BKH 033113 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 March 31, 2013
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 April 30, 2013
 
 
 
Common stock, $1.00 par value
44,442,886

shares






TABLE OF CONTENTS
 
 
 
Page
 
Glossary of Terms and Abbreviations
 
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Condensed Consolidated Statements of Income - unaudited
 
 
 
   Three Months Ended March 31, 2013 and 2012
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income - unaudited
 
 
 
   Three Months Ended March 31, 2013 and 2012
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - unaudited
 
 
 
   March 31, 2013, Dec. 31, 2012 and March 31, 2012
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows - unaudited
 
 
 
   Three Months Ended March 31, 2013 and 2012
 
 
 
 
 
 
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 4.
Mine Safety Disclosures
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
 
 
Signatures
 
 
 
 
 
 
Index to Exhibits
 


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
AOCI
Accumulated Other Comprehensive Income (Loss)
ASU
Accounting Standards Update
Basin Electric
Basin Electric Power Cooperative
Bbl
Barrel
BHC
Black Hills Corporation; the Company
BHEP
Black Hills Exploration and Production, Inc., 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 of Black Hills Utility Holdings, Inc., and its subsidiaries
Black Hills Non-regulated Holdings
Black Hills Non-regulated Holdings, LLC, a direct, wholly-owned subsidiary of Black Hills Corporation
Black Hills Power
Black Hills Power, Inc., a direct, wholly-owned subsidiary of Black Hills Corporation
Black Hills Utility Holdings
Black Hills Utility Holdings, Inc., a direct, wholly-owned subsidiary of Black Hills Corporation
Black Hills Wyoming
Black Hills Wyoming, LLC, a direct, wholly-owned subsidiary of Black Hills Electric Generation
Cheyenne Light
Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation
Cheyenne Prairie
Cheyenne Prairie Generating Station currently being constructed in Cheyenne, Wyo. by Cheyenne Light and Black Hills Power. Construction is expected to be completed for this 132 megawatt facility in 2014.
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, LLC a direct wholly-owned subsidiary of Black Hills Electric Generation
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.
Conflict Mineral
As defined by the Dodd-Frank, conflict minerals are cassiterite, columbite-tantalite, gold and wolframite that are mined in the Democratic Republic of the Congo or surrounding countries
CPCN
Certificate of Public Convenience and Necessity
CPUC
Colorado Public Utilities Commission
CVA
Credit Valuation Adjustment
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 were subsequently de-designated
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, sold Feb. 29, 2012
FASB
Financial Accounting Standards Board

3



FERC
United States Federal Energy Regulatory Commission
Fitch
Fitch Ratings
GAAP
Accounting principles generally accepted in the United States of America
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.
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
United States 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
Thousand cubic feet
Mcfe
Thousand cubic feet equivalent. Natural gas liquid is converted by dividing gallons by 7. Crude oil is converted by multiplying barrels by 6.
MMBtu
Million British thermal units
Moody’s
Moody’s Investors Service, Inc.
MWh
Megawatt-hour
NGL
Natural Gas Liquids. One gallon equals 7 Mcfe
OTC
Over-the-counter
PPA
Power Purchase Agreement
PSCo
Public Service Company of Colorado
Revolving Credit Facility
Our $500 million credit facility used to fund working capital needs, letters of credit and other corporate purposes, which matures in 2017
SDPUC
South Dakota Public Utilities Commission
SEC
U. S. Securities and Exchange Commission
S&P
Standard and Poor’s, a division of The McGraw-Hill Companies, Inc.
WPSC
Wyoming Public Service Commission

4





BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
Three Months Ended
March 31,
 
2013
2012
 
(in thousands, except per share amounts)
 
 
 
Revenue
$
380,671

$
365,851

 
 
 
Operating expenses:
 
 
Utilities -
 
 
Fuel, purchased power and cost of gas sold
168,173

157,183

Operations and maintenance
65,690

64,760

Non-regulated energy operations and maintenance
21,329

22,595

Depreciation, depletion and amortization
34,781

38,559

Taxes - property, production and severance
10,380

11,510

Other operating expenses
472

1,196

Total operating expenses
300,825

295,803

 
 
 
Operating income
79,846

70,048

 
 
 
Other income (expense):
 
 
Interest charges -
 
 
Interest expense incurred (including amortization of debt issuance costs, premiums and discounts and realized settlements on interest rate swaps)
(23,672
)
(29,914
)
Allowance for funds used during construction - borrowed
74

518

Capitalized interest
266

161

Unrealized gain (loss) on interest rate swaps, net
7,456

12,045

Interest income
285

437

Allowance for funds used during construction - equity
200

277

Other income (expense), net
405

1,472

Total other income (expense)
(14,986
)
(15,004
)
 
 
 
Income (loss) from continuing operations before earnings (loss) of unconsolidated subsidiaries and income taxes
64,860

55,044

Equity in earnings (loss) of unconsolidated subsidiaries
(86
)
(56
)
Income tax benefit (expense)
(21,577
)
(19,717
)
Income (loss) from continuing operations
43,197

35,271

Income (loss) from discontinued operations, net of tax

(5,484
)
Net income (loss) available for common stock
$
43,197

$
29,787

 
 
 
Earnings (loss) per share, Basic -
 
 
Income (loss) from continuing operations, per share
$
0.98

$
0.81

Income (loss) from discontinued operations, per share

(0.13
)
Total income (loss) per share, Basic
$
0.98

$
0.68

Earnings (loss) per share, Diluted -
 
 
Income (loss) from continuing operations, per share
$
0.97

$
0.80

Income (loss) from discontinued operations, per share

(0.12
)
Total income (loss) per share, Diluted
$
0.97

$
0.68

Weighted average common shares outstanding:
 
 
Basic
44,053

43,731

Diluted
44,312

43,969

 
 
 
Dividends paid per share of common stock
$
0.380

$
0.370


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

5





BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)

 
Three Months Ended
March 31,
 
2013
2012
 
(in thousands)
 
 
 
Net income (loss) available for common stock
$
43,197

$
29,787

 
 
 
Other comprehensive income (loss), net of tax:
 
 
Fair value adjustment on derivatives designated as cash flow hedges (net of tax (expense) benefit of $1,117 and $55, respectively)
(1,661
)
576

Reclassification adjustments related to defined benefit plan (net of tax of $(175) and $0)
457


Reclassification adjustments of cash flow hedges settled and included in net income (loss) (net of tax (expense) benefit of $(236) and $445, respectively)
468

(742
)
Other comprehensive income (loss), net of tax
(736
)
(166
)
 
 
 
Comprehensive income (loss) available for common stock
$
42,461

$
29,621


See Note 8 for additional disclosures.

