BKH 10Q Q3 2013


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, 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 October 31, 2013
Common stock, $1.00 par value
44,485,101

shares





TABLE OF CONTENTS
 
 
 
Page
 
Glossary of Terms and Abbreviations
 
 
 
 
 
PART I.
FINANCIAL INFORMATION
 
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
Condensed Consolidated Statements of Income (Loss) - unaudited
 
 
 
   Three and Nine Months Ended Sept. 30, 2013 and 2012
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Income (Loss)- unaudited
 
 
 
   Three and Nine Months Ended Sept. 30, 2013 and 2012
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - unaudited
 
 
 
   Sept. 30, 2013, Dec. 31, 2012 and Sept. 30, 2012
 
 
 
 
 
 
Condensed Consolidated Statements of Cash Flows - unaudited
 
 
 
   Nine Months Ended Sept. 30, 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, and Black Hills Gas Resources, Inc. and Black Hills Plateau Production, LLC, direct wholly-owned subsidiaries of Black Hills Exploration and Production, Inc.

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, a 132 megawatt generating facility, currently being constructed in Cheyenne, Wyo. by Cheyenne Light and Black Hills Power.
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 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 Minerals
As defined by 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

3


CTII
The 40 megawatt Gillette CT, a simple-cycle, gas-fired combustion turbine owned by Black Hills Wyoming
CVA
Credit Valuation Adjustment, an adjustment to the measurement of derivatives to reflect the default risk of the counterparty.
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
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.
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 of natural gas
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

4


 
 
 
 
 
 
NGL
Natural Gas Liquids. One gallon equals 1/7 Mcfe
NOL
Net Operating Loss
OTC
Over-the-counter
PPA
Power Purchase Agreement
PSCo
Public Service Company of Colorado
Revolving Credit Facility
Our $500 million credit facility 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

5




BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Three Months Ended Sept. 30,
Nine Months Ended Sept. 30,
 
2013
2012
2013
2012
 
(in thousands, except per share and per share amounts)
 
 
 
 
 
Revenue
$
259,907

$
246,808

$
920,404

$
855,022

 
 
 
 
 
Operating expenses:
 
 
 
 
Utilities -
 
 
 
 
Fuel, purchased power and cost of gas sold
71,503

62,582

338,848

283,217

Operations and maintenance
66,061

59,398

196,728

183,721

Non-regulated energy operations and maintenance
20,484

22,466

62,703

65,774

Gain on sale of operating assets
—

(27,285
)
—

(27,285
)
Depreciation, depletion and amortization
36,135

41,408

106,068

121,398

Taxes - property, production and severance
10,068

10,213

30,517

31,201

Impairment of long-lived assets
—

—

—

26,868

Other operating expenses
90

216

1,091

1,679

Total operating expenses
204,341

168,998

735,955

686,573

 
 
 
 
 
Operating income
55,566

77,810

184,449

168,449

 
 
 
 
 
Other income (expense):
 
 
 
 
Interest charges -
 
 
 
 
Interest expense incurred (including amortization of debt issuance costs, premiums and discounts and realized settlements on interest rate swaps)
(23,840
)
(27,475
)
(70,881
)
(85,151
)
Allowance for funds used during construction - borrowed
347

1,127

831

2,608

Capitalized interest
273

175

811

467

Unrealized gain (loss) on interest rate swaps, net
3,144

605

29,393

(2,902
)
Interest income
565

364

1,325

1,428

Allowance for funds used during construction - equity
85

196

327

668

Other income (expense), net
318

(287
)
1,197

2,073

Total other income (expense), net
(19,108
)
(25,295
)
(36,997
)
(80,809
)
 
 
 
 
 
Income (loss) from continuing operations before earnings (loss) of unconsolidated subsidiaries and income taxes
36,458

52,515

147,452

87,640

Equity in earnings (loss) of unconsolidated subsidiaries
—

22

(86
)
(12
)
Income tax benefit (expense)
(13,334
)
(17,914
)
(50,527
)
(30,057
)
Income (loss) from continuing operations
23,124

34,623

96,839

57,571

Income (loss) from discontinued operations, net of tax
—

(166
)
—

(6,810
)
Net income (loss) available for common stock
$
23,124

$
34,457

$
96,839

$
50,761

 
 
 
 
 
Earnings (loss) per share, Basic -
 
 
 
 
Income (loss) from continuing operations, per share
$
0.52

$
0.79

$
2.19

$
1.31

Income (loss) from discontinued operations, per share
—

—

—

(0.16
)
Total income (loss) per share, Basic
$
0.52

$
0.79

$
2.19

$
1.15

Earnings (loss) per share, Diluted -
 
 
 
