Certain states where we conduct electric utility operations have adopted renewable energy portfolio standards that require or encourage us to source, by a certain future date, a minimum percentage of the electricity delivered to customers from renewable energy generation facilities. At December 31, 2018,2019, we were subject to the following renewable energy portfolio standards or objectives:

Absent a specific renewable energy mandate in the territories we serve, our current strategy is to prudently incorporateproactively integrate alternative and renewable energy into our resourceutility energy supply seeking to minimize associatedwhile mitigating customer rate increases for our utility customers. Portfolioimpacts. Mandatory portfolio standards mayhave increased, and will likely continue to increase the power supply costs of our electric 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 the costs we pay to be in compliance with standards or objectives. We cannot at this time reasonably forecast the potential costs associated with any new renewable energy standards that have been or may be proposed at the federal or state level.

The nature of our business subjects us to a number of uncertainties and risks. The followingRisks that may adversely affect the business, financial condition, results of operations or cash flows are described below. These 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

Our results of operations depend, in significant part, on our actual results or outcomesability to differ materially.

Our regulated electric operations areElectric Utility is subject to cost-of-service regulation and earnings oversight from federal and three state utility commissions. This regulatory treatment does not provide any assurance as to achievement of desired earnings levels. Our retail electric utility 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. 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 theeach state public utility commissionscommission will judge all of our costs, including our direct and allocated 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 produce a full recovery of our costs and the allowed return on invested capital allowedcapital. In addition, rate decisions could be influenced by many factors, including general economic conditions and the applicable state public utility commission.political environment.

To some degree, we areOur Electric Utility is permitted to recover certain costs (such as increased fuel and purchased power and transmission costs, as applicable) without having to filecosts) outside of a base rate review. To the extent we are able to pass through such costs to our customers, and athe state public utility commission subsequently determines that such costs should not have been paid by the customers, we may be required to refund such costs to customers.costs. Any such costs not recovered through rates, or any such refund, could adversely affect financial operating results including earnings, cash flow and liquidity.

Increased rules and regulations associated with fossil fuels and GHG emissions could result in the impairment or retirement of some of our existing or future transmission, distribution and generation facilities. Further, these rules could create the need to purchase or build clean-energy fuel sources to fulfill obligations to our customers. These actions could also result in increased operating costs which could adversely impact customers and our financial operating results of operations, financial position orincluding earnings, cash flows.flow and liquidity.

Operation, construction, expansion and refurbishment of operations.

The ongoing operation of our facilitiesbusiness involves many 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, including newer environmental emission control technology.above. Any of these risks could cause us to experience negative financial results and damage to our reputation and public confidence. These risks could cause us to incur significant costs, be unable to deliver energy and/or operate below expected capacity levels, which in turn could reduce revenues increase expenses or cause us to incur higher operating and maintenance costs and penalties. While we maintain insurance and we obtain warranties from vendors and obligate contractors to meet certain performance levels, the proceeds of such insurance and our rights under contracts, warranties or performance guarantees may not be timely or adequate to cover lost revenues, increased expenses, liability or liquidated damage payments.

These hazards could result in injury or loss of human life, cause environmental pollution, significantly damage property or natural resources and impair our ability to operate our facilities. While we maintain liability and property insurance coverage, such policies are subject to certain limits and deductibles. The occurrence of any of these events may not be fully covered by our insurance and could have a material adverse effect on our financial operating results of operationsincluding earnings, cash flow and financial condition are impacted by customerliquidity.

Our revenues,financial operating results of operations and financial condition are impacted by demand in our service territories. Customer growth and usage may be impacted by a number of factors, including the voluntary reduction of consumption of electricity and natural gas by our customers in response to increases in prices and demand-side managementenergy efficiency programs, economic conditions impacting decreases in customers’ disposable income and the use of distributed generation resources or other emerging technologies. Continued technological improvements may make customer and third-party distributed generation and energy storage systems, including fuel cells, micro-turbines, wind turbines, solar cells and batteries, more cost effective and feasible for our customers. If more customers utilize their own generation, demand for energy from us would decline. Such developments could affect the price of energy and delivery of energy, require further improvements to our distribution systems to address changing load demands and could make portions of our electric system power supply and transmission and/or distribution facilities obsolete prior to the end of their useful lives.  Each of these factors could materially affect our financial operating results including earnings, cash flow and liquidity.

