BLACK HILLS POWER INC - FORM 10-Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2014
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________.

Commission File Number 1-7978

Black Hills Power, Inc.



Incorporated in South Dakota		IRS Identification Number 46-0111677

625 Ninth Street, Rapid City, South Dakota 57701

Registrant’s telephone number (605) 721-1700

Former name, former address, and former fiscal year if changed since last report

NONE

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes x	No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).



Yes x	No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).



Large accelerated filer	o	Accelerated filer	o

Non-accelerated filer	x	Smaller reporting company	o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes o	No x

As of April 30, 2014, 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.

TABLE OF CONTENTS



		Page
	GLOSSARY OF TERMS AND ABBREVIATIONS	3

PART 1.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Statements of Income and Comprehensive Income - unaudited	4
	Three Months Ended March 31, 2014 and 2013

	Condensed Balance Sheets - unaudited	5
	March 31, 2014 and December 31, 2013

	Condensed Statements of Cash Flows - unaudited	7
	Three Months Ended March 31, 2014 and 2013

	Notes to Condensed Financial Statements - unaudited	8

Item 2.	Managements’ Discussion and Analysis of Financial Condition and Results of Operations	14

Item 4.	Controls and Procedures	18

PART II.	OTHER INFORMATION	18

Item 1.	Legal Proceedings	18

Item 1A.	Risk Factors	18

Item 6.	Exhibits	19

	Signatures	20

	Exhibit Index	21

GLOSSARY OF TERMS AND ABBREVIATIONS

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



AFUDC	Allowance for Funds Used During Construction
BHC	Black Hills Corporation, the Parent Company
Black Hills Energy	The name used to conduct the business of Black Hills Utility Holdings, Inc., and its subsidiaries
Black Hills Utility Holdings	Black Hills Utility Holdings, Inc. a direct, wholly-owned subsidiary of BHC
Black Hills Service Company	Black Hills Service Company, LLC, a direct, wholly-owned subsidiary of BHC
Cheyenne Light	Cheyenne Light, Fuel and Power Company, a direct, wholly-owned subsidiary of BHC
Cheyenne Prairie	Cheyenne Prairie Generating Station, a 132 megawatt generating facility, currently being constructed in Cheyenne, Wyo. by Cheyenne Light and Black Hills Power
Cooling degree day	A cooling degree day is equivalent to each degree that the average of the high and low temperature for a day is above 65 degrees. The warmer the climate, the greater the number of cooling degree days. Cooling degree days are used in the utility industry to measure the relative warmth of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations over a 30-year average.
FERC	Federal Energy Regulatory Commission
Fitch	Fitch Ratings
GAAP	Generally Accepted Accounting Principles in the United States of America
Happy Jack	Happy Jack Wind Farms, LLC, a subsidiary of Duke Energy Generation Services
Heating degree day	A heating degree day is equivalent to each degree that the average of the high and the low temperatures for a day is below 65 degrees. The colder the climate, the greater the number of heating degree days. Heating degree days are used in the utility industry to measure the relative coldness of weather and to compare relative temperatures between one geographic area and another. Normal degree days are based on the National Weather Service data for selected locations over a 30-year average.
IRS	United States Internal Revenue Service
LIBOR	London Interbank Offered Rate
Moody's	Moody's Investor Services, Inc.
MW	Megawatts
SDPUC	South Dakota Public Utilities Commission
SEC	U.S. Securities and Exchange Commission
Silver Sage	Silver Sage Windpower, LLC, a subsidiary of Duke Energy Generation Services
S&P	Standard & Poor's Rating Services
WPSC	Wyoming Public Service Commission
WRDC	Wyodak Resources Development Corp., an indirect, wholly-owned subsidiary of BHC

BLACK HILLS POWER, INC.

