Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedFor the quarterly period ended June 30, 2020
OR
☐ 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 001-7978

Black Hills Power, Inc.
Incorporated in South Dakota IRS Identification Number 46-0111677

7001 Mount Rushmore Road
Rapid City, South Dakota 57702
Registrant’s telephone number (605) 721-1700

Former name, former address, and former fiscal year if changed since last report
NONE

June 30, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number1-7978
Black Hills Power, Inc.
Incorporated inSouth DakotaIRS Identification Number46-0111677
7001 Mount Rushmore RoadRapid CitySouth Dakota57702
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 ☒ No ☐

Yesx
No o

Indicate by check mark whether the Registrant has submitted electronically 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 ☒ No ☐
Yesx
No
o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FileroAccelerated Filero
Non-accelerated Filerx(Do not check if a smaller reporting company)
Large Accelerated FileroAccelerated Filero
Non-accelerated Filerx(Do not check if a smaller reporting company)
Smaller Reporting Company☐
Emerging Growth Company☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Yes☐
No x
Securities registered pursuant to Section 12(b) of the Act:  None


As of July 31, 2019,2020, there were issued and outstanding 23,416,396 shares of the Registrant’s common stock, $1.00 par value, all of which were held beneficially and of record by Black Hills Corporation.

Reduced Disclosure

The Registrant meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.


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TABLE OF CONTENTS

Page
3
Page
Glossary of Terms and AbbreviationsItem 1.
PART 1. FINANCIAL INFORMATION
Item 1.
Financial Statements - unaudited
45
Condensed Statements of Comprehensive Income
45
Condensed Balance SheetSheets
56
Condensed Statements of Cash Flows
78
Condensed Statements of Common Stockholder’s Equity
89
Notes to Condensed Financial Statements
910
Note 1. Management’s Statement
910
Note 2. Revenue
1011
Note 3. Accounts Receivable
1012
Note 4. Regulatory AccountingMatters
1113
Note 5. Related-Party Transactions
1213
Note 6. Employee Benefit Plans
1315
Note 7. Derivatives and Fair Value of Financial Instrumentss
1517
Note 8. Supplemental Disclosure of Cash Flow InformationCommitments and Contingencies
1520
Note 9. Commitments and ContingenciesLong-term Debt
1521
Note 10. Leases
15
Item 2.
1721
Significant Events
21
Results of Operations
22
Operating Statistics
23
Credit Ratings
25
Forward-Looking Information
26
Item 4.
2226
Item 1.
26
Item 1.1A.
2326
Item 6.
2328
2429


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GLOSSARY OF TERMS AND ABBREVIATIONS

The following terms and abbreviations appear in the text of this report and have the definitions described below:

AFUDCAllowance for Funds Used During Construction
ASCAOCIAccumulated Other Comprehensive Income
ASCAccounting Standards Codification
ASUAccounting Standards Update issued by the FASB
BHCBlack Hills Corporation;Corporation, the Parent Companyof Black Hills Power, Inc.
Black Hills EnergyThe name used to conduct the business of BHCour utility companiescompany as well as our affiliates.
Black Hills Service CompanyBHSCBlack Hills Service Company, LLC, a direct, wholly-owned subsidiary of BHC
Cheyenne LightCheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of Black Hills Corporation (doing business as Black Hills Energy and providing electric service)Energy)
CARES ActCoronavirus Aid, Relief, and Economic Security Act, signed on March 27, 2020, which is a tax and spending package intended to provide additional economic relief and address the impact of the COVID-19 pandemic.
Cooling degree day (CDD)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.
CPCNCorriedaleCertificate of Public ConvenienceWind project near Cheyenne, Wyoming, that will be a 52.5 MW wind farm jointly owned by South Dakota Electric and NecessityWyoming Electric and will serve as the dedicated wind energy supply to the Renewable Ready program.
FASBCOVID-19The official name for the 2019 novel coronavirus disease announced on February 11, 2020 by the World Health Organization, that is causing a global pandemic.
FASBFinancial Accounting Standards Board
FERCUnited States Federal Energy Regulatory Commission
FitchFitch Ratings, Inc.
GAAPAccounting principles generally accepted in the United States of America
Happy JackHappy Jack Wind Farms, LLC, a subsidiary of Duke Energy Generation Services
Heating degree day (HDD)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.
Horizon PointBHC Corporate headquarters building in Rapid City, South Dakota, which was completed in 2017.
LIBORICFRInternal Controls over Financial Reporting
LIBORLondon Interbank Offered Rate
Moody’sMoody’s Investors Service, Inc.
MWMegawatts
MWhMWMegawatt-hoursMegawatts
ParentMWhMegawatt-hours
ParentBlack Hills Corporation
SDPUCRenewable ReadyVoluntary renewable energy subscription program for large commercial, industrial and governmental agency customers in South Dakota Public Utilities Commissionand Wyoming.
SECU. S.
SECUnited States Securities and Exchange Commission
Silver SageSilver Sage Windpower, LLC, a subsidiary of Duke Energy Generation Services
South Dakota ElectricBlack Hills Power, which includes operationsInc., a direct, wholly-owned subsidiary of Black Hills Corporation, providing electric service to customers in Montana, South Dakota and Wyoming and Montana(doing business as Black Hills Energy).
S&PStandard & Poor’s, a division of The McGraw-Hill Companies, Inc.
TCJA
TCJATax Cuts and Jobs Act enacted December 22, 2017
WPSCWyoming Public Service Commission
WRDC
WRDCWyodak Resources Development Corp., an indirect,a direct, wholly-owned subsidiary of BHCBlack Hills Non-Regulated Holdings (doing business as Black Hills Energy).
3
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Wygen III110 MW mine-mouth coal-fired power plant in which BHP owns a 52% interest, MDU owns a 25% interest and the City of Gillette owns the remaining 23% interest. BHP operates the plant.
Wyodak PlantWyodak,
Wyoming ElectricCheyenne Light, Fuel and Power Company, a 362 MW mine-mouth coal-fired plant in Gillette, Wyoming, owned 80% by Pacificorp and 20% bydirect, wholly-owned subsidiary of Black Hills Energy South Dakota. Our WRDC mine supplies all ofCorporation, providing electric service to customers in the fuel for the plant.
Cheyenne, Wyoming Electric
Includes Cheyenne Light’s electric utility operations

area (doing business as Black Hills Energy).


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PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30,Six Months Ended June 30,
(unaudited)2020201920202019
(in thousands)
Revenue$62,587  $69,246  $134,198  $148,287  
Operating expenses:
Fuel and purchased power12,614  18,381  28,601  41,114  
Operations and maintenance19,204  21,128  40,263  40,685  
Depreciation and amortization10,762  10,357  21,903  20,434  
Taxes - property2,280  2,070  4,511  4,102  
Total operating expenses44,860  51,936  95,278  106,335  
Operating income17,727  17,310  38,920  41,952  
Other income (expense):
Interest expense incurred net of amounts capitalized (including amortization of debt issuance costs, premiums and discounts)(5,994) (5,449) (11,942) (10,996) 
Interest income(27) 172  123  287  
Other income (expense), net(543) 291  (184) (84) 
Total other income (expense), net(6,564) (4,986) (12,003) (10,793) 
Income before income taxes11,163  12,324  26,917  31,159  
Income tax (expense)(1,536) (2,176) (3,955) (5,514) 
Net income9,627  10,148  22,962  25,645  
Other comprehensive income (loss), net of tax:
Reclassification of net realized (gains) losses on settled/amortized interest rate swaps (net of tax of $(3), $(7), $(6) and $(7), respectively13  25  25  25  
Reclassification adjustment of benefit plan liability - net gain (loss) (net of tax of $(7), $(2), $(14) and $(6), respectively)25  14  50  26  
Other comprehensive income (loss), net of tax38  39  75  51  
Comprehensive income$9,665  $10,187  $23,037  $25,696  
 Three Months Ended June 30,Six Months Ended June 30,
(unaudited)2019201820192018
 (in thousands)
Revenue$69,246
$70,676
$148,287
$144,491
     
Operating expenses:    
Fuel and purchased power18,381
20,753
41,114
43,193
Operations and maintenance21,128
18,428
40,685
37,579
Depreciation and amortization10,357
9,866
20,434
19,750
Taxes - property2,070
2,134
4,102
4,110
Total operating expenses51,936
51,181
106,335
104,632
     
Operating income17,310
19,495
41,952
39,859
     
Other income (expense):    
Interest charges -    
Interest expense incurred (including amortization of debt issuance costs, premiums, and discounts)(5,876)(5,654)(11,706)(11,241)
Allowance for funds used during construction - borrowed427
152
710
200
Interest income172
123
287
238
Other income (expense), net291
(242)(84)(359)
Total other income (expense), net(4,986)(5,621)(10,793)(11,162)
     
Income before income taxes12,324
13,874
31,159
28,697
Income tax expense(2,176)(2,749)(5,514)(5,812)
Net income10,148
11,125
25,645
22,885
     
Other comprehensive income (loss), net of tax:    
Reclassification of net realized (gains) losses on settled/amortized interest rate swaps (net of tax of $(7), $(5), $(7) and $(11), respectively)25
11
25
21
Reclassification adjustment of benefit plan liability - net gain (loss) (net of tax of $(2), $(9), $(6) and $(18), respectively)14
17
26
34
Other comprehensive income (loss), net of tax39
28
51
55
     
