10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
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 001-31303
BLACK HILLS CORPORATION
Incorporated in South Dakota IRS Identification Number 46-0458824
7001 Mount Rushmore Road
Rapid City, South Dakota57702
Registrant’s telephone number (605) 721-1700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common stock of $1.00 par value BKH New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ 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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting common equity held by non-affiliates of the registrant on the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2022, was $4,702,221,557
Class Outstanding at January 31, 2023
Documents Incorporated by Reference
Portions of the registrant’s Definitive Proxy Statement being prepared for the solicitation of proxies in connection with the 2023 Annual Meeting of Stockholders to be held on April 26, 2023, are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
Page
GLOSSARY OF TERMS AND ABBREVIATIONS 4
WEBSITE ACCESS TO REPORTS 10
FORWARD-LOOKING INFORMATION 10
Part I
ITEM 1. BUSINESS 11
History and Organization 11
Electric Utilities 11
Gas Utilities 14
Utility Regulation Characteristics 16
Environmental Matters 20
Human Capital Resources 21
ITEM 1A. RISK FACTORS 23
ITEM 1B. UNRESOLVED STAFF COMMENTS 30
ITEM 2. PROPERTIES 30
ITEM 3. LEGAL PROCEEDINGS 30
ITEM 4. MINE SAFETY DISCLOSURES 30
INFORMATION ABOUT OUR EXECUTIVE OFFICERS 31
Part II
ITEM 6. RESERVED 33
Executive Summary 33
Key Elements of our Business Strategy 34
Recent Developments 38
Results of Operations - Consolidated Summary and Overview 39
Non-GAAP Financial Measure 40
Electric Utilities 41
Gas Utilities 44
Corporate and Other 46
Liquidity and Capital Resources 47
Cash Flow Activities 47
Capital Resources 49
Credit Ratings 50
Capital Requirements 50
Critical Accounting Estimates 52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54
2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 56
Management’s Report on Internal Controls Over Financial Reporting 56
Reports of Independent Registered Public Accounting Firm 57
Consolidated Statements of Income 60
Consolidated Statements of Comprehensive Income 61
Consolidated Balance Sheets 62
Consolidated Statements of Cash Flows 64
Consolidated Statements of Equity 65
Notes to Consolidated Financial Statements 66
Note 1. Business Description and Significant Accounting Policies 66
Note 2. Regulatory Matters 74
Note 3. Commitments, Contingencies and Guarantees 78
Note 4. Revenue 80
Note 5. Property, Plant and Equipment 82
Note 6. Jointly Owned Facilities 83
Note 7. Asset Retirement Obligations 83
Note 8. Financing 84
Note 9. Risk Management and Derivatives 88
Note 10. Fair Value Measurements 91
Note 11. Other Comprehensive Income 93
Note 12. Variable Interest Entity 94
Note 13. Employee Benefit Plans 94
Note 14. Share-based Compensation Plans 100
Note 16. Business Segment Information 106
Note 17. Subsequent Events 108
ITEM 9A. CONTROLS AND PROCEDURES 108
ITEM 9B. OTHER INFORMATION 108
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 108
Part III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 108
ITEM 11. EXECUTIVE COMPENSATION 109
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 110
Part IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 110
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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:
AC Alternating Current
AFUDC Allowance for Funds Used During Construction
AOCI Accumulated Other Comprehensive Income (Loss)
APSC Arkansas Public Service Commission
ARO Asset Retirement Obligation
ASC Accounting Standards Codification
ASU Accounting Standards Update as issued by the FASB
ATM At-the-market equity offering program
BHC Black Hills Corporation; the Company
Btu British thermal unit
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CFTC United States Commodity Futures Trading Commission
Chief Operating Decision Maker (CODM) Chief Executive Officer
City of Gillette Gillette, Wyoming
CO2 Carbon dioxide
CP Program Commercial Paper Program
CPUC Colorado Public Utilities Commission
CSAPR Cross-State Air Pollution Rule
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CT Combustion Turbine
CVA Credit Valuation Adjustment
DC Direct Current
DRSPP Dividend Reinvestment and Stock Purchase Plan
DSM Demand Side Management
EGU Electric generating unit
EPA United States Environmental Protection Agency
EV Electric Vehicle
EWG Exempt Wholesale Generator
FASB Financial Accounting Standards Board
FERC United States Federal Energy Regulatory Commission
Fitch Fitch Ratings Inc.
GAAP Accounting principles generally accepted in the United States of America
GHG Greenhouse gases
Happy Jack Happy Jack Wind Farm, LLC, owned by Duke Energy Generation Services
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IPP Independent Power Producer
IRA Inflation Reduction Act of 2022
IRC Internal Revenue Code
IRP Integrated Resource Plan
IRS United States Internal Revenue Service
ITC Investment Tax Credit
IUB Iowa Utilities Board
KCC Kansas Corporation Commission
kV Kilovolt
LIBOR London Interbank Offered Rate
Mcf Thousand cubic feet
Mcfd Thousand cubic feet per day
MDU Montana-Dakota Utilities Co., a subsidiary of MDU Resources Group, Inc.
MEAN Municipal Energy Agency of Nebraska
MISO Midcontinent Independent System Operator, Inc.
MMBtu Million British thermal units
Moody’s Moody’s Investors Service, Inc.
MSHA United States Department of Labor’s Mine Safety and Health Administration
MW Megawatts
MWh Megawatt-hours
N/A Not Applicable
NAAQS National Ambient Air Quality Standards
NAV Net Asset Value
NERC North American Electric Reliability Corporation
NOx Nitrogen oxide
NOL Net Operating Loss
NPSC Nebraska Public Service Commission
OCI Other Comprehensive Income
OPEB Other Post-Employment Benefits
OSM United States Department of the Interior’s Office of Surface Mining
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Peak View The 60.8 MW wind farm owned by Colorado Electric.
PPA Power Purchase Agreement
PRPA Platte River Power Authority
PSA Power Sales Agreement
PTC Production Tax Credit
PUHCA 2005 Public Utility Holding Company Act of 2005
RNG Renewable natural gas
RTO Regional Transmission Organization
SDPUC South Dakota Public Utilities Commission
SEC United States Securities and Exchange Commission
Silver Sage Silver Sage Windpower, LLC, owned by Duke Energy Generation Services
SO2 Sulfur dioxide
S&P S&P Global Ratings, a division of S&P Global Inc.
SSIR System Safety and Integrity Rider
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TCJA Tax Cuts and Jobs Act enacted on December 22, 2017
Utilities Black Hills’ Electric and Gas Utilities
VEBA Voluntary Employee Benefit Association
VIE Variable Interest Entity
WEIS Western Energy Imbalance Service
Working Capacity Total gas storage capacity minus cushion gas
WPSC Wyoming Public Service Commission
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WEBSITE ACCESS TO REPORTS
The reports we file with the SEC are available free of charge at our website www.blackhillscorp.com as soon as reasonably practicable after they are filed. In addition, the charters of our Audit, Governance and Compensation Committees are located on our website along with our Code of Business Conduct, Code of Ethics for our Chief Executive Officer and Senior Finance Officers, Corporate Governance Guidelines of the Board of Directors and Policy for Director Independence. The information contained on our website is not part of this document.
FORWARD-LOOKING INFORMATION
This Form 10-K 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 7 - 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 adverse macroeconomic conditions, global pandemics or severe weather events, 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 in this Annual Report on Form 10-K, including statements contained within Item 1A - Risk Factors.
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PART I
ITEM 1. BUSINESS
History and Organization
Black Hills Corporation, a South Dakota corporation (together with its subsidiaries, referred to herein as the “Company,” “we,” “us” or “our”), is a customer-focused, growth-oriented utility company headquartered in Rapid City, South Dakota (incorporated in South Dakota in 1941).
We operate our business in the United States, reporting our operating results through our Electric Utilities and Gas Utilities segments. Certain unallocated corporate expenses that support our operating segments are presented as Corporate and Other.
Our Electric Utilities segment generates, transmits and distributes electricity to approximately 220,000 electric utility customers in Colorado, Montana, South Dakota and Wyoming. We also own and operate non-regulated power generation and mining assets that are vertically integrated into and primarily contracted to our Electric Utilities. Our Electric Utilities own 1,482 MW of generation and 9,024 miles of electric transmission and distribution lines.