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
(unaudited)

 
As of
 
March 31,
2013
 
Dec. 31, 2012
 
March 31,
2012
 
(in thousands)
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
12,397

 
$
15,462

 
$
56,132

Restricted cash and equivalents
6,846

 
7,916

 
8,960

Accounts receivable, net
168,783

 
163,698

 
143,987

Materials, supplies and fuel
64,189

 
77,643

 
63,236

Derivative assets, current
1,630

 
3,236

 
17,877

Income tax receivable, net

 

 
10,399

Deferred income tax assets, net, current
38,196

 
77,231

 
23,710

Regulatory assets, current
23,422

 
31,125

 
56,282

Other current assets
28,260

 
28,795

 
26,546

Total current assets
343,723

 
405,106

 
407,129

 
 
 
 
 
 
Investments
16,545

 
16,402

 
16,451

 
 
 
 
 
 
Property, plant and equipment
3,977,704

 
3,930,772

 
3,800,011

Less accumulated depreciation and depletion
(1,210,833
)
 
(1,188,023
)
 
(980,944
)
Total property, plant and equipment, net
2,766,871

 
2,742,749

 
2,819,067

 
 
 
 
 
 
Other assets:
 
 
 
 
 
Goodwill
353,396

 
353,396

 
353,396

Intangible assets, net
3,565

 
3,620

 
3,787

Derivative assets, non-current

 
510

 
881

Regulatory assets, non-current
181,119

 
188,268

 
186,093

Other assets, non-current
21,367

 
19,420

 
21,132

Total other assets, non-current
559,447

 
565,214

 
565,289

 
 
 
 
 
 
TOTAL ASSETS
$
3,686,586

 
$
3,729,471

 
$
3,807,936


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

7



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


 
As of
 
March 31,
2013
 
Dec. 31, 2012
 
March 31,
2012
 
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
82,437

 
$
84,422

 
$
59,793

Accrued liabilities
140,230

 
154,389

 
151,130

Derivative liabilities, current
89,112

 
96,541

 
76,389

Accrued income tax, net
1,157

 
4,936

 

Regulatory liabilities, current
19,020

 
13,628

 
35,414

Notes payable
245,000

 
277,000

 
225,000

Current maturities of long-term debt
104,637

 
103,973

 
8,977

Total current liabilities
681,593

 
734,889

 
556,703

 
 
 
 
 
 
Long-term debt, net of current maturities
936,477

 
938,877

 
1,272,016

 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
 
Deferred income tax liabilities, net, non-current
367,502

 
385,908

 
317,369

Derivative liabilities, non-current
15,237

 
16,941

 
43,169

Regulatory liabilities, non-current
126,573

 
127,656

 
112,516

Benefit plan liabilities
172,353

 
167,397

 
157,623

Other deferred credits and other liabilities
125,958

 
125,294

 
123,848

Total deferred credits and other liabilities
807,623

 
823,196

 
754,525

 
 
 
 
 
 
Commitments and contingencies (See Notes 6, 9, 11 and 14)


 

 

 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
Common stock equity —
 
 
 
 
 
Common stock $1 par value; 100,000,000 shares authorized; issued 44,482,304; 44,278,189; and 44,151,428 shares, respectively
44,482

 
44,278

 
44,151

Additional paid-in capital
735,000

 
733,095

 
725,512

Retained earnings
519,184

 
492,869

 
490,114

Treasury stock, at cost – 41,606; 71,782; and 65,015 shares, respectively
(1,549
)
 
(2,245
)
 
(2,041
)
Accumulated other comprehensive income (loss)
(36,224
)
 
(35,488
)
 
(33,044
)
Total stockholders’ equity
1,260,893

 
1,232,509

 
1,224,692

 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,686,586

 
$
3,729,471

 
$
3,807,936


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

8



BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
Three Months Ended March 31,
 
2013
2012
 
(in thousands)
Operating activities:
 
 
Net income (loss) available to common stock
$
43,197

$
29,787

(Income) loss from discontinued operations, net of tax

5,484

Income (loss) from continuing operations
43,197

35,271

Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
 
 
Depreciation, depletion and amortization
34,781

38,559

Deferred financing cost amortization
1,095

2,719

Derivative fair value adjustments
3,673

1,594

Stock compensation
3,778

1,817

Unrealized mark-to-market (gain) loss on interest rate swaps
(7,456
)
(12,045
)
Deferred income taxes
20,541

18,083

Allowance for funds used during construction - equity
(200
)
(277
)
Employee benefit plans
5,548

5,246

Other adjustments, net
3,614

2,243

Changes in certain operating assets and liabilities:
 
 
Materials, supplies and fuel
18,519

20,828

Accounts receivable, unbilled revenues and other current assets
(9,166
)
9,439

Accounts payable and other current liabilities
(13,637
)
(42,368
)
Regulatory assets
9,463

(776
)
Regulatory liabilities
374

18,938

Contributions to defined benefit pension plans

(25,000
)
Other operating activities, net
(4,892
)
610

Net cash provided by operating activities of continuing operations
109,232

74,881

Net cash provided by (used in) operating activities of discontinued operations

21,184

Net cash provided by operating activities
109,232

96,065

 
 
 
Investing activities:
 
 
Property, plant and equipment additions
(63,939
)
(67,652
)
Other investing activities
1,030