Comprehensive income$10,187
$11,153
$25,696
$22,940


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

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BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS

As of
(unaudited)June 30, 2020December 31, 2019
(in thousands)
ASSETS
Current assets:
Cash$5  $6  
Accounts receivable, net24,987  25,532  
Accounts receivable from affiliates6,557  7,838  
Materials, supplies and fuel31,800  27,950  
Regulatory assets, current25,043  21,588  
Other current assets7,064  4,949  
Total current assets95,456  87,863  
Investments5,136  5,079  
Property, plant and equipment1,517,000  1,494,670  
Less: accumulated depreciation and amortization(382,896) (400,054) 
Total property, plant and equipment, net1,134,104  1,094,616  
Other assets:
Regulatory assets, non-current49,951  54,109  
Other assets, non-current18,560  18,690  
Total other assets, non-current68,511  72,799  
TOTAL ASSETS$1,303,207  $1,260,357  

 As of
(unaudited)June 30, 2019December 31, 2018
 (in thousands)
ASSETS  
Current assets:  
Cash$5
$112
Accounts receivable, net25,882
28,431
Accounts receivable from affiliates5,102
8,119
Materials, supplies and fuel25,313
24,853
Regulatory assets, current22,339
19,052
Other current assets4,460
4,538
Total current assets83,101
85,105
   
Investments4,846
4,889
   
Property, plant and equipment1,428,721
1,381,045
Less: accumulated depreciation and amortization(390,570)(376,160)
Total property, plant and equipment, net1,038,151
1,004,885
   
Other assets:  
Regulatory assets, non-current53,364
56,680
Other assets, non-current26,284
9,729
Total other assets, non-current79,648
66,409
   
TOTAL ASSETS$1,205,746
$1,161,288

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

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BLACK HILLS POWER, INC.
CONDENSED BALANCE SHEETS
(Continued)
As of
(unaudited)June 30, 2020December 31, 2019
(in thousands, except share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable$18,678  $20,654  
Accounts payable to affiliates35,033  32,121  
Accrued liabilities30,074  25,492  
Money pool notes payable56,827  57,585  
Notes payable to Parent65,000  25,000  
Regulatory liabilities, current3,353  3,162  
Total current liabilities208,965  164,014  
Long-term debt337,391  340,176  
Deferred credits and other liabilities:
Deferred income tax liabilities, net113,079  112,202  
Regulatory liabilities, non-current161,237  163,009  
Benefit plan liabilities12,856  14,636  
Other deferred credits and other liabilities15,738  15,397  
Total deferred credits and other liabilities302,910  305,244  
Commitments and contingencies (Notes 5, 6 and 9)
Stockholder’s equity:
Common stock $1 par value; 50,000,000 shares authorized; 23,416,396 shares issued23,416  23,416  
Additional paid-in capital39,575  39,575  
Retained earnings392,255  389,312  
Accumulated other comprehensive loss(1,305) (1,380) 
Total stockholder’s equity453,941  450,923  
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$1,303,207  $1,260,357  
 As of
(unaudited)June 30, 2019December 31, 2018
 (in thousands, except share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY  
Current liabilities:  
Accounts payable$22,730
$25,122
Accounts payable to affiliates24,737
25,804
Accrued liabilities38,159
34,193
Money pool notes payable13,071
38,690
Notes payable to Parent25,000
—
Regulatory liabilities, current2,392
2,574
Total current liabilities126,089
126,383
   
Long-term debt340,105
340,035
   
Deferred credits and other liabilities:  
Deferred income tax liabilities, net117,272
114,009
Regulatory liabilities, non-current162,104
160,642
Benefit plan liabilities14,568
14,606
Other deferred credits and other liabilities15,672
1,368
Total deferred credits and other liabilities309,616
290,625
   
Commitments and contingencies (Notes 5, 6 and 9)


   
Stockholder’s equity:  
Common stock $1 par value; 50,000,000 shares authorized; 23,416,396 shares issued23,416
23,416
Additional paid-in capital39,575
39,575
Retained earnings367,785
342,145
Accumulated other comprehensive loss(840)(891)
Total stockholder’s equity429,936
404,245
   
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$1,205,746
$1,161,288


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


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BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)Six Months Ended June 30,
20202019
(in thousands)
Operating activities:
Net income$22,962  $25,645  
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization21,903  20,434  
Deferred income tax(987) 2,004  
Employee benefits649  389  
Other adjustments, net1,345  1,767  
Change in operating assets and liabilities:
Accounts receivable and other current assets(3,611) 4,841  
Accounts payable and other current liabilities1,642  47  
Regulatory assets - current(693) (2,037) 
Regulatory liabilities - current191  (131) 
Contributions to defined benefit pension plan(1,739) —  
Other operating activities, net(409) (2,372) 
Net cash provided by operating activities41,253  50,587  
Investing activities:
Property, plant and equipment additions(56,837) (49,387) 
Other investing activities(804) (688) 
Net cash (used in) investing activities(57,641) (50,075) 
Financing activities:
Change in money pool notes payable, net(758) (619) 
Net borrowings of Notes payable to Parent40,000  —  
Long-term debt - repayments(2,855) —  
Dividend to Parent company(20,000) —  
Net cash provided by (used in) financing activities16,387  (619) 
Net change in cash(1) (107) 
Cash, beginning of period6  112  
Cash, end of period$5  $5  
Supplemental cash flow information:
Cash (paid) during the period for -
Interest (net of amounts capitalized)$(11,681) $(11,342) 
Non-cash investing and financing activities -
Accrued property, plant and equipment purchases at June 30$11,573  $15,316  

(unaudited)Six Months Ended
June 30,
 20192018
 (in thousands)
Operating activities:  
Net income$25,645
$22,885
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and amortization20,434
19,750
Deferred income tax2,004
(1,407)
Employee benefits389
760
Other adjustments, net1,767
1,091
Change in operating assets and liabilities:  
Accounts receivable and other current assets4,841
(1,494)
Accounts payable and other current liabilities47
2,170
Regulatory assets - current(2,037)2,797
Regulatory liabilities - current(131)5,709
Other operating activities, net(2,372)(458)
Net cash provided by (used in) operating activities50,587
51,803
   
Investing activities:  
Property, plant and equipment additions(49,387)(27,399)
Proceeds from sale of assets—
4,994
Other investing activities(688)(4,961)
Net cash provided by (used in) investing activities(50,075)(27,366)
   
Financing activities:  
Change in money pool notes payable, net(619)(24,448)
Net cash provided by (used in) financing activities(619)(24,448)
   
Net change in cash(107)(11)
   
Cash, beginning of period112
16
Cash, end of period$5
$5

See Note 8 for supplemental cash flow information.

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

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BLACK HILLS POWER, INC.
CONDENSED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY
(unaudited)Common Stock
(in thousands, except share amounts)SharesValueAdditional Paid in CapitalRetained EarningsAOCITotal
December 31, 201923,416,396  $23,416  $39,575  $389,312  $(1,380) $450,923  
Net income—  —  —  13,335  —  13,335  
Other comprehensive income (loss), net of tax—  —  —  —  37  37  
Dividend to Parent company—  —  —  (20,000) —  (20,000) 
Implementation of ASU 2016-13 Financial Instruments — Credit Losses—  —  —  (19) —  (19) 
March 31, 202023,416,396  $23,416  $39,575  $382,628  $(1,343) $444,276  
Net income—  —  —  9,627  —  9,627  
Other comprehensive income (loss), net of tax—  —  —  —  38  38  
June 30, 202023,416,396  $23,416  $39,575  $392,255  $(1,305) $453,941  

Common Stock
(in thousands except share amounts)SharesValueAdditional Paid in CapitalRetained EarningsAOCITotal
December 31, 201823,416,396  $23,416  $39,575  $342,145  $(891) $404,245  
Net income—  —  —  15,497  —  15,497  
Other comprehensive income (loss), net of tax—  —  —  —  12  12  
Cumulative effect of ASC 842 implementation—  —  —  (7) —  (7) 
Other adjustments—  —  —  1  —  1  
March 31, 201923,416,396  $23,416  $39,575  $357,636  $(879) $419,748  
Net income—  —  —  10,148  —  10,148  
Other comprehensive income (loss), net of tax—  —  —  —  39  39  
Other adjustments—  —  —  1  —  1  
June 30, 201923,416,396  $23,416  $39,575  $367,785  $(840) $429,936  
9
 Common Stock    
(in thousands, except share amounts)SharesValueAdditional Paid in CapitalRetained EarningsAOCITotal
December 31, 201823,416,396
$23,416
$39,575
$342,145
$(891)$404,245
Net income (loss) available for common stock—
—
—
15,497
—
15,497
Other comprehensive income (loss), net of tax—
—
—
—
12
12
Cumulative effect of ASC 842 implementation—
—
—
(7)—
(7)
Other adjustments—
—
—
1
—
1
March 31, 201923,416,396
$23,416
$39,575
$357,636
$(879)$419,748
Net income (loss) available for common stock—
—
—
10,148
—
10,148
Other comprehensive income (loss), net of tax—
—
—
—
39
39
Other adjustments—
—
—
1
—
1
June 30, 201923,416,396
$23,416
$39,575
$367,785
$(840)$429,936
       
Table of Contents


 Common Stock    
(in thousands except share amounts)SharesValueAdditional Paid in CapitalRetained EarningsAOCITotal
December 31, 201723,416,396
$23,416
$39,575
$332,499
$(1,258)$394,232
Net income (loss) available for common stock—
—
—
11,760
—
11,760
Other comprehensive income (loss), net of tax—
—
—
—
27
27
Dividend to Parent company—
—
—
(16,000)—
(16,000)
Other adjustments—
—
—
1
—
1
March 31, 201823,416,396
$23,416
$39,575
$328,260
$(1,231)$390,020
Net income (loss) available for common stock—
—
—
11,125
—
11,125
Other comprehensive income (loss), net of tax—
—
—
—
28
28
Dividend to Parent company—
—
—
(10,000)—
(10,000)
June 30, 201823,416,396
$23,416
$39,575
$329,385
$(1,203)$391,173

BLACK HILLS POWER, INC.