Our Gas Utilities segment serves approximately 1,107,000 natural gas utility customers in Arkansas, Colorado, Iowa, Kansas, Nebraska, and Wyoming. Our Gas Utilities own and operate 4,713 miles of intrastate gas transmission pipelines and 42,222 miles of gas distribution mains and service lines, seven natural gas storage sites, more than 50,000 horsepower of compression and over 515 miles of gathering lines.
Electric Utilities
We conduct electric utility operations through our Colorado, South Dakota and Wyoming subsidiaries. Our electric generating facilities and power purchase agreements provide for the supply of electricity principally to our retail customers. Additionally, we sell excess power to other utilities and marketing companies, including our affiliates. We also provide non-regulated services to our retail customers under the Service Guard Comfort Plan and Tech Services.
Additionally, we own and operate non-regulated power generation and mining assets that are vertically integrated into and primarily support our Electric Utilities. Nearly all of these operations are located at our electric generating complexes and are physically integrated into our Electric Utilities’ operations.
As of December 31,
As of December 31,
Capacity and Demand. System Peak Demand for the Electric Utilities’ retail customers for each of the last three years are listed below:
System Peak Demand (in MW)
Summer Winter Summer Winter Summer Winter
____________________
(a)
In December 2022, each of our Electric Utilities set new winter peak loads. In July 2022, South Dakota Electric and Wyoming Electric set new all-time and summer peak loads. See recent peak discussion in the Recent Developments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 in this Annual Report on Form 10-K for additional information.
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As of December 31, 2022, our Electric Utilities’ ownership interests in electric generating plants were as follows:
Colorado Electric:
Busch Ranch I (a) Wind Pueblo, Colorado 50% 14.5 2012
Peak View (b) (c) Wind Pueblo, Colorado 100% 60.8 2016
Pueblo Airport Generation #1-2 Gas Pueblo, Colorado 100% 200.0 2011
Pueblo Airport Generation CT #6 Gas Pueblo, Colorado 100% 40.0 2016
South Dakota Electric:
Cheyenne Prairie Gas Cheyenne, Wyoming 58% 58.0 2014
Corriedale (c) Wind Cheyenne, Wyoming 62% 32.5 2020
Wygen III Coal Gillette, Wyoming 52% 60.3 2010
Neil Simpson II Coal Gillette, Wyoming 100% 90.0 1995
Wyodak Plant Coal Gillette, Wyoming 20% 80.5 1978
Neil Simpson CT Gas Gillette, Wyoming 100% 40.0 2000
Lange CT Gas Rapid City, South Dakota 100% 40.0 2002
Ben French Diesel #1-5 Oil Rapid City, South Dakota 100% 10.0 1965
Wyoming Electric:
Cheyenne Prairie Gas Cheyenne, Wyoming 42% 42.0 2014
Cheyenne Prairie CT Gas Cheyenne, Wyoming 100% 40.0 2014
Corriedale (c) Wind Cheyenne, Wyoming 38% 20.0 2020
Integrated Generation:
Pueblo Airport Generation #4-5 Gas Pueblo, Colorado 50.1% (e) 200.0 2012
Busch Ranch I (a) Wind Pueblo, Colorado 50% 14.5 2012
Busch Ranch II (c) Wind Pueblo, Colorado 100% 59.4 2019
Northern Iowa Windpower (c) Wind Joice, Iowa 100% 87.1 2019
____________________
(a)
In 2013, Busch Ranch I was awarded a one-time cash grant in lieu of ITCs under the Section 1603 program created under the American Recovery and Reinvestment Act.
(b)
The PTCs for Peak View flow back to customers through a rider mechanism as a reduction to Colorado Electric’s margins.
(c)
This facility qualifies for PTCs at $26/MWh under IRC 45 during the 10-year period beginning on the date the facility was originally placed in service.
(d)
Jointly owned facilities are discussed in Note 6 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
(e)
In 2016, Black Hills Electric Generation sold a 49.9% non-controlling interest in Black Hills Colorado IPP to a third party. See Note 12 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional information.
Our Electric Utilities’ power supply by resource as a percent of the total power supply for our energy needs for the years ended December 31 was as follows:
Natural Gas and Diesel Oil (a) 18.8 % 24.4 % 25.0 %
Coal, Natural Gas, Oil and Other Market Purchases 29.6 % 25.1 % 21.1 %
Wind Purchases 5.1 % 5.0 % 4.8 %
____________________
(a)
The diesel-fueled generating units are generally used as supplemental peaking units. Power generated from these units, as a percentage of total power supply, was 0.0% for each of the years presented.
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Our Electric Utilities’ weighted average cost of fuel utilized to generate electricity and the average price paid for purchased power (excluding contracted capacity) per MWh for the years ended December 31 were as follows:
Total Generated Weighted Average Fuel Cost 17.57 17.40 9.09
Coal, Natural Gas, Oil and Other Market Purchases 66.35 64.85 40.80
Total Purchased Power Weighted Average Cost 61.56 59.84 41.03
Total Weighted Average Fuel and Purchased Power Cost $ 32.82 $ 30.17 $ 17.36
Purchased Power. We have executed various PPAs to support our Electric Utilities’ capacity and energy needs beyond our regulated power plants’ generation, which include long-term related party agreements with our non-regulated power generation businesses. See additional information in Note 3 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Coal Mining. We own and operate a single coal mine through our WRDC subsidiary which is reported within our Electric Utilities segment. We surface mine, process and sell low-sulfur sub-bituminous coal at our mine located immediately adjacent to our Gillette energy complex in the Powder River Basin in northeastern Wyoming, where our five coal-fired power plants are located. We produced approximately 3.7 million tons of coal in 2022.
The mine provides low-sulfur coal directly to these five power plants via a conveyor belt system, minimizing transportation costs. The fuel can be delivered to our adjacent power plants at very cost competitive prices (i.e., $1.09 per MMBtu for year ended December 31, 2022) when compared to alternatives. Nearly all of the mine’s production is sold to our on-site generation facilities under long-term supply contracts.
As of December 31, 2022, we estimated our recoverable reserves to be approximately 174 million tons, based on a life-of-mine engineering study utilizing currently available drilling data and geological information prepared by internal engineering analyses. The recoverable reserve life is equal to approximately 47 years at the current production levels.
Transmission and Distribution. Through our Electric Utilities, we own electric transmission and distribution systems composed of high voltage lines (greater than 69 kV) and low voltage lines (69 kV or less). We also jointly operate an electric transmission system, referred to as the Common Use System, with Basin Electric Power Cooperative and Powder River Energy Corporation. Each participant in the Common Use System individually owns assets that are operated together for a single system. The Common Use System also provides transmission service to our Transmission Tie. South Dakota Electric owns 35% of the Transmission Tie. The Transmission Tie is further discussed in Note 6 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
At December 31, 2022, our Electric Utilities owned the electric transmission and distribution lines shown below:
Utility State Transmission (a)(in Line Miles) Distribution(in Line Miles)
Colorado Electric Colorado 598 3,198
South Dakota Electric (b) South Dakota, Wyoming 1,235 2,587
Wyoming Electric Wyoming 59 1,347
____________________
(a)
Electric transmission line miles include voltages of 69 kV and above.
(b)
South Dakota Electric transmission line miles include 43 miles within the Common Use System.
Material transmission services agreements are disclosed in Note 3 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Seasonal Variations of Business. Our Electric Utilities are seasonal businesses and weather patterns may impact their operating performance. Demand for electricity is sensitive to seasonal cooling, heating and industrial load requirements, as well as market price. In particular, cooling demand is often greater in the summer and heating demand is often greater in the winter.
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Competition. We generally have limited competition for the retail generation and distribution of electricity in our service areas. Various legislative or regulatory restructuring and competitive initiatives have been discussed in several of the states in which our utilities operate. These initiatives would be aimed at increasing competition or providing for distributed generation. To date, these initiatives have not had a material impact on our utilities. In Colorado, our electric utility is subject to rules which may require competitive bidding for generation supply. Because of these rules, we face competition from other utilities and non-affiliated IPPs for the right to supply electric energy and capacity for Colorado Electric when resource plans require additional resources. Additionally, electrification initiatives in our service territories could increase demand for electricity and increase customer growth.