1,105

Net cash provided by (used in) investing activities of continuing operations
(62,909
)
(66,547
)
Proceeds from sale of discontinued business operations

108,837

Net cash provided by (used in) investing activities of discontinued operations

(824
)
Net cash provided by (used in) investing activities
(62,909
)
41,466

 
 
 
Financing activities:
 
 
Dividends paid on common stock
(16,882
)
(16,276
)
Common stock issued
1,231

764

Short-term borrowings - issuances
78,500

56,453

Short-term borrowings - repayments
(110,500
)
(176,453
)
Long-term debt - repayments
(1,737
)
(1,897
)
Other financing activities

(2,758
)
Net cash provided by (used in) financing activities of continuing operations
(49,388
)
(140,167
)
Net cash provided by (used in) financing activities of discontinued operations


Net cash provided by (used in) financing activities
(49,388
)
(140,167
)
Net change in cash and cash equivalents
(3,065
)
(2,636
)
Cash and cash equivalents, beginning of period*
15,462

58,768

Cash and cash equivalents, end of period
$
12,397

$
56,132

_______________________
*
Includes cash of discontinued operations of $37.1 million at Dec. 31, 2011.

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.

9



BLACK HILLS CORPORATION

Notes to Condensed Consolidated Financial Statements
(unaudited)
(Reference is made to Notes to Consolidated Financial Statements
included in the Company’s 2012 Annual Report on Form 10-K)

(1)    MANAGEMENT'S STATEMENT

The unaudited Condensed Consolidated Financial Statements included herein have been prepared by Black Hills Corporation (together with our subsidiaries the “Company,” “us,” “we,” 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 Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2012 Annual Report on Form 10-K filed with the SEC.

We conduct our operations through the following reportable segments: Electric Utilities, Gas Utilities, Power Generation, Coal Mining and Oil and Gas. 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. All of our operations and assets are located within the United States.

Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying Condensed Consolidated Financial Statements reflects all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the March 31, 2013, Dec. 31, 2012 and March 31, 2012 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 electric utilities is June through August while 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 months ended March 31, 2013 and March 31, 2012, and our financial condition as of March 31, 2013, Dec. 31, 2012, and March 31, 2012 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.

On Feb. 29, 2012, we sold our Energy Marketing segment, which resulted in this segment being classified as discontinued operations.


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

Recently Adopted Accounting Standards

Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, ASU 2013-02

In February 2013, the FASB issued ASU 2013-02 which requires new disclosures for items reclassified out of AOCI. ASU 2013-02 requires disclosure of (1) changes in components of other comprehensive income, (2) for items reclassified out of AOCI and into net income in their entirety, the effect of the reclassification on each affected net income line item and (3) cross references to other disclosures that provide additional detail for components of other comprehensive income that are not reclassified in their entirety to net income. Disclosures are required either on the face of the statements of income or as a separate disclosure in the notes to the financial statements. The new disclosure requirements are effective for interim and annual periods beginning after Dec. 15, 2012. The adoption of this standard did not have an impact on our financial position, results of operations or cash flows. See additional disclosures in Note 8.



10



Balance Sheet: Disclosure about Offsetting Assets and Liabilities, ASU 2011-11

In December 2011, the FASB issued revised accounting guidance to amend disclosure requirements for offsetting financial assets and liabilities to enhance current disclosures, as well as to improve comparability of balance sheets prepared under GAAP and IFRS. The revised disclosure guidance affects all companies that have financial instruments and derivative instruments that are either offset in the balance sheet (i.e., presented on a net basis) or subject to an enforceable master netting and/or similar arrangement. In addition, the revised guidance requires that certain enhanced quantitative and qualitative disclosures are made with respect to a company’s netting arrangements and/or rights of offset associated with its financial instruments and/or derivative instruments. The revised disclosure guidance is effective on a retrospective basis for interim and annual periods beginning Jan. 1, 2013. The adoption of this standard did not have an impact on our financial position, results of operations or cash flows. See additional disclosures in Note 12.

Recently Issued Accounting Pronouncements and Legislation

Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, ASU 2013-04

In March 2013, the FASB issued new disclosure requirements for recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements including disclosure of the nature and amount of the obligations. The new disclosure requirements are effective for interim and annual periods beginning after Dec. 15, 2013. The amendment requires additional details in the notes to financial statements, but will not have any other impact on our financial statements.

Dodd-Frank Wall Street Reform and Consumer Protection Act, SEC Final Rule No. 34-67716

In Aug. 2012, under Dodd-Frank, the SEC adopted new requirements for companies that manufacture or contract to manufacture products that contain certain minerals and metals, known as conflict minerals. The final rules requires all issuers that file reports with the SEC to report supply chain and sourcing information for companies that use conflict minerals on an annual basis. These new requirements will require due diligence efforts in fiscal 2013, with initial disclosure requirements beginning in May 2014. Based on our preliminary analysis, we do not believe that our products contain conflict minerals as defined by the rule; however, our assessment process to determine whether conflict minerals are necessary to the functionality or production of any of our products is not complete.


(3)    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
Three Months Ended
 
March 31, 2013
 
March 31, 2012
 
(in thousands)
Non-cash investing and financing activities from continuing operations—
 
 
 
Property, plant and equipment acquired with accrued liabilities
$
31,780

 
$
31,644

Increase (decrease) in capitalized assets associated with asset retirement obligations
$

 
$
2,826

 
 
 
 
Cash (paid) refunded during the period for continuing operations—
 
 
 
Interest (net of amounts capitalized)
$
(12,768
)
 
$
(16,799
)
Income taxes, net
$
(4,656
)
 
$
(1,838
)



11



(4)    MATERIALS, SUPPLIES AND FUEL

The following amounts by major classification are included in Materials, supplies and fuel in the accompanying Condensed Consolidated Balance Sheets (in thousands) as of:
 