 
Income (loss) from continuing operations, per share
$
0.52

$
0.78

$
2.18

$
1.31

Income (loss) from discontinued operations, per share
—

—

—

(0.16
)
Total income (loss) per share, Diluted
$
0.52

$
0.78

$
2.18

$
1.15

Weighted average common shares outstanding:
 
 
 
 
Basic
44,201

43,847

44,143

43,792

Diluted
44,457

44,108

44,395

44,026

 
 
 
 
 
Dividends paid per share of common stock
$
0.380

$
0.370

$
1.140

$
1.110


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

6




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


(unaudited)
Three Months Ended
Sept. 30,
Nine Months Ended
Sept. 30,
 
2013
2012
2013
2012
 
(in thousands)
 
 
 
 
 
Net income (loss) available for common stock
$
23,124

$
34,457

$
96,839

$
50,761

 
 
 
 
 
Other comprehensive income (loss), net of tax:
 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges (net of tax (expense) benefit of $964 and $1,204 for the three months ended 2013 and 2012 and $(93) and $1,092 for the nine months ended 2013 and 2012, respectively)
(2,083
)
(3,591
)
134

(3,004
)
Reclassification adjustments related to defined benefit plan (net of tax of $(220) for the three months ended 2013 and $(663) for the nine months ended 2013)
417

—

1,238

—

Reclassification adjustments for cash flow hedges settled and included in net income (loss) (net of tax (expense) benefit of $(586) and $13 for the three months ended 2013 and 2012 and $(1,469) and $890 for the nine months ended 2013 and 2012, respectively)
1,426

28

3,095

(1,333
)
Other comprehensive income (loss), net of tax
(240
)
(3,563
)
4,467

(4,337
)
 
 
 
 
 
Comprehensive income (loss) available for common stock
$
22,884

$
30,894

$
101,306

$
46,424


See Note 7 for additional disclosures.

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
(unaudited)
As of
 
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 2012
 
(in thousands)
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
13,637

 
$
15,462

 
$
247,192

Restricted cash and equivalents
6,782

 
7,916

 
7,302

Accounts receivable, net
114,137

 
163,698

 
104,482

Materials, supplies and fuel
95,230

 
77,643

 
80,900

Derivative assets, current
126

 
3,236

 
16,063

Income tax receivable, net
4,539

 
—

 
11,869

Deferred income tax assets, net, current
37,163

 
77,231

 
33,681

Regulatory assets, current
30,208

 
31,125

 
24,606

Other current assets
27,075

 
28,795

 
44,823

Total current assets
328,897

 
405,106

 
570,918

 
 
 
 
 
 
Investments
16,612

 
16,402

 
16,273

 
 
 
 
 
 
Property, plant and equipment
4,152,097

 
3,930,772

 
3,950,222

Less: accumulated depreciation and depletion
(1,258,450
)
 
(1,188,023
)
 
(1,253,808
)
Total property, plant and equipment, net
2,893,647

 
2,742,749

 
2,696,414

 
 
 
 
 
 
Other assets:
 
 
 
 
 
Goodwill
353,396

 
353,396

 
353,396

Intangible assets, net
3,453

 
3,620

 
3,675

Derivative assets, non-current
—

 
510

 
1,167

Regulatory assets, non-current
183,119

 
188,268

 
191,935

Other assets, non-current
22,116

 
19,420

 
19,850

Total other assets, non-current
562,084

 
565,214

 
570,023

 
 
 
 
 
 
TOTAL ASSETS
$
3,801,240

 
$
3,729,471

 
$
3,853,628


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

8


BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
(unaudited)
As of
 
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 2012
 
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
77,077

 
$
84,422

 
$
69,138

Accrued liabilities
152,911

 
154,389

 
179,284

Derivative liabilities, current
65,944

 
96,541

 
86,509

Accrued income tax, net
—

 
4,936

 
—

Regulatory liabilities, current
14,707

 
13,628

 
10,705

Notes payable
138,300

 
277,000

 
225,000

Current maturities of long-term debt
255,694

 
103,973

 
328,310

Total current liabilities
704,633

 
734,889

 
898,946

 
 
 
 
 
 
Long-term debt, net of current maturities
955,979

 
938,877

 
942,950

 
 
 
 
 
 
Deferred credits and other liabilities:
 
 
 
 
 
Deferred income tax liabilities, net, non-current
403,772

 
385,908

 
338,194

Derivative liabilities, non-current
11,388

 
16,941

 
41,410

Regulatory liabilities, non-current
131,730

 
127,656

 
120,491

Benefit plan liabilities
169,448

 
167,397

 
167,690

Other deferred credits and other liabilities
133,341

 
125,294

 
129,630

Total deferred credits and other liabilities
849,679

 
823,196

 
797,415

 
 
