 
Dividends paid per share of common stock
$
0.365

$
0.360

 
$
1.095

$
1.080


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

5


BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

 
September 30,
2011
 
December 31,
2010
 
September 30,
2010
 
(in thousands)
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
74,779

 
$
32,438

 
$
58,975

Restricted cash
4,080

 
4,260

 
17,082

Accounts receivable, net
241,831

 
328,811

 
234,480

Materials, supplies and fuel
134,463

 
139,677

 
145,251

Derivative assets, current
48,727

 
56,572

 
71,688

Income tax receivable, net
10,958

 
—

 
25,156

Deferred income tax assets, current
39,628

 
17,113

 
15,073

Regulatory assets, current
45,713

 
66,429

 
55,941

Other current assets
65,889

 
25,571

 
20,932

Total current assets
666,068

 
670,871

 
644,578

 
 
 
 
 
 
Investments
17,338

 
17,780

 
17,981

 
 
 
 
 
 
Property, plant and equipment
3,664,967

 
3,359,762

 
3,243,641

Less accumulated depreciation and depletion
(934,112
)
 
(864,329
)
 
(880,938
)
Total property, plant and equipment, net
2,730,855

 
2,495,433

 
2,362,703

 
 
 
 
 
 
Other assets:
 
 
 
 
 
Goodwill
354,831

 
354,831

 
353,734

Intangible assets, net
3,899

 
4,069

 
4,129

Derivative assets, non-current
17,215

 
9,260

 
12,762

Regulatory assets, non-current
142,267

 
138,405

 
124,134

Other assets, non-current
20,894

 
20,860

 
20,216

Total other assets
539,106

 
527,425

 
514,975

 
 
 
 
 
 
TOTAL ASSETS
$
3,953,367

 
$
3,711,509

 
$
3,540,237


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

6


BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)

 
September 30,
2011
 
December 31,
2010
 
September 30,
2010
 
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
219,167

 
$
279,069

 
$
201,072

Accrued liabilities
168,640

 
170,301

 
166,977

Derivative liabilities, current
129,163

 
79,167

 
108,318

Accrued income taxes, net
—

 
779

 
—

Regulatory liabilities, current
10,568

 
3,943

 
12,368

Notes payable
359,000

 
249,000

 
145,000

Current maturities of long-term debt
2,893

 
5,181

 
5,314

Total current liabilities
889,431

 
787,440

 
639,049

 
 
 
 
 
 
Long-term debt, net of current maturities
1,282,194

 
1,186,050

 
1,188,293

 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
 
Deferred income tax liabilities, non-current
329,833

 
277,136

 
279,315

Derivative liabilities, non-current
26,603

 
21,361

 
25,892

Regulatory liabilities, non-current
85,074

 
84,611

 
79,393

Benefit plan liabilities
124,214

 
124,709

 
122,178

Other deferred credits and other liabilities
128,013

 
129,932

 
125,710

Total deferred credits and other liabilities
693,737

 
637,749

 
632,488

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Common stockholders' equity —
 
 
 
 
 
Common stock $1 par value; 100,000,000 shares authorized; issued 39,491,616, 39,280,048 and 39,243,257 shares, respectively
39,492

 
39,280

 
39,243

Additional paid-in capital
604,945

 
598,805

 
597,108

Retained earnings
467,043

 
486,075

 
466,691

Treasury stock at cost – 28,041, 10,962 and 7,905 shares, respectively
(810
)
 
(309
)
 
(226
)
Accumulated other comprehensive income (loss)
(22,665
)
 
(23,581
)
 
(22,409
)
Total stockholders' equity
1,088,005

 
1,100,270

 
1,080,407

 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
3,953,367

 
$
3,711,509

 
$
3,540,237


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

7


BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Nine Months Ended
September 30,
 
2011
 
2010
Operating activities:
(in thousands)
 
 
 
 
Net income (loss)
$
24,137

 
$
35,165

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
97,695

 
88,691

Derivative fair value adjustments
9,605

 
(10,690
)
Gain on sale of operating assets
—

 
(8,921
)
Stock compensation
4,931

 
2,908

Unrealized mark-to-market loss (gain) on interest rate swaps
40,608

 
41,663

Deferred income taxes
26,280

 
32,366

Equity in (earnings) loss of unconsolidated subsidiaries
(1,076
)
 
(1,471
)
Allowance for funds used during construction - equity
(676
)
 
(2,663
)
Employee benefit plans
10,930

 
12,214

Other, net
9,702

 
6,663

 
 
 
 
Changes in certain operating assets and liabilities:
 
 
 
Materials, supplies and fuel
12,592

 
(40,344
)
Accounts receivable and other current assets
29,631

 
8,754

Accounts payable and other current liabilities
(73,489
)
 
(21,295
)
Regulatory assets
22,357

 
(2,205
)
Regulatory liabilities
5,041

 
7,176

 
 
 
 
Contributions to defined pension plans
(11,050
)
 
(30,015
)
Other operating activities
(691
)
 
7,765

Net cash provided by operating activities
206,527

 
125,761

 
 
 
 
Investing activities:
 
 
 
Property, plant and equipment additions
(328,496
)
 
(323,883
)
Proceeds from sale of operating assets
583

 
68,105

Payment for acquisition of assets
—

 
(2,250
)
Other investing activities
1,051

 
4,273

Net cash provided by (used in) investing activities
(326,862
)
 
(253,755
)
 
 
 
 
Financing activities:
 
 
 
Dividends paid
(43,169
)
 
(42,331
)
Common stock issued
2,199

 
3,073

Short-term borrowings - issuances
770,000

 
451,500

Short-term borrowings - repayments
(560,000
)
 
(471,000
)
Long-term debt - issuances
—

 
200,000

Long-term debt - repayments
(6,169
)
 
(57,550
)
Other financing activities
(185
)
 
(9,624
)
Net cash provided by (used in) financing activities
162,676

 
74,068

 
 
 
 
Net change in cash and cash equivalents
42,341

 
(53,926
)
 
 
 
 
Cash and cash equivalents, beginning of period
32,438

 
112,901

Cash and cash equivalents, end of period
$
74,779

 
$
58,975


See Note 3 for supplemental disclosure of cash flow information.