March 31, 2013
 
Dec. 31, 2012
 
March 31, 2012
Materials and supplies
$
50,401

 
$
43,397

 
$
44,361

Fuel - Electric Utilities
8,445

 
8,589

 
7,812

Natural gas in storage held for distribution
5,343

 
25,657

 
11,063

Total materials, supplies and fuel
$
64,189

 
$
77,643

 
$
63,236



(5)    ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Following is a summary of Accounts receivable, net included in the accompanying Condensed Consolidated Balance Sheets (in thousands) as of:
 
Accounts
Unbilled
Less Allowance for
Accounts
March 31, 2013
Receivable, Trade
Revenue
 Doubtful Accounts
Receivable, net
Electric Utilities
$
47,896

$
21,591

$
(623
)
$
68,864

Gas Utilities
59,024

28,439

(751
)
86,712

Power Generation
3



3

Coal Mining
1,857



1,857

Oil and Gas
10,340


(19
)
10,321

Corporate
1,026



1,026

Total
$
120,146

$
50,030

$
(1,393
)
$
168,783


 
Accounts
Unbilled
Less Allowance for
Accounts
Dec. 31, 2012
Receivable, Trade
Revenue
 Doubtful Accounts
Receivable, net
Electric Utilities
$
54,482

$
23,843

$
(527
)
$
77,798

Gas Utilities
31,495

39,962

(222
)
71,235

Power Generation
16



16

Coal Mining
2,247



2,247

Oil and Gas
11,622


(19
)
11,603

Corporate
799



799

Total
$
100,661

$
63,805

$
(768
)
$
163,698


 
Accounts
Unbilled
Less Allowance for
Accounts
March 31, 2012
Receivable, Trade
Revenue
 Doubtful Accounts
Receivable, net
Electric Utilities
$
44,356

$
19,381

$
(585
)
$
63,152

Gas Utilities
44,287

18,502

(936
)
61,853

Power Generation
265



265

Coal Mining
2,578



2,578

Oil and Gas
15,014


(105
)
14,909

Corporate
1,230



1,230

Total
$
107,730

$
37,883

$
(1,626
)
$
143,987



12




(6)    NOTES PAYABLE

Our Revolving Credit Facility and debt securities contain certain restrictive financial covenants. As of March 31, 2013, we were in compliance with all of these covenants.

We had the following short-term debt outstanding in the Condensed Consolidated Balance Sheets (in thousands) as of:

 
March 31, 2013
Dec. 31, 2012
March 31, 2012
 
Balance Outstanding
Letters of Credit
Balance Outstanding
Letters of Credit
Balance Outstanding
Letters of Credit
Revolving Credit Facility
$
95,000

$
36,500

$
127,000

$
36,300

$
75,000

$
41,200

Term Loan due June 2013
150,000


150,000


150,000


Total
$
245,000

$
36,500

$
277,000

$
36,300

$
225,000

$
41,200


Debt Covenants

Certain debt obligations require compliance with the following covenants at the end of each quarter (dollars in thousands):

 
As of
 
 
 
March 31, 2013
 
Covenant Requirement
Consolidated Net Worth
$
1,260,893

 
Greater than
$
946,493

Recourse Leverage Ratio
52.2
%
 
Less than
65.0
%


(7)    EARNINGS PER SHARE

A reconciliation of share amounts used to compute Earnings (loss) per share is as follows (in thousands):

 
Three Months Ended
March 31,
 
2013
2012
 
 
 
Income (loss) from continuing operations
$
43,197

$
35,271

 
 
 
Weighted average shares - basic
44,053

43,731

Dilutive effect of:
 
 
Restricted stock
155

147

Stock options
13

18

Other dilutive effects
91

73

Weighted average shares - diluted
44,312

43,969


13




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
March 31,
 
2013
2012
Stock options
6

127

Restricted stock
34

31

Other stock

16

Anti-dilutive shares
40

174



(8)
OTHER COMPREHENSIVE INCOME

The components of the reclassification adjustments for the period, net of tax, included in Other Comprehensive Income were as follows (in thousands):
 
Location on the Condensed Consolidated Statements of Income
Amount Reclassified from AOCI
 
Three Months Ended March 31, 2013
Three Months Ended March 31, 2012
Gains and losses on cash flow hedges:
 
 
 
 
Interest rate swaps
Interest expense
$
1,796

$
1,822

 
Commodity contracts
Revenue
(1,092
)
(3,009
)
 
 
 
704

(1,187
)
 
Income tax
Income tax benefit (expense)
(236
)
445

 
Total reclassification adjustments related to cash flow hedges, net of tax
 
$
468

$
(742
)
 
 
 
 
 
 
Amortization of defined benefit plans:
 
 
 
 
Prior service cost
Utilities - Operations and maintenance
$
(31
)
$

 
 
Non-regulated energy operations and maintenance
(32
)

 
 
 
 
 
 
Actuarial gain (loss)
Utilities - Operations and maintenance
421


 
 
Non-regulated energy operations and maintenance
274


 
 
 
632


 
Income tax
Income tax benefit (expense)
(175
)

 
Total reclassification adjustments related to defined benefit plans, net of tax
 
$
457

$

 


14



Balances by classification included within Accumulated other comprehensive income (loss) on the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):
 
Derivatives Designated as Cash Flow Hedges
Employee Benefit Plans
Total
Balance as of December 31, 2011
$
(13,802
)
$
(19,076
)
$
(32,878
)
Other comprehensive income (loss), net of tax
(166
)

(166
)
Ending Balance March 31, 2012
$
(13,968
)
$
(19,076
)
$
(33,044
)
 
 
 
 
Balance as of December 31, 2012
$
(15,713
)
$
(19,775
)
$
(35,488
)
Other comprehensive income (loss), net of tax
(1,193
)
457

(736
)
Ending Balance March 31, 2013
$
(16,906
)
$
(19,318
)
$
(36,224
)