 
 
 
 
Commitments and contingencies (See Notes 5, 8, 10 and 13)


 

 

 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
Common stock equity —
 
 
 
 
 
Common stock $1 par value; 100,000,000 shares authorized; issued 44,532,245; 44,278,189; and 44,250,588 shares, respectively
44,532

 
44,278

 
44,251

Additional paid-in capital
740,209

 
733,095

 
731,176

Retained earnings
539,030

 
492,869

 
478,459

Treasury stock, at cost – 47,127; 71,782; and 75,420 shares, respectively
(1,801
)
 
(2,245
)
 
(2,354
)
Accumulated other comprehensive income (loss)
(31,021
)
 
(35,488
)
 
(37,215
)
Total stockholders’ equity
1,290,949

 
1,232,509

 
1,214,317

 
 
 
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
3,801,240

 
$
3,729,471

 
$
3,853,628


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

9


BLACK HILLS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended Sept. 30,
 
 
2013
2012
 
Operating activities:
(in thousands)
 
Net income (loss) available to common stock
$
96,839

$
50,761

 
(Income) loss from discontinued operations, net of tax
—

6,810

 
Income (loss) from continuing operations
96,839

57,571

 
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
106,068

121,398

 
Deferred financing cost amortization
3,209

5,301

 
Impairment of long-lived assets
—

26,868

 
Derivative fair value adjustments
275

(3,522
)
 
Gain on sale of operating assets
—

(27,285
)
 
Stock compensation
9,100

5,974

 
Unrealized (gain) loss on interest rate swaps, net
(29,393
)
2,902

 
Deferred income taxes
54,865

28,718

 
Employee benefit plans
16,644

15,737

 
Other adjustments, net
9,434

2,837

 
Changes in certain operating assets and liabilities:
 
 
 
Materials, supplies and fuel
(12,522
)
3,085

 
Accounts receivable, unbilled revenues and other operating assets
28,762

56,301

 
Accounts payable and other current liabilities
(23,774
)
(22,041
)
 
Contributions to defined benefit pension plans
(12,500
)
(25,000
)
 
Other operating activities, net
4,759

(361
)
 
Net cash provided by operating activities of continuing operations
251,766

248,483

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

21,184

 
Net cash provided by operating activities
251,766

269,667

 
 
 
 
 
Investing activities:
 
 
 
Property, plant and equipment additions
(239,485
)
(261,414
)
 
Proceeds from sale of assets
—

268,482

 
Investment in notes receivable
—

(21,832
)
 
Other investing activities
2,846

5,057

 
Net cash provided by (used in) investing activities of continuing operations
(236,639
)
(9,707
)
 
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
(236,639
)
98,306

 
 
 
 
 
Financing activities:
 
 
 
Dividends paid on common stock
(50,678
)
(48,904
)
 
Common stock issued
3,606

3,835

 
Short-term borrowings - issuances
269,600

62,453

 
Short-term borrowings - repayments
(408,300
)
(182,453
)
 
Long-term debt - issuances
275,000

—

 
Long-term debt - repayments
(106,180
)
(11,647
)
 
Other financing activities
—

(2,833
)
 
Net cash provided by (used in) financing activities of continuing operations
(16,952
)
(179,549
)
 
Net cash provided by (used in) financing activities of discontinued operations
—

—

 
Net cash provided by (used in) financing activities
(16,952
)
(179,549
)
 
Net change in cash and cash equivalents
(1,825
)
188,424

 
Cash and cash equivalents, beginning of period
15,462

58,768

*
Cash and cash equivalents, end of period
$
13,637

$
247,192

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

See Note 2 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.

10


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 Sept. 30, 2013, Dec. 31, 2012, and Sept. 30, 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. 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 Sept. 30, 2013 and Sept. 30, 2012, and our financial condition as of Sept. 30, 2013, Dec. 31, 2012, and Sept. 30, 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.


11


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) 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 7.

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. 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 11.

Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, ASU 2013-10

In July 2013, the FASB issued an amendment to accounting for derivatives and hedges to permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes effective for new or re-designated hedging relationships entered into on or after July 17, 2013. The amendment also removed the restriction on using different benchmark rates for similar hedges. The initial adoption had no impact on our consolidated financial position, results of operations or cash flows.