To effectively operate our business, we rely upon a sophisticated electronic control system, SCADA, information technology systems and network infrastructure to collect and retain sensitive information including personal information about our customers and employees. Cyberattacks, terrorism or other malicious acts targeting electronic control systems could result in a full or partial disruption of our operations. Attacks targeting other key information technology systems, including our third-party vendors’ information systems, could further add to a full or partial disruption of our operations. Any disruption of these operations financial position could result in a loss of service to customers and a significant decrease in revenues, as well as significant expense to repair system damage and remedy security breaches. Any theft, loss and/or cash flows.fraudulent use of customer, shareowner, employee or proprietary data could subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others.

We rely on pipeline companieshave instituted security measures and other ownerssafeguards to protect our operational systems and information technology assets, including certain safeguards required by FERC. The security measures and safeguards we have implemented may not always be effective. Despite our implementation of gas storage facilitiessecurity measures and safeguards, all of our information technology systems may be vulnerable to deliver natural gas to our natural gas-fired power plants. If storage capacity is inadequatedisability, failures or transportation is disrupted,unauthorized access.

We have significant capital investment programs planned for the next five years. The successful execution of our capital investment strategy depends on, or could be hindered. Asaffected by, a result, we may be responsible for damages incurred by our counterparties, such as the additionalvariety of factors that include, but are not limited to: extreme weather conditions, effective management of projects, availability of qualified construction personnel, including contractors, changes in commodity and other prices, governmental approvals and permitting and regulatory cost of acquiring alternative supply at then-current market rates, or for penalties imposed by state regulatory authorities.recovery.

Our utility business is a seasonal business and weather conditions and 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.heating, respectively. Accordingly, our utility operations have historically generated lower revenues and income when weather conditions are cooler than normal in the summer and warmer than normal in the winter. Unusually mild summers and winters, therefore, could have an adverse effect on our results of operations, financial conditionposition or cash flows.

Our business is located in areas that could be subject to seasonal natural disasterssevere weather events such as severe snow and ice storms, tornadoes, strong winds, significant thunderstorms, flooding and wildfires.drought. These factorsevents could result in interruption of our business,lost operating revenues due to outages, property damage, to our property such as powerincluding inoperable generation facilities and downed transmission and distribution lines, and substations, and repair and clean-up costs associated with these events.storm restoration activities. We may not be able to recover the costs incurred in restoring transmission and distribution property following these natural disasters through a change in our regulated rates therebyweather events resulting in a negative impact on our financial operating results of operations, financial condition orincluding earnings, cash flows.

Business activities in recovering capitalthe energy sector are heavily regulated, primarily by agencies of the federal government. Many agencies employ mandatory civil penalty structures for regulatory violations. The FERC, NERC, CFTC, EPA, OSHA and operating costs incurredSEC may impose significant civil and criminal penalties to comply with new environmental regulations through existing regulatory rate structures and contracts with customers. More stringent environmental laws or regulationsenforce compliance requirements relative to our business, which could result in additional costs of operation for existing facilities or impede the development of new facilities. Although it is not expected that the costs to comply with current environmental regulations will have a material adverse effect on our financial position,operating results including earnings, cash flow and liquidity.

Certain Federal laws provide special protection to certain designated animal species. These laws and any state equivalents provide for significant civil and criminal penalties for non-permitted activities that result in harm to or harassment of certain protected animals, including damage to their habitats. If such species are located in an area in which we conduct operations, or cash flows, future environmental compliance costs could have a significant negative impact.

Municipal governments within our utility service territories possess the power of condemnation and could establish a municipal utility within a portion of our current service territories by limiting or denying franchise privileges for our operations and exercising powers of condemnation over all or part of our utility assets within municipal boundaries. Although condemnation is a process that is subject to constitutional protections requiring just and fair compensation, as with any judicial procedure, the outcome is uncertain. If a municipality sought to pursue this course of action, we cannot assure that we would secure adequate recovery of our investment in assets subject to condemnation.