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME



	Three Months Ended March 31,
(unaudited)	2014			2013
	(in thousands)

Revenue	$	71,267		$	59,817

Operating expenses:
Fuel and purchased power	27,045			22,098
Operations and maintenance	18,110			16,808
Depreciation and amortization	6,887			6,986
Taxes - property	1,679			1,422
Total operating expenses	53,721			47,314

Operating income	17,546			12,503

Other income (expense):
Interest expense	(4,947		)	(4,847		)
AFUDC - borrowed	72			58
Interest income	58			27
AFUDC - equity	145			134
Other income (expense), net	43			82
Total other income (expense)	(4,629		)	(4,546		)

Income from continuing operations before income taxes	12,917			7,957
Income tax expense	(4,274		)	(2,375		)
Net income	8,643			5,582

Other comprehensive income (loss):
Reclassification adjustments of cash flow hedges settled and included in net income (net of tax (expense) benefit of $(6) and $(6), respectively)	10			10
Reclassification adjustment of benefit plan liability - net gain (loss) (net of tax (expense) benefit of $(4) and $(6), respectively)	7			11
Other comprehensive income	17			21

Comprehensive income	$	8,660		$	5,603

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

BLACK HILLS POWER, INC.

CONDENSED BALANCE SHEETS



(unaudited)	March 31, 2014			December 31, 2013
	(in thousands, except common stock par value and share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	4,398		$	2,259
Receivables - customers, net	30,554			25,799
Receivables - affiliates	4,938			4,934
Other receivables, net	387			579
Money pool notes receivable, net	11,072			17,292
Materials, supplies and fuel	24,493			23,278
Deferred income tax assets, net, current	1,565			2,170
Regulatory assets, current	7,656			4,891
Other, current assets	4,355			4,933
Total current assets	89,418			86,135

Investments	4,494			4,431

Property, plant and equipment	1,115,668			1,095,884
Less accumulated depreciation and amortization	(339,749		)	(334,174		)
Total property, plant and equipment, net	775,919			761,710

Other assets:
Regulatory assets, non-current	42,828			40,373
Other, non-current assets	6,657			8,524
Total other assets	49,485			48,897
TOTAL ASSETS	$	919,316		$	901,173

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

BLACK HILLS POWER, INC.

CONDENSED BALANCE SHEETS



(unaudited)	March 31, 2014			December 31, 2013
	(in thousands, except common stock par value and share amounts)
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable	$	29,838		$	26,144
Accounts payable - affiliates	19,137			21,082
Accrued liabilities	20,062			14,966
Regulatory liabilities, current	385			161
Total current liabilities	69,422			62,353

Long-term debt, net of current maturities	269,949			269,948

Deferred credits and other liabilities:
Deferred income tax liability, net, non-current	171,481			167,309
Regulatory liabilities, non-current	42,693			43,357
Benefit plan liabilities	12,085			12,105
Other, non-current liabilities	3,172			4,247
Total deferred credits and other liabilities	229,431			227,018

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 issued	23,416			23,416
Additional paid-in capital	39,575			39,575
Retained earnings	288,703			280,060
Accumulated other comprehensive loss	(1,180		)	(1,197		)
Total stockholder’s equity	350,514			341,854
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	919,316		$	901,173

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

BLACK HILLS POWER, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)



(unaudited)	Three Months Ended March 31,
	2014			2013
	(in thousands)
Operating activities:
Net income	$	8,643		$	5,582
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization	6,887			6,986
Deferred income tax	4,254			2,252
Employee benefits	324			774
AFUDC - equity	(145		)	(134		)
Other adjustments, net	(1,014		)	389
Change in operating assets and liabilities -
Accounts receivable and other current assets	(7,768		)	(994		)
Accounts payable and other current liabilities	8,111			393
Other operating activities, net	(1,419		)	1,749
Net cash provided by (used in) operating activities	17,873			16,997

Investing activities:
Property, plant and equipment additions	(21,885		)	(14,243		)
Change in money pool notes receivable, net	6,220			(3,418		)
Other investing activities	(63		)	(78		)
Net cash provided by (used in) investing activities	(15,728		)	(17,739		)

Financing activities:
Other financing activities	(6		)	—
Net cash provided by (used in) financing activities	(6		)	—

Net change in cash and cash equivalents	2,139			(742		)

Cash and cash equivalents, beginning of period	2,259			3,805
Cash and cash equivalents, end of period	$	4,398		$	3,063

See Note 8 for supplemental cash flow information.