Notes to Condensed Financial Statements
(unaudited)
(Reference is made to Notes to Financial Statements
included in our 20182019 Annual Report on Form 10-K)


(1) MANAGEMENT’S STATEMENTManagement’s Statement

The unaudited condensed financial statements included herein have been prepared by Black Hills Power, Inc. (the(“South Dakota Electric”, the “Company,” “we,” “us,”“us” 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 financial statements should be read in conjunction with the financial statements and the notes thereto, included in our 20182019 Annual Report on Form 10-K filed with the SEC.

The information furnished in the accompanying condensed financial statements reflects certain estimates required and all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the June 30, 2019,2020, December 31, 20182019 and June 30, 20182019 financial information and are of a normal recurring nature. The results of operations for the three and six months ended June 30, 20192020 and June 30, 2018,2019, and our financial condition as of June 30, 20192020 and December 31, 20182019 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.

COVID-19 Pandemic

In March 2020, the World Health Organization categorized COVID-19 as a pandemic and the President of the United States declared the outbreak a national emergency.  The U.S. government has deemed electric utilities to be a critical infrastructure sector that provides essential services during this emergency.  As a provider of essential services, the Company has an obligation to provide services to our customers.  The Company remains focused on protecting the health of its employees and the communities in which it operates while assuring the continuity of its business operations.

The Company’s Condensed Financial Statements reflect estimates and assumptions made by management that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Financial Statements and reported amounts of revenue and expenses during the reporting periods presented.  The Company considered the impacts of COVID-19 on the assumptions and estimates used and determined that for the three and six months ended June 30, 2020, there were no material adverse impacts on the Company’s results of operations.

Change in Accounting Principle - Pension Accounting Asset Method

Effective January 1, 2020, we changed our method of accounting for net periodic benefit cost. Prior to the change, the Company used a calculated value for determining market-related value of plan assets which amortized the effects of gains and losses over a five-year period. Effective with the accounting change, the Company will use a calculated value for the return-seeking assets (equities) in the portfolio and change to fair value for the liability-hedging assets (fixed income). See Note 6 for additional information.

Recently Issued Accounting Standards

Simplifying the Accounting for Income Taxes, ASU 2019-12

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes as part of its overall simplification initiative to reduce costs and complexity in applying accounting standards while maintaining or improving the usefulness of the information provided to users of the financial statements. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in several other areas such as accounting for a franchise tax (or similar tax) that is partially based on income. The new guidance is effective for interim and annual periods beginning after December 15, 2020 with early adoption permitted. We are currently reviewing this standard to assess the impact on our financial position, results of operations and cash flows.

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Recently Adopted Accounting Standards

Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial Instruments, ASU 2018-192016-13

In June 2016, the FASB issued ASU 2016-13, Financial Instruments -- Credit Losses: Measurement of Credit Losses on Financial InstrumentInstruments, s, which was subsequently amended by ASUASUs 2018-19, in November 2018.2019-04, 2019-05, 2019-10, and 2019-11. The standard introduces new accounting guidance for credit losses on financial instruments within its scope, including trade receivables. This new guidance adds an impairment model that is based on expected losses rather than incurred losses. It is effective

We adopted this standard on January 1, 2020, with prior year comparative financial information remaining as previously reported when transitioning to the new standard. On January 1, 2020, we recorded an increase to our allowance for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessingcredit losses, primarily associated with the impactsinclusion of adopting this standard.expected losses on unbilled revenue. The cumulative effect of the adoption, net of tax impact, was recorded as an adjustment to retained earnings.


Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, ASU 2018-15
Recently Adopted Accounting Standards

Leases, ASU 2016-02

In February 2016,August 2018, the FASB issued ASU 2016-02,2018-15, Leases (Topic 842)Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for recording implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to increase transparencydevelop or obtain internal-use software. As a result, certain categories of implementation costs that previously would have been charged to expense as incurred are now capitalized as prepayments and comparability among organizations by requiringamortized over the recognitionterm of right-of-use assets and lease liabilities on the balance sheet for most leases, whereas previously only financing-type lease liabilities (capital leases) were recognized on the balance sheet. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

arrangement. We adopted thethis standard effectiveprospectively on January 1, 2019. We elected2020. Adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

(2) Revenue

Our revenue contracts generally provide for performance obligations that: are fulfilled and transfer control to customers over time; represent a series of distinct services that are substantially the option to not recast comparative periods presented with transitioningsame; involve the same pattern of transfer to the new lease standardcustomer; and will report these comparative periods as presented under previous lease guidance. In addition, we elected the package of practical expedients permitted under the transition guidance with the new standard, which among other things, allowed usprovide a right to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forwardconsideration from our accounting treatment of existing land easement agreements.

Adoption of the new standard resulted in the recording of an operating lease right-of-use asset and an off-setting operating lease obligation liability of $14 million as of January 1, 2019. The lease standard did not materially impact our net earnings and had no impact on cash flows.





(2)    REVENUE

Revenue Recognition

As of January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), and its related amendments (collectively known as ASC 606). Revenue is recognizedcustomers in an amount that reflectscorresponds directly with the considerationvalue to the customer for the performance completed to date. Therefore, we expectrecognize revenue in the amount to receive in exchange for goods or services, when control of the promised goods or services is transferredwhich we have a right to our customers.invoice. The following table depictstables depict the disaggregation of revenue from contracts with customers by customer type and timing of revenue recognition for each of the reporting segments for the three and six months ended June 30, 20192020 and 2018.2019. Sales tax and other similar taxes are excluded from revenues.
Three Months Ended June 30, 2020Three Months Ended June 30, 2019Six Months Ended June 30, 2020Six Months Ended June 30, 2019
(in thousands)
Customer types:
Retail$46,509  $46,809  $97,936  $99,885  
Wholesale2,716  6,780  7,098  15,123  
Market - off-system sales2,004  2,393  4,381  7,063  
Transmission/Other11,299  13,083  24,599  25,914  
Revenue from contracts with customers62,528  69,065  134,014  147,985  
Other revenues59  181  184  302  
Total revenues$62,587  $69,246  $134,198  $148,287  
Timing of revenue recognition:
Services transferred over time$62,528  $69,065  $134,014  $147,985  
Revenue from contracts with customers$62,528  $69,065  $134,014  $147,985  
 Three Months Ended June 30, 2019Three Months Ended June 30, 2018Six Months Ended June 30, 2019Six Months Ended June 30, 2018
 (in thousands)
Customer types:    
Retail$46,809
$46,525
$99,885
$97,166
Wholesale6,780
8,191
15,123
17,241
Market - off-system sales2,393
3,449
7,063
5,724
Transmission/Other13,083
12,372
25,914
24,090
Revenue from contracts with customers69,065
70,537
147,985
144,221
Other revenues181
139
302
270
Total revenues$69,246
$70,676
$148,287
$144,491
     
Timing of revenue recognition:    
Services transferred over time$69,065
$70,537
$147,985
$144,221
Revenue from contracts with customers$69,065
$70,537
$147,985
$144,221

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Contract Balances

The nature of our primary revenue contracts provides an unconditional right to consideration upon service delivery; therefore, no customer contract assets or liabilities exist. The unconditional right to consideration is represented by the balance in our Accounts receivableReceivable and is further discussed in Note 3. We do not typically incur costs that would be capitalized, to obtain or fulfill a revenue contract.3.


(3)ACCOUNTS RECEIVABLE
(3) Accounts Receivable

Following is a summary of Accounts receivable, net included in the accompanying Condensed Balance Sheets (in thousands) as of:
June 30, 2020December 31, 2019
Accounts receivable, trade$14,615  $14,778  
Unbilled revenues10,933  10,914  
Less allowance for credit losses(561) (160) 
Accounts receivable, net$24,987  $25,532  
 June 30, 2019December 31, 2018
Accounts receivable trade$15,972
$16,236
Unbilled revenues10,110
12,333
Allowance for doubtful accounts(200)(138)
Accounts receivable, net$25,882
$28,431



(4)REGULATORY ACCOUNTING

Our regulated electric operations are subject to regulation by various state and federal agencies. The accounting policies followed are generally subjectDue to the Uniform SystemCOVID-19 pandemic, we experienced an increase in our accounts receivable arrears balances. As a result, we increased our allowance for credit losses and bad debt expense for the six months ended June 30, 2020 by $0.1 million.