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

8


BLACK HILLS CORPORATION

Notes to Condensed Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company's 2010 Annual Report on Form 10-K)

(1)     MANAGEMENT'S STATEMENT

The condensed consolidated financial statements included herein have been prepared by Black Hills Corporation together with our subsidiaries (the "Company," "us," "we," or "our") without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, we believe that the footnotes adequately disclose the information presented. These condensed quarterly financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2010 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 quarterly financial statements reflects all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the September 30, 2011, December 31, 2010 and September 30, 2010 financial information and are of a normal recurring nature. Certain industries in which we operate are highly seasonal and revenue from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Demand for electricity and natural gas is sensitive to seasonal cooling, heating and industrial load requirements, as well as changes in market price. In particular, the normal peak usage season for gas utilities is November through March and significant earnings variances can be expected between the Gas Utilities segment's peak and off-peak seasons. Due to this seasonal nature, our results of operations for the three and nine months ended September 30, 2011 and September 30, 2010, and our financial condition as of September 30, 2011, December 31, 2010, and September 30, 2010 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period. All earnings per share amounts discussed refer to diluted earnings per share unless otherwise noted.

Certain prior year data presented in the accompanying condensed consolidated financial statements has been reclassified to conform to the current year presentation. Specifically, (a) the Company has reclassified revenue into two categories:  Utilities revenue and Non-regulated energy revenue, (b) the categories of Fuel, purchased power and cost of gas sold and Operations and maintenance included in our Operating expenses have been reclassified into Utilities and Non-regulated energy, and (c) the Taxes - property, production and severance line has been reclassified to show only those taxes. Any taxes other than property, production and severance are now included in the respective Utility or Non-regulated energy operations and maintenance lines. Income taxes remain as a separate line item. These reclassifications had no effect on total assets, net income, cash flows or earnings per share.

Restatement - Subsequent to the issuance of the Company's 2010 consolidated financial statements, the Company's management determined that certain intercompany transactions with our rate regulated operations had not been properly eliminated in consolidation, resulting in an overstatement of Utility and Non-regulated energy revenue and Fuel, purchased power and cost of gas sold of $14.8 million and $45.6 million, in aggregate for the three and nine months ended September 30, 2010, respectively.  As such, the condensed consolidated financial statements have been restated for the correction of this error.  The correction did not have an impact on our gross margin, net income, total assets or cash flows.



9


(2)    RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS AND LEGISLATION

Recently Adopted Accounting Standards and Legislation

Fair Value Measurements, ASC 820

In January 2010, the FASB issued guidance related to improving disclosures about fair value measurements. The guidance requires separate disclosures of the amounts of transfers in and out of Level 1 and Level 2 fair value measurements, disclosure of inputs and techniques used in valuation and a description of the reason for such transfers. In the reconciliation for Level 3 fair value measurements using significant unobservable inputs, information about purchases, sales, issuances and settlements is required to be presented separately. These disclosures are required for interim and annual reporting periods and were effective for us on January 1, 2010, except for the disclosures related to the purchases, sales, issuances and settlements in the roll forward activity of Level 3 fair value measurements, which were effective on January 1, 2011. The guidance required additional disclosures, but did not impact our financial position, results of operations or cash flows. The additional disclosures are included in Note 13 of these Notes to Condensed Consolidated Financial Statements.

Patient Protection and Affordable Care Act

In March 2010, the President of the United States signed into law comprehensive healthcare reform legislation under the PPACA as amended by the Healthcare and Education Reconciliation Act. The total potential impact on the Company, if any, cannot be determined until regulations are promulgated under the PPACA.  Included among the provisions of the PPACA is a change in the tax treatment of the Medicare Part D subsidy (the "subsidy"), which affects our Non-Pension Postretirement Benefit Plan. Internal Revenue Code Section 139A has been amended to eliminate the deduction of the subsidy in reducing income for years beginning after December 31, 2012. The impact of this change in the tax treatment of the subsidy had an immaterial effect on our financial position, results of operations and cash flows. The Company will continue to assess the implications on our financial statements of the PPACA as related regulations and interpretations become available. 

Recently Issued Accounting Standards and Legislation

Intangibles - Goodwill and Other, ASU No. 2011-08

The FASB issued an accounting standards update amending ASC 350 which permits entities to first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011 with early adoption permitted.

Other Comprehensive Income, ASU No. 2011-05

FASB issued an accounting standards update amending ASC 220 to improve the comparability, consistency and transparency of reporting of comprehensive income. The update 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 other 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 No. 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. The adoption of this update may change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on our consolidated financial statements.


10


Fair Value Measurement, ASU No. 2011-04

FASB issued an accounting standards update amending ASC 820 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 No. 2011-04 is effective for fiscal years, and interim periods within those years, beginning after December 31, 2011, with early adoption permitted. We do not expect this amendment to have an impact on our financial position, results of operations, or cash flows.

Dodd-Frank Wall Street Reform and Consumer Protection Act

In July 2010, the President of the United States signed into law comprehensive financial reform legislation under Dodd-Frank. Title VII of Dodd-Frank effectively regulates many derivative transactions in the United States that were previously unregulated, including swap transactions in the over-the-counter market. Among other things, Dodd-Frank (i) mandates the clearing of some swaps through regulated central clearing organizations and the trading of clearing swaps through regulated exchanges or swap execution facilities, in each case subject to certain key exemptions, and (ii) authorizes regulators to establish collateral and margin requirements for certain swap transactions that are not cleared. Dodd-Frank provides for a potential exception from these clearing and cash collateral requirements for commercial end-users, and includes a number of defined terms that will be used in determining how this exception applies to particular derivative transactions and the parties to those transactions. Significant rule-making by numerous governmental agencies, particularly the CFTC with respect to non-security commodities, will be required in order to implement the restrictions, limitations, and requirements contemplated by Dodd-Frank. We will continue to evaluate the impact as these rules become available.