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

BLACK HILLS POWER, INC.

Notes to Condensed Financial Statements

(unaudited)

(Reference is made to Notes to Financial Statements

included in our 2013 Annual Report on Form 10-K)


(1)	MANAGEMENT’S STATEMENT

The unaudited condensed financial statements included herein have been prepared by Black Hills Power, Inc. (the “Company,” “we,” “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 2013 Annual Report on Form 10-K filed with the SEC.

Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying condensed financial statements reflects all adjustments, including accruals, which are, in the opinion of management, necessary for a fair presentation of the March 31, 2014, December 31, 2013 and March 31, 2013 financial information and are of a normal recurring nature. The results of operations for the three months ended March 31, 2014 and March 31, 2013, and our financial condition as of March 31, 2014 and December 31, 2013 are not necessarily indicative of the results of operations and financial condition to be expected as of or for any other period.

Recently Issued and Adopted Accounting Standards

We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position, results of operations, or cash flows.


(2)	ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

Following is a summary of Receivables - customers, net included in the accompanying Condensed Balance Sheets (in thousands) as of:



	March 31, 2014			December 31, 2013
Accounts receivable trade	$	22,131		$	16,300
Unbilled revenues	8,629			9,719
Allowance for doubtful accounts	(206		)	(220		)
Receivables - customers, net	$	30,554		$	25,799


(3)	REGULATORY ASSETS AND LIABILITIES

Our regulated electric operations are subject to regulation by various state and federal agencies. The accounting policies followed are generally subject to the Uniform System of Accounts of the FERC.

Our regulatory assets and liabilities were as follows (in thousands) as of:



	Recovery/Amortization Period (in years)	March 31, 2014		December 31, 2013
Regulatory assets:
Unamortized loss on reacquired debt^(a)	14	$	2,196	$	2,257
AFUDC^(b)	45	8,375		8,327
Employee benefit plans^(c)	13	15,314		15,233
Deferred energy costs^(a)	1	9,639		7,711
Flow through accounting^(a)	35	10,024		9,723
Other^(a)	2	4,936		2,013
Total regulatory assets		$	50,484	$	45,264



Regulatory liabilities:
Cost of removal for utility plant^(a)	53	$	30,999	$	30,467
Employee benefit plans	13	10,327		10,177
Other	13	1,752		2,874
Total regulatory liabilities		$	43,078	$	43,518

____________________


(a)	Recovery or return of costs, but 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 of costs, we are allowed a return on a portion of this amount or a reduction in rate base, respectively.


(4)	PROPERTY, PLANT AND EQUIPMENT

On March 21, 2014, we retired our Osage, Ben French and Neil Simpson I electric generating plants primarily due to federal environmental regulations. The total plant to be decommissioned remaining in Property, plant and equipment at March 31, 2014 is as follows (in thousands):



Cost of Plant		Accumulated Depreciation			Net Book Value
$	54,929	$	(50,555	)	$	4,374

We reasonably expect the remaining book value to be recovered through future rates.


(5)	RELATED-PARTY TRANSACTIONS

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:



	March 31, 2014		December 31, 2013
Receivables - affiliates	$	4,938	$	4,934
Accounts payable - affiliates	$	19,137	$	21,082

Money Pool Notes Receivable and Notes Payable

We have entered into a Utility Money Pool Agreement (the “Agreement”) with BHC, Cheyenne Light and Black Hills Energy. Under the Agreement, we may borrow from BHC; however the Agreement restricts us 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 and advances under the Agreement bear interest at the weighted average daily cost of our parent company’s credit facility 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 March 31, 2014, the cost of borrowing under the Utility Money Pool was 1.61%.