The ongoing credit evaluation of Accountsour customers during the COVID-19 pandemic is further discussed in the Credit Risk section of Note 7.


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(4) Regulatory Matters

We had the FERC.

Ourfollowing regulatory assets and liabilities were as follows (in thousands) as of:
June 30, 2020December 31, 2019
Regulatory assets:
Loss on reacquired debt (a)
$854  $989  
Deferred taxes on AFUDC (b)
4,840  4,927  
Employee benefit plans and related deferred taxes (c)
20,810  20,661  
Deferred energy and fuel cost adjustments (b)
23,937  23,203  
Deferred taxes on flow through accounting (c)
10,727  9,801  
Decommissioning costs (a)
5,323  6,211  
Vegetation management (a)
6,911  8,062  
Other regulatory assets (a)
1,592  1,843  
Total regulatory assets$74,994  $75,697  
Less current regulatory assets(25,043) (21,588) 
Regulatory assets, non-current$49,951  $54,109  
 June 30, 2019 December 31, 2018
Regulatory assets:   
Loss on reacquired debt (a)
$1,124
 $1,259
Deferred taxes on AFUDC (b)
4,955
 5,020
Employee benefit plans and related deferred taxes (c)

20,022
 19,868
Deferred energy and fuel cost adjustments (b)
22,195
 20,334
Deferred taxes on flow through accounting (c)
9,201
 8,749
Decommissioning costs (a)
7,168
 8,196
Vegetation management (a)
9,214
 10,366
Other regulatory assets (a)
1,824
 1,940
Total regulatory assets$75,703
 $75,732
Less current regulatory assets(22,339) (19,052)
Regulatory assets, non-current$53,364
 $56,680
Regulatory liabilities:
Cost of removal (a)
$56,339  $57,318  
Employee benefit plan costs and related deferred taxes (c)
6,986  7,023  
Excess deferred income taxes (c)
97,254  98,228  
TCJA revenue reserve3,209  3,162  
Other regulatory liabilities (c)
802  440  
Total regulatory liabilities$164,590  $166,171  
Less current regulatory liabilities(3,353) (3,162) 
Regulatory liabilities, non-current$161,237  $163,009  
____________________
(a) We are allowed a recovery of costs, but we are not allowed a rate of return.
(b) In addition to recovery of costs, we are allowed a rate of return.
(c) In addition to recovery or repayment of costs, we are allowed a return on a portion of this amount or a reduction in rate base.


Regulatory Activity
Regulatory liabilities:   
Cost of removal for utility plant (a)
$54,947
 $52,366
Employee benefit plan costs and related deferred taxes (c)
7,518
 7,518
Excess deferred income taxes (c)
99,417
 100,276
TCJA revenue reserve2,392
 2,523
Other regulatory liabilities (c)
222
 533
Total regulatory liabilities$164,496
 $163,216
Less current regulatory liabilities(2,392) (2,574)
Regulatory liabilities, non-current$162,104
 $160,642

____________________
(a)We are allowed a recovery of costs, but we are not allowed a rate of return.
(b)In addition to recovery of costs, we are allowed a rate of return.
(c)In addition to recovery or repayment of costs, we are allowed a return on a portion of this amount or a reduction in rate base.

Regulatory Matters

There have been no significant changes to our Regulatory Matters from those previously disclosed in Note 17 of the Notes to the Financial Statements in our 20182019 Annual Report on Form 10-K except as reported below.10-K.

Renewable Ready Service Tariffs and Corriedale Wind Energy Project

South Dakota Electric and Wyoming Electric received approvals for the Renewable Ready Service Tariffs and related jointly-filed CPCN to construct the $57 million, 40 MW Corriedale Wind Energy Project. The wind project will be jointly owned by the two electric utilities to deliver renewable energy for large commercial and industrial customers and governmental agencies. The project is expected to be in service in 2020.(5) Related-Party Transactions



(5)RELATED-PARTY TRANSACTIONS

Dividend to Parent

For the six months ended June 30, 2020, we paid a $20 million dividend to BHC. We did not recordpay any dividends for the six months ended June 30, 2019. We recorded non-cash dividends to our Parent of $26 million and decreased the utility Money pool note receivable by $26 million for the six months ended June 30, 2018.

Receivables and Payables

We have accounts receivable and accounts payable balances related to transactions with other BHC subsidiaries. The balances were as follows (in thousands) as of:
June 30, 2020December 31, 2019
Accounts receivable from affiliates$6,557  $7,838  
Accounts payable to affiliates$35,033  $32,121  
 June 30, 2019December 31, 2018
Accounts receivable from affiliates$5,102
$8,119
Accounts payable to affiliates$24,737
$25,804

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Money Pool Notes Receivable and Notes Payable

We participate in the Utility Money Pool Agreement (the Agreement). Under the Agreement, we may borrow from the pool; however the Agreement restricts the pool from loaning funds to BHC or to any of BHC’s non-utility subsidiaries. The Agreement does not restrict us from paying dividends to BHC. Borrowings under the Agreement bear interest at the weighted average daily cost of our parent company’s external borrowings as defined under the Agreement or, if there are no external funds outstanding on that date, then the rate will be the daily one-month LIBOR plus 1.0%. At June 30, 2019,2020, the average cost of borrowing under the Utility Money Pool was 2.78%1.16%.

We had the following balances with the Utility Money Pool (in thousands) as of:
June 30, 2020December 31, 2019
Money pool notes payable$56,827  $57,585  
 June 30, 2019December 31, 2018
Money pool notes payable$13,071
$38,690


Our net interest income (expense) relating to balances with the Utility Money Pool was as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net interest (expense)$(201) $(198) $(488) $(471) 
 Three Months Ended June 30,Six Months Ended June 30,
 2019201820192018
Net interest income (expense)$(198)$(96)$(471)$(132)



Notes payable to Parent

 June 30, 2019December 31, 2018
Notes payable to Parent (a)
$25,000
$—

(a) Note bears interest at 4.51%, expires December 31, 2019, andOn June 1, 2020, we entered into a $65 million, 4.11% short-term promissory note with BHC. This note is eligible for annual renewal. Interestrenewal at December 31, 2020. The current note replaces the prior $45 million short-term promissory note entered into on March 1, 2020. We had the following balances for our Notes payable related to this noteParent balance (in thousands) as of:
June 30, 2020December 31, 2019
Notes payable to Parent$65,000  $25,000  

Our Net interest income (expense) relating to balances of the Notes Payable to Parent was $0.2 million as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net interest (expense)$(589) $(214) $(977) $(227) 

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Table of June 30, 2019.Contents



Other related party activity was as follows (in thousands):
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Revenue:
Energy sold to Wyoming Electric$235  $340  $529  $914  
Rent from electric properties$989  $895  $1,978  $1,791  
Horizon Point shared facility revenue$2,840  $3,006  $5,680  $6,013  
Fuel and purchased power:
Purchases from WRDC mine$4,332  $3,216  $8,649  $7,873  
Purchase of excess energy from Wyoming Electric$125  $41  $286  $173  
Purchase of renewable wind energy from Wyoming Electric - Happy Jack$416  $342  $1,208  $877  
Purchase of renewable wind energy from Wyoming Electric - Silver Sage$804  $611  $2,196  $1,594  
Gas transportation service agreement with Wyoming Electric for firm and interruptible gas transportation$82  $75  $164  $151  
Operations and maintenance:
Corporate support services and fees from BHSC$9,822  $9,451  $20,241  $19,642  
Wygen III ground lease with WRDC$251  $247  $502  $493  
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2019201820192018
Revenue:    
Energy sold to Cheyenne Light$340
$501
$914
$1,204
Rent from electric properties$895
$908
$1,791
$1,817
Horizon Point shared facility revenues$3,006
$2,783
$6,013
$5,552
     
Fuel and purchased power:
    
Purchases of coal from WRDC$3,216
$4,249
$7,873
$8,316
Purchase of excess energy from Cheyenne Light$41
$82
$173
$168
Purchase of renewable wind energy from Cheyenne Light - Happy Jack$342
$381
$877
$1,022
Purchase of renewable wind energy from Cheyenne Light - Silver Sage$611
$696
$1,594
$1,789
Gas transportation service agreement with Cheyenne Light for firm and interruptible gas transportation$75
$96
$151
$192
     
Operations and maintenance:    
Corporate support services and fees from Black Hills Service Company (a)
$9,451
$7,604
$19,642
$15,210
Wygen III ground lease with WRDC$247
$241
$493
$481


(a) Increase
(6) Employee Benefit Plans

Change in 2019 was primarily dueAccounting Principle - Pension Accounting Asset Method

Effective January 1, 2020, the Company changed its method of accounting for net periodic benefit cost. Prior to higher outsidethe change, the Company used a calculated value for determining market-related value of plan assets which amortized the effects of gains and losses over a five-year period. Effective with the accounting change, the Company will use a calculated value for the return-seeking assets (equities) in the portfolio and fair value for the liability-hedging assets (fixed income). The Company considers the fair value method for determining market-related value of liability-hedging assets to be a preferable method of accounting because asset-related gains and losses are subject to amortization into pension cost immediately. Additionally, the fair value for liability-hedging assets allows for the impact of gains and losses on this portion of the asset portfolio to be reflected in tandem with changes in the liability which is linked to changes in the discount rate assumption for remeasurement.