(3)    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 
Nine Months Ended
 
September 30,
2011
 
September 30,
2010
 
(in thousands)
Non-cash investing activities—
 
 
 
Property, plant and equipment acquired with accrued liabilities
$
49,566

 
$
37,661

Cash (paid) refunded during the period for—
 
 
 
Interest (net of amounts capitalized)
$
(61,461
)
 
$
(62,740
)
Income taxes, net
$
11,826

 
$
(488
)
 


11


(4)    MATERIALS, SUPPLIES AND FUEL

The amounts of materials, supplies and fuel included in the accompanying Condensed Consolidated Balance Sheets, by major classification, were as follows (in thousands):

 
 
September 30,
2011
 
December 31,
2010
 
September 30,
2010
Materials and supplies
 
$
37,611

 
$
31,749

 
$
31,192

Fuel - Electric Utilities
 
8,639

 
9,687

 
9,056

Natural gas in storage — Gas Utilities
 
38,641

 
21,691

 
36,782

Commodities held by Energy Marketing*
 
49,572

 
76,550

 
68,221

Total materials, supplies and fuel
 
$
134,463

 
$
139,677

 
$
145,251

_____________
* As of September 30, 2011, December 31, 2010 and September 30, 2010, market adjustments related to natural gas held by Energy Marketing and recorded in inventory as part of fair value hedge transactions were $(1.7) million, $(9.1) million and $(18.7) million, respectively (see Note 12 for further discussion of Energy Marketing activities).


(5)    ACCOUNTS RECEIVABLE

Trade Accounts Receivable

Our Accounts receivable represents primarily customer trade accounts at our Electric Utilities and Gas Utilities segments and counterparty trade accounts at our Energy Marketing segment. This balance fluctuates primarily due to the seasonality of our Gas Utilities and volume and commodity prices at our Energy Marketing segment. We maintain an allowance for doubtful accounts that reflects our best estimate of probable uncollectible trade receivables. We regularly review our trade receivable allowances 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.
Following is a summary of receivables (in thousands):

As of
Accounts
Unbilled
Total Accounts
Less Allowance for
Accounts
September 30, 2011
Receivable, Trade
Revenue
Receivable
 Doubtful Accounts
Receivable, net
Electric
$
41,889

$
16,401

$
58,290

$
(590
)
$
57,700

Gas
21,168

12,518

33,686

(789
)
32,897

Oil and Gas
8,820

—

8,820

(161
)
8,659

Coal Mining
1,845

—

1,845

—

1,845

Energy Marketing
139,332

—

139,332

(174
)
139,158

Power Generation
119

—

119

—

119

Corporate
1,453

—

1,453

—

1,453

Total
$
214,626

$
28,919

$
243,545

$
(1,714
)
$
241,831



12


As of
Accounts
Unbilled
Total Accounts
Less Allowance for
Accounts
December 31, 2010
Receivable, Trade
Revenue
Receivable
 Doubtful Accounts
Receivable, net
Electric
$
51,005

$
19,572

$
70,577

$
(708
)
$
69,869

Gas
41,970

40,376

82,346

(1,425
)
80,921

Oil and Gas
6,213

—

6,213

(161
)
6,052

Coal Mining
2,420

—

2,420

—

2,420

Energy Marketing
157,064

—

157,064

(69
)
156,995

Power Generation
307

—

307

—

307

Corporate (a)
12,247

—

12,247

—

12,247

Total
$
271,226

$
59,948

$
331,174

$
(2,363
)
$
328,811


As of
Accounts
Unbilled
Total Accounts
Less Allowance for
Accounts
September 30, 2010
Receivable, Trade
Revenue
Receivable
 Doubtful Accounts
Receivable, net
Electric
$
41,955

$
17,959

$
59,914

$
(927
)
$
58,987

Gas
19,611

11,107

30,718

(830
)
29,888

Oil and Gas
6,112

—

6,112

(161
)
5,951

Coal Mining
2,201

—

2,201

—

2,201

Energy Marketing
99,850

—

99,850

(375
)
99,475

Power Generation
463

—

463

—

463

Corporate (a) (b)
37,515

—

37,515

—

37,515

Total
$
207,707

$
29,066

$
236,773

$
(2,293
)
$
234,480

            
(a) During the third quarter of 2010 we reached a settlement with the IRS and received a refund relating to this settlement during 2011 of $12.0 million, excluding interest income.
(b) includes cash collateral receivable on de-designated interest rate swaps. See Note 12 for further information.


(6)    NOTES PAYABLE

Our credit facilities and debt securities contain certain restrictive covenants including, among others, recourse leverage ratios and consolidated net worth covenants. As of September 30, 2011, we were in compliance with these covenants. Our credit facilities and debt securities do not contain default provisions pertaining to our credit ratings.

We had the following short-term debt issued and outstanding as of the Condensed Consolidated Balance Sheet dates (in thousands):
 
As of September 30, 2011
As of December 31, 2010
As of September 30, 2010
 
Balance Outstanding
Letters of Credit
Balance Outstanding
Letters of Credit
Balance Outstanding
Letters of Credit
Revolving Credit Facility
$
209,000

$
42,355

$
149,000

$
46,900

$
145,000

$
15,500

Enserco Credit Facility
—

132,625

—

166,900

—

131,500

Term Loan due 2011
—

—

100,000

—

—

—

Term Loan due 2012
150,000

—

—

—

—

—

Total
$
359,000

$
174,980

$
249,000

$
213,800

$
145,000

$
147,000



13


Revolving Credit Facility

Our $500.0 million Revolving Credit Facility expiring April 14, 2013 contains an accordion feature which allows us, with the consent of the administrative agent, to increase the capacity of the facility to $600.0 million and can be used for the issuance of letters of credit, to fund working capital needs and for other corporate purposes. Borrowings are available under a base rate option or a Eurodollar option. The cost of borrowings or letters of credit is determined based upon our credit ratings. At current ratings levels, the margins for base rate borrowings, Eurodollar borrowings and letters of credit were 1.75%, 2.75% and 2.75%, respectively, at September 30, 2011. The facility contains a commitment fee to be charged on the unused amount of the facility. Based upon current credit ratings, the fee is 0.5%.