The independent power industry consists of many strong and capable competitors, some of which may have more extensive operations or greater financial resources than we possess. With respect to the merchant power sector, FERC has taken steps to increase access to the national transmission grid by utility and non-utility purchasers and sellers of electricity to foster competition within the wholesale electricity markets. Our non-regulated power generation businesses could face greater competition if utilities are permitted to robustly invest in power generation assets. Conversely, state regulations requiring utilities to competitively bid generation resources may provide opportunity for IPPs in some regions. To date, these initiatives have not had a material impact on our non-regulated power generation businesses.
Our mining business strategy is to sell nearly all of our production to on-site generation facilities under long-term supply contracts. Historically, any off-site sales have been to consumers within close proximity to the WRDC mine. Rail transport market opportunities for WRDC are limited due to the lower heating value (Btu) of the coal, combined with the fact that the WRDC mine is served by only one railroad, resulting in less competitive transportation rates. Additionally, coal competes with other energy sources, such as natural gas, wind, solar and hydropower. Costs and other factors relating to these alternative fuels, such as safety, environmental and availability considerations affect the overall demand for coal as a fuel.
Operating Statistics. See a summary of key operating statistics in the Electric Utilities segment operating results within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.
Gas Utilities
We conduct natural gas utility operations through our Arkansas, Colorado, Iowa, Kansas, Nebraska and Wyoming subsidiaries. Our Gas Utilities transport and distribute natural gas through our distribution network to approximately 1,107,000 customers. Additionally, we sell contractual pipeline capacity and gas commodities to other utilities and marketing companies, including our affiliates, on an as-available basis.
We also provide non-regulated services to our regulated customers. Black Hills Energy Services provides natural gas supply to approximately 52,600 retail distribution customers under the Choice Gas Program in Nebraska and Wyoming. Additionally, we provide services under the Service Guard Comfort Plan, Tech Services and HomeServe.
As of December 31,
As of December 31,
We procure natural gas for our distribution customers from a diverse mix of producers, processors and marketers and generally use hedging, physical fixed-price purchases and market-based price purchases to achieve dollar-cost averaging within our natural gas portfolio. The majority of our procured natural gas is transported in interstate pipelines under firm transportation service agreements.
In addition to company-owned natural gas storage assets in Arkansas, Colorado and Wyoming, we also contract with third-party transportation providers for natural gas storage service to provide gas supply during the winter heating season and to meet peak day customer demand for natural gas.
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The following table summarizes certain information regarding our company-owned regulated underground gas storage facilities as of December 31, 2022:
The following table summarizes certain information regarding our system infrastructure as of December 31, 2022:
Seasonal Variations of Business. Our Gas Utilities are seasonal businesses and weather patterns may impact their operating performance. Demand for natural gas is sensitive to seasonal heating and industrial load requirements, as well as market price. In particular, demand is often greater in the winter months for heating. Natural gas is used primarily for residential and commercial heating, and demand for this product can depend heavily upon weather throughout our service territories. As a result, a significant amount of natural gas revenue is normally recognized in the heating season consisting of the first and fourth quarters. Demand for natural gas can also be impacted by summer temperatures and precipitation, which can affect demand for irrigation.
Competition. We generally have limited competition for the retail distribution of natural gas in our service areas. Various restructuring and competitive initiatives have been discussed in several of the states in which our utilities operate. These initiatives are aimed at increasing competition. Additionally, electrification initiatives in our service territories could negatively impact demand for natural gas and decrease growth. To date, these initiatives have not had a material impact on our utilities. Although we face competition from independent marketers for the sale of natural gas to our industrial and commercial customers, in instances where independent marketers displace us as the seller of natural gas, we still collect fees for transporting the gas through our distribution network.
Operating statistics. See a summary of key operating statistics in the Gas Utilities segment operating results within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.
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Utility Regulation Characteristics
Our Utilities are subject to regulation by a number of federal, state and other organizations, including, but not limited to, the following:
•
State public utility commissions, which have jurisdiction over services and facilities, rates and charges, accounting, valuation of property, depreciation rates and various other matters;
•
the FERC, which oversees the acquisition and disposition of generation, transmission and other facilities, transmission of electricity and natural gas in interstate commerce, proposals to build and operate interstate natural gas pipelines and storage facilities, and wholesale purchases and sales of electric energy, among other things;
•
the NERC, which, through its regional entities, establishes and enforces mandatory reliability standards, subject to approval by the FERC, to ensure the reliability of the U.S. electric transmission and generation system and to prevent major system blackouts;
•
the EPA, which has the responsibility to maintain and enforce national standards under a variety of environmental laws, in some cases delegating authority to state agencies. The EPA also works with industries and all levels of government, including federal and state governments, in a wide variety of voluntary pollution prevention programs and energy conservation efforts;
•
the TSA, which regulates certain activities related to the safety and security of natural gas pipelines. In May and July 2021 the TSA issued security directives that included several new cybersecurity requirements for critical pipeline owners and operators; and
•
the PHMSA, which is responsible for administering the federal regulatory program to help ensure the safe transportation of natural gas, petroleum and other hazardous materials by pipelines, including pipelines associated with natural gas storage, and develops regulations and other approaches to risk management to help ensure safety in design, construction, testing, operation, maintenance and emergency response of pipeline facilities.
Rates and Regulation
Our Utilities are subject to the jurisdiction of the public utility commissions in the states where they operate and the FERC for certain assets and transactions. These commissions oversee services and facilities, rates and charges, accounting, valuation of property, depreciation rates and various other matters. Rate decisions are influenced by many factors, including the cost of providing service, capital expenditures, the prudence of costs we incur, views concerning appropriate rates of return, general economic conditions and the political environment. Certain commissions also have jurisdiction over the issuance of debt or securities and the creation of liens on property located in their states to secure bonds or other securities.
The regulatory provisions for recovering the costs of service vary by jurisdiction. Our Utilities have cost recovery mechanisms that allow us to pass the prudently-incurred cost of natural gas, fuel and purchased power to customers. These mechanisms allow the utility operating in that state to collect or refund the difference between the cost of commodities and certain services embedded in our base rates and the actual cost of the commodities and certain services without filing a general rate review. In addition, some jurisdictions allow us to recover certain costs or earn a return on capital investments placed in service between base rate reviews through approved rider tariffs, such as energy efficiency plan costs and system safety and integrity investments. These tariffs allow the utility a return on the investment.
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Electric Utilities
The following table provides regulatory information for each of our Electric Utilities:
SD Global Settlement 7.76% Global Settlement $543.9 10/2014 ECA, TFA, EIA 70%
____________________
(a)
For both Colorado Electric and Wyoming Electric, transmission investments are recovered through retail rates rather than FERC Transmission Tariffs. Effective September 1, 2022, a formulaic approach determines the revenue component of Colorado Electric's open access transmission tariff.
(b)
Includes $160.7 million in 2022 rate base for the 2022 Projected Common Use System formula rate that is updated annually and $17.1 million in rate base for the Transmission Tie that is based on the approved stated rate from 2005.
(c)
For additional information regarding recent rate review updates, see Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
The following table summarizes the mechanisms we have in place for each of our Electric Utilities:
Cost Recovery Mechanisms
Colorado Electric ☑ ☑ ☑ ☑ ☑ ☑
South Dakota Electric (SD) (a) ☑ ☑ ☑ ☑ ☑
South Dakota Electric (WY) (b) ☑ ☑ ☑ ☑
South Dakota Electric (FERC) (c) ☑
Wyoming Electric (d) ☑ ☑ ☑ ☑ ☑
____________________
(a)
South Dakota Electric’s EIA and TFA tariffs were suspended for a six-year moratorium period effective July 1, 2017. On January 7, 2020, South Dakota Electric received approval from the SDPUC to extend the 6-year moratorium period by an additional 3 years whereby these recovery mechanisms will not be effective prior to July 1, 2026.
(b)
South Dakota Electric has WPSC authorization to accumulate certain Energy Efficiency costs in a regulatory asset with determination of recovery to be made in the next rate review.
(c)
South Dakota Electric has an approved FERC Transmission Tariff based on a formulaic approach that determines the revenue component of South Dakota Electric’s open access transmission tariff.
(d)
Wyoming Electric has a WPSC-approved transmission tariff based on a formulaic approach that determines the recovery of Wyoming Electric's transmission costs.
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Gas Utilities
The following table provides regulatory information for each of our Gas Utilities:
____________________
(a)
For additional information regarding recent rate review updates, see Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
(b)
Arkansas Gas return on rate base is adjusted to remove certain liabilities from rate review capital structure for comparison with other subsidiaries.