We had the following balances with the Utility Money Pool (in thousands) as of:



	March 31, 2014		December 31, 2013
Money pool notes receivable, net	$	11,072	$	17,292

Net interest income (expense) relating to balances with the Utility Money Pool was as follows (in thousands):

Other related party activity was as follows (in thousands):



	Three Months Ended March 31,
	2014		2013
Revenue:
Energy sold to Cheyenne Light	$	679	$	140
Rent from electric properties	$	1,023	$	988

Fuel and purchased power:
Purchases of coal from WRDC	$	5,014	$	4,524
Purchase of excess energy from Cheyenne Light	$	629	$	946
Purchase of renewable wind energy from Cheyenne Light - Happy Jack	$	664	$	650
Purchase of renewable wind energy from Cheyenne Light - Silver Sage	$	1,094	$	1,085

Corporate support:
Corporate support services and fees from Parent, Black Hills Service Company and Black Hills Utility Holdings	$	7,853	$	7,276


(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 March 31,
	2014			2013
Service cost	$	176		$	213
Interest cost	748			742
Expected return on plan assets	(926		)	(941		)
Prior service cost	11			11
Net loss (gain)	235			652
Net periodic benefit cost	$	244		$	677

Non-pension Defined Benefit Postretirement Healthcare Plan

The components of net periodic benefit cost for the Non-Pension Defined Benefit Postretirement Healthcare Plan were as follows (in thousands):



	Three Months Ended March 31,
	2014			2013
Service cost	$	56		$	54
Interest cost	60			60
Prior service cost (benefit)	(84		)	(69		)
Net loss (gain)	—			2
Net periodic benefit cost	$	32		$	47

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 March 31,
	2014		2013
Interest cost	$	37	$	33
Net loss (gain)	11		17
Net periodic benefit cost	$	48	$	50

Contributions

We anticipate we will make contributions to the benefit plans during 2014 and 2015. Contributions to the Defined Pension Plan are cash contributions made directly to the Pension Plan Trust accounts. Contributions to the Healthcare and Supplemental Plans are made in the form of benefit payments. Contributions and anticipated contributions are as follows (in thousands):



	Three Months Ended March 31, 2014		Remaining Anticipated Contributions for 2014		Anticipated Contributions for 2015
Defined Benefit Pension Plan	$	—	$	—	$	20
Non-Pension Defined Benefit Postretirement Healthcare Plan	$	138	$	415	$	595
Supplemental Non-qualified Defined Benefit Plans	$	54	$	163	$	215


(7)	FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance on fair value measurements establishes a hierarchy for grouping assets and liabilities, based on significance of inputs. For additional information see Note 1 included in our 2013 Annual Report on Form 10-K filed with the SEC.

The estimated fair values of our financial instruments were as follows (in thousands) as of:



	March 31, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents ^(a)	$	4,398	$	4,398	$	2,259	$	2,259
Long-term debt, including current maturities^(b)	$	269,949	$	332,917	$	269,948	$	317,531

_________________


(a)	Carrying value approximates fair value due to either short-term length of maturity or variable interest rates that approximate prevailing market rates and therefore is classified in Level 1 in the fair value hierarchy.

(b)

Long-term debt is valued using the market approach based on observable inputs of quoted market prices and yields available for debt instruments either directly or indirectly for similar maturities and debt ratings in active markets and therefore is classified in Level 2 in the fair value hierarchy. The carrying amount of our variable rate debt approximates fair value due to the variable interest rates with short reset periods.