Deferred financing costs are being amortized over the term of the facility. The amortization expense is included in Interest expense on the accompanying Condensed Consolidated Statements of Income as follows (in thousands):

 
Deferred Financing
Amortization Expense
 
Costs Remaining on Balance Sheet as of
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
September 30, 2011
2011
2010
2011
2010
Deferred Financing Costs - Revolving Credit Facility
$1,970
$
473

$
481

$
1,419

$
866


The Revolving Credit Facility includes the following covenants that we must comply with at the end of each quarter (dollars in thousands). We were in compliance with these covenants as of September 30, 2011.

As of September 30, 2011
 
Actual
 
Covenant Requirement
Consolidated Net Worth
 
$
1,088,000

 
$
871,300

Recourse Leverage Ratio
 
61.3
%
 
65.0
%

Enserco Credit Facility

Enserco's $250.0 million committed credit facility expiring May 7, 2012 contains an accordion feature which allows, with the consent of the administrative agent, the commitment under the facility to increase to $350.0 million. Maximum borrowings under the facility are subject to a sub-limit of $50.0 million. Borrowings under this facility are available under a base rate option or a Eurodollar option. Margins for base rate borrowings are 1.75% and for Eurodollar borrowings are 2.50%. Enserco Credit Facility covenants include tangible net worth, net working capital and realized net working capital requirements. Enserco was in compliance with these covenants as of September 30, 2011.

Deferred financing costs for the Enserco Credit Facility are being amortized over the term of the Enserco Credit Facility. The amortization expense is included in Interest expense on the accompanying Condensed Consolidated Statements of Income as follows (in thousands):
 
 
 
Amortization Expense
 
Deferred Financing Costs Remaining on Balance Sheet as of
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
September 30, 2011
2011
2010
2011
2010
Deferred Financing Costs - Enserco Credit Facility
$812
$
305

$
263

$
866

$
1,245



14


Corporate Term Loans

On September 30, 2011, we extended our $100.0 million term loan for two-years under the existing terms. This term loan is now due on September 30, 2013.

In June 2011, we entered into a one-year $150.0 million unsecured, single draw, term loan with CoBank, the Bank of Nova Scotia and U.S. Bank due on June 24, 2012. The cost of borrowing under the loan is based on a spread of 125 basis points over LIBOR (1.63% at September 30, 2011). The covenants are substantially the same as those included in the Revolving Credit Facility. We were in compliance with these covenants as of September 30, 2011.


(7)    EARNINGS PER SHARE
 
Basic earnings (loss) per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by using all dilutive common shares potentially outstanding during a period. A reconciliation of share amounts used to compute earnings (loss) per share is as follows (in thousands):

 
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
 
2011
2010
2011
2010
 
 
 
 
 
 
Net income (loss)
 
$
(10,525
)
$
12,390

$
24,137

$
35,165

 
 
 
 
 
 
Weighted average shares - basic
 
39,145

38,933

39,105

38,895

Dilutive effect of:
 
 
 
 
 
Restricted stock
 
—

131

147

110

Stock options
 
—

12

16

9

Forward equity issuance
 
—

—

473

—

Other
 
—

57

51

38

Weighted average shares - diluted
 
39,145

39,133

39,792

39,052

 
Below is a discussion of our potentially dilutive shares that were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive.

Due to the Company's net loss in the quarter ending September 30, 2011, potentially dilutive securities, consisting of outstanding stock options, restricted common stock, restricted stock units, non-vested performance-based share awards, warrants and forward equity instruments were excluded from the diluted loss per share calculation due to their anti-dilutive effect. In computing diluted net loss per share, 11,880 options to purchase shares of common stock, 159,873 vested and non-vested restricted stock shares, 31,408 warrants and other performance shares and 424,715 forward equity instruments were excluded from the computations for the three months ended September 30, 2011.

In addition to these potentially dilutive shares, the following outstanding securities were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive (in thousands):
  
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Stock options
176

 
128

 
119

 
169

Restricted stock
20

 
2

 
17

 
2

Other stock
27

 
1

 
19

 
1

Anti-dilutive shares
223

 
131

 
155

 
172



15



(8)    COMPREHENSIVE INCOME (LOSS)

The following table presents the components of our comprehensive income (loss) (in thousands):

 
Three Months Ended September 30, 2011
Net income (loss)
 
 
$
(10,525
)
Other comprehensive income (loss), net of tax:
 
 
 
Benefit plan liability adjustments
$
—

 
 
Taxes on benefit plan liability adjustments
—

 
 
Benefit plan liability adjustments, net of tax
 
 
—

 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges
$
3,137

 
 
Taxes on fair value adjustment on derivatives designated as cash flow hedges
(1,215
)
 
 
Fair value adjustment on derivatives designated as cash flow hedges, net of tax
 
 
1,922

 
 
 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss)
$
414

 
 
Taxes on reclassification adjustment on cash flow hedges settled and included in net income (loss)
(129
)
 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss), net of tax
 
 
285

 
 
 
 
Comprehensive income (loss)
 
 
$
(8,318
)

 
Three Months Ended September 30, 2010
Net income (loss)
 
 
$
12,390

Other comprehensive income (loss), net of tax:
 
 
 
Benefit plan liability adjustments
$
—

 
 