(c)
Arkansas Gas rate base is adjusted to include certain liabilities for comparison with other subsidiaries.
(d)
The Choice Gas Program mechanisms are applicable to only a portion of Nebraska Gas and Wyoming Gas customers.
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The following table summarizes the mechanisms we have in place for each of our Gas Utilities:
Gas Utility Jurisdiction Cost Recovery Mechanisms
Arkansas Gas ☑ ☑ ☑ ☑ ☑
Colorado Gas ☑ ☑ ☑
RMNG (a) ☑
Iowa Gas ☑ ☑ ☑
Kansas Gas ☑ ☑ ☑ ☑ ☑
Nebraska Gas ☑ ☑ ☑
Wyoming Gas ☑ ☑ ☑
____________________
(a)
RMNG, which is an intrastate transmission pipeline that provides natural gas transmission and wholesale services in western Colorado, has an SSIR mechanism which allows recovery of investments through December 31, 2021. The other cost recovery mechanisms are not applicable to RMNG.
(b)
All of our Gas Utilities, except where the Choice Gas Program is the only option, have GCAs that allow us to pass the prudently-incurred cost of gas and certain services through to the customer between rate reviews.
Recent Tariff Filings
See Note 2 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for information regarding current regulatory activity.
FERC
The Federal Power Act gives FERC exclusive rate-making jurisdiction over wholesale sales of electricity and the transmission of electricity in interstate commerce. Pursuant to the Federal Power Act, all public utilities subject to FERC’s jurisdiction must maintain tariffs and rate schedules on file with FERC that govern the rates, and terms and conditions for the provision of FERC-jurisdictional wholesale power and transmission services. Public utilities are also subject to accounting, record-keeping and reporting requirements administered by FERC. FERC also places certain limitations on transactions between public utilities and their affiliates. Our public Electric Utility subsidiaries provide FERC-jurisdictional services subject to FERC’s oversight.
Our Electric Utilities entities are authorized by FERC to make wholesale sales of electric capacity and energy at market-based rates under tariffs on file with FERC. As a condition of their market-based rate authority, Electric Quarterly Reports are filed with FERC. Our Electric Utilities own and operate FERC-jurisdictional interstate transmission facilities and provide open access transmission service under tariffs on file with FERC. Our Electric Utilities are subject to routine audit by FERC with respect to their compliance with FERC’s regulations.
PUHCA 2005 provides FERC authority with respect to the books and records of a utility holding company. As a utility holding company whose assets consist primarily of investments in our subsidiaries, including subsidiaries that are public utilities and also a centralized service company subsidiary, BHSC, we are subject to FERC’s authority under PUHCA 2005.
PUHCA 2005 reiterated the definition and benefits of EWG status. Under PUHCA 2005, an EWG is an entity or generator engaged, directly or indirectly through one or more affiliates, exclusively in the business of owning, operating or both owning and operating all or part of one or more eligible facilities and selling electric energy at wholesale. Though EWGs are public utilities within the definition set forth in the Federal Power Act and are subject to FERC regulation of rates and charges, they are exempt from other FERC requirements. Through its subsidiaries, Black Hills Corporation is affiliated with three EWGs, Wygen I, Pueblo Airport Generation (facilities #4-5) and Northern Iowa Windpower. Each of these three EWGs have been granted market-based rate authority.
NERC
The Energy Policy Act of 2005 included provisions to create an Electric Reliability Organization, which is required to promulgate mandatory reliability standards governing the operation of the bulk power system in the U.S. FERC certified NERC as the Electric Reliability Organization and also issued an initial order approving many reliability standards that went into effect in 2007. Entities that violate standards can be subject to fines and can also be assessed non-monetary penalties, depending upon the nature and severity of the violation.
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Pipeline Security
In May and July 2021, the TSA issued security directives in response to a ransomware attack on the Colonial Pipeline that occurred earlier in 2021 that included several new cybersecurity requirements for critical pipeline owners and operators. Among these requirements is the implementation of specific mitigation measures to protect against ransomware attacks and other known threats to information and operational technology systems; development and implementation of a cybersecurity contingency and recovery plan; and performance of a cybersecurity architecture design review. We have implemented several of these directives and are evaluating the potential effect of several others on our operations and facilities, as well as the potential cost of implementation, and will continue to monitor for any clarifications or amendments to these directives.
Gas Pipeline and Storage Integrity and Safety
We are subject to regulation by PHMSA, which requires the following for certain gas distribution and transmission pipelines and underground storage facilities: inspection and maintenance plans; integrity management programs, including the determination of pipeline integrity risks and periodic assessments on certain pipeline segments; an operator qualification program, which includes certain trainings; a public awareness program that provides certain information; and a control room management plan. If we fail to comply with applicable statutes and the PHMSA Office of Pipeline Safety’s rules and related regulations and orders, we could be subject to significant penalties and fines.
Environmental Matters
We have clean energy goals to reduce GHG emissions that are based on prudent and proven solutions while minimizing cost impacts to and ensuring safety of our customers. See more information in Key Elements of our Business Strategy within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Annual Report on Form 10-K.
We are subject to significant state and federal environmental regulations that encourage the use of clean energy technologies and regulate emissions of GHGs. We have undertaken initiatives to meet current requirements and to prepare for anticipated future regulations, reduce GHG emissions, and respond to state renewable and energy efficiency goals. Compliance with future environmental regulations could result in substantial cost.
In July of 2019, the EPA adopted the Affordable Clean Energy rule, which requires states to develop plans by 2022 for GHG reductions from coal-fired power plants. In a January 2021 decision, the U.S. Court of Appeals for the D.C. Circuit issued a decision vacating and remanding the Affordable Clean Energy rule. Four petitions for review of the D.C. Circuit’s opinion were subsequently granted by the U.S. Supreme Court on October 29, 2021, consolidated under West Virginia v. EPA et al. On June 30, 2022, the U.S. Supreme Court released its opinion in favor of West Virginia and aligned parties. The decision clarifies that there are limits on how the EPA may regulate GHGs absent further direction from the U.S. Congress. The court concluded that emission caps that would cause generation shifting from fossil-fuel-fired power plants to renewable energy facilities would require specific congressional authorization and that such authorization had not been given under the Clean Air Act. The decision by the U.S. Supreme Court may affect the EPA’s development of any new regulations to address CO2 emissions from coal- and natural gas-fired power plants; however, at this time, we cannot predict the impact of any such regulations or the decision by the U.S. Supreme Court on the results of operations, financial position, and liquidity. The EPA has indicated that it intends to issue a proposed rule in early 2023 with a new set of emission guidelines for states to follow in submitting state plans to establish and implement standards of performance for GHG emissions from existing fossil fuel-fired electric generating units. We will continue to monitor any related guidelines and rulemakings issued by the EPA or state regulatory authorities.
In February 2022, the EPA proposed the Good Neighbor Rule Provisions, which are part of the CSAPR framework and is intended to address ozone transport for the 2015 ozone NAAQS. The rule focuses on reductions of NOx, which is a precursor to ozone formation, for states that do not have an approved State Implementation Plan (SIP). On January 31, 2023, the EPA finalized a notice which disapproved 19 SIPs, partially disapproved two other SIPs and deferred action until December 2023 on two SIPs, which included Wyoming. The EPA action on January 31, 2023 was a necessary prerequisite for the EPA to finalize a proposed Good Neighbor Rule by the March 15, 2023 deadline. The EPA also released a new air quality modeling that indicated two states (including Wyoming), which were previously within scope of the Good Neighbor Rule, no longer exceeded the cross-state ozone emissions threshold. It is likely that the EPA will rely on this new air quality modeling as part of the final Good Neighbor Rule. Based on the new air quality modeling, Wyoming will not be required to purchase additional NOx allowances during the 2023 ozone season. Until the EPA takes action on Wyoming's SIP, which is anticipated in December 2023, we cannot determine our future CSAPR compliance costs or impacts on our operations, but they could be material. However, we anticipate that any costs incurred as a result of the proposed rule would be recoverable through our regulatory mechanisms.