(8)	SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow for the three months ended are as follows (in thousands):



	Three Months Ended March 31,
	2014			2013
Non-cash investing and financing activities -
Property, plant and equipment acquired with accrued liabilities	$	11,760		$	4,953

Cash (paid) refunded during the period for -
Interest (net of amounts capitalized)	$	(3,264	)	$	(3,098	)
Income taxes, net	$	—		$	—


(9)	COMMITMENTS AND CONTINGENCIES

Other than the items discussed below, 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 2013 Annual Report on Form 10-K.

Cheyenne Prairie

Construction is continuing on Cheyenne Prairie, a natural gas-fired electric generating facility, jointly owned by us and Cheyenne Light. We own 55 MW and Cheyenne Light owns 40 MW of the facility’s combined-cycle unit. We expect to incur approximately $96 million of the expected total cost for our share of the jointly owned combined-cycle unit. Year-to-date expenditures for construction costs for our share of the combined cycle unit are approximately $13 million. Construction is expected to be completed by September 30, 2014. As of March 31, 2014, committed contracts for equipment purchases and for construction were 100% and 83% complete, respectively.

Oil Creek Fire

On June 29, 2012, a forest and grassland fire occurred in the western Black Hills of Wyoming. A state fire investigator concluded that the fire was caused by the failure of a transmission structure owned, operated and maintained by Black Hills Power. On April 16, 2013, a lawsuit was filed in the United States District Court for the District of Wyoming, which forty-seven plaintiffs have now joined, asserting claims for damages against Black Hills Power. The claims include allegations of negligence, negligence per se, common law nuisance, and trespass. Although not currently included in the lawsuit, Black Hills Power also received written damage claims from an additional landowner and from the State of Wyoming. Altogether the claims seek recovery for fire suppression, reclamation and rehabilitation costs, damage to fencing and other personal property, alleged injury to timber, grass or hay, livestock and related operations, and diminished value of real estate, for a current total amount of $16 million. In addition to claims for these compensatory damages, the lawsuit seeks recovery of punitive damages. Our investigation of the cause and origin of the fire is ongoing. We have denied and will vigorously defend all claims arising out of the fire, pending the completion of our investigation. We cannot predict the outcome of our investigation, the viability of alleged claims or the outcome of the litigation.

Civil litigation of this kind, however, is likely to lead to settlement negotiations, including negotiations prompted by pre-trial civil court procedures. We believe such negotiations would effect a settlement of all claims. Regardless of whether the litigation is determined at trial, or through settlement, we expect to incur significant investigation, legal and expert services expenses associated with the litigation. In order to limit our exposure to losses due to civil liability claims, and related litigation expense, we maintain insurance coverage above a $1.0 million deductible. We expect this coverage to limit our exposure, and we will pursue recoveries to the maximum extent available under the policies. Based upon information currently available, we believe that a loss associated with settlement of pending claims is probable. Accordingly, as of March 31, 2014, we recorded a loss contingency liability related to these claims, and we recorded a receivable for costs we believe are reimbursable and probable of recovery under our insurance coverage. Both of these entries reflect our reasonable estimate of probable future litigation expense and settlement costs; we did not base these contingencies on any determination that it is probable we would be found liable for these claims were they to be litigated.

Given the uncertainty of litigation, however, a loss related to the fire, the litigation and related claims, in excess of the loss we have determined to be probable is reasonably possible. However, we cannot reasonably estimate the amount of such possible loss because our investigation is ongoing, damage claims are currently incomplete or undocumented, and there are significant factual and legal issues to be resolved. Further claims may be presented by these and other parties. Based upon information currently available, however, management does not expect the outcome of the claims to have a material adverse effect upon our financial condition, results of operations or cash flows.

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

Cheyenne Prairie

Construction continued on Cheyenne Prairie, a jointly owned natural gas-fired electric generating facility, to serve our customers and the customers of Cheyenne Light. We own 55 MW and Cheyenne Light owns 40 MW of a combined-cycle unit that is part of the facility. We expect to incur approximately $96 million for our share of the combined-cycle unit. Project-to-date expenditures for our share of the combined-cycle unit are approximately $79 million. The project is on schedule to be placed into service in October of 2014.