Taxes on benefit plan liability adjustments
—

 
 
Benefit plan liability adjustments, net of tax
 
 
—

 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges
$
517

 
 
Taxes on fair value adjustment on derivatives designated as cash flow hedges
486

 
 
Fair value adjustment on derivatives designated as cash flow hedges, net of tax
 
 
1,003

 
 
 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss)
$
(4,730
)
 
 
Taxes on reclassification adjustment on cash flow hedges settled and included in net income (loss)
1,761

 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss), net of tax
 
 
(2,969
)
 
 
 
 
Comprehensive income (loss)
 
 
$
10,424




16


 
Nine Months Ended September 30, 2011
Net income (loss)
 
 
$
24,137

Other comprehensive income (loss), net of tax:
 
 
 
Benefit plan liability adjustments
$
—

 
 
Taxes on benefit plan liability adjustments
—

 
 
Benefit plan liability adjustments, net of tax
 
 
—

 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges
$
(1,644
)
 
 
Taxes on fair value adjustment on derivatives designated as cash flow hedges
653

 
 
Fair value adjustment on derivatives designated as cash flow hedges, net of tax
 
 
(991
)
 
 
 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss)
$
2,892

 
 
Taxes on reclassification adjustment on cash flow hedges settled and included in net income (loss)
(985
)
 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss), net of tax
 
 
1,907

 
 
 
 
Comprehensive income (loss)
 
 
$
25,053


 
Nine Months Ended September 30, 2010
Net income (loss)
 
 
$
35,165

Other comprehensive income (loss), net of tax:
 
 
 
Benefit plan liability adjustments
$
(8
)
 
 
Taxes on benefit plan liability adjustments
(7
)
 
 
Benefit plan liability adjustments, net of tax
 
 
(15
)
 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges
$
495

 
 
Taxes on fair value adjustment on derivatives designated as cash flow hedges
641

 
 
Fair value adjustment on derivatives designated as cash flow hedges, net of tax
 
 
1,136

 
 
 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss)
$
(6,909
)
 
 
Taxes on reclassification adjustment on cash flow hedges settled and included in net income (loss)
2,543

 
 
Reclassification adjustments on cash flow hedges settled and included in net income (loss), net of tax
 
 
(4,366
)
 
 
 
 
Comprehensive income (loss)
 
 
$
31,920



17


Balances by classification included within Accumulated other comprehensive income (loss) on the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):

 
September 30,
2011
 
December 31,
2010
 
September 30,
2010
Derivatives designated as cash flow hedges
$
(11,523
)
 
$
(12,437
)
 
$
(12,741
)
Benefit plans
(11,142
)
 
(11,142
)
 
(9,636
)
Amount from equity-method investees
—

 
(2
)
 
(32
)
Total
$
(22,665
)
 
$
(23,581
)
 
$
(22,409
)


(9)     COMMON STOCK

Other than the following transactions, we had no material changes in our common stock during the nine months ended September 30, 2011 from the amount reported in Note 11 of the Notes to Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.

Equity Compensation Plans

•
We granted 67,389 target performance shares to certain officers and business unit leaders for the January 1, 2011 through December 31, 2013 performance period during the nine months ended September 30, 2011. Actual shares are issued after the end of the performance plan period. Performance shares are awarded based on our total stockholder return over the designated performance period as measured against a selected peer group and can range from 0% to 175% of target. In addition, certain stock price performance must be achieved for a payout to occur. The final value of the performance shares will vary according to the number of shares of common stock that are ultimately granted based upon the actual level of attainment of the performance criteria. The performance awards are paid 50% in the form of cash and 50% in shares of common stock. The grant date fair value was $25.91 per share.

•
We issued 14,111 shares of common stock under our short-term incentive compensation plan during the nine months ended September 30, 2011. Pre-tax compensation cost related to the awards was approximately $0.4 million, which was expensed in 2010.

•
We granted 136,348 shares of restricted common stock and restricted stock units during the nine months ended September 30, 2011. The pre-tax compensation cost related to the awards of restricted stock and restricted stock units of approximately $4.1 million will be recognized over the three year vesting period.

•
We granted 99,000 stock options at a weighted-average exercise price of $32.04 during the nine months ended September 30, 2011. The total fair value of approximately $0.6 million will be recognized over the three year vesting period.

•
Stock options totaling 5,500 shares were exercised during the nine months ended September 30, 2011 at a weighted-average exercise price of $29.94 per share, providing $0.2 million of proceeds.

Total compensation expense recognized for all equity compensation plans for the three months ended September 30, 2011 and 2010 was $1.7 million and $1.9 million, respectively, and for the nine months ended September 30, 2011 and 2010 was $5.0 million and $4.7 million, respectively.

As of September 30, 2011, total unrecognized compensation expense related to non-vested stock awards was $8.5 million and is expected to be recognized over a weighted-average period of 2 years.

Dividend Reinvestment and Stock Purchase Plan

We have a Dividend Reinvestment and Stock Purchase Plan ("DRIP") under which stockholders may purchase additional shares of common stock through dividend reinvestment and/or optional cash payments at 100% of the recent average market price. We have the option of issuing new shares or purchasing the shares on the open market. We issued 79,339 new shares at a weighted-average price of $30.81 during the nine months ended September 30, 2011. At September 30, 2011, 476,437 shares of unissued common stock were available for future offering under the DRIP.

18



Dividend Restrictions

Our Revolving Credit Facility contains restrictions on the payment of cash dividends upon a default or event of default. An event of default would be deemed to have occurred if we did not meet certain financial covenants. The most restrictive financial covenants include the following: a recourse leverage ratio not to exceed 0.65 to 1.00 and a minimum consolidated net worth of $625 million plus 50.0% of aggregate consolidated net income, if positive, since January 1, 2005. As of September 30, 2011, we were in compliance with these covenants.