(9)    EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

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

 
Three Months Ended
March 31,
 
2013
2012
Service cost
$
1,608

$
1,430

Interest cost
3,825

3,687

Expected return on plan assets
(4,654
)
(4,084
)
Prior service cost
16

22

Net loss (gain)
3,062

2,408

Net periodic benefit cost
$
3,857

$
3,463


Non-pension Defined Benefit Postretirement Healthcare Plans

The components of net periodic benefit cost for the Non-pension Defined Benefit Postretirement Healthcare Plans were as follows (in thousands):
 
Three Months Ended
March 31,
 
2013
2012
Service cost
$
419

$
402

Interest cost
417

523

Expected return on plan assets
(20
)
(19
)
Prior service cost (benefit)
(125
)
(125
)
Net loss (gain)
121

222

Net periodic benefit cost
$
812

$
1,003



15



Supplemental Non-qualified Defined Benefit and Defined Contribution Plans

The components of net periodic benefit cost for the Supplemental Non-qualified Defined Benefit and Defined Contribution Plans were as follows (in thousands):
 
Three Months Ended
March 31,
 
2013
2012
Service cost
$
348

$
246

Interest cost
332

331

Prior service cost
1

1

Net loss (gain)
198

202

Net periodic benefit cost
$
879

$
780


Contributions

We anticipate that we will make contributions to the benefit plans during 2013 and 2014. Contributions to the Pension Plans are cash contributions made directly to the Pension Plan Trust accounts. Healthcare and Supplemental Plan contributions are made in the form of benefit payments. Contributions and anticipated contributions are as follows (in thousands):
 
Contributions Made
Additional
 
 
Three Months Ended March 31, 2013
Contributions Anticipated for 2013
Contributions Anticipated for 2014
Defined Benefit Pension Plans
$

$
8,787

$
19,922

Non-pension Defined Benefit Postretirement Healthcare Plans
$
784

$
2,352

$
3,350

Supplemental Non-qualified Defined Benefit and Defined Contribution Plans
$
322

$
965

$
1,463



(10)    BUSINESS SEGMENT INFORMATION

Segment information and Corporate activities included in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets are below.

On Feb. 29, 2012, we sold our Energy Marketing segment, Enserco, which resulted in this segment being classified as discontinued operations. Indirect corporate costs and inter-segment interest expense related to Enserco that have not been classified as discontinued operations have been reclassified to Corporate activity.


16



Segment information and Corporate activities included in the accompanying Condensed Consolidated Statements of Income was as follows (in thousands):
Three Months Ended March 31, 2013
 
External
Operating
Revenue
 
Intercompany
Operating
Revenue
 
Income (Loss) from Continuing Operations
Utilities:
 
 
 
 
 
 
   Electric
 
$
158,483

 
$
4,147

 
$
12,356

   Gas
 
199,812

 

 
18,483

Non-regulated Energy:
 
 
 
 
 
 
   Power Generation
 
1,022

 
19,338

 
5,644

   Coal Mining
 
6,010

 
7,573

 
1,065

   Oil and Gas
 
15,344

 

 
(53
)
Corporate activities (a)
 

 

 
5,699

Intercompany eliminations
 

 
(31,058
)
 
3

Total
 
$
380,671

 
$

 
$
43,197


Three Months Ended March 31, 2012
 
External
Operating
Revenue
 
Intercompany
Operating
Revenue
 
Income (Loss) from Continuing Operations
Utilities:
 
 
 
 
 
 
   Electric
 
$
156,133

 
$
3,036

 
$
8,746

   Gas
 
180,522

 

 
15,207

Non-regulated Energy:
 
 
 
 
 
 
   Power Generation
 
1,178

 
18,449

 
6,914

   Coal Mining
 
6,373

 
8,616

 
1,000

   Oil and Gas  
 
21,645

 

 
13

Corporate activities (a)(b)
 

 

 
3,391

Intercompany eliminations
 

 
(30,101
)
 

Total
 
$
365,851

 
$

 
$
35,271

_____________
(a)
Income (loss) from continuing operations includes a $4.8 million and a $7.8 million net after-tax non-cash mark-to-market gain for the three months ended March 31, 2013 and 2012, respectively.
(b)
Certain indirect corporate costs and inter-segment interest expense after-tax totaling $1.6 million for the three months ended March 31, 2012 were included in the Corporate activities in continuing operations and were not reclassified as discontinued operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

17



Segment information and Corporate balances included in the accompanying Condensed Consolidated Balance Sheets was as follows (in thousands):
Total Assets (net of inter-company eliminations) as of:
March 31, 2013
 
Dec. 31, 2012
 
March 31, 2012
Utilities:
 
 
 
 
 
   Electric (a)
$
2,367,014

 
$
2,387,458

 
$
2,268,524

   Gas
752,468

 
765,165

 
717,185

Non-regulated Energy:
 
 
 
 
 
   Power Generation (a)
115,708

 
119,170

 
128,225

   Coal Mining
82,839

 
83,810

 
87,139

   Oil and Gas
255,786

 
258,460

 
430,851

Corporate activities
112,771

 
115,408

 
176,012

Total assets
$
3,686,586

 
$
3,729,471

 
$
3,807,936

___________
(a)
The PPA under which the Pueblo Airport Generation site owned by Colorado IPP supports Colorado customers is accounted for as a capital lease. Therefore, assets owned by the Power Generation segment are included in Total Assets of Electric Utilities Segment under this accounting for a capital lease.


(11)    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 credit risk. To manage and mitigate these identified risks, we have adopted the Black Hills Corporation Risk Policies and Procedures as discussed in our 2012 Annual Report on Form 10-K.

Market Risk

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 including, but not limited to:

Commodity price risk associated with our natural long position with crude oil and natural gas reserves and production and fuel procurement for certain of our gas-fired generation assets; and

Interest rate risk associated with our variable rate credit facility, project financing floating rate debt and our other long-term debt instruments.

Credit Risk

Credit risk is the risk of financial loss resulting from non-performance of contractual obligations by a counterparty.

For production and generation activities, we attempt to mitigate our credit exposure by conducting business primarily with high credit quality entities, setting tenor and credit limits commensurate with counterparty financial strength, obtaining master netting agreements, and mitigating credit exposure with less creditworthy counterparties through parental guarantees, prepayments, letters of credit, and other security agreements.