On September 17, 2013, the SDPUC approved the use of a construction financing rider for the South Dakota portion of costs for Cheyenne Prairie, effective April 1, 2013. We recorded additional gross margins of approximately $1.4 million for the three months ended March 31, 2014, relating to this rider. The WPSC approved a similar construction financing rider for our Wyoming customers during 2012.

Request for Rate Increase

On March 31, 2014, we filed a rate request with the SDPUC for an annual revenue increase of $14.6 million to recover operating expenses and infrastructure investments, primarily for Cheyenne Prairie. The filing seeks a return on equity of 10.25%, and a capital structure of approximately 53.3% equity and 46.7% debt. This filing also includes recovery of deferred costs for both Winter Storm Atlas and the retirement of certain plants. Osage, Ben French, and Neil Simpson 1 were retired on March 21, 2014 due to federal environmental regulations.

On January 17, 2014, we filed a request with the WPSC for an annual revenue increase of $2.8 million, to recover investments made in electric infrastructure, primarily for Cheyenne Prairie. The filing seeks a return on equity of 10.25% and a capital structure of approximately 53.3% equity and 46.7% debt.

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 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, purchased power and cost of gas sold. Our gross margin is impacted by the fluctuations in power purchases, natural gas and other fuel supply costs. However, while these fluctuating costs impact gross margin as a percentage of revenue, they only impact total gross margin if the costs cannot be passed through to our customers.

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

The following tables provide certain financial information and operating statistics:



	Three Months Ended March 31,
	2014			2013			Variance
	(in thousands)
Revenue	$	71,267		$	59,817		$	11,450
Fuel and purchased power	27,045			22,098			4,947
Gross margin	44,222			37,719			6,503

Operating expenses	26,676			25,216			1,460
Operating income	17,546			12,503			5,043

Interest income (expense), net	(4,817		)	(4,762		)	(55		)
Other income (expense), net	188			216			(28		)
Income tax expense	(4,274		)	(2,375		)	(1,899		)
Net income	$	8,643		$	5,582		$	3,061



	Electric Revenue by Customer Type
	Three Months Ended March 31,
	(in thousands)
	2014		Percentage Change	2013
Residential	$	20,061	22%	$	16,442
Commercial	21,528		23%	17,484
Industrial	7,335		22%	6,010
Municipal	792		11%	714
Total retail revenue	49,716		22%	40,650
Contract wholesale	5,598		(3)%	5,767
Off-system wholesale	9,075		45%	6,250
Other revenue	6,878		(4)%	7,150
Total revenue	$	71,267	19%	$	59,817



	Megawatt Hours Sold by Customer Type
	Three Months Ended March 31,
	2014	Percentage Change	2013
Residential	171,311	6%	160,970
Commercial	184,448	5%	175,617
Industrial	100,851	10%	91,632
Municipal	7,686	(1)%	7,783
Total retail quantity sold	464,296	6%	436,002
Contract wholesale	95,228	(8)%	103,784
Wholesale off-system	254,796	7%	238,447
Total quantity sold	814,320	5%	778,233
Losses and company use	36,037	(10)%	40,101
Total energy	850,357	4%	818,334



	Megawatt Hours Generated and Purchased
	Three Months Ended March 31,
Generated -	2014		Percentage Change	2013
Coal-fired	417,248	^(a)	(2)%	427,015
Gas-fired	2,308		(26)%	3,120
Total generated	419,556		(2)%	430,135

Total purchased	430,801		11%	388,199
Total generated and purchased	850,357		4%	818,334

__________________

(a) Decrease reflects the retirement of Neil Simpson I on March 21, 2014.