Due to our holding company structure, substantially all of our operating cash flows are provided by dividends paid or distributions made by our subsidiaries. The cash to pay dividends to our stockholders is derived from these cash flows. As a result, certain statutory limitations or regulatory or financing agreements could affect the levels of distributions allowed to be made by our subsidiaries. The following restrictions on distributions from our subsidiaries existed as of September 30, 2011:

•
Our utility subsidiaries are generally limited to the amount of dividends allowed by state regulatory authorities to be paid to us as a utility holding company and also may be subject to further restrictions under the Federal Power Act. As of September 30, 2011, the restricted net assets at our Utilities Group were approximately $164.3 million.

•
Our Enserco credit facility is a borrowing base credit facility, the structure of which requires certain levels of tangible net worth and net working capital to be maintained for a given borrowing base election level. In order to maintain a borrowing base election level, Enserco may be restricted from making dividend payments to its parent company. Enserco's restricted net assets at September 30, 2011 were $163.8 million.

•
Pursuant to a covenant in the Black Hills Wyoming project financing, Black Hills Non-regulated Holdings has restricted assets of $100.0 million. Black Hills Non-regulated Holdings is the parent of Black Hills Electric Generation, which is the parent of Black Hills Wyoming.

Forward Equity Instrument

In November 2010, we entered into a Forward Equity Agreement in connection with a public offering of 4,000,000 shares of Black Hills Corporation common stock. In December 2010, the underwriters exercised the over-allotment option to purchase an additional 413,519 shares under the same terms as the original Forward Equity Agreement. We settled the equity forward instrument on November 1, 2011 by physically delivering 4,413,519 shares of common stock in exchange for proceeds of approximately $120 million.


(10)     EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

We have three non-contributory defined benefit pension plans (the "Pension Plans"). One covers certain eligible employees of the following subsidiaries: Black Hills Service Company, Black Hills Power, WRDC and BHEP; one covers certain eligible employees of Cheyenne Light, and one Pension Plan covers certain eligible employees of Black Hills Energy. The Pension Plan benefits are based on years of service and compensation levels.

The components of net periodic benefit cost for the Pension Plans were as follows (in thousands):

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Service cost
$
1,355

 
$
1,533

 
$
4,066

 
$
4,599

Interest cost
3,732

 
3,773

 
11,196

 
11,319

Expected return on plan assets
(4,239
)
 
(3,623
)
 
(12,717
)
 
(10,869
)
Prior service cost
25

 
305

 
75

 
915

Net loss (gain)
1,135

 
500

 
3,405

 
1,500

Curtailment expense
—

 
—

 
—

 
—

Net periodic benefit cost
$
2,008

 
$
2,488

 
$
6,025

 
$
7,464


19



Non-pension Defined Benefit Postretirement Healthcare Plans

We sponsor the following retiree healthcare plans (the "Healthcare Plans"): the Black Hills Corporation Postretirement Healthcare Plan, the Healthcare Plan for Retirees of Cheyenne Light, and the Black Hills Energy Postretirement Healthcare Plan. Employees who participate in the Healthcare Plans and who retire on or after meeting 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
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Service cost
$
375

 
$
377

 
$
1,125

 
$
1,131

Interest cost
542

 
611

 
1,626

 
1,833

Expected return on plan assets
(41
)
 
(52
)
 
(123
)
 
(156
)
Prior service benefit
(120
)
 
(77
)
 
(360
)
 
(231
)
Net transition obligation
—

 
—

 
—

 
—

Net loss (gain)
169

 
159

 
507

 
477

Net periodic benefit cost
$
925

 
$
1,018

 
$
2,775

 
$
3,054


It has been determined that our post-65 retiree prescription drug plans are actuarially equivalent and qualify for the Medicare Part D subsidy.

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
September 30,
 
Nine Months Ended
September 30,
 
2011
 
2010
 
2011
 
2010
Service cost
$
257

 
$
171

 
$
771

 
$
513

Interest cost
324

 
321

 
973

 
963

Prior service cost
1

 
1

 
3

 
3

Net loss (gain)
128

 
71

 
383

 
213

Net periodic benefit cost
$
710

 
$
564

 
$
2,130

 
$
1,692



20


Contributions

We anticipate that we will make contributions to each of the benefit plans during 2011 and 2012. Contributions to the Healthcare Plans and the Supplemental Plans expected to be made in the form of benefit payments are as follows (in thousands):
 
Contributions Made
Contributions Made
 
 
 
Three Months Ended September 30, 2011
Nine Months Ended September 30, 2011
Contributions Remaining for 2011
Contributions Anticipated for 2012
Defined Benefit Pension Plans
$
10,500

$
11,050

$
—

$
7,869

Non-pension Defined Benefit Postretirement Healthcare Plans
$
882

$
2,646

$
882

$
3,765

Supplemental Non-qualified Defined Benefit Plans
$
235

$
705

$
236

$
896



(11)     SUMMARY OF INFORMATION RELATING TO SEGMENTS OF OUR BUSINESS

Our reportable segments are based on our method of internal reporting, which generally segregates the strategic business groups due to differences in products, services and regulation. As of September 30, 2011, substantially all of our operations and assets were located within the United States.

We conduct our operations through the following six reportable segments:

Utilities Group —

•
Electric Utilities, which supplies electric utility service to areas in South Dakota, Wyoming, Colorado and Montana and natural gas utility service to Cheyenne, Wyoming and vicinity; and

•
Gas Utilities, which supplies natural gas utility service to areas in Colorado, Iowa, Kansas and Nebraska.

Non-regulated Energy Group —

•
Oil and Gas, which produces, explores and operates oil and natural gas interests located in the Rocky Mountain region and other states;

•
Power Generation, which produces and sells power and capacity to wholesale customers from power plants located in Wyoming. Additionally, in 2009 our Power Generation segment entered into a 20-year PPA to supply Colorado Electric with 200 MW of capacity and energy from power plants under construction in Colorado, which are expected to be placed into service by December 31, 2011. In January 2011, we sold our ownership interests in the partnerships which owned the generation facilities in Idaho;

•
Coal Mining, which engages in the mining and sale of coal from our mine near Gillette, Wyoming; and

•
Energy Marketing, which provides natural gas, crude oil, coal, power and environmental marketing and related services in the United States and Canada.