12


Recently Issued Accounting Pronouncements and Legislation

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, ASU 2013-11

In July 2013, the FASB issued an amendment to accounting for income taxes which provides guidance on financial statement presentation of an unrecognized tax benefit when an NOL carryforward, a similar tax loss, or a tax credit carryforward exists. The objective in issuing this amendment is to eliminate diversity in practice resulting from a lack of guidance on this topic in current GAAP. Under the amendment, an entity must present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward except under certain conditions. The amendment is effective for fiscal years beginning after Dec. 15, 2013, and interim periods within those years and should be applied to all unrecognized tax benefits that exist as of the effective date. The adoption of this standard is not expected to have an impact on our financial position, results of operations or cash flows.

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 enhanced disclosures in the notes to financial statements, but will not have any other impact on our consolidated financial statements.

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

In August 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 rule requires all issuers that file reports with the SEC and use conflict minerals to report supply chain and sourcing information on an annual basis. These new requirements will require due diligence efforts in 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.

Tangible Personal Property, IRS T.D. 9636

In September 2013, the U.S. Treasury issued final regulations addressing the tax consequences associated with the acquisition, production and improvement of tangible property. We continue to evaluate what impact the adoption of the regulations will have on our consolidated financial statements. As of this date, we do not expect the adoption of the regulations to have a material impact on our consolidated financial statements.



13


(2)    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow for the nine months ended are as follows (in thousands):
 
Nine Months Ended
 
Sept. 30, 2013
 
Sept. 30, 2012
 
 
Non-cash investing and financing activities from continuing operations—
 
 
 
Property, plant and equipment acquired with accrued liabilities
$
47,214

 
$
39,303

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

 
$
3,806

 
 
 
 
Cash (paid) refunded during the period for continuing operations—
 
 
 
Interest (net of amounts capitalized)
$
(57,175
)
 
$
(69,901
)
Income taxes, net
$
(4,924
)
 
$
425



(3)    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:
 
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 2012
Materials and supplies
$
50,564

 
$
43,397

 
$
43,847

Fuel - Electric Utilities
6,384

 
8,589

 
8,289

Natural gas in storage held for distribution
38,282

 
25,657

 
28,764

Total materials, supplies and fuel
$
95,230

 
$
77,643

 
$
80,900


 

14


(4)    ACCOUNTS RECEIVABLE

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
Sept. 30, 2013
Receivable, Trade
Revenue
 Doubtful Accounts
Receivable, net
Electric Utilities
$
49,254

$
20,153

$
(648
)
$
68,759

Gas Utilities
20,693

11,877

(542
)
32,028

Power Generation
3

—

—

3

Coal Mining
2,677

—

—

2,677

Oil and Gas
8,463

—

(19
)
8,444

Corporate
2,226

—

—

2,226

Total
$
83,316

$
32,030

$
(1,209
)
$
114,137


 
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
Sept. 30, 2012
Receivable, Trade
Revenue
 Doubtful Accounts
Receivable, net
Electric Utilities
$
46,802

$
18,441

$
(603
)
$
64,640

Gas Utilities
18,198

9,480

(204
)
27,474

Power Generation
4

—

—

4

Coal Mining
1,540

—

—

1,540

Oil and Gas
10,272

—

(105
)
10,167

Corporate
657

—

—

657

Total
$
77,473

$
27,921

$
(912
)
$
104,482




15


(5)    NOTES PAYABLE AND LONG-TERM DEBT

We had the following notes payable outstanding in the accompanying Condensed Consolidated Balance Sheets (in thousands) as of:
 
Sept. 30, 2013
Dec. 31, 2012
Sept. 30, 2012
 
Balance Outstanding
Letters of Credit
Balance Outstanding
Letters of Credit
Balance Outstanding
Letters of Credit
Revolving Credit Facility
$
138,300

$
53,137

$
127,000

$
36,300

$
75,000

$
36,300

Term Loan due June 2013
—

—

150,000

—

150,000

—

Total
$
138,300

$
53,137

$
277,000

$
36,300

$
225,000

$
36,300


Replacement of Notes Payable and Long-Term Term Loan

On June 21, 2013, we entered into a new $275 million term loan expiring on June 19, 2015. The proceeds from this new term loan repaid the $150 million term loan due on June 24, 2013, the $100 million corporate term loan due on Sept. 30, 2013, and $25 million in short-term borrowing under our Revolving Credit Facility. At Sept. 30, 2013, the cost of borrowing under this new term loan was 1.3125 percent (LIBOR plus a margin of 1.125 percent). The covenants of the new term loan are substantially the same as the Revolving Credit Facility.