Environmental risk changes constantly with the implementation of new or modified regulations, changing stakeholder interests and needs, and through the introduction of innovative work practices and technologies. We continually assess risk and develop mitigation strategies to manage and ensure compliance across the enterprise successfully and responsibly. For additional information on environmental matters, see Item 1A and Note 3 of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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Human Capital Resources
Overview
We are committed to supporting operational excellence by attracting, motivating, retaining and encouraging the development of a highly qualified and diverse employee team. Our employees’ drive and dedication to their work, and their commitment to the safety of our customers and their fellow employees, allows us to successfully grow and manage our business year over year.
Women in executive leadership positions (a) 33% 30%
Gender diversity (women as a % of total employees) 25% 26%
Represented by a union 25% 25%
Military veterans 11% 14%
Ethnic diversity (non-white employees as a % of total) 14% 12%
For the year ended December 31, 2022 For the year ended December 31, 2021
Number of external hires 487 214
External hires gender diversity (as a % of total external hires) 30% 25%
External hires ethnic diversity (as a % of total external hires) 23% 20%
Turnover rate (b) 13% 11%
Retirement rate 3% 3%
____________________
(a)
Executive leadership positions are defined as positions with Vice President, Senior Vice President or Chief in their title.
(b)
Includes voluntary and involuntary separations but excludes internships.
Total Employees
Number of Employees
Electric Utilities 442
Corporate and Other 1,314
At December 31, 2022, approximately 19% of our total employees and 21% of our Electric and Gas Utilities employees were eligible for retirement (age 55 with at least 5 years of service).
Collective Bargaining Agreements
At December 31, 2022, certain employees of our Electric Utilities and Gas Utilities were covered by the collective bargaining agreements as shown in the table below. We have not experienced any labor stoppages in decades.
Total Electric Utilities 270
Total Gas Utilities 464
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Attraction
Attracting talent to join our team is critical to our ability to serve over 1.3 million customers safely and efficiently. We continuously evaluate our recruitment strategies to determine their effectiveness to attract and build a high-performing, diverse workforce. Our diversity recruiting strategies support our efforts to attract qualified individuals with targeted efforts to reach underrepresented talent pools. Our internship program and our partnerships and participation in outreach programs with local schools and colleges attract students to careers in energy. Our commitment to equitable and inclusive hiring practices, including pay equity, further supports our vision of attracting, developing and retaining a high-performing workforce driven by improving life with energy.
Diversity & Inclusion
We believe in the benefits of diversity, equity and inclusion. We believe that a diverse workforce will assist us in executing our strategic business plans, including our growth strategy. Workforce diversity trends, which include gender and diverse new hires, promotions and turnover, are monitored at regular intervals throughout the year.
Development and Retention
Retaining and developing team members is critical to our continued success. Our retention efforts include competitive compensation programs, monitoring employee engagement, career development resources for all employees and internal training programs. Our compensation programs are designed to be strategically aligned, externally competitive, internally equitable, personally motivating, cost effective and legally compliant. We continuously monitor employee engagement through bi-annual engagement surveys and quarterly pulse surveys. Every leader is responsible for creating and implementing an action plan based on their team’s engagement survey results. Our career development resources include management onboarding, leadership development programs, mentoring programs, individual development assessments and more. Internal training opportunities include corporate-wide and specialized training opportunities for different job functions. Our Field Career Path Program (FCPP) promotes career growth through established standards of knowledge, skills, abilities and performance.
Employee Safety and Wellness
Safety is one of our company values, a top priority in all we do and deeply embedded in our culture. We are committed to consistently outperforming utility industry averages in key safety metrics. Meetings of three or more employees begin with a safety share, a practice which contributes to keeping safety top of mind. Since 2009, we have reduced workplace injuries by more than 75% and continue to see long-term, sustained improvements in our safety practices and performance.
For the year ended December 31, 2022
Total Case Incident Rate (incidents per 200,000 hours worked) 1.39
% of injuries reported within 1 day 90.8 %
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ITEM 1A. RISK FACTORS
The nature of our business subjects us to a number of uncertainties and risks. Risks that may adversely affect our business operations, financial condition, results of operations or cash flows are described below. These risk factors, along with other risk factors that we discuss in our periodic reports filed with the SEC should be considered for a better understanding of our Company.
STRATEGIC RISK
Our continued success is dependent on execution of our business plan and growth strategy, including our capital investment program.
Our continued success depends, in significant part, on our ability to execute our strategic business plans, including our growth strategy. Our plans and strategy include building sustainable operations and supporting the Energy Transition; consistently outperforming utility industry averages in key safety metrics; modernizing utility infrastructure; transforming the customer experience; growing our electric and natural gas customer load; and pursuing operational efficiencies. Our current plans and strategy may be negatively impacted by disruptive forces and innovations in the marketplace, workforce capabilities, changing political, business or regulatory conditions and technology advancements.
In addition, we have significant capital investment programs planned for the next five years that are key to our strategic business plans. The successful execution of our capital investment program depends on, or could be affected by, a variety of factors that include, but are not limited to: availability of low cost capital to fund projects, weather conditions, effective management of projects, availability of qualified construction personnel including contractors, changes in commodity and other prices, impacts of supply chain disruptions on availability and cost of materials, governmental approvals and permitting, regulatory cost recovery and return on investment.
An inability to successfully and timely adapt to changing conditions and execute our strategic plans could materially affect our financial operating results including earnings, cash flow and liquidity.
REGULATORY, LEGISLATIVE AND LEGAL RISKS
We may be subject to unfavorable or untimely federal and state regulatory outcomes.
Our regulated Electric and Gas Utilities are subject to cost-of-service/rate-of-return regulation and earnings oversight from federal and eight state utility commissions. This regulatory treatment does not provide any assurance as to achievement of desired earnings levels. Our customer rates are regulated based on an analysis of our costs and investments, as reviewed and approved in regulatory proceedings. While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that our various regulatory authorities will judge all of our costs to have been prudently incurred or that the regulatory process in which rates are determined will result in full or timely recovery of our costs with a reasonable return on invested capital. In addition, adverse rate decisions, including rate moratoriums, rate refunds, limits on rate increases, lower allowed returns on investments or rate reductions, could be influenced by competitive, economic, political, legislative, public perception and regulatory pressures and adversely impact earnings, cash flow and liquidity.
Each of our Electric and Gas Utilities are permitted to recover certain costs (such as increased fuel and purchased power costs, including costs from certain severe weather events, or integrity capital investments) outside of a base rate review in order to stabilize customer rates and reduce regulatory lag. If regulators decide to discontinue these tariff-based recovery mechanisms, it could negatively impact earnings, cash flow and liquidity.
Costs could significantly increase to achieve or maintain compliance with existing or future environmental laws, regulations or requirements including those associated with climate change.
Our business segments are subject to numerous environmental laws and regulations affecting many aspects of present and future operations, including air emissions (i.e., SO2, NOx, volatile organic compounds, particulate matter and GHG), water quality, wastewater discharges, solid waste and hazardous waste.
These laws and regulations may result in increased capital, operating and other costs. These laws and regulations generally require the business segments to obtain and comply with a wide variety of environmental licenses, permits, inspections and other government approvals. Compliance with environmental laws and regulations may require significant expenditures, including expenditures for cleanup costs and damages arising from contaminated properties. Failure or inability to comply with evolving environmental regulations may result in the imposition of fines, penalties and injunctive measures affecting operating assets.
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Our business segments may not be successful in recovering increased capital and operating costs incurred to comply with new environmental regulations through existing regulatory rate structures and contracts with customers. More stringent environmental laws or regulations could result in additional costs of operation for existing facilities or impede the development of new facilities.
There is significant uncertainty regarding if and when new climate legislation, regulations or administrative policies will be adopted to reduce or limit GHG and the impact any such regulations would have on us. New or more stringent regulations or other energy efficiency requirements could require us to incur significant additional costs relating to, among other things, the installation of additional emission control equipment, the acceleration of capital expenditures, the purchase of additional emissions allowances or offsets, the acquisition or development of additional energy supply from renewable resources, the closure or capacity reductions of coal-fired power generation facilities or conversion to natural gas, and potential increased production from our combined cycle natural gas-fired generating units. Additional rules and regulations associated with fossil fuels and GHG emissions could result in the impairment or retirement of some of our existing or future transmission, distribution, generation and natural gas storage facilities or our coal mine. Further, these rules could create the need to purchase or build clean-energy fuel sources to fulfill obligations to our customers. These actions could also result in increased operating costs which could adversely impact customers and our financial operating results including earnings, cash flow and liquidity. We cannot definitively estimate the effect of GHG legislation or regulation on our earnings, cash flow and liquidity.