Segment information follows the accounting policies described in Note 1 of the Notes to Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.


21


Segment information included in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets was as follows (in thousands):

Three Months Ended September 30, 2011
 
External
Operating
Revenue
 
Inter-segment
Operating
Revenue
 
Net Income (Loss)
Utilities:
 
 
 
 
 
 
   Electric
 
$
151,063

 
$
2,653

 
$
15,790

   Gas
 
72,651

 
—

 
572

Non-regulated Energy:
 
 
 
 
 
 
   Oil and Gas
 
19,163

 
—

 
241

   Power Generation
 
1,011

 
7,089

 
337

   Coal Mining
 
9,184

 
8,651

 
555

   Energy Marketing
 
3,388

 
3,550

 
273

Corporate (a)
 
—

 
—

 
(27,943
)
Inter-segment eliminations
 
—

 
(21,943
)
 
(350
)
Total
 
$
256,460

 
$
—

 
$
(10,525
)
    
Three Months Ended September 30, 2010
 
External
Operating
Revenue
 
Inter-segment
Operating
Revenue (d)
 
Net Income (Loss)
Utilities:
 
 
 
 
 
 
   Electric (b)
 
$
138,761

 
$
2,884

 
$
18,537

   Gas (c)
 
72,323

 
—

 
(595
)
Non-regulated Energy:
 
 
 
 
 
 
   Oil and Gas (e)  
 
19,354

 
—

 
836

   Power Generation
 
1,124

 
6,731

 
575

   Coal Mining
 
7,744

 
6,533

 
1,673

   Energy Marketing
 
9,060

 
(87
)
 
1,370

Corporate (a) (f)
 
—

 
—

 
(10,093
)
Inter-segment eliminations
 
—

 
(14,933
)
 
87

Total
 
$
248,366

 
$
1,128

 
$
12,390

    
Nine Months Ended September 30, 2011
 
External
Operating
Revenue
 
Inter-segment
Operating
Revenue
 
Net Income (Loss)
Utilities:
 
 
 
 
 
 
   Electric
 
$
431,624

 
$
9,902

 
$
34,653

   Gas
 
402,839

 
—

 
24,275

Non-regulated Energy:
 
 
 
 
 
 
   Oil and Gas
 
55,907

 
—

 
(553
)
   Power Generation
 
2,750

 
20,750

 
2,071

   Coal Mining
 
23,064

 
25,806

 
(1,124
)
   Energy Marketing
 
16,701

 
5,178

 
1,327

Corporate (a)
 
—

 
—

 
(36,101
)
Inter-segment eliminations
 
—

 
(61,636
)
 
(411
)
Total
 
$
932,885

 
$
—

 
$
24,137

    

22


Nine Months Ended September 30, 2010
 
External
Operating
Revenue
 
Inter-segment
Operating
Revenue (d)
 
Net Income (Loss)
Utilities:
 
 
 
 
 
 
   Electric (b)
 
$
415,092

 
$
11,627

 
$
35,585

   Gas (c)
 
402,608

 
—

 
18,017

Non-regulated Energy:
 
 
 
 
 
 
   Oil and Gas (e) 
 
57,755

 
—

 
3,405

   Power Generation
 
3,266

 
19,336

 
1,239

   Coal Mining
 
22,431

 
20,875

 
6,093

   Energy Marketing
 
27,797

 
(157
)
 
4,890

Corporate (a) (f)
 
—

 
—

 
(34,221
)
Inter-segment eliminations
 
—

 
(48,298
)
 
157

Total
 
$
928,949

 
$
3,383

 
$
35,165

____________
(a) Net income (loss) includes a $24.9 million and a $26.4 million net after-tax mark-to-market loss on interest rate swaps for the three and nine months ended September 30, 2011 and an $8.9 million and $27.1 million net after-tax loss on interest rate swaps for the three and nine months ended September 30, 2010, respectively.
(b) Net income (loss) includes a $4.1 million after-tax gain on sale of a 23% interest in Wygen III to the City of Gillette.
(c) Net income (loss) includes a $1.7 million after-tax gain on sale of operating assets in the Gas Utilities at Nebraska Gas.
(d) Total operating revenue has been restated to reflect elimination of intercompany activities previously not eliminated. See Note 1 for further information.
(e) Net income (loss) includes a $0.4 million reduction of income taxes as a result of a re-measurement of a previously reported uncertain tax position due to a settlement with the IRS.
(f) Net income (loss) includes a $2.0 million reduction in income tax expense reflecting a re-measurement of an uncertain tax position due to a settlement agreement that was reached with the IRS primarily due to tax depreciation method changes.

Total assets
September 30,
2011
 
December 31,
2010
 
September 30,
2010
Utilities:
 
 
 
 
 
   Electric (a)
$
1,917,183

 
$
1,834,019

 
$
1,771,014

   Gas
683,163

 
722,287

 
659,801

Non-regulated Energy:
 
 
 
 
 
   Oil and Gas
405,513

 
349,991

 
358,113

   Power Generation (a)
372,313

 
293,334

 
249,778

   Coal Mining
94,908

 
96,962

 
94,149

   Energy Marketing
340,499

 
314,930

 
287,173

Corporate
139,788

 
99,986

 
120,209

Total assets
$
3,953,367

 
$
3,711,509

 
$
3,540,237

____________
(a) Includes construction of a 180 MW power generation facility by our Colorado Electric utility and a 200 MW power generation facility by our Power Generation segment; both facilities are currently under construction and are expected to be completed by December 31, 2011.


