Rates for our retail electric service are subject to regulation by the SDPUC for customers in South Dakota, the WPSC for customers in Wyoming and the MTPSC for customers in Montana. Any changes in retail rates are subject to approval by the respective regulatory body. We have rate adjustment mechanisms in Montana and South Dakota which provide for pass-through of certain costs related to the purchase, production and/or transmission of electricity. We are also subject to the jurisdiction of FERC with respect to accounting practices and wholesale electricity sales. We have been granted market-based rate authority by FERC and are not required to file cost-based tariffs for wholesale electric rates. Rates charged by us for use of our transmission system are subject to regulation by FERC.

In South Dakota beginning April 1, 2010, the steam plant fuel and conditional energy cost adjustmentadjustments were combined into a single cost adjustment called the Fuel and Purchased Power Adjustment clause. The Fuel and Purchased Power Adjustment Clause provides for the direct recovery of increased fuel and purchased power costs incurred to serve South Dakota customers. TheAs of April 1, 2010, the Fuel and Purchased Power Adjustment clause was modified in the rate case settlement for our power marketing. It now containsto contain a power marketing operating income sharing mechanism in which South Dakota customers will receive a credit equal to 65% of power marketing operating income andincome. The modification also adjusts the methodology to directly assign renewable resources and firm purchases to the customer load. In Wyoming beginning June 1, 2010, a similar Fuel and Purchase Power Cost Adjustment was instituted.

On September 30, 2009, we filed a rate case with the SDPUC requesting an electric revenue increase to recover costs associated with Wygen III and other generation, transmission and distribution assets and increased operating expenses incurred during the past four years. We requested a $32.0 million, or 26.6%, increase in annual utility revenues. In March 2010, the SDPUC approved a 20% increase in interim revenues, subject to refund, effective April 1, 2010 for South Dakota customers. On July 7, 2010, the SDPUC approved a final revenue increase of $15.2 million, or 12.7%, and a base rate increase of $22 million, or 19.4% with an effective date of April 1, 2010. The approved capital structure and return on equity are confidential. A refund was provided to customers in the third quarter of 2010.

As part of the settlement stipulation, we agreed (1) to credit customers 65% of power marketing operating income with a minimum of $2.0 million per year; (2) that rates will include a South Dakota Surplus Energy Credit of $2.5 million in year one (fiscal year ending March 2011), $2.25 million in year two, $2.0 million in year three and zero thereafter; and (3) a moratorium until April 2013 for any base rate increases excluding any extraordinary events as defined in the stipulation agreement; while (4) the SDPUC agreed to adjust the power marketing sales portion of the Fuel and Purchased Power Adjustment clause to directly assign renewable resources and firm purchases to the customer load.

On October 19, 2009, we filed a rate case with the WPSC requesting an electric revenue increase of $3.8 million to recover costs associated with Wygen III and other generation, transmission and distribution assets and increased operating expenses incurred since 1995. On May 4, 2010, we filed a settlement stipulation agreement with the WPSC for a $3.1 million increase in annual revenues. On May 13, 2010, WPSC approved these new rates based on a return on equity of 10.5% with a capital structure of 52% equity and 48% debt. Rates went into effect on June 1, 2010.

Mandatory portfolio standards have increased, and may continue to increase the power supply costs of our annual transmission revenue requirement by approximately $3.8 million. The revenue requirement is based on an equity returnelectric utility operations. Although we will seek to recover these higher costs in rates, we can provide no assurance that we will be able to secure full recovery of 10.8%, and a capital structure consisting of 57% equity and 43% debt. The new annual rates had an effective date of January 1, 2009.the costs we pay to be in compliance with standards or objectives.

We are subject to numerous federal, state and local laws and regulations relating to the protection of the environment and the safety and health of personnel and the public. These laws and regulations affect a broad range of our utility activities, and generally regulate: (i) the protection of air and water quality; (ii) the identification, generation, storage, handling, transportation, disposal, record-keeping, labeling, reporting of, and emergency response in connection with hazardous and toxic materials and wastes, including asbestos; and (iii) the protection of plant and animal species and minimization of noise emissions. We have incurred, and expect to incur, capital, operating and maintenance costs to comply withfor the operations of our plants.plants to comply with these laws and regulations. While the requirements are evolving, it is virtually certain that environmental requirements placed on the operations will continue to be more restrictive.

South DakotaIn 2011, the EPA issued the Industrial and Commercial Boiler Regulations for Area Sources of Hazardous Air Pollutants, which impose emission limits, fuel requirements and monitoring requirements. The rule has adoptedan effective date of May 20, 2011 and a renewable portfolio objectivecompliance deadline of March 21, 2014. This rule has a significant impact on our Neil Simpson I, Osage and Ben French facilities. Engineering evaluations have been completed as to the economic viability of continued operations of these units. It is our expectation that encourages utilitiesthe Neil Simpson I, Osage and Ben French units will be closed prior to generate, or causethe March 21, 2014 compliance deadline.

On December 16, 2011, the EPA signed the National Emission Standards for Hazardous Air Pollutants from Coal and Oil Fired Electric Utility Steam Generating Units (Utility Maximum Achievable Control Technology Rule) which became effective on February 16, 2012. Affected units will have three years from the rule effective date to be generated,in compliance, with a pathway defined to apply for a one year extension due to certain circumstances. Certain requirements of that regulation could have significant impacts on the Neil Simpson II, Wygen III and Wyodak plants. Neil Simpson II, Wygen III and the Wyodak plant are expected to be in compliance within the compliance time frame. Significant modifications may be required to ensure compliance at least 10%Neil Simpson II and we are working toward that goal. Preliminary estimates of capital requirements to comply with this rule are $30 million to $50 million.