Legislative and regulatory requirements may result in compliance penalties.
Business activities in the energy sector are heavily regulated, primarily by agencies of the federal government. Many agencies employ mandatory civil penalty structures for regulatory violations. The FERC, NERC, PHMSA, CFTC, EPA, OSHA, SEC, TSA and MSHA may impose significant civil and criminal penalties to enforce compliance requirements relative to our business, which could have a material adverse effect on our financial operating results including earnings, cash flow and liquidity.
Municipal governments may seek to limit or deny our franchise privileges.
Municipal governments within our utility service territories possess the power of condemnation and could establish a municipal utility within a portion of our current service territories by limiting or denying franchise privileges for our operations and exercising powers of condemnation over all or part of our utility assets within municipal boundaries. We regularly engage in negotiations on renewals of franchise agreements with our municipal governments. We have from time to time faced challenges or ballot initiatives on franchise renewals. To date, we have been successful in resolving or defending most of these challenges. Although condemnation is a process that is subject to constitutional protections requiring just and fair compensation, as with any judicial procedure, the outcome is uncertain. If a municipality sought to pursue this course of action, we cannot assure that we would secure adequate recovery of our investment in assets subject to condemnation. We also cannot quantify the impact that such action would have on the remainder of our business operations.
Changes in Federal tax law may significantly impact our business.
We are subject to taxation by the various taxing authorities at the federal, state and local levels where we operate. Sweeping legislation or regulation could be enacted by any of these governmental authorities which may affect our tax burden. Changes may include numerous provisions that affect businesses, including changes to corporate tax rates, business-related exclusions, and deductions and credits. The outcome of regulatory proceedings regarding the extent to which a change in corporate tax rate will affect our utility customers and the time period over which that change will occur could significantly impact future earnings and cash flows. Separately, a challenge by a taxing authority, changes in taxing authorities’ administrative interpretations, decisions, policies and positions, our ability to utilize tax benefits such as carryforwards or tax credits, or a deviation from other tax-related assumptions may cause actual financial results to deviate from previous estimates.
Our business, financial condition, results of operations and prospects may be materially adversely affected due to adverse results of litigation.
Material legal proceedings are summarized in Note 3 of Notes to Consolidated Financial Statement in this Annual Report on Form 10-K. Unfavorable resolution of legal or administrative proceedings in which we are involved or other future legal or administrative proceedings could have an adverse effect on our financial operating results, including earnings, cash flow and liquidity.
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OPERATING RISKS
Failure to attract and retain an appropriately qualified workforce could have a negative impact on our operations and long-term business strategy.
Recent trends, such as higher turnover, a competitive and tight labor market and an aging workforce may lead to higher costs and increased risk of negative outcomes for safety, compliance, customer service, and operations. Our ability to transition and replace our retirement-eligible utility employees is a risk; at December 31, 2022, approximately 19% of our employees were eligible for retirement. Our ability to avoid or minimize supply interruptions, work stoppages and labor disputes is also a risk with approximately 25% of our employees represented by unions. Failure to hire and retain qualified employees, including the ability to transfer significant internal historical knowledge and expertise to new employees, may adversely affect our ability to manage and operate our business. If we are unable to successfully attract and retain an appropriately qualified workforce and maintain satisfactory collective bargaining agreements, safety, service reliability, customer satisfaction and our results of operations could be adversely affected.
Our plans and strategy include building sustainable operations and supporting the Energy Transition; consistently outperforming utility industry averages in key safety metrics; modernizing utility infrastructure; transforming the customer experience; growing our electric and natural gas customer load; and pursuing operating efficiencies. As part of our strategic plan, we will need to attract and retain personnel who are qualified to implement our strategy and may need to retrain or re-skill certain employees to support our long-term objectives.
The nature of our business subjects us to climate-related risk, stemming from both physical risk and transition risk of climate change, over varying time horizons.
Physical risks of climate change refer to risks to our facilities or operations that may result from changes in the physical climate, such as changes to temperature and weather patterns. Our utility businesses are seasonal businesses and weather conditions and patterns can have a material impact on our operating performance. To the extent weather conditions are affected by climate change, fluctuations in customers’ energy usage could be magnified. Climate change may lead to increased intensity and frequency of storms, resulting in increased likelihood of fire, wind and extreme temperature events. Severe weather events, such as snow and ice storms (e.g., Winter Storm Uri), fire, and strong winds could negatively impact our operations, including our ability to provide energy safely, reliably and profitably and our ability to complete construction, expansion or refurbishment of facilities as planned. Unmitigated impacts of climate change may intensify these events or increase the frequency of their occurrence. Over time, we may need to make additional investments to protect our facilities from physical risks of climate change.
Transition risks of climate change include changes to the energy systems as a result of new technologies, changing customer demand and/or expectations and voluntary GHG reduction goals, as well as local, state or federal regulatory requirements (discussed above) intended to reduce GHG emissions. Policies such as a carbon or methane tax could increase costs associated with fossil fuel usage, resulting in higher operating costs including costs of energy generation, construction, and transportation. Risks of the transition to a low-carbon economy could result in shrinking customer demand for fossil fuel-based energy sources. This could come from increased use of behind the meter technology, such as residential solar and storage. Risk of investor pressure over climate risk and/or ESG standards, activist campaigns against coal producers, employee preferences to work for sustainable companies and consumers preference for renewable energy could impact our reputation and overall access to capital and/or adequate insurance policies.
Supply chain challenges could negatively impact our operations.
We rely on various suppliers in our supply chain for the materials necessary to execute on our capital investment program that is key to our strategic business plans and to respond to a significant unplanned event such as a natural disaster. Our largest customers also rely on our supply chain and delays in critical materials could impact their ability to operate and grow as planned. Our supply chain, material costs, and capital investment program may be negatively impacted by:
•
Unanticipated price increases due to recent macroeconomic factors, such as inflation, including wage inflation, or rising demand for raw materials associated with the Energy Transition; and
•
Supply restrictions beyond our control or the control of our suppliers such as disruption of the freight system (e.g. railroad labor union strikes), increased environmental threats from weather-related disasters, rising demand for raw materials associated with the Energy Transition and/or geopolitical unrest (e.g. Russian invasion of Ukraine).
An inability to successfully manage challenges in our supply chain network could materially affect our financial operating results including earnings, cash flow and liquidity.
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Cyberattacks, terrorism, or other malicious acts targeting our key technology systems could disrupt our operations or lead to a loss or misuse of confidential and proprietary information.
To effectively operate our business, we rely upon a sophisticated electronic control system, information and operation technology systems and network infrastructure to generate, distribute and deliver energy, and collect and retain sensitive information including personal information about our customers and employees. Cyberattacks, terrorism or other malicious acts targeting electronic control systems could result in a full or partial disruption of our electric and/or natural gas operations. Attacks targeting other key technology systems, including our third-party vendors’ information systems, could further add to a full or partial disruption of our operations. Recent geopolitical conflicts (e.g. Russia's invasion of Ukraine) have increased the risk of cyberattack. Any disruption of these operations could result in a loss of service to customers and associated revenues, as well as significant expense to repair damages and remedy security breaches. In addition, any theft, loss and/or fraudulent use of customer, shareowner, employee or proprietary data could subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others. We maintain cyber risk insurance to mitigate a portion, but not all, of these risks and losses.
As discussed in Utility Regulation Characteristics above, in 2021 the TSA issued security directives that included several new cybersecurity requirements for critical pipeline owners and operators. Such directives or other requirements may require expenditure of significant additional resources to respond to cyberattacks, to continue to modify or enhance protective measures, or to assess, investigate and remediate any critical infrastructure security vulnerabilities. Any failure to comply with such government regulations or failure in our cybersecurity protective measures may result in enforcement actions that may have a material adverse effect on our business, results of operations and financial condition. In addition, there is no certainty that costs incurred related to securing against threats will be recovered through rates.
We have instituted security measures and safeguards to protect our operational systems and information technology assets, including certain safeguards required by FERC. Despite our implementation of security measures and safeguards, all of our technology systems may still be vulnerable to disability, failures or unauthorized access.
Our financial performance depends on the successful operation of electric generating facilities, electric and natural gas transmission and distribution systems, natural gas storage facilities and a coal mine.