We evaluated the effect of this change in accounting method and deemed it immaterial to the historical and current financial statements and therefore did not account for the change retrospectively. Accordingly, the Company calculated the cumulative difference using a calculated value versus fair value to determine market-related value for liability-hedging assets of the portfolio. The cumulative effect of this change, as of January 1, 2020, resulted in a $0.1 million decrease to prior service expenses and higher employee costs, driven by labor and benefits.as recorded in Other income (expense), net within the accompanying Condensed Statements of Comprehensive Income for the six months ended June 30, 2020.

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(6)EMPLOYEE BENEFIT PLANS


Defined Benefit Pension Plan

The components of net periodic benefit cost for the Defined Benefit Pension Plan were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Service cost$92  $92  $184  $183  
Interest cost463  602  926  1,205  
Expected return on plan assets(781) (852) (1,562) (1,703) 
Prior service cost—  3  —  5  
Net loss510  305  1,021  610  
Net periodic benefit cost$284  $150  $569  $300  
 Three Months Ended June 30,Six Months Ended June 30,
 2019201820192018
Service cost$92
$129
$183
$258
Interest cost602
549
1,205
1,097
Expected return on plan assets(852)(887)(1,703)(1,773)
Prior service cost3
11
5
22
Net loss (gain)305
516
610
1,032
Net periodic benefit cost$150
$318
$300
$636


Defined Benefit Postretirement Healthcare Plan

The components of net periodic benefit cost for the Defined Benefit Postretirement Healthcare Plan were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Service cost39  37  78  74  
Interest cost33  46  65  93  
Prior service (benefit)(84) (84) (168) (168) 
Net periodic benefit cost(12) (1) (25) (1) 
 Three Months Ended June 30,Six Months Ended June 30,
 2019201820192018
Service cost$37
$49
$74
$97
Interest cost46
44
93
89
Prior service cost (benefit)(84)(84)(168)(168)
Net periodic benefit cost$(1)$9
$(1)$18



Supplemental Non-qualified Defined Benefit Plans

The components of net periodic benefit cost for the Supplemental Non-qualified Defined Benefit Plans were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Interest cost$21  $28  $42  $57  
Net loss32  17  63  33  
Net periodic benefit cost$53  $45  $105  $90  
 Three Months Ended June 30,Six Months Ended June 30,
 2019201820192018
Interest cost$28
$27
$57
$54
Net loss (gain)17
26
33
52
Net periodic benefit cost$45
$53
$90
$106


Contributions

Contributions to the Defined Benefit Pension Plan are cash contributions made directly to the Pension Plan Trust account. Contributions to the Postretirement Healthcare and Supplemental Plans are made in the form of benefit payments. Contributions made for 20192020 and anticipated contributions for 20192020 and 20202021 are as follows (in thousands):
ContributionsRemaining Anticipated Contributions forAnticipated Contributions for
Six Months Ended June 30, 202020202021
Defined Benefit Pension Plan$1,739  $—  $1,703  
Defined Benefit Postretirement Healthcare Plan$293  $293  $597  
Supplemental Non-qualified Defined Benefit Plans$160  $161  $304  
 
Contributions
Six Months Ended
June 30, 2019
Remaining Anticipated Contributions for 2019Anticipated Contributions for 2020
Defined Benefit Pension Plan$—
$1,753
$1,841
Defined Benefit Postretirement Healthcare Plan$233
$233
$466
Supplemental Non-qualified Defined Benefit Plans$115
$115
$240


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(7) Derivatives and Fair Values

Market and Credit Risk Disclosures

Our activities in the regulated and non-regulated energy sectors expose us to a number of risks in the normal operations of our businesses. Depending on the activity, we are exposed to varying degrees of market risk and credit risk.

Market Risk

Market risk is the potential loss that may occur as a result of an adverse change in market price, rate or supply. We are exposed to the following market risks, including, but not limited to:

•Commodity price risk associated with our purchased power costs which include market fluctuations due to unpredictable factors such as weather, market speculation, transmission constraints, and other factors that may impact electric power supply and demand; and

•Interest rate risk associated with future debt, including reduced access to liquidity during periods of extreme capital markets volatility, such as the 2008 financial crisis and the COVID-19 pandemic;

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, cash collateral requirements, letters of credit, and other security agreements.

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

We continue to monitor COVID-19 impacts and changes to customer load, consistency in customer payments, requests for deferred or discounted payments, and requests for changes to credit limits to quantify estimated future financial impacts to the allowance for credit losses. During the three and six months ended June 30, 2020, the potential economic impact of the COVID-19 pandemic was considered in forward looking projections related to write-off and recovery rates, and resulted in increases to the allowance for credit losses and bad debt expense of $0.1 million and $0.1 million, respectively. See Note 3 for further information.

Derivatives

We have wholesale power purchase and sale contracts used to manage purchased power costs and customer load requirements associated with serving our electric customers that are considered derivative instruments. Changes in the fair value of these commodity derivatives are recorded in Fuel and purchased power, net of amounts credited to customers under margin-sharing mechanisms.
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The contract or notional amounts and terms of the derivative commodity instruments held at our utilities are composed of both long and short positions. We were in a net long position as of:
June 30, 2020December 31, 2019
MWhMaximum
Term
(months)		MWhMaximum
Term
(months)
Wholesale power contracts (a)
141,2256—0
__________
(a) Volumes exclude contracts that qualify for the normal purchases and normal sales exception.

From time to time we utilize risk management contracts including interest rate swaps to fix the interest on variable rate debt or to lock in the Treasury yield component associated with anticipated issuance of senior notes.  For swaps that settled in connection with the issuance of senior debt, the effective portion is deferred as a component in AOCI and recognized as interest expense over the life of the senior note. As of June 30, 2020, we had no outstanding interest rate swap agreements.

Derivatives by Balance Sheet Classification

As required by accounting standards for derivatives and hedges, fair values within the following tables are presented on a gross basis aside from the netting of asset and liability positions. Netting of positions is permitted in accordance with accounting standards for offsetting and under terms of our master netting agreements that allow us to settle positive and negative positions.

The following table presents the fair value and balance sheet classification of our derivative instruments (in thousands) as of:
(7)FAIR VALUE OF FINANCIAL INSTRUMENTSBalance Sheet LocationJune 30, 2020December 31, 2019
Derivatives not designated as hedges:
Asset derivative instruments:
Current commodity derivativesOther current assets$1,158 $— 
Total derivatives not designated as hedges$1,158 $— 

Derivatives Designated as Hedges

The impacts of cash flow hedges on our Condensed Statements of Comprehensive Income are presented below for the three and six months ended June 30, 2020 and 2019. Derivatives designated as cash flow hedges relate to a treasury lock entered into in August 2002 to hedge $50 million of our First Mortgage Bonds due on August 15, 2032. The treasury lock cash settled on August 8, 2002, the bond pricing date, and resulted in a $1.8 million loss. The treasury lock is treated as a cash flow hedge and the resulting loss is carried in Accumulated other comprehensive loss and is being amortized over the life of the related bonds.


Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Derivatives in Cash Flow Hedging RelationshipsIncome Statement LocationAmount of Gain/(Loss) Reclassified from AOCI into Income
(in thousands)(in thousands)
Interest rate swapsInterest expense$(16) $(16) $(32) $(32) 
Total$(16) $(16) $(32) $(32) 

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Derivatives Not Designated as Hedges

The following table summarizes the impacts of derivative instruments not designated as hedge instruments on our Condensed Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019. Note that this presentation does not reflect gains or losses arising from the underlying physical transactions; therefore, it is not indicative of the economic profit or loss we realized when the underlying physical and financial transactions were settled.

Three Months Ended June 30,
20202019
Derivatives Not Designated as Hedging InstrumentsIncome Statement LocationAmount of Gain/(Loss) on Derivatives Recognized in Income
(in thousands)
Commodity derivativesFuel and purchased power$(204) $—  
$(204) $—  


Six Months Ended June 30,
20202019
Derivatives Not Designated as Hedging InstrumentsIncome Statement LocationAmount of Gain/(Loss) on Derivatives Recognized in Income
(in thousands)
Commodity derivativesFuel and purchased power$1,158  $—  
$1,158  $—  

As discussed above, financial instruments used to manage lowest cost resources for our customers are not designated as cash flow hedges. The unrealized gains and losses arising from these derivatives are recognized in the Condensed Statements of Comprehensive Income.

Fair Value

We use the following fair value hierarchy for determining inputs for our financial instruments. Our assets and liabilities for financial instruments are classified and disclosed in one of the following fair value categories:

Level 1 — Unadjusted quoted prices available in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Level 1 instruments primarily consist of highly liquid and actively traded financial instruments with quoted pricing information on an ongoing basis.

Level 2 — Pricing inputs include quoted prices for identical or similar assets and liabilities in active markets other than quoted prices in Level 1, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — Pricing inputs are generally less observable from objective sources. These inputs reflect management’s best estimate of fair value using its own assumptions about the assumptions a market participant would use in pricing the asset or liability.

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.