Debt Covenants

Our Revolving Credit Facility and our new Term Loan require compliance with the following financial covenant at the end of each quarter (dollars in thousands):
 
As of
 
 
 
Sept. 30, 2013
 
Covenant Requirement
Recourse Leverage Ratio
52.0
%
 
Less than
65.0
%

As of Sept. 30, 2013, we were in compliance with this covenant.



16


(6)    EARNINGS PER SHARE

A reconciliation of share amounts used to compute Earnings (loss) per share in the accompanying Condensed Consolidated Statements of Income (loss) is as follows (in thousands):
 
Three Months Ended Sept. 30,
 
Nine Months Ended Sept. 30,
 
2013
2012
 
2013
2012
 
 
 
 
 
 
Income (loss) from continuing operations
$
23,124

$
34,623

 
$
96,839

$
57,571

 
 
 
 
 
 
Weighted average shares - basic
44,201

43,847

 
44,143

43,792

Dilutive effect of:
 
 
 
 
 
Restricted stock
131

175

 
137

159

Stock options
13

12

 
13

14

Other dilutive effects
112

74

 
102

61

Weighted average shares - diluted
44,457

44,108

 
44,395

44,026


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 Sept. 30,
Nine Months Ended Sept. 30,
 
2013
2012
2013
2012
Stock options
—

77

9

101

Restricted stock
—

61

—

53

Other stock
—

—

—

19

Anti-dilutive shares
—

138

9

173




17


(7)
OTHER COMPREHENSIVE INCOME (LOSS)

The components of the reclassification adjustments, net of tax, included in Other Comprehensive Income (Loss) for the periods were as follows (in thousands):
 
Location on the Condensed Consolidated Statements of Income (Loss)
Amount Reclassified from AOCI
Three Months Ended
Nine Months Ended
Sept. 30, 2013
Sept. 30, 2012
Sept. 30, 2013
Sept. 30, 2012
Gains (losses) on cash flow hedges:
 
 
 
 
 
Interest rate swaps
Interest expense
$
1,844

$
1,853

$
5,460

$
5,518

Commodity contracts
Revenue
168

(1,838
)
(896
)
(7,741
)
 
 
2,012

15

4,564

(2,223
)
Income tax
Income tax benefit (expense)
(586
)
13

(1,469
)
890

Reclassification adjustments related to cash flow hedges, net of tax
 
$
1,426

$
28

$
3,095

$
(1,333
)
 
 
 
 
 
 
Amortization of defined benefit plans:
 
 
 
 
 
Prior service cost
Utilities - Operations and maintenance
$
(31
)
$
—

$
(93
)
$
—

 
Non-regulated energy operations and maintenance
(32
)
—

(96
)
—

 
 
 
 
 
 
Actuarial gain (loss)
Utilities - Operations and maintenance
425

—

1,267

—

 
Non-regulated energy operations and maintenance
275

—

823

—

 
 
637

—

1,901

—

Income tax
Income tax benefit (expense)
(220
)
—

(663
)
—

Reclassification adjustments related to defined benefit plans, net of tax
 
$
417

$
—

$
1,238

$
—



18


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 Dec. 31, 2011
$
(13,802
)
$
(19,076
)
$
(32,878
)
Other comprehensive income (loss), net of tax
(166
)
—

(166
)
Balance as of March 31, 2012
(13,968
)
(19,076
)
(33,044
)
Other comprehensive income (loss), net of tax
(608
)
—

(608
)
Balance as of June 30, 2012
(14,576
)
(19,076
)
(33,652
)
Other comprehensive income (loss), net of tax
(3,563
)
—

(3,563
)
Ending Balance Sept. 30, 2012
$
(18,139
)
$
(19,076
)
$
(37,215
)
 
 
 
 
Balance as of Dec. 31, 2012
$
(15,713
)
$
(19,775
)
$
(35,488
)
Other comprehensive income (loss), net of tax
(1,193
)
457

(736
)
Balance as of March 31, 2013
(16,906
)
(19,318
)
(36,224
)
Other comprehensive income (loss), net of tax
5,079

364

5,443

Balance as of June 30, 2013
(11,827
)
(18,954
)
(30,781
)
Other comprehensive income (loss), net of tax
(657
)
417

(240
)
Ending Balance Sept. 30, 2013
$
(12,484
)
$
(18,537
)
$
(31,021
)


(8)    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 Sept. 30,
Nine Months Ended Sept. 30,
 
2013
2012
2013
2012
Service cost
$
1,608

$
1,431

$
4,824

$
4,291

Interest cost
3,825

3,688

11,475

11,062

Expected return on plan assets
(4,654
)
(4,084
)
(13,962
)
(12,252
)
Prior service cost
16