The risks associated with managing these operations include:
•
Operating hazards. Operating hazards such as leaks, mechanical problems and accidents, including fires or explosions, could impact employee and public safety, reliability and customer confidence;
•
Inherent dangers. Electricity and natural gas can be dangerous to employees and the general public. Failures of or contact with power lines, natural gas pipelines or service facilities and equipment may result in fires, explosions, property damage and personal injuries, including death. While we maintain liability and property insurance coverage, such policies are subject to certain limits and deductibles. The occurrence of any of these events may not be fully covered by our insurance;
•
Weather, natural conditions and disasters including impacts from climate change (discussed above);
•
Acts of sabotage, terrorism or other malicious attacks. Damage to our facilities due to deliberate acts could lead to outages or other adverse effects;
•
Equipment and processes. Breakdown or failure of equipment or processes, unavailability or increased cost of equipment, and performance below expected levels of output or efficiency could negatively impact our results of operations;
•
Disrupted transmission and distribution. We depend on transmission and distribution facilities, including those operated by unaffiliated parties, to deliver the electricity and natural gas that we sell to our retail and wholesale customers. If transmission is interrupted physically, mechanically or with cyber means, our ability to sell or deliver utility services and satisfy our contractual obligations may be hindered;
•
Natural gas supply for generation and distribution. Our regulated utilities and non-regulated entities purchase natural gas from a number of suppliers for our generating facilities and for distribution to our customers. Our results of operations could be negatively impacted by the lack of availability and cost of natural gas, and disruptions in the delivery of natural gas due to various factors, including but not limited to, transportation delays, labor relations, weather, sabotage, cyber-attacks and environmental regulations;
•
Replacement power. The cost of supplying or securing replacement power during scheduled and unscheduled outages of generation facilities could negatively impact our results of operations;
•
Governmental permits. The inability to obtain required governmental permits and approvals along with the cost of complying with or satisfying conditions imposed upon such approvals could negatively impact our ability to operate and our results of operations;
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•
Operational limitations. Operational limitations imposed by environmental and other regulatory requirements and contractual agreements, including those that restrict the timing of generation plant scheduled outages, could negatively impact our results of operations;
•
Increased costs. Increased capital and operating costs to comply with increasingly stringent laws and regulations, unexpected engineering, environmental and geological problems, and unanticipated cost overruns could negatively impact our results of operations;
•
Supply chain challenges (discussed above);
•
Workforce capabilities and labor relations (discussed above); and
•
Public opposition. Opposition by members of public or special-interest groups could negatively impact our ability to operate our businesses.
Any of these risks described above could damage our reputation and public confidence. These risks could also cause us to incur significant costs or be unable to deliver energy and/or operate below expected capacity levels, which in turn could reduce revenues or cause us to incur higher operating and maintenance costs and penalties. While we maintain insurance, obtain warranties from vendors and obligate contractors to meet certain performance levels, the proceeds of such insurance and our rights under contracts, warranties or performance guarantees may not be timely or adequate to cover lost revenues, increased expenses, liability or liquidated damage payments.
Our operations are subject to various conditions that can result in fluctuations in customer usage, including customer growth and general economic conditions in our service territories, weather conditions, and responses to price increases and technological improvements.
Our results of operations and cash flows are affected by the demand for electricity and natural gas, which can vary greatly based upon:
•
Fluctuations in customer growth and general economic conditions in our service territories. Customer growth and energy use can be negatively impacted by population declines as well as adverse economic factors in our service territories, including recession, inflation, workforce reductions, stagnant wage growth, changing levels of support from state and local government for economic development, business closings, and reductions in the level of business investment. Our utility businesses are impacted by economic cycles and the competitiveness of the commercial and industrial customers we serve. Any economic downturn, inflation, disruption of financial markets, or reduced incentives by state government for economic development could adversely affect the financial condition of our customers and demand for their products or services. These risks could directly influence the demand for electricity and natural gas as well as the need for additional power generation and generating facilities. We could also be exposed to greater risks of accounts receivable write-offs if customers are unable to pay their bills.
•
Weather conditions. Our utility businesses are seasonal businesses and weather conditions and patterns can have a material impact on our operating performance. Demand for electricity is typically greater in the summer and winter months associated with cooling and heating, respectively. Demand for natural gas depends heavily upon winter-weather patterns throughout our service territory and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. Accordingly, our utility operations have historically generated lower revenues, income and cash flows when weather conditions are cooler than normal in the summer and warmer than normal in the winter. Demand for natural gas is also impacted by summer weather patterns that are cooler than normal and provide higher than normal precipitation; both of which can reduce natural gas demand for irrigation. Unusually mild summers and winters, therefore, could have an adverse effect on our financial operating results, including earnings, cash flow and liquidity.
•
Our customers' focus on energy conservation. Customer growth and usage may be impacted by the voluntary reduction in consumption of electricity and natural gas by our customers in response to increases in prices and energy efficiency programs, electrification initiatives that could negatively impact the demand for natural gas, economic conditions (i.e., inflation, recession) impacting customers’ disposable income and the use of distributed generation resources or other emerging technologies. Continued technological improvements may make customer and third-party distributed generation and energy storage systems, including fuel cells, micro-turbines, wind turbines, solar cells and batteries, more cost effective and feasible for our customers. If more customers utilize their own generation, demand for energy from us could decline. Such developments could affect the price of energy and delivery of energy, require further improvements to our distribution systems to address changing load demands and could make portions of our electric system power supply and transmission and/or distribution facilities obsolete prior to the end of their useful lives.
Each of these factors described above could materially affect demand for electricity and natural gas which would impact our financial operating results including earnings, cash flow and liquidity.
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If macroeconomic or other conditions adversely affect operations or require us to make changes to our strategic business plan, we may be forced to record a non-cash goodwill impairment charge.
We had approximately $1.3 billion of goodwill on our consolidated balance sheets as of December 31, 2022. If we make changes in our strategic business plan and growth strategy, or if macroeconomic or other conditions adversely affect operations in any of our businesses, we may be forced to record a non-cash impairment charge. Goodwill is tested for impairment annually or whenever events or changes in circumstances indicate impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record an impairment charge for the difference between the carrying value of the goodwill and the implied fair value of the goodwill in the period the determination is made. The testing of goodwill for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including: future business operating performance, changes in macroeconomic conditions including recession, inflation and interest rates, changes in our regulatory environment, industry-specific market conditions, changes in business operations, changes in competition or changes in technologies. Any changes in key assumptions, or actual performance compared with key assumptions, about our business and its future prospects could affect the fair value of either or both of our operating segments, which may result in an impairment charge. See additional information in “Critical Accounting Estimates” under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Widespread public health crises and epidemics or pandemics could negatively affect our business operations, results of operations, financial condition and cash flows.
We are subject to the impacts of widespread public health crises, epidemics and pandemics, including, but not limited to, impacts on the global, national or local economies, capital and credit markets, our workforce, customers and suppliers. There is no assurance that our businesses will be able to operate without material adverse impacts depending on the nature of the public health crisis, epidemic or pandemic. The ultimate severity, duration and impact of public health crises, epidemics and pandemics cannot be predicted. Additionally, there is no assurance that vaccines, or other treatments, are or will be widely available or effective, or that the public will be willing to participate, in an effort to contain the spread of disease. Actions taken in response to such crises by federal, state and local government or regulatory agencies may adversely affect our financial operating results including earnings, cash flow and liquidity.
FINANCIAL RISKS
A sub-investment grade credit rating could impact our ability to access capital markets.
Our senior unsecured debt rating is Baa2 (Stable outlook) by Moody’s; BBB+ (Stable outlook) by S&P; and BBB+ (Stable outlook) by Fitch. Reduction of our investment grade credit ratings could impair our ability to refinance or repay our existing debt and complete new financings on reasonable terms. A credit rating downgrade, particularly to sub-investment grade, could also result in counterparties requiring us to post additional collateral under existing or new contracts. In addition, a ratings downgrade would increase our interest expense under some of our existing debt obligations, including borrowings under our credit facilities, potentially significantly increasing our cost of capital and other associated operating costs which may not be recoverable through existing regulatory rate structures and contracts with customers.
We may be unable to obtain financing on reasonable terms needed to refinance debt, fund planned capital expenditures or otherwise execute our operating strategy.