(12)     RISK MANAGEMENT ACTIVITIES

Our activities in the regulated and non-regulated energy sectors expose us to a number of risks in the normal operation of our businesses. Depending on the activity, we are exposed to varying degrees of market risk and counterparty risk. We have developed policies, processes, systems, and controls to manage and mitigate these risks.


23


Market risk is the potential loss that might occur as a result of an adverse change in market price or rate. We are exposed to the following market risks:

•
Commodity price risk associated with our marketing businesses, our natural long position with crude oil, natural gas and coal reserves and production, fuel procurement for certain of our gas-fired generation assets and variability in revenue due to changes in gas usage at our Gas Utilities segment and from commodity price changes;

•
Interest rate risk associated with variable rate credit facilities and changes in forward interest rates used to determine the mark-to-market adjustment on our interest rate swaps; and

•
Foreign currency exchange risk associated with marketing transacted in Canadian dollars.

Our exposure to these market risks is affected by a number of factors including the size, duration, and composition of our energy portfolio, the absolute and relative levels of interest rates, currency exchange rates and commodity prices, the volatility of these prices and rates, and the liquidity of the related interest rate and commodity markets.

We actively manage our exposure to certain market risks as described in Note 3 of the Notes to our Consolidated Financial Statements in our 2010 Annual Report on Form 10-K. Our derivative and hedging activities included in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Income are detailed below and within Note 13.

Trading Activities

Our Energy Marketing segment is engaged in marketing natural gas, crude oil, coal, power and environmental products, specializing in producer services, end-use origination and wholesale marketing in the United States and Canada. Coal marketing activity began June 1, 2010, Power marketing began late in the third quarter of 2010, and Environmental marketing began late in the third quarter of 2010 with no significant activity until the second quarter of 2011.

Contracts and other activities at our Energy Marketing operations are accounted for under the accounting standards for energy trading contracts. As such, all of the contracts and other activities at our marketing operations that meet the definition of a derivative are accounted for at fair value. The fair values are recorded as either Derivative assets or Derivative liabilities on the accompanying Condensed Consolidated Balance Sheets. The net gains or losses are recorded as Operating revenue in the accompanying Condensed Consolidated Statements of Income. Accounting for energy trading contracts precludes mark-to-market accounting for energy trading contracts that are not defined as derivatives pursuant to accounting standards for derivatives. As part of our marketing operations, we often employ strategies that include derivative contracts along with inventory, storage and transportation positions to accomplish the objectives of our producer services, end-use origination and wholesale marketing groups. Except in limited circumstances when we are able to designate transportation, storage or inventory positions as part of a fair value hedge, accounting for derivatives and hedging generally does not allow us to mark inventory, transportation or storage positions to market. The result is that while a significant majority of our natural gas, crude oil and coal marketing positions are economically hedged, we are required to mark some parts of our overall strategies (the derivatives) to market value, but are generally precluded from marking the rest of our economic hedges (transportation, inventory or storage) to market. Volatility in reported earnings and derivative positions results from these accounting requirements.

To effectively manage our portfolios, we enter into forward physical commodity contracts, financial derivative instruments including over-the-counter swaps and options, and storage and transportation agreements. The business activities of our Energy Marketing segment are conducted within the parameters as defined and allowed in the BHCRPP and further delineated in the Energy Marketing Risk Management Policies and Procedures as approved by our Executive Risk Committee.

We use a number of quantitative tools to measure, monitor and limit our exposure to market risk in our marketing portfolio. We limit and monitor our market risk through established limits on the nominal size of positions based on type of trade, location and duration. Such limits include those on fixed price, basis, index, storage, transportation and foreign exchange positions.

Daily risk management activities include reviewing positions in relation to established position limits, assessing changes in daily mark-to-market and other non-statistical risk management techniques.


24


The contract or notional amounts and terms of our marketing activities and derivative commodity instruments were as follows:

 
Outstanding at
 
Outstanding at
 
Outstanding at
 
September 30, 2011
 
December 31, 2010
 
September 30, 2010
 
Notional
Amounts
 
Latest
Expiration
(months)
 
Notional
Amounts
 
Latest
Expiration
(months)
 
Notional
Amounts
 
Latest
Expiration
(months)
(notional in thousands of MMBtus)
 
 
 
 
 
 
 
 
 
 
 
Natural gas basis swaps purchased
425,360

 
42

 
399,128

 
22

 
335,805

 
25

Natural gas basis swaps sold
443,489

 
42

 
426,903

 
22

 
358,929

 
25

Natural gas fixed-for-float swaps purchased
251,602

 
27

 
135,005

 
33

 
84,636

 
36

Natural gas fixed-for-float swaps sold
249,808

 
27

 
150,803

 
22

 
97,210

 
18

Natural gas physical purchases
105,446

 
27

 
144,948

 
36

 
135,818

 
18

Natural gas physical sales
122,232

 
72

 
143,021

 
36

 
136,530

 
36

Natural gas futures purchased
78,100

 
7

 
—

 
—

 
—

 
—

Natural gas futures sold
96,730

 
7

 
—

 
—

 
—

 
—

Natural gas options purchased
6,000

 
2

 
—

 
—

 
—

 
—

Natural gas options sold
6,000

 
2

 
—

 
—

 
—

 
—


 
Outstanding at
 
Outstanding at
 
Outstanding at
 
September 30, 2011
 
December 31, 2010
 
September 30, 2010
 
Notional
Amounts
 
Latest
Expiration
(months)
 
Notional
Amounts
 
Latest
Expiration
(months)
 
Notional
Amounts
 
Latest
Expiration
(months)
(notional in thousands of Bbls)
 
 
 
 
 
 
 
 
 
 
 
Crude oil physical purchases
7,326

 
15

 
5,628

 
16

 
5,561

 
15

Crude oil physical sales
7,917

 
15

 
6,921

 
16

 
4,759

 
15

Crude oil fixed-for-float swaps purchased
—