22

48

66

Net loss (gain)
3,062

2,408

9,186

7,224

Net periodic benefit cost
$
3,857

$
3,465

$
11,571

$
10,391



19


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 Sept. 30,
Nine Months Ended Sept. 30,
 
2013
2012
2013
2012
Service cost
$
419

$
402

$
1,257

$
1,206

Interest cost
417

523

1,251

1,569

Expected return on plan assets
(20
)
(19
)
(60
)
(57
)
Prior service cost (benefit)
(125
)
(125
)
(375
)
(375
)
Net loss (gain)
121

222

363

666

Net periodic benefit cost
$
812

$
1,003

$
2,436

$
3,009


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 Sept. 30,
Nine Months Ended Sept. 30,
 
2013
2012
2013
2012
Service cost
$
348

$
243

$
1,044

$
735

Interest cost
332

331

996

993

Prior service cost
1

1

3

3

Net loss (gain)
198

202

594

606

Net periodic benefit cost
$
879

$
777

$
2,637

$
2,337


Contributions

We anticipate that we will make contributions to the benefit plans during 2013 and 2014. Contributions to the Defined Benefit Pension Plans are cash contributions made directly to the Pension Plan Trust accounts. Contributions to the Healthcare and Supplemental Plan are made in the form of benefit payments. Contributions and anticipated contributions are as follows (in thousands):
 
Contributions Made
Contributions Made
Additional
 
 
Three Months Ended Sept. 30, 2013
Nine Months Ended Sept. 30, 2013
Contributions Anticipated for 2013
Contributions Anticipated for 2014
Defined Benefit Pension Plans
$
12,500

$
12,500

$
—

$
12,500

Non-pension Defined Benefit Postretirement Healthcare Plans
$
784

$
2,352

$
784

$
3,350

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

$
966

$
322

$
1,463




20


(9)    BUSINESS SEGMENT INFORMATION

Segment information and Corporate activities included in the accompanying Condensed Consolidated Statements of Income (Loss) were as follows (in thousands):
Three Months Ended Sept. 30, 2013
 
External
Operating
Revenue
 
Intercompany
Operating
Revenue
 
Income (Loss) from Continuing Operations
Utilities:
 
 
 
 
 
 
   Electric
 
$
169,401

 
$
2,003

 
$
15,097

   Gas
 
67,792

 
—

 
(1,450
)
Non-regulated Energy:
 
 
 
 
 
 
   Power Generation
 
1,575

 
20,393

 
6,707

   Coal Mining
 
6,713

 
8,604

 
2,142

   Oil and Gas
 
14,426

 
—

 
(1,682
)
Corporate activities (a)
 
—

 
—

 
2,310

Intercompany eliminations
 
—

 
(31,000
)
 
—

Total
 
$
259,907

 
$
—

 
$
23,124


Three Months Ended Sept. 30, 2012
 
External
Operating
Revenue
 
Intercompany
Operating
Revenue
 
Income (Loss) from Continuing Operations
Utilities:
 
 
 
 
 
 
   Electric
 
$
151,281

 
$
3,736

 
$
14,573

   Gas
 
63,435

 
—

 
3

Non-regulated Energy:
 
 
 
 
 
 
   Power Generation
 
1,256

 
19,695

 
5,128

   Coal Mining
 
6,108

 
8,567

 
1,690

   Oil and Gas (b)
 
24,728

 
—

 
17,389

Corporate activities (a)
 
—

 
—

 
(4,160
)
Intercompany eliminations
 
—

 
(31,998
)
 
—

Total
 
$
246,808

 
$
—

 
$
34,623


21



Nine Months Ended Sept. 30, 2013
 
External
Operating
Revenues
 
Intercompany
Operating
Revenues
 
Income (Loss) from Continuing Operations
Utilities:
 
 
 
 
 
 
   Electric
 
$
482,222

 
$
9,844

 
$
38,063

   Gas
 
373,440

 
—

 
20,225

Non-regulated Energy:
 
 
 
 
 
 
   Power Generation
 
3,628

 
58,825

 
17,382

   Coal Mining
 
19,530

 
23,688

 
5,180

   Oil and Gas
 
41,584

 
—

 
(3,699
)
Corporate (a)
 
—

 
—

 
19,688

Intercompany eliminations
 
—

 
(92,357
)
 
—

Total
 
$
920,404

 
$
—

 
$
96,839


Nine Months Ended Sept. 30, 2012
 
External
Operating
Revenues
 
Intercompany
Operating
Revenues
 
Income (Loss) from Continuing Operations
Utilities:
 
 
 
 
 
 
   Electric
 
$
451,974

 
$
11,946

 
$
37,478

   Gas
 
314,343

 
—

 
16,369

Non-regulated Energy:
 