To the extent climate change occurs, our businessbusinesses could be adversely impacted, although we believe is likely that any such resulting impacts would occur very gradually over a very long period of time and thus would be difficult to quantify with any degree of specificity. Coolerimpacted. Warmer temperatures during the heating season or cooler temperatures during the cooling season in our electric service territories could adversely affect financial results through lower MWh sold and associated lower revenues.

We own and operate regulated fossil-fuel generating plants in South Dakota and Wyoming. Developments under federal and state laws and regulations governing air emissions from fossil-fuel generating plants may result in more stringent emission limitations, which could have a material impact on our costs of operations. Various pending or final state and EPA regulations that will impact our facilities are also discussed in Item 1 of this Annual Report on Form 10-K under the section “Business and Properties.”“Environmental Matters”.

DueThere is uncertainty surrounding current climate regulation due to uncertainty as to the final outcome oflegal challenges, new federal climate regulation, legal challenges,legislation anticipated in the future, or state clean power plan developments or regulatory changes under the Clean Air Act, weclimate legislation and regulation. We cannot definitively estimate the effect of GHG legislation or regulation on our results of operations, financial position or cash flows or financial position.flows.

New or more stringent regulations or other energy efficiency requirements could require us to incur significant additional costs relating to, among other things, the installation of additional emission control equipment, the acceleration of capital expenditures, the purchase of additional emissions allowances or offsets, the acquisition or development of additional energy supply from renewable resources, the closure or reduction of load of coal-fired power generation facilities and potential increased load of our combined cycle natural gas-fired generation units. To the extent our regulated fossil-fuel generating plants are included in rate base we will attempt to recover costs associated with complying with emission standards or other requirements. Any unrecovered costs could have a material impact on our results of operations and financial condition. In addition, future changes in environmental regulations governing air emissions could render some of our power generating units more expensive or uneconomical to operate and maintain.

Business activitiesWe are subject to numerous environmental laws and regulations affecting many aspects of present and future operations, including air emissions, water quality, wastewater discharges, solid waste and hazardous waste. These laws and regulations may result in increased capital, operating and other costs. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Compliance with environmental laws and regulations may require significant expenditures, including expenditures for cleanup costs and damages arising from contaminated properties. Failure to comply with environmental regulations may result in the energy sector are heavily regulated, primarily by agenciesimposition of fines, penalties and injunctive measures affecting operating assets.

We may not be successful in recovering capital and operating costs incurred to comply with new environmental regulations through existing regulatory rate structures and contracts with customers. More stringent environmental laws or regulations could result in additional costs of operation for existing facilities or impede the federal government. Agenciesdevelopment of new facilities. Although it is not expected that historically sought voluntary compliance, or issued non-monetary sanctions, now employ mandatory civil penalty structures for regulatory violations. The FERC, NERC, CFTC, EPA, OSHA, and SEC may impose significant civil and criminal penaltiesthe costs to enforce compliance requirements relative to our business, which couldcomply with current environmental regulations will have a material adverse effect on our operations and/or our financial results.

None.

MATTERS

All of our common stock is held by our parent company, Black Hills Corporation. Accordingly, there is no established trading market for our common stock.

The following discussion includes financial information prepared in accordance with GAAP, as well as another financial measure, gross margin, that is considered a “non-GAAP financial measure.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. Gross margin (revenue less cost of sales) is a non-GAAP financial measure due to the exclusion of depreciation from the measure. The presentation of gross margin is intended to supplement investors’ understanding of our operating performance.

In our Management’s Discussion and Analysis of Results of Operations, grossGross margin is calculated as operating revenue less cost of fuel and purchased power. Our gross margin is impacted by the fluctuations in power purchases and natural gas and other fuel supply costs. However, while these fluctuating costs impact gross margin as a percentage of revenue, they only impact total gross margin if the costs cannot be passed through to our customers.

Our gross margin measure may not be comparable to other companies’ gross margin measure. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.