In 2011, the State of Wyoming issued a letter addressing startup and shutdown emissions at Neil Simpson II, requiring the facility to include those emissions in consideration of compliance with the permitted emission limits. This represents a significant change in requirements from renewable energy sources by 2015. Absent a specific renewable energy mandatethe original air permit issued in South Dakota, our current strategy is1993. As this facility was not designed and built according to prudently incorporate renewable energy into our resource supply, seekingthose requirements, we are currently undergoing engineering evaluations to minimize associated rate increases for our utility customers.determine methods and costs of compliance.

We follow accounting for regulated utility operations and our financial statements reflect the effects of the different ratemakingrate making principles followed by the various jurisdictions in which we operate. If rate recovery becomes unlikely or uncertain, due to competition or regulatory action, these accounting standards may no longer apply to our regulated operations. In the event we determine that we no longer meet the accounting criteria for regulated operations, the accounting impact to us could be an extraordinary non-cash charge to operations of an amount that could be material.

The nature of our business subjects us to a number of uncertainties and risks. The following specific risk factors and other risk factors that we discuss in our periodic reports filed with the SEC should be considered for a better understanding of our Company. These important factors and other matters discussed herein are important factors that could cause our actual results or outcomes to differ materially from

those discussed in the forward lookingour forward-looking statements, included elsewhere in this document.or otherwise.

Our electricity operations are subject to cost-of-service regulation and earnings oversight. This regulatory treatment does not provide any assurance as to achievement of desired earnings levels. Our rates are regulated on a state-by-state basis by the relevant state regulatory authorities based on an analysis of our costs, as reviewed and approved in a regulatory proceeding. The rates that we are allowed to charge may or may not match our related costs and allowed return on invested capital at any given time. Our returns could be threatened by plant outages, machinery failures, increased purchased power costs, acts of nature, acts of terrorism or other unexpected events over which we have no control that could cause our costs to increase and operating margins to decline. While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the state public utility commissions will judge all of our costs, including our borrowing and debt service costs, to have been prudently incurred or that the regulatory process in which rates are determined will always result in rates that will produce a full recovery of our costs and the return on invested capital allowed by the applicable state public utility commission.

To some degree, we are permitted to recover certain costs (such as increased fuel, purchased power costs and transmission, as applicable) without having to file a rate case. To the extent we pass through such costs to customers and a state public utility commission subsequently determines that such costs should not have been paid by customers, we may be required to refund such costs to customers. Any such costs not recovered through rates, or any such refund, could negatively affect our revenues, cash flows and results of operations.operations, financial position or liquidity.

Operating electric generating facilities involves risks, including:

As a consequence of the global financial crisis in recent years, the creditworthiness of many of our contractual counterparties (particularly financial institutions) has deteriorated. Although we aggressively monitor and evaluate changes in our counterparties' credit quality and adjust the credit limits based upon such changes, our credit guidelines, controls and limits may not protect us from increasing counterparty credit risk. To the extent the financial crisis causes our credit exposure to contractual counterparties to increase materially, such increased exposure could have a materialan adverse effect on our results of operations, cash flows and financial condition.position or liquidity.

The continued recessionary environment and cash flows.

Our credit rating on our First Mortgage Bonds is "A3" by Moody's, "BBB+" by S&P and A- by Fitch. Any reduction in our ratings by the rating agencies could adversely affect our ability to refinance or repay our existing debt and to complete new financings. In addition, a downgrade in our credit rating would increase our costs of borrowing under some of our existing debt obligations. A downgrade could also result in our business counterparties requiring us to provide additional amounts of collateral under new transactions.

The construction, expansion, refurbishment and operation of power generating and transmission facilities involve many risks, including:

The ongoing operation of our facilities involves all of the risks described above, in addition to risks relating to the breakdown or failure of equipment or processes and performance below expected levels of output or efficiency. New plants may employ recently developed and technologically complex equipment, especially in the case of newer environmental emission control technology. Any of these risks could cause us to operate below expected capacity levels, which in turn could reduce revenues, increase expenses, or cause us to incur higher maintenance costs and penalties. While we maintain insurance, obtain warranties from vendors and obligate contractors to meet certain performance levels, the proceeds of such insurance and our rights under warranties or performance guarantees may not be timely or adequate to cover lost revenues, increased expenses or liquidated damage payments.

A portion of the variability of our net income in recent years has been attributable to off-system wholesale electricity sales. The related power prices are influenced by many factors outside our control, including among other things, fuel prices, transmission constraints, supply and demand, weather, general economic conditions and the rules, regulations and actions of the system operators in those markets.

Our utility business is a seasonal business and weather patterns can have a material impact on our operating performance. Demand for electricity is typically greater in the summer and winter months associated with cooling and heating. Accordingly, our utility operations have historically generated less revenues and income when weather conditions are cooler in the summer and warmer in the winter. Unusually mild summers and winters therefore could have an adverse effect on our financial condition and results of operations.operations, financial position and liquidity.

Our business is subject to extensive energy, environmental and other laws and regulations of federal, state and local authorities. We generally must obtain and comply with a variety of regulations, licenses, permits and other approvals in order to operate, which could require significant capital expenditures and operating costs. If we fail to comply with these requirements, we could be subject to civil or criminal liability and the imposition of liens or fines; claims for property damage or personal injury; or environmental clean-up costs. In addition, existing regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to us or our facilities, which could require additional unexpected expenditures and have a detrimental effect on our business.

We strive to comply with all applicable environmental laws and regulations. Future steps to bring our facilities into compliance, if necessary, could be expensive, and could adversely affect our results of operation and financial condition. We expect our environmental compliance expenditures to be substantial in the future due to the continuing trends toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the number of assets we operate.

The following tables provide certain electric utility operating statistics for the years ended December 31 (dollars in thousands):