 
 
 
 
 
   Power Generation
 
3,193

 
56,119

 
15,968

   Coal Mining
 
18,518

 
24,273

 
3,924

   Oil and Gas (b)
 
66,994

 
—

 
(2,219
)
Corporate (a)(c)
 
—

 
—

 
(13,949
)
Intercompany eliminations
 
—

 
(92,338
)
 
—

Total
 
$
855,022

 
$
—

 
$
57,571

__________
(a)
Income (loss) from continuing operations includes a $2.0 million and a $19.1 million net after-tax non-cash mark-to-market gain on certain interest rate swaps for the three and nine months ended Sept. 30, 2013, respectively, and a $0.4 million after-tax non-cash mark-to-market gain and a $1.9 million net after-tax non-cash mark-to-market loss for the three and nine months ended Sept. 30, 2012, respectively, for those same interest rate swaps.
(b)
Income (loss) from continuing operations for the nine months ended Sept. 30, 2012, includes a $17.3 million non-cash after-tax ceiling test impairment charge. Income (loss) from continuing operations for the three and nine months ended Sept. 30, 2012, includes an after-tax gain of $17.7 million relating to the sale of the Williston Basin assets. See Notes 14 and 15 for further information.
(c)
Certain indirect corporate costs and inter-segment interest expense after-tax totaling $1.6 million for the nine months ended Sept. 30, 2012, were included in the Corporate activities in continuing operations and were not reclassified as discontinued operations.


22


Segment information and Corporate balances included in the accompanying Condensed Consolidated Balance Sheets were as follows (in thousands):
Total Assets (net of inter-company eliminations) as of:
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 2012
Utilities:
 
 
 
 
 
   Electric (a)
$
2,464,123

 
$
2,387,458

 
$
2,302,951

   Gas
757,746

 
765,165

 
710,099

Non-regulated Energy:
 
 
 
 
 
   Power Generation (a)
102,331

 
119,170

 
119,489

   Coal Mining
82,155

 
83,810

 
90,444

   Oil and Gas
264,785

 
258,460

 
263,088

Corporate activities
130,100

 
115,408

 
367,557

Total assets
$
3,801,240

 
$
3,729,471

 
$
3,853,628

__________
(a)
The PPA pertaining to the portion of the Pueblo Airport Generation Station owned by Colorado IPP that supports Colorado Electric 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.


(10)    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 in crude oil and natural gas reserves and production and our fuel procurement for certain of our gas-fired generation assets; and

•
Interest rate risk associated with our variable rate debt, including our project financing floating rate debt and our other short-term and long-term debt instruments.


23


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 Sept. 30, 2013, our credit exposure included a $1.3 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 rated companies, cooperative utilities and federal agencies. Our derivative and hedging activities recorded in the accompanying Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income (Loss) and Condensed Consolidated Statements of Comprehensive Income (Loss) are detailed below and in Note 11.

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 in the accompanying Condensed Consolidated Balance Sheets and the ineffective portion, if any, is reported in Revenue in the accompanying Condensed Consolidated Statements of Income (Loss).


24


The contract or notional amounts, terms of our commodity derivatives, and the derivative balances for our Oil and Gas segment reflected on the Condensed Consolidated Balance Sheet were as follows (dollars in thousands) as of:
 
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 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)
499,500

9,874,000

 
528,000

8,215,500

 
537,000

7,455,250

Maximum terms in years (b)
0.25

0.08

 
1.00

0.75

 
1.00

1.00

Derivative assets, current
$
13

$
113

 
$
1,405

$
1,831

 
$
1,651

$
2,032

Derivative assets, non-current
$
—

$
—

 
$
297

$
170

 
$
494

$
39

Derivative liabilities, current
$
98

$
52

 
$
847

$
507

 
$
527

$
1,040

Derivative liabilities, non-current
$
—

$
—

 
$
—

$
—

 
$
414

$
141

__________
(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 market prices at Sept. 30, 2013, a $0.1 million gain 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.