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by review of their current credit information. We maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issue that is identified.

As of March 31, 2013, our credit exposure included a $2.3 million exposure to a non-investment grade energy marketing company. The remainder of our credit exposure was concentrated primarily among retail utility customers, investment grade companies, cooperative utilities and federal agencies. Our derivative and hedging activities included in the accompanying Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income (Loss) are detailed below and within Note 12.


18



Oil and Gas

We produce natural gas and crude oil through our exploration and production activities. Our natural “long” positions, or unhedged open positions, result in commodity price risk and variability to our cash flows.

To mitigate commodity price risk and preserve cash flows, we primarily use over-the-counter swaps, exchange traded futures and related options to hedge portions of our crude oil and natural gas production. We elect hedge accounting on these instruments. These transactions were designated at inception as cash flow hedges, documented under accounting standards for derivatives and hedging, and initially met prospective effectiveness testing. Effectiveness of our hedging position is evaluated at least quarterly.

The derivatives were marked to fair value and were recorded as Derivative assets or Derivative liabilities on the accompanying Condensed Consolidated Balance Sheets. The effective portion of the gain or loss on these derivatives for which we have elected cash flow hedge accounting is reported in AOCI on the accompanying Condensed Consolidated Balance Sheets and the ineffective portion, if any, is reported in Revenue on the accompanying Condensed Consolidated Statements of Income.

We had the following derivatives and related balances for our Oil and Gas segment (dollars in thousands) as of:
 
March 31, 2013
 
Dec. 31, 2012
 
March 31, 2012
 
Crude oil futures, swaps and options
Natural gas futures and swaps
 
Crude oil futures, swaps and options
Natural gas futures and swaps
 
Crude oil futures, swaps and options
Natural gas futures and swaps
Notional (a)
522,000

10,633,000

 
528,000

8,215,500

 
522,000

5,001,750

Maximum terms in years (b)
0.75

0.5

 
1

0.75

 
1.25

1.5

Derivative assets, current
$
821

$
287

 
$
1,405

$
1,831

 
$
406

$
8,256

Derivative assets, non-current
$

$

 
$
297

$
170

 
$
46

$
808

Derivative liabilities, current
$
250

$
1,188

 
$
847

$
507

 
$
2,904

$

Derivative liabilities, non-current
$

$

 
$

$

 
$
1,084

$

Pre-tax accumulated other comprehensive income (loss)
$
10

$
(2,781
)
 
$
206

$
873

 
$
(3,566
)
$
9,064

Cash collateral receivable (payable) included in derivatives
$
730

$
1,880

 
$
786

$
620

 
$

$

Cash collateral included in Other current assets
$
723

$
2,102

 
$
1,078

$
709

 
$

$

____________
(a)
Crude oil in Bbls, natural gas in MMBtus.
(b)
Refers to the term of the derivative instrument. Assets and liabilities are classified as current/non-current based on the term of the hedged transaction and the corresponding settlement of the derivative instrument.
Based on March 31, 2013 market prices, a $0.2 million loss would be reclassified from AOCI during the next 12 months. Estimated and actual realized gains or losses will change during future periods as market prices fluctuate.


19



Utilities

The operations of our utilities, including tolling arrangements, expose our utility customers to volatility in natural gas prices; therefore, as allowed or required by state utility commissions, we have entered into commission approved hedging programs utilizing natural gas futures, options and basis swaps to reduce our customers’ underlying exposure to these fluctuations. These transactions are considered derivatives and in accordance with accounting standards for derivatives and hedging, mark-to-market adjustments are recorded as Derivative assets or Derivative liabilities on the accompanying Condensed Consolidated Balance Sheets. Unrealized and realized gains and losses, as well as option premiums and commissions on these transactions are recorded as Regulatory assets or Regulatory liabilities in accordance with state commission guidelines. Accordingly, the hedging activity is recognized in the Condensed Consolidated Statements of Income or the Condensed Consolidated Statements of Comprehensive Income (Loss) when the related costs are recovered through our rates.

The contract or notional amounts and terms of the natural gas derivative commodity instruments held at our Gas Utilities were as follows, as of:
 
March 31, 2013
 
Dec. 31, 2012
 
March 31, 2012
 
Notional
(MMBtus)
 
Maximum
Term
(months)
 
Notional
(MMBtus)
 
Maximum
Term
(months)
 
Notional
(MMBtus)
 
Maximum
Term
(months)
Natural gas futures purchased
13,180,000

 
80
 
15,350,000

 
83
 
11,550,000

 
81
Natural gas options purchased
440,000

 
5
 
2,430,000

 
2
 
670,000

 
12
Natural gas basis swaps purchased
11,350,000

 
69
 
12,020,000

 
72
 
7,640,000

 
81

We had the following derivative balances related to the hedges in our Utilities (in thousands) as of:
 
March 31, 2013
 
Dec. 31, 2012
 
March 31, 2012
Derivative assets, current
$
522

 
$

 
$
9,215

Derivative assets, non-current
$

 
$
43

 
$
27

Derivative liabilities, non-current
$

 
$

 
$
6,407

Net unrealized (gain) loss included in Regulatory assets or Regulatory liabilities
$
4,315

 
$
9,596

 
$
15,223

 
 
 
 
 
 
Cash collateral receivable (payable) included in derivatives
$
4,487

 
$
8,576

 
$
17,651

Cash collateral included in Other current assets
$
3,295

 
$
4,354

 
$

Option premiums and commissions included in derivatives
$
350

 
$
1,063

 
$
407



20



Financing Activities

We have entered into floating-to-fixed interest rate swap agreements to reduce our exposure to interest rate fluctuations associated with our floating rate debt obligations. Our interest rate swaps and related balances were as follows (dollars in thousands) as of:
 
March 31, 2013
 
Dec. 31, 2012
 
March 31, 2012
 
Designated 
Interest Rate
Swaps (a)
De-designated
Interest Rate
Swaps (b)
 