	Power Plant Availability
	Three Months Ended March 31,
	2014		2013
Coal-fired plants	94.5	%	95.9	%
Other plants	99.8	%	97.8	%
Total availability	96.5	%	96.7	%



	Degree Days
	Three Months Ended March 31,
	2014			2013
	Actual	Variance from 30-year Average		Actual	Variance from 30-year Average
Heating and cooling degree days:
Heating degree days	3,410	6	%	3,210	—	%
Cooling degree days	—	—	%	—	—	%

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013. Net income was $8.6 million compared to $5.6 million for the same period in the prior year primarily due to the following:

Gross margin increased primarily due to $4.4 million from increased retail rates, the Cheyenne Prairie construction financing rider, and a $1.8 million increase resulting from higher retail volumes sold, partially offset by a decrease in contract wholesale volumes sold.

Operations and maintenance increased primarily due to increased maintenance and higher vegetation management costs, partially offset by lower costs due to a plant suspension.

Interest expense, net was comparable to the same period in the prior year.

Other income, net was comparable to the same period in the prior year.

Income tax expense: The effective tax rate is higher in 2014 when compared to 2013 due primarily to the research and development tax credit not being extended to 2014. The credit was retroactively reinstated to January 1, 2012 in January 2013.

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. As of March 31, 2014, our credit ratings for our Senior Secured Debt, as assessed by the three major credit rating agencies, were as follows:



Rating Agency	Rating
S&P	A-
Moody’s^(*)	A1
Fitch	A-

______________________


*	On January 30, 2014, Moody’s upgraded the BHP credit rating to A1 from A2.

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.

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, 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 2013 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 10Q.


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, 2013.

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) as of March 31, 2014. Based on their evaluation, they have concluded that our disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2014, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

BLACK HILLS POWER, INC.

Part II - Other Information


Item 1.	Legal Proceedings

For information regarding legal proceedings, see Note 11 of Notes to Financial Statements in Item 8 of our 2013 Annual Report on Form 10-K and Note 9 of our Notes to Condensed Financial Statements in this Quarterly Report on Form 10-Q, which information from Note 9 is incorporated by reference into this item.


Item 1A.	Risk Factors

There are no material changes to the Risk Factors previously disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2013.


Item 6.	Exhibits


Exhibit 3.1*	Restated Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant’s Form 8-K dated June 7, 1994 (No. 1-7978)).


Exhibit 3.2*	Articles of Amendment to the Articles of Incorporation of the Registrant, as filed with the Secretary of State of the State of South Dakota on December 22, 2000 (filed as an exhibit to the Registrant’s Form 10-K for 2000).


Exhibit 3.3*	Bylaws of the Registrant (filed as an exhibit to the Registrant’s Registration Statement on Form S-8 dated July 13, 1999).

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)).


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.


Exhibit 101	Financial Statements for XBRL Format

_________________________


*	Previously filed as part of the filing indicated and incorporated by reference herein.

BLACK HILLS POWER, INC.

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/ DAVID R. EMERY

David R. Emery, Chairman

and Chief Executive Officer

/S/ ANTHONY S. CLEBERG

Anthony S. Cleberg, Executive Vice President

and Chief Financial Officer

Dated: May 7, 2014

EXHIBIT INDEX


Exhibit Number	Description


Exhibit 3.1*	Restated Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant’s Form 8-K dated June 7, 1994 (No. 1-7978)).


Exhibit 3.2*	Articles of Amendment to the Articles of Incorporation of the Registrant, as filed with the Secretary of State of the State of South Dakota on December 22, 2000 (filed as an exhibit to the Registrant’s Form 10-K for 2000).


Exhibit 3.3*	Bylaws of the Registrant (filed as an exhibit to the Registrant’s Registration Statement on Form S-8 dated July 13, 1999).

Exhibit 4.1*


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.


Exhibit 101	Financial Statements for XBRL Format

_________________________


*	Previously filed as part of the filing indicated and incorporated by reference herein.

Three Months Ended March 31,

Net interest income (expense)