Our ability to execute our operating strategy is highly dependent upon our access to capital. Historically, we have addressed our liquidity needs (including funds required to make scheduled principal and interest payments, refinance debt, pay dividends and fund working capital and planned capital expenditures) with operating cash flow, borrowings under credit facilities, proceeds of debt and equity offerings and proceeds from asset sales. Our ability to access capital markets and the costs and terms of available financing depend on many factors, including changes in our credit ratings, general macroeconomic conditions which may drive changes in interest rates and cause volatility in our stock price, changes in the federal or state regulatory environment affecting energy companies and volatility in commodity prices.
In addition, because we are a holding company and our utility assets are owned by our subsidiaries, if we are unable to adequately access the credit markets, we could be required to take additional measures designed to ensure that our utility subsidiaries are adequately capitalized to provide safe and reliable service. Possible additional measures would be evaluated in the context of then-prevailing market conditions, prudent financial management and any applicable regulatory requirements.
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Our use of derivative financial instruments as hedges against commodity prices and financial market risks could result in material financial losses.
We use various financial and physical derivatives, including futures, forwards, options and swaps, to manage commodity price and interest rate risks. The timing of the recognition of gains or losses on these economic hedges in accordance with GAAP may not consistently match up with the gains or losses on the commodities being hedged. For Black Hills Energy Services under the Choice Gas Program, and in certain instances within our regulated Utilities where unrealized and realized gains and losses from derivative instruments are not approved for regulatory accounting treatment, fluctuating commodity prices may cause fluctuations in reported financial results due to mark-to-market accounting treatment.
To the extent that we hedge our commodity price and interest rate exposures, we forgo the benefits we would otherwise experience if commodity prices or interest rates were to change in our favor. In addition, even though they are closely monitored by management, our hedging activities can result in losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the hedge arrangement, the hedge is economically imperfect, commodity prices or interest rates move unfavorably related to our physical or financial positions, or hedging policies and procedures are not followed.
Additionally, our exchange-traded futures contracts are subject to futures margin posting requirements. To the extent we are unable to meet these requirements, this could have a significant impact on our business by reducing our ability to execute derivative transactions to reduce commodity price uncertainty and to protect cash flows. Requirements to post collateral may cause significant liquidity issues by reducing our ability to use cash for investment or other corporate purposes or may require us to increase our level of debt. Further, a requirement for our counterparties to post collateral could result in additional costs being passed on to us, thereby decreasing our profitability.
We have a holding company corporate structure with multiple subsidiaries. Corporate dividends and debt payments are dependent upon cash distributions to the holding company from the subsidiaries.
As a holding company, our investments in our subsidiaries are our primary assets. Our operating cash flow and ability to service our indebtedness depend on the operating cash flow of our subsidiaries and the payment of funds by them to us in the form of dividends or advances. Our subsidiaries are separate legal entities that have no obligation to make any funds available for that purpose, whether by dividends or otherwise. In addition, each subsidiary’s ability to pay dividends to us depends on any applicable contractual or regulatory restrictions that may include requirements to maintain minimum levels of cash, working capital, equity or debt service funds.
There is no assurance as to the amount, if any, of future dividends to the holding company because these subsidiaries depend on future earnings, capital requirements and financial conditions to fund such dividends. See “Liquidity and Capital Resources” within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Note 8 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for further information regarding these restrictions and their impact on our liquidity.
We may be unable to obtain insurance coverage, and the coverage we currently have may not apply or may be insufficient to cover a significant loss.
Our ability to obtain insurance, as well as the cost of such insurance, could be impacted by developments affecting the insurance industry and the financial condition of insurers. Additionally, insurance providers could deny coverage or decline to extend coverage under the same or similar terms that are presently available to us. A loss for which we are not adequately insured could materially affect our financial results. The coverage we currently have in place may not apply to a particular loss, or it may not be sufficient to cover all liabilities to which we may be subject, including liability and losses associated with wildfires, natural gas and storage field explosions, cyber-security breaches, environmental hazards and natural disasters.
Market performance or changes in key valuation assumptions could require us to make significant unplanned contributions to our pension plan and other postretirement benefit plans.
Assumptions related to interest rates, expected return on investments, mortality and other key actuarial assumptions have a significant impact on our funding requirements and the expense recognized related to our pension and other postretirement benefit plans. An adverse change to key assumptions associated with our defined benefit retirement plans may require significant unplanned contributions to the plans which could adversely affect our financial operating results including earnings, cash flow and liquidity. See Note 8 of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K for further information
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Costs associated with our healthcare plans and other benefits could increase significantly.
The costs of providing healthcare benefits to our employees and retirees have increased substantially in recent years. We believe that our employee benefit costs, including costs related to healthcare plans for our employees and former employees, will continue to rise. Significant regulatory developments have required, and likely will continue to require, changes to our current employee benefit plans and supporting administrative processes. Our electric and natural gas utility rates are regulated on a state-by-state basis by the relevant state regulatory authorities based on an analysis of our costs, as reviewed and approved in a regulatory proceeding. Within our utility rates, we have generally recovered the cost of providing employee benefits. As benefit costs continue to rise, however, there is no assurance that the utility commissions will allow recovery of these increased costs. The rising employee benefit costs, or inadequate recovery of such costs, may adversely affect our financial operating results including earnings, cash flow, or liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
See Item 1 for a description of our principal business properties.
In addition to the properties disclosed in the Item 1, we own or lease several facilities throughout our service territories including a corporate headquarters building and various office, service center, storage, shop and warehouse space. Substantially all of the tangible utility properties of South Dakota Electric and Wyoming Electric are subject to liens securing first mortgage bonds issued by South Dakota Electric and Wyoming Electric, respectively.
ITEM 3. LEGAL PROCEEDINGS
Information regarding our legal proceedings is incorporated herein by reference to the “Legal Proceedings” sub-caption within Item 8, Note 3, “Commitments, Contingencies and Guarantees”, of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Information concerning mine safety violations or other regulatory matters required by Sections 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act is included in Exhibit 95 of this Annual Report.
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Linden R. Evans, age 60, has been President and Chief Executive Officer since January 1, 2019, President and Chief Operating Officer from 2016 through 2018, and President and Chief Operating Officer - Utilities from 2004 through 2015. Mr. Evans served as the Vice President and General Manager of our former communication subsidiary in 2003 and 2004, and Associate Counsel from 2001 to 2003. Mr. Evans has 21 years of experience with the Company.
Brian G. Iverson, age 60, has been Senior Vice President, General Counsel and Chief Compliance Officer since August 26, 2019. He served as Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary from February 1, 2019 to August 26, 2019, Senior Vice President, General Counsel and Chief Compliance Officer from 2016 to February 2019, Senior Vice President - Regulatory and Governmental Affairs and Assistant General Counsel from 2014 to 2016, Vice President and Treasurer from 2011 to 2014, Vice President - Electric Regulatory Services from 2008 to 2011 and as Corporate Counsel from 2004 to 2008. Mr. Iverson has 19 years of experience with the Company.
Erik D. Keller, age 59, joined the Company as Senior Vice President and Chief Information Officer on July 27, 2020. Prior to joining the company, he was an Information Technology consultant to Ontic Inc., a global provider of parts and services for legacy aerospace platforms, from January 2020 to July 2020, and Chief Information Officer for BBA Aviation, a global aviation support and aftermarket services provider, from February 2012 to January 2020.
Richard W. Kinzley, age 57, has been Senior Vice President and Chief Financial Officer since 2015. He served as Vice President - Corporate Controller from 2013 to 2014, Vice President - Strategic Planning and Development from 2008 to 2013, and as Director of Corporate Development from 2000 to 2008. Mr. Kinzley has 23 years of experience with the Company. As previously announced, Mr. Kinzley intends to retire in mid-2023 He will continue to serve in his current position until March 31, 2023, after which Kimberly F. Nooney, the Company’s Vice President, Treasurer, will succeed Mr. Kinzley and Mr. Kinzley will continue as Senior Vice President until his retirement to provide for a reasonable transition period.
Jennifer C. Landis, age 48, has been Senior Vice President - Chief Human Resources Officer since February 1, 2017. She served as Vice President of Human Resources from April 2016 through January 2017, Director of Corporate Human Resources and Talent Management from 2013 to April 2016, and Director of Organization Development from 2008 to 2013. Ms. Landis has 21 years of experience with the Company.
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