Utilities

The operations of our utilities, including power purchase arrangements where our utilities must provide the generation fuel (tolling agreements), 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, net of balance sheet offsetting as permitted by GAAP. 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 the accompanying Condensed Consolidated Balance Sheets in accordance with state commission guidelines. Accordingly, the hedging activity is recognized in the Condensed Consolidated Statements of Income (Loss) 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 Utilities were as follows, as of:
 
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 2012
 
Notional
(MMBtus)
 
Maximum
Term
(months)
 
Notional
(MMBtus)
 
Maximum
Term
(months)
 
Notional
(MMBtus)
 
Maximum
Term
(months)
Natural gas futures purchased
14,010,000

 
74
 
15,350,000

 
83
 
14,690,000

 
75
Natural gas options purchased
6,810,000

 
6
 
2,430,000

 
2
 
5,560,000

 
6
Natural gas basis swaps purchased
9,790,000

 
63
 
12,020,000

 
72
 
8,800,000

 
75


25


We had the following derivative balances related to the hedges in our Utilities reflected in our Condensed Consolidated Balance Sheet as of (in thousands):
 
Sept. 30, 2013
Dec. 31, 2012
Sept. 30, 2012
Derivative assets, current
$
—

$
—

$
12,380

Derivative assets, non-current
$
—

$
43

$
634

Derivative liabilities, non-current
$
—

$
—

$
4,527

Net unrealized (gain) loss included in Regulatory assets or Regulatory liabilities
$
10,652

$
9,596

$
9,318


Financing Activities

We entered into floating-to-fixed interest rate swap agreements to reduce our exposure to interest rate fluctuations associated with our floating rate debt obligations. The contract or notional amounts, terms of our interest rate swaps and the interest rate swaps balances reflected on the Condensed Consolidated Balance Sheet were as follows (dollars in thousands) as of:
 
Sept. 30, 2013
 
Dec. 31, 2012
 
Sept. 30, 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
3.25

0.25

 
4.00

1.00

 
4.25

1.25

Derivative liabilities, current
$
7,039

$
58,755

 
$
7,039

$
88,148

 
$
7,028

$
77,914

Derivative liabilities, non-current
$
11,388

$
—

 
$
16,941

$
—

 
$
18,660

$
17,668

__________
(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 that hedge the variable rate debt at Black Hills Wyoming were transferred from BHC. Both BHC and Black Hills Wyoming are jointly and severally obligated for the swaps’ 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 approximately 5.25 years and de-designated swaps totaling $150.0 million notional terminate in approximately 15.25 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 approximately $6.0 million cash collateral posted at Sept. 30, 2013.

Based on Sept. 30, 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.

 

26


(11)    FAIR VALUE MEASUREMENTS

Derivative Financial Instruments

The accounting guidance for fair value measurements requires certain disclosures about assets and liabilities measured at fair value. This guidance establishes a hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value. 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 to the Consolidated Financial Statements 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 when the time between the valuation date and the delivery date of a transaction becomes shorter, positively impacting the availability of observable pricing inputs.

Valuation Methodologies for Derivatives

Oil and Gas Segment:

•
The commodity option contracts for our Oil and Gas segment are valued using the market approach and can 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 using 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 Segments:

•
The commodity contracts for our Utilities Segments, 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 because 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.


27


Recurring Fair Value Measurements

There have been no significant transfers between Level 1 and Level 2 derivative balances. Amounts included in cash collateral and counterparty netting in the following tables represent the impact of legally enforceable master netting agreements that allow us to settle positive and negative positions, netting of asset and liability positions permitted in accordance with accounting standards for offsetting as well as cash collateral posted with the same counterparties.

The following tables set forth by level within the fair value hierarchy our gross assets and gross liabilities and related offsetting as permitted by GAAP that were accounted for at fair value on a recurring basis for derivative instruments. A discussion of fair value of financial instruments is included in Note 12:
 
As of Sept. 30, 2013
 
Level 1
Level 2
Level 3
 
Cash Collateral and Counterparty
Netting
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 


    Options -- Oil
$
—

$
2

$
—

 
$
—

$
2

    Basis Swaps -- Oil
—

51

—

 
(40
)
11

    Options -- Gas
—

—

—

 
—

—

    Basis Swaps -- Gas
—

1,752

—

 
(1,639
)
113

Commodity derivatives — Utilities
—

2,351

—

 
(2,351
)
—

Total
$
13,637

$
4,156

$
—

 
$
(4,030
)
$
126

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Commodity derivatives — Oil and Gas
 
 
 
 
 


    Options -- Oil
$
—

$
142

$
—

 
$
(77
)
$
65

    Basis Swaps -- Oil
—

1,318

—

 
(1,284
)
34

    Options -- Gas
—

—

—

 
—

—

    Basis Swaps -- Gas
—

232

—

 
(181
)
51

Commodity derivatives — Utilities
—

10,747

—

 
(10,747
)
—

Interest rate swaps
—

83,142

—

 
(5,960
)
77,182

Total
$
—

$
95,581

$
—

 
$
(18,249
)
$
77,332




28



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

$
378

$
—

 
$
—

$
378

Basis Swaps -- Oil
—

1,325

—

 
—

1,325

Options -- Gas
—

—

—