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. We currently do not have any Level 3 investments.
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Recurring Fair Value Measurements

Derivatives

Our commodity contracts are valued using the market approach and include wholesale power contracts that do not meet the normal purchases and normal sales exception. For these derivative instruments, the fair value is obtained by utilizing a nationally recognized service that obtains observable inputs to compute the fair value.
As of June 30, 2020
Level 1Level 2Level 3Cash Collateral and Counterparty
Netting		Total
(in thousands)
Assets:
Commodity derivatives$—  $1,158  $—  $—  1,158  
As of December 31, 2019
Level 1Level 2Level 3Cash Collateral and Counterparty
Netting		Total
(in thousands)
Assets:
Commodity derivatives$— $— $— $— $— 

Pension and Postretirement Plan Assets

Fair value measurements also apply to the valuation of our pension and postretirement plan assets. Current accounting guidance requires employers to annually disclose information about the fair value measurements of their assets of a defined benefit pension or other postretirement plan. The fair value of these assets was presented in Note 12 to the Financial Statements included in our 2019 Annual Report on Form 10-K.

The Company has concluded that the market volatility associated with COVID-19 does not require interim re-measurement of our pension plan assets or defined benefit obligations.

Other fair value measures

Financial instruments for which the carrying amount did not equal the fair value were as follows (in thousands) as of:
 June 30, 2019December 31, 2018
 Carrying AmountFair ValueCarrying AmountFair Value
Long-term debt, including current maturities (a) (b)
$340,105
$447,036
$340,035
$412,894
June 30, 2020December 31, 2019
Carrying AmountFair ValueCarrying AmountFair Value
Long-term debt, including current maturities (a)
$337,391  $491,595  $340,176  $458,286  
_________________

(a)Long-term debt is valued based on observable inputs available either directly or indirectly for similar liabilities in active markets and therefore is classified in Level 2 in the fair value hierarchy.
(b)(a) Long-term debt is valued based on observable inputs available either directly or indirectly for similar liabilities in active markets and therefore is classified in Level 2 in the fair value hierarchy. Carrying amount of long-term debt is net of deferred financing costs.


(8)SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 Six Months Ended June 30,
 20192018
 (in thousands)
Non-cash investing and financing activities -  
Property, plant and equipment acquired with accrued liabilities$15,316
$7,477
Non-cash (decrease) to money pool notes receivable, net$—
$(26,000)
Non-cash dividend to Parent$—
$26,000
   
Cash (paid) refunded during the period for -  
Interest (net of amounts capitalized)$(11,342)$(10,930)


(9)COMMITMENTS AND CONTINGENCIES
(8) Commitments and Contingencies

There have been no significant changes to commitments and contingencies from those previously disclosed in Note 11 of our Notes to the Financial Statements in our 20182019 Annual Report on Form 10-K.


(10)LEASES

We have a ground lease for the Wygen III generating facility with an affiliate and communication tower site and operation center facility leases with third parties. Our leases have remaining terms ranging from less than one year to 30 years.
The components of lease expense were as follows (in thousands):
 Income Statement LocationThree Months Ended June 30, 2019Six Months Ended June 30, 2019
Operating lease costOperations and maintenance$228
$456
Variable lease costOperations and maintenance39
82
Total lease cost $267
$538



Supplemental balance sheet information related to leases was as follows (in thousands):
 Balance Sheet LocationAs of June 30, 2019
Assets:  
Operating lease assetsOther assets, non-current$14,244
Total lease assets $14,244
   
Liabilities:  
Current:  
Operating leasesAccrued liabilities$268
   
Noncurrent:  
Operating leasesOther deferred credits and other liabilities13,993
Total lease liabilities $14,261


20
Supplemental cash flow information related to leases was as follows (in thousands):
Table of Contents
 Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from operating leases$451
Right-of-use assets obtained in exchange for lease obligations: 
Operating leases$—


(9) Long-term Debt
As of June 30, 2019
Weighted average remaining lease term (years):
Operating leases30 years
Weighted average discount rate:
Operating leases4.4%


Series 94A Debt
Scheduled maturities of operating lease liabilities for future years
On March 24, 2020, South Dakota Electric paid off its $2.9 million, Series 94A variable rate notes due June 1, 2024. These notes were as follows (in thousands):tendered by the sole investor on March 17, 2020.


 Total
2019 (a)
$463
2020856
2021856
2022856
2023853
Thereafter21,947
Total lease payments$25,831
Less imputed interest11,570
Present value of lease liabilities$14,261

(a)Includes lease obligations for the remaining six months of 2019.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Amounts are presented on a pre-tax basis unless otherwise indicated.
Minor differences in amounts may result due to rounding.

Significant Events

On July 23, 2019, Fitch affirmed South Dakota Electric’sCOVID-19 Pandemic

One of the Company’s core values is safety. The COVID-19 pandemic has given us an opportunity to demonstrate our commitment to the health and safety of our customers, employees, business partners and the communities we serve. We have executed our business continuity plan with the goal of continuing to provide safe and reliable service during the COVID-19 pandemic.

For the three and six months ended June 30, 2020, we experienced limited impacts to our financial results and operational activities due to COVID-19. Increased costs due to sequestration of mission-critical and essential employees and increased bad debt expense were mostly offset by decreased training, travel and outside services related expenses.
During the three months ended June 30, 2020, COVID-19 had a limited impact on revenues and customer loads, as the decline in commercial usage was partially offset by an increase in residential usage. Decline in revenues and customer loads for the six months ended June 30, 2020, when compared to the same period in the prior year, were driven primarily by weather. We continue to closely monitor loads and have proactively communicated with various commercial and industrial customers in our service territories to understand their needs and forecast the potential financial implications. We have increased our allowance for credit rating at A.losses and bad debt expense by $0.1 million for the three and six months ended June 30, 2020 after considering the potential economic impact of the COVID-19 pandemic in forward looking projections related to write-off and recovery efforts. We continue to monitor customer loads, accounts receivable arrears balances, disconnects, cash flows and bad debt expense. We are proactively working with customers to establish payment plans and find available payment assistance resources.

We continue to maintain adequate liquidity to operate our business and fund our capital investment program. The Company has no material upcoming debt maturities until August 2032. We have not had any changes to our credit ratings. We also continue to monitor the funding status of our employee benefit plan obligations, which did not materially change during the six months ended June 30, 2020.

We are monitoring supply chains, including lead times for key materials and supplies, availability of resources, and status of large capital projects. To date, there have been limited impacts to supply chains including availability of supplies, materials and lead times. Capital projects are ongoing without material disruption to schedules. Our third party resources continue to support our business plans without disruption. Contingency plans are ongoing due to the impacts of COVID-19, including the potential for rescheduling projects. We currently do not anticipate a significant impact to our capital investment plan for 2020.

We continue to work closely with local health, public safety and government officials to minimize the spread of COVID-19 and its impact to our employees and the service we provide to our customers. Some of the actions the Company has taken include implementing protocols for our field operations personnel to continue to safely and effectively interact with our customers, asking employees to work from home to the extent possible, quarantining employees if they have traveled to an at-risk area, limiting travel to only mission-critical purposes and sequestering essential employees.

As we look forward to the second half of 2020, we anticipate that our operating results could potentially be further affected from COVID-19, as discussed in detail in our Risk Factors.

During these uncertain times, we remain highly focused on the safety and health of our customers, employees, business partners and communities. We continue to monitor load, customers’ ability to pay, the potential for supply chain disruption that may impact our capital and maintenance project plans and the availability of resources to execute our plans.
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Company Highlights

South Dakota Electric and Wyoming Electric received approvals forcontinued construction of the Renewable Ready Service Tariffs and related jointly-filed CPCN to construct the $57$79 million, 40-megawatt Corriedale Wind Energy Project.project. The wind project will be jointly owned by the two electric utilities to deliver renewable energy for large commercial, and industrial customers and governmental agencies.agency customers. The project is on schedule and on budget and expected to be in service inby year-end 2020.

South Dakota Electric continued construction on a 175-mile electric transmission line from Stegall, Nebraska to Rapid City, South Dakota. The 94-mile final segment of the transmission line is expected to be in service in the fall of 2019.

On April 30, 2019,16, 2020, S&P affirmed South Dakota Electric’sour credit rating at A.


Results of Operations

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 and amortization from the measure. The presentation of gross margin is intended to supplement investors’ understanding of our operating performance.

Gross margin is calculated as operating revenue less cost of fuel and purchased power. Our gross margin is impacted by the fluctuations in purchased power, 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.measures. Furthermore, this measure is not intended to replace operating income as determined in accordance with GAAP as an indicator of operating performance.


The following tables provide certain financial information and operating statistics:
Three Months Ended June 30,Six Months Ended June 30,
20202019Variance20202019Variance
(in thousands)
Revenue (a)
$62,587  $69,246  $(6,659) $134,198  $148,287  $(14,089) 
Fuel and purchased power (a)
12,614  18,381  (5,767) 28,601  41,114  (12,513) 
Gross margin (non-GAAP)49,973  50,865  (892) 105,597  107,173  (1,576) 
Operating expenses32,246  33,555  (1,309) 66,677  65,221  1,456  
Operating income17,727  17,310  417  38,920  41,952  (3,032) 
Interest expense, net(6,021) (5,277) (744) (11,819) (10,709) (1,110) 
Other income (expense), net(543) 291  (834) (184) (84) (100) 
Income tax (expense)(1,536) (2,176) 640  (3,955) (5,514) 1,559  
Net income$9,627  $10,148  $(521) $22,962  $25,645  $(2,683) 
____________________
(a) Revenue and purchased power for the three and six months ended June 30, 2020, as well as associated quantities, for certain wholesale contracts have been presented on a net basis, which resulted in a decrease of $5.0 million and $8.6 million, or 183,120 MWh and 318,447 MWh, respectively.  Amounts for the three and six months ended June 30, 2019, were presented on a gross basis and, due to their immaterial nature, were not revised.  This presentation change has no impact on Gross margin.