Designated 
Interest Rate
Swaps (a)
De-designated
Interest Rate
Swaps (b)
 
Designated 
Interest Rate
Swaps (a)
De-designated
Interest Rate
Swaps (b)
Notional
$
150,000

$
250,000

 
$
150,000

$
250,000

 
$
150,000

$
250,000

Weighted average fixed interest rate
5.04
%
5.67
%
 
5.04
%
5.67
%
 
5.04
%
5.67
%
Maximum terms in years
3.75

0.75

 
4.00

1.00

 
4.75

1.75

Derivative liabilities, current
$
6,982

$
80,692

 
$
7,039

$
88,148

 
$
6,777

$
66,708

Derivative liabilities, non-current
$
15,237

$

 
$
16,941

$

 
$
18,441

$
17,237

Pre-tax accumulated other comprehensive income (loss)
$
(22,219
)
$

 
$
(23,980
)
$

 
$
(25,218
)
$

Pre-tax gain (loss)
$

$
7,456

 
$

$
1,882

 
$

$
12,045

Cash collateral receivable (payable) included in derivatives
$

$
5,960

 
$

$
5,960

 
$

$

_____________
(a)
These swaps have been designated to $75.0 million of borrowings on our Revolving Credit Facility and $75.0 million of borrowings on our project financing debt at Black Hills Wyoming. The swaps transferred to Black Hills Wyoming such that BHC and Black Hills Wyoming are both jointly and severally liable for the amount of those obligations. These swaps are priced using three-month LIBOR, matching the floating portion of the related swaps.
(b)
Maximum terms in years reflect the amended early termination dates. If the early termination dates are not extended, the swaps will require cash settlement based on the swap value on the termination date. If extended, de-designated swaps totaling $100.0 million notional terminate in 6 years and de-designated swaps totaling $150.0 million notional terminate in 16 years.

Collateral requirements based on our corporate credit rating apply to $50.0 million of our de-designated swaps. At our current credit ratings, we are required to post collateral for any amount by which the swaps’ negative mark-to-market fair value exceeds $20.0 million. If our senior unsecured credit rating drops to BB+ or below by S&P, or to Ba1 or below by Moody’s, we would be required to post collateral for the entire amount of the swaps’ negative mark-to-market fair value. We had $6.0 million cash collateral posted at March 31, 2013.

Based on March 31, 2013 market interest rates and balances related to our designated interest rate swaps, a loss of approximately $7.0 million would be realized, reported in pre-tax earnings and reclassified from AOCI during the next 12 months. Estimated and actual realized gains or losses will change during future periods as market interest rates change.


(12)    FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels. We record transfers, if necessary, between levels at the end of the reporting period for all of our financial instruments. For additional information see Notes 1, 3 and 4 included in our 2012 Annual Report on Form 10-K filed with the SEC.

Transfers into Level 3, if any, occur when significant inputs used to value the derivative instruments become less observable such as a significant decrease in the frequency and volume in which the instrument is traded, negatively impacting the availability of observable pricing inputs. Transfers out of Level 3, if any, occur when the significant inputs become more observable such as the time between the valuation date and the delivery date of a transaction becomes shorter, positively impacting the availability of observable pricing inputs.


21



Valuation Methodologies for Derivatives

Oil and Gas Segment:

The commodity option contracts for our Oil and Gas segment are valued under the market approach and include calls and puts. Fair value was derived using quoted prices from third party brokers for similar instruments as to quantity and timing. The prices are then validated through third party sources and therefore support Level 2 disclosure.

The commodity basis swaps for our Oil and Gas segment are valued under the market approach using the instrument’s current forward price strip hedged for the same quantity and date and discounted based on the three-month LIBOR. We utilize observable inputs which support Level 2 disclosure.

Utilities Segment:

The commodity contracts for our Utilities, valued using the market approach, include exchange-traded futures, options and basis swaps (Level 2) and OTC basis swaps (Level 3) for natural gas contracts. For Level 2 assets and liabilities, fair value was derived using broker quotes validated by the Chicago Mercantile Exchange pricing for similar instruments. For Level 3 assets and liabilities, fair value was derived using average price quotes from the OTC contract broker and an independent third party market participant since these instruments are not traded on an exchange.

Corporate Activities:

The interest rate swaps are valued using the market approach. We establish fair value by obtaining price quotes directly from the counterparty which are based on the floating three-month LIBOR curve for the term of the contract. The fair value obtained from the counterparty is then validated by utilizing a nationally recognized service that obtains observable inputs to compute fair value for the same instrument. In addition, the fair value for the interest rate swap derivatives includes a CVA component. The CVA considers the fair value of the interest rate swap and the probability of default based on the life of the contract. For the probability of a default component, we utilize observable inputs supporting Level 2 disclosure by using our credit default spread, if available, or a generic credit default spread curve that takes into account our credit ratings.



22



Recurring Fair Value Measurements

There have been no significant transfers between Level 1 and Level 2 derivative balances. The following tables set forth by level within the fair value hierarchy our assets and liabilities that were accounted for at fair value on a recurring basis (in thousands):
 
 
As of March 31, 2013
 
 
Level 1
Level 2
Level 3
 
Cash Collateral and Counterparty
Netting
Total
Assets:
 
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 
 


    Options -- Oil
 
$

$
71

$

 
$
(11
)
$
60

    Basis Swaps -- Oil
 

836


 
(75
)
761

    Options -- Gas
 



 


    Basis Swaps -- Gas
 

435


 
(148
)
287

Commodity derivatives — Utilities
 

1,897


 
(1,375
)
522

Cash equivalents (a)
 
12,397



 

12,397

Total
 
$
12,397

$
3,239

$

 
$
(1,609
)
$
14,027

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 
 


    Options -- Oil
 
$

$
396

$

 
$
(204
)
$
192

    Basis Swaps -- Oil
 

670


 
(612
)
58

    Options -- Gas
 



 


    Basis Swaps -- Gas
 

3,216


 
(2,028
)
1,188

Commodity derivatives — Utilities
 

5,862


 
(5,862
)

Interest rate swaps
 

108,871


 
(5,960
)
102,911

Total
 
$

$
119,015

$

 
$
(14,666
)
$
104,349

______________
(a)
Level 1 assets and liabilities are described in Note 13.


23




 
 
As of Dec. 31, 2012
 
 
Level 1
Level 2
Level 3
 
Cash Collateral and Counterparty
Netting
Total
Assets:
 
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 
 
 
Options -- Oil
 
$

$
378

$

 
$

$
378

Basis Swaps -- Oil
 

1,325


 

1,325

Options -- Gas
 



 


Basis Swaps -- Gas
 

2,000


 

2,000

Commodity derivatives —Utilities
 


43

(b) 

43

Cash equivalents (a)
 
15,462



 

15,462

Total
 
$
15,462

$
3,703

$
43

 
$

$
19,208

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 
 
 
Options -- Oil
 
$

$
1,131

$

 
$
(336
)
$
795

Basis Swaps -- Oil
 

502


 
(450
)
52

Options -- Gas
 



 


Basis Swaps -- Gas
 

1,127


 
(620
)
507

Commodity derivatives — Utilities
 

10,162


 
(10,162
)

Interest rate swaps
 

118,088


 
(5,960
)
112,128

Total
 
$

$
131,010

$

 
$
(17,528
)
$
113,482

______________
(a)
Level 1 assets and liabilities are described in Note 13.
(b)
The significant unobservable inputs used in the fair value measurement of the long-term OTC contracts are based on the average of price quotes from an independent third party market participant and the OTC contract broker. The unobservable inputs are long-term natural gas prices. Significant changes to these inputs along with the contract term would impact the derivative asset/liability and regulatory asset/liability, but will not impact the results of operations until the contract is settled under the original terms of the contract. The contracts will be classified as Level 2 once settlement is within 60 months of maturity and quoted market prices from a market exchange are available.


24



 
 
As of March 31, 2012
 
 
Level 1
Level 2
Level 3
 
Cash Collateral and Counterparty
Netting
Total
Assets:
 
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 
 
 
Options -- Oil
 
$

$
404

$

 
$

$
404

Basis Swaps -- Oil
 

48


 

48

Options -- Gas
 



 


Basis Swaps -- Gas
 

9,064


 

9,064

Commodity derivatives — Utilities
 

(8,412
)
3

(b) 
17,651

9,242

Cash equivalents (a)
 
55,919



 

55,919

Total
 
$
55,919

$
1,104

$
3

 
$
17,651

$
74,677

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 
 
 
Options -- Oil
 
$

$
1,347

$

 
$

$
1,347

Basis Swaps -- Oil
 

2,641


 

2,641

Options -- Gas
 



 


Basis Swaps -- Gas
 



 


Commodity derivatives — Utilities
 

6,359

48

(b) 

6,407

Interest rate swaps
 

109,163


 

109,163

Total
 
$

$
119,510

$
48

 
$

$
119,558

______________
(a)
Level 1 assets and liabilities are described in Note 13.
(b)
The significant unobservable inputs used in the fair value measurement of the long-term OTC contracts are based on the average of price quotes from an independent third party market participant and the OTC contract broker. The unobservable inputs are long-term natural gas prices. Significant changes to these inputs along with the contract term would impact the derivative asset/liability and regulatory asset/liability, but will not impact the results of operations until the contract is settled under the original terms of the contract. The contracts will be classified as Level 2 once settlement is within 60 months of maturity and quoted market prices from a market exchange are available.

Fair Value Measures By Balance Sheet Classification

As required by accounting standards for derivatives and hedges, fair values within the following tables are presented on a gross basis and reflect the netting of asset and liability positions permitted in accordance with accounting standards for offsetting and under terms of our master netting agreements and the amounts do not include net cash collateral on deposit in margin accounts at March 31, 2013, Dec. 31, 2012, and March 31, 2012, to collateralize certain financial instruments, which are included in Derivative assets and/or Derivative liabilities. Therefore, the balances are not indicative of either our actual credit exposure or net economic exposure. Additionally, the amounts below will not agree with the amounts presented on our Condensed Consolidated Balance Sheets, nor will they correspond to the fair value measurements presented in Note 11.


25



The following tables present the fair value and balance sheet classification of our derivative instruments (in thousands):
As of March 31, 2013
 
Balance Sheet Location
 
Fair Value
of Asset
Derivatives
Fair Value
of Liability
Derivatives
Derivatives designated as hedges:
 
 
 
 
Commodity derivatives
Derivative assets — current
 
$
832

$

Commodity derivatives
Derivative assets — non-current
 
206


Commodity derivatives
Derivative liabilities — current
 

3,110

Commodity derivatives
Derivative liabilities — non-current
 

1,114

Interest rate swaps
Derivative liabilities — current
 

6,982

Interest rate swaps
Derivative liabilities — non-current
 

15,237

Total derivatives designated as hedges
 
 
$
1,038

$
26,443

 
 
 
 
 
Derivatives not designated as hedges:
 
 
 
 
Commodity derivatives
Derivative assets — current
 
$
2,201

$

Commodity derivatives
Derivative assets — non-current
 


Commodity derivatives
Derivative liabilities — current
 

58

Commodity derivatives
Derivative liabilities — non-current
 

5,862

Interest rate swaps
Derivative liabilities — current
 

86,652

Interest rate swaps
Derivative liabilities — non-current
 


Total derivatives not designated as hedges
 
 
$
2,201

$
92,572


As of Dec. 31, 2012
 
Balance Sheet Location
 
Fair Value
of Asset
Derivatives
Fair Value
of Liability
Derivatives
Derivatives designated as hedges:
 
 
 
 
Commodity derivatives
Derivative assets — current
 
$
2,874

$

Commodity derivatives
Derivative assets — non-current
 
510


Commodity derivatives
Derivative liabilities — current
 

1,993

Commodity derivatives
Derivative liabilities — non-current