22
 Three Months Ended June 30,Six Months Ended June 30,
 20192018Variance20192018Variance
 (in thousands)
Revenue$69,246
$70,676
$(1,430)$148,287
$144,491
$3,796
Fuel and purchased power18,381
20,753
(2,372)41,114
43,193
(2,079)
Gross margin (non-GAAP)50,865
49,923
942
107,173
101,298
5,875
       
Operating expenses33,555
30,428
3,127
65,221
61,439
3,782
Operating income17,310
19,495
(2,185)41,952
39,859
2,093
       
Interest income (expense), net(5,277)(5,379)102
(10,709)(10,803)94
Other income (expense), net291
(242)533
(84)(359)275
Income tax expense(2,176)(2,749)573
(5,514)(5,812)298
Net income$10,148
$11,125
$(977)$25,645
$22,885
$2,760
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Six Months Ended June 30, 20192020 Compared to Six Months Ended June 30, 2018.2019. Net income was $26$23 million compared to $23$26 million for the same period in the prior year primarily due to the following:

Gross margin increaseddecreased primarily due to a $3.2$1.2 million reduction in the purchased power capacity chargesdecline from lower heating demand with warmer weather and higher rider revenues$1.1 million of $1.4 million related to transmission investment recovery. Higherlower off-system power marketing revenue, customer growth, and favorable weather, comprised the remainder of the increase.margins partially offset by a $1.2 million mark-to-market gain on wholesale energy contracts. COVID-19 impacts to gross margin included a $0.8 million decrease due to lower commercial volumes partially offset by higher residential usage.

Operating expenses increased primarily due higher depreciation due to a higher asset base driven by prior year and current year capital expenditures. COVID-19 impacts to operations and maintenance expense included $0.7 million of expenses related to the sequestration of essential employees and $0.1 million of additional bad debt expense which were mostly offset by $0.6 million of lower travel, training and outside services related expenses.

Interest expense, net increased primarily due to higher outside services expensesMoney pool notes payable and higher employee costs driven by increased headcountNotes payable to Parent balances partially offset by a decreaselower interest rates.

Income Tax (Expense): The effective tax rate was 14.7% compared to 17.7% for the same period in expenses2019. The lower effective tax rate is primarily due to generation outages.current year tax flow-through benefits related to repairs.


Operating Statistics
 Electric Revenue by Customer Type
 Three Months Ended June 30, Six Months Ended June 30,
 (in thousands)
 2019 Percentage Change 2018 2019 Percentage Change 2018
Residential$15,570
 (5)% $16,426
 $36,760
 (2)% $37,487
Commercial22,131
 (6)% 23,538
 45,275
 (4)% 47,082
Industrial8,576
 5% 8,170
 16,933
 3% 16,446
Municipal776
 (11)% 876
 1,557
 (8)% 1,687
Total retail revenue47,053
 (4)% 49,010
 100,525
 (2)% 102,702
Wholesale (a)
6,780
 (17)% 8,191
 15,123
 (12)% 17,241
Market - off-system sales (b)
2,393
 (31)% 3,449
 7,063
 23% 5,724
Other revenue (c)
13,020
 30% 10,026
 25,576
 36% 18,824
Total revenue$69,246
 (2)% $70,676
 $148,287
 3% $144,491
____________________
(a)Decrease for the six months ended June 30, 2019 was primarily driven by prior year increased volumes on long-term wholesale contracts.
(b)Increase for the six months ended June 30, 2019 was driven by weather and energy prices.
(c)Increase for the six months ended June 30, 2019 was primarily due to the prior year reserve to revenue to reflect the reduction of the lower federal income tax rate from the TCJA on our existing rate tariffs.

 Megawatt Hours Sold by Customer Type
 Three Months Ended June 30, Six Months Ended June 30,
 2019 Percentage Change 2018 2019 Percentage Change 2018
Residential114,399
 (1)% 115,905
 284,335
 2% 279,018
Commercial180,966
 (3)% 186,784
 375,760
 (2)% 381,715
Industrial112,623
 6% 106,100
 220,819
 5% 210,402
Municipal6,756
 (10)% 7,479
 14,329
 (4)% 14,982
Total retail quantity sold414,744
 —% 416,268
 895,243
 1% 886,117
Wholesale194,222
 (11)% 218,132
 417,242
 (8)% 455,836
Market - off-system sales113,014
 (20)% 141,866
 212,586
 (9)% 233,968
Total quantity sold721,980
 (7)% 776,266
 1,525,071
 (3)% 1,575,921
Losses and Company use (a)
35,660
 (42)% 61,677
 77,570
 (14)% 90,199
Total energy757,640
 (10)% 837,943
 1,602,641
 (4)% 1,666,120
____________________
(a)Includes company uses, line losses, and excess exchange production.

 Megawatt Hours Generated and Purchased
 Three Months Ended June 30, Six Months Ended June 30,
Generated -2019 Percentage Change 2018 2019 Percentage Change 2018
Coal-fired (a)
287,201
 (26)% 388,081
 696,867
 (11)% 787,168
Natural Gas and Oil (b) 
28,724
 21% 23,758
 76,427
 107% 36,865
Total generated315,925
 (23)% 411,839
 773,294
 (6)% 824,033
 
          
Total purchased441,715
 4% 426,104
 829,347
 (2)% 842,087
Total generated and purchased757,640
 (10)% 837,943
 1,602,641
 (4)% 1,666,120
Electric Revenue by Customer Type
(in thousands)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Residential$16,693  $15,570  $36,374  $36,760  
Commercial20,540  22,131  42,766  45,275  
Industrial8,111  8,576  17,197  16,933  
Municipal799  776  1,570  1,557  
Total retail revenue46,143  47,053  97,907  100,525  
Wholesale (a)
2,716  6,780  7,098  15,123  
Market - off-system sales2,004  2,393  4,381  7,063  
Other revenue11,724  13,020  24,812  25,576  
Total revenue$62,587  $69,246  $134,198  $148,287  
____________________
(a) DecreaseRevenue for the three and six months ended June 30, 2020 for certain wholesale contracts has been presented on a net basis, which resulted in a decrease of $5.0 million and $8.6 million, respectively.  Amounts for the three and six months ended June 30, 2019, iswere presented on a gross basis and, due to their immaterial nature, were not revised.  This presentation change has no impact on Gross margin.


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Quantities Sold (MWh) by Customer Type
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Residential122,223  114,399  275,260  284,335  
Commercial166,711  180,966  352,672  375,760  
Industrial100,761  112,623  219,319  220,819  
Municipal7,263  6,756  14,702  14,329  
Total retail quantity sold396,958  414,744  861,953  895,243  
Wholesale (a)
38,483  194,222  120,220  417,242  
Market - off-system sales106,005  113,014  211,749  212,586  
Total quantity sold541,446  721,980  1,193,922  1,525,071  
Losses and Company use (b)
29,083  35,660  61,830  77,570  
Total energy570,529  757,640  1,255,752  1,602,641  
____________________
(a) MWh sold for the three and six months ended June 30, 2020 for certain wholesale contracts have been presented on a net basis, which resulted in a decrease of 183,120 MWh and 318,447 MWh, respectively.  Amounts for the three and six months ended June 30, 2019, were presented on a gross basis and, due to their immaterial nature, were not revised.  This presentation change has no impact on Gross margin.
(b) Includes company uses, line losses, and excess exchange production.
Quantities Generated and Purchased (MWh)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Coal-fired399,005  287,201  779,500  696,867  
Natural Gas and Oil43,561  28,724  136,032  76,427  
Total generated442,566  315,925  915,532  773,294  
Purchased (a)
127,963  441,715  340,220  829,347  
Total generated and purchased570,529  757,640  1,255,752  1,602,641  
________________
(a) Purchased power quantities for the three and six months ended June 30, 2020 for certain wholesale contracts have been presented on a net basis, which resulted in a decrease of 183,120 MWh and 318,447 MWh, respectively.  Amounts for the three and six months ended June 30, 2019, were presented on a gross basis and, due to their immaterial nature, were not revised.  This presentation change has no impact on Gross margin.

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Contracted Power Plant Fleet Availability (a)
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Coal-fired plants (b)
97.1 %71.9 %94.4 %85.0 %
Other plants (c) (d)
86.1 %79.7 %92.1 %83.5 %
Total availability91.2 %76.0 %93.2 %84.2 %
____________________
(a) Total availability is calculated using a weighted average based on capacity of our generating fleet.
(b) 2019 included planned outages at Neil Simpson II and Wygen III and unplanned outages at Wyodak Plant.
(b) Increase is primarily due to low natural gas prices(c) 2019 included planned outages at Neil Simpson CT and the ability to generateLange CT.
(d) 2020 includes planned outages at a lower cost than to purchase generation on the open market for the six months ended June 30, 2019.Ben French CTs #1-4.


Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
ActualVariance from NormalActualVariance from NormalActualVariance from NormalActualVariance from Normal
Heating degree days1,127  10 %1,279  25 %4,238  — %5,195  23 %
Cooling degree days120  21 %38  (62)%120  21 %38  (62)%


 Power Plant Availability
 Three Months Ended June 30,Six Months Ended June 30,
 2019201820192018
Coal-fired plants (a)
71.9%91.3%85.0%92.1%
Other plants (b)
79.7%97.5%83.5%98.4%
Total availability76.0%94.6%84.2%95.5%
____________________
(a)2019 included planned outages at Neil Simpson II and Wygen III unplanned outages at Wyodak Plant, and 2018 included planned outages at Neil Simpson II and Wyodak Plant.
(b)2019 included planned outages at Neil Simpson CT and Lange CT.


 Degree Days Degree Days
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
 ActualVariance from Normal ActualVariance from Normal ActualVariance from Normal ActualVariance from Normal
            
Heating degree days1,279
25 % 1,037
1% 5,195
23 % 4,736
12%
Cooling degree days38
(62)% 132
33% 38
(62)% 132
33%


Credit Ratings

Credit ratings impact our ability to obtain short and long-term financing, the cost of such financing, and vendor payment terms including collateral requirements. The following table represents our secured credit rating from each agency’s review which was in effect at June 30, 2019:

2020:
Rating AgencySenior Secured Rating
S&P (a)
A
Moody’s (b)
A1
Fitch (c)
A
__________
(a)On April 30, 2019,
(a) On April 16, 2020, S&P affirmed A rating.
(b)On December 12, 2018, Moody’s affirmed A1 rating.
(c)On July 23, 2019, Fitch affirmed A rating.


(b) On December 20, 2019, Moody’s affirmed A1 rating.

(c) On August 29, 2019, Fitch affirmed A rating.


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FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements as defined by the SEC. Forward-looking statements are all statements other than statements of historical fact, including without limitation those statements that are identified by the words “anticipates”, “estimates”, “expects”, “intends”, “plans”, “predicts” and similar expressions, and include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements that are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature, including statements contained within Item 2 - Management’s Discussion & Analysis of Financial Condition and Results of Operations.

Forward-looking statements involve risks and uncertainties, which could cause actual results or outcomes to differ materially from those expressed. The Company’s expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties. Nonetheless, the Company’s expectations, beliefs or projections may not be achieved or accomplished.

Any forward-looking statement contained in this document speaks only as of the date on which the statement is made and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, such as the COVID-19 pandemic, and it is not possible for management to predict all of the factors, nor can it assess the effect of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. All forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by the risk factors and cautionary statements described in Item 1A of our 20182019 Annual Report on Form 10-K, including statements contained within Item 1A - Risk Factors and Part II, Item 1A of this Quarterly Report on Form 10-Q.


ITEM 4.CONTROLS AND PROCEDURES

ITEM 4.CONTROLS AND PROCEDURES
This section should be read in conjunction with Item 9A, “Controls and Procedures” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934)1934, as amended (the “Exchange Act”)) as of June 30, 2019.2020. Based on their evaluation, they have concluded that our disclosure controls and procedures were effective as ofat June 30, 2019.2020.

Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Security Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Commission’sSEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended June 30, 2019,2020, there have been no changes in our internal controlcontrols over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. Although we have altered some work routines due to the COVID-19 pandemic, the changes in our work environment (i.e. remote work arrangements) have not materially impacted our internal controls over financial reporting and have not adversely affected the Company’s ability to maintain operations, including financial reporting systems, ICFR, and disclosure controls and procedures.



BLACK HILLS POWER, INC.

PART II. OTHER INFORMATION
Part II - Other Information

Item 1.Legal Proceedings

ITEM 1.LEGAL PROCEEDINGS

For information regarding legal proceedings, see Note 11 of Notes to Financial Statements in Item 8 of our 20182019 Annual Report on Form 10-K and Note 98 of our Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q,10-Q.


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ITEM 1A.RISK FACTORS

There are no material changes to the risk factors previously disclosed in Item 1A of Part I in our 2019 Annual Report on Form 10-K filed with the SEC except as shown below:

Our business, results of operations, financial condition and cash flows could be adversely affected by the recent coronavirus (COVID-19) pandemic.

We have responded to the global pandemic of COVID-19 by taking steps to mitigate the potential risks to us posed by its spread.

For the six months ended June 30, 2020, the COVID-19 pandemic had a limited financial impact on our business, operations, financial condition and cash flows. In particular, we experienced:

•Lower commercial volumes partially offset by higher residential usage;
•Increased allowance for credit losses and bad debt expense due to anticipated higher customer accounts receivable arrears balances;
•Minimal cash flow impacts from delayed payments from residential, commercial and industrial customers;
•Minimal disruptions receiving the materials and supplies necessary to maintain operations and continue executing our capital investment plan;
•Reduced availability and productivity of our employees;
•Minimal impacts to the availability of our third-party resources;
•Minimal decline in the funded status of our pension plan;
•Increased costs for personal protection equipment and cleaning supplies;
•Increased costs due to sequestration of mission-critical and essential employees; and
•Reduced training, travel and outside services related expenses.

Should the COVID-19 pandemic continue for a prolonged period or impact the areas we serve more significantly than it has today, our business, operations, financial condition and cash flows could be impacted in more significant ways. In addition to exacerbating the impacts described above, we could experience:

•Adverse impacts on our strategic business plans, growth strategy and capital investment plans;
•Increased adverse impacts to electricity demand from our customers, particularly from commercial and industrial customers;
•Further reduction in the availability and productivity of our employees and third-party resources;
•Increased costs as a result of our emergency measures;
•Increased allowance for credit losses and bad debt expense as a result of delayed or non-payment from our customers, both of which information from Note 9could be magnified by Federal or state government legislation that requires us to extend suspensions of disconnections for non-payment;
•Delays and disruptions in the availability, timely delivery and cost of materials and components used in our operations;
•Disruptions in the commercial operation dates of certain projects impacting qualification criteria for certain tax credits and potential damages in our power purchase agreements;
•Deterioration of the credit quality of our counterparties, including power purchase agreement counterparties, contractors or retail customers, that could result in credit losses;
•Impairment of long-lived assets;
•Adverse impacts on our ability to develop, construct and operate facilities;
•Deterioration in our financial metrics or the business environment that adversely impacts our credit ratings;
•Delay in the permitting process of certain development projects, affecting the timing of final investment decisions and start dates of construction;
•Delays in our ability to change rates through regulatory proceedings; and
•Other risks that impact us, such as the risks described in the “Risk Factors” section of our 2019 Annual Report on Form 10-K and our ability to meet our financial obligations.

To date, we have experienced limited impacts to our results of operations, financial condition, cash flows or business plans. However, the situation remains fluid and it is incorporated by reference into this item.difficult to predict with certainty the potential impact of COVID-19 on our business, results of operations, financial condition and cash flows.

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Item 6.Exhibits

ITEM 6. EXHIBITS

Exhibit 3.1* Restated Articles of Incorporation of the Registrant dated January 30, 2018 (filed as Exhibit 3 to Registrant’s Form 8-K filed on February 5, 2018).
Exhibit 3.1*

Exhibit 3.2* Amended and Restated Bylaws of the Registrant dated March 30, 2015 (filed as Exhibit 3.2 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015).

Exhibit 4.1* Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as Exhibit 4.19 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)).
FirstRestated Articles of Incorporation of the Registrant dated January 30, 2018 (filed as Exhibit 3 to Registrant’s Form 8-K filed on February 5, 2018).

Exhibit 3.2*
Amended and Restated Bylaws of the Registrant dated March 30, 2015 (filed as Exhibit 3.2 to Registrant’s Form 10-Q for the quarterly period ended March 31, 2015).

Exhibit 4.1*
Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as Exhibit 4.19 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)).
First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and The Bank of New York Mellon (as successor to J.P. Morgan Chase Bank), as Trustee (filed as Exhibit 4.20 to the Registrant’s Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form S-3 (No. 333-150669-01)).
Second Supplemental Indenture, dated as of October 27, 2009, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 4.21 to the Registration Statement on Form S-3 (No. 333-150669-01)).
Third Supplemental Indenture, dated as of October 1, 2014, between Black Hills Power, Inc. and The Bank of New York Mellon (filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 2, 2014).

Exhibit 31.1
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

Exhibit 31.2
Certification of Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

Exhibit 32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002.

101.INSXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
_________________________
*
* Previously filed as part of the filing indicated and incorporated by reference herein.

BLACK HILLS POWER, INC.
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Signatures

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BLACK HILLS POWER, INC.


/S/ LINDEN R. EVANS
Linden R. Evans, Chairman, President
and Chief Executive Officer


/S/ RICHARD W. KINZLEY
Richard W. Kinzley, Senior Vice President
and Chief Financial Officer

/s/ Linden R. Evans
Linden R. Evans, Chairman, President and
  Chief Executive Officer
/s/ Richard W. Kinzley
Richard W. Kinzley, Senior Vice President and
  Chief Financial Officer
Dated:August 4, 2020
Dated: August 6, 2019


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