<PAGE> SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1993 TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________
Commission file Number 1-7978
BLACK HILLS CORPORATION
Incorporated in South Dakota
IRS Identification Number 46-0111677
625 Ninth Street, P.O. Box 1400
Rapid City, South Dakota 57709
Registrant's telephone number, including area code
(605) 348-1700
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common stock of $1.00 par value New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of the voting stock held by non-
affiliates of the Registrant.
At February 28, 1994 $305,709,166
Indicate the number of shares outstanding of each of the
Registrant's classes of common stock, as of the latest
practicable date.
CLASS OUTSTANDING AT FEBRUARY 28, 1994
Common stock, $1.00 par value 14,277,277 shares
DOCUMENTS INCORPORATED BY REFERENCE
1. Pages 11 through 32 of the Annual Report to
Stockholders of the Registrant for the year ended
December 31, 1993, are incorporated by reference in
Part I and Part II and appended hereto.
2. Definitive Proxy Statement of the Registrant filed
pursuant to Regulation 14A for the 1994 Annual Meeting
of Stockholders to be held on May 24, 1994, is
incorporated by reference in Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
The Company was incorporated under the laws of South Dakota
in 1941 under the name Black Hills Power and Light Company. In
1986 the Company changed its name to Black Hills Corporation and
now operates its investor-owned electric public utility
operations under the assumed name of Black Hills Power and Light
Company. In addition the Company has diversified into coal
mining through Wyodak Resources and into oil and gas production
through Western Production.
Black Hills Power is engaged in the generation, purchase,
transmission, distribution and sale of electric power and energy
to approximately 53,330 customers in 11 counties in western South
Dakota, northeastern Wyoming and southeastern Montana. The
territory served by Black Hills Power includes 20 incorporated
communities and various unincorporated and rural areas with a
population estimated at 165,000. The largest community served is
Rapid City, South Dakota, with a population, including environs,
estimated at 75,000. Rapid City is the major retail, wholesale
and health care center for a 250-mile radius. Principal
industries in the territory served are tourism (including small
stake casino gambling at Deadwood), cattle and sheep raising,
farming, milling, meat packing, lumbering, the production of
cement, the mining of bentonite, stone, gravel, silica sand,
gold, silver, coal and other minerals, the manufacture of
electronic products, wood products and gold jewelry, and the
production and refining of oil. Black Hills Power serves a
substantial portion of the electric needs of the Black Hills
tourist region which includes the National Shrine of Democracy,
Mount Rushmore National Memorial and the Crazy Horse Memorial, a
large granite mountain carving under construction as a memorial
to native Americans and one of their leaders. Tourism has been
and is expected to continue to be enhanced significantly by the
establishment of small stakes casino gambling at Deadwood, South
Dakota, which is a part of Black Hills Power's service territory.
Although only a small portion of EAFB is served by Black Hills
Power, EAFB forms a significant economic base for the territory
served.
Wyodak Resources, incorporated under the laws of Delaware in
1956, is engaged in the mining and sale of sub-bituminous coal.
The coal mining operation is located approximately five miles
east of Gillette, Wyoming.
In 1986, Wyodak Resources acquired all of the outstanding
capital stock of Western Production, an oil and gas exploration,
producing and operating company incorporated under the laws of
Wyoming. Western Production is an oil producing and operating
company with interests located in the Rocky Mountain Region and
Texas. Western Production also has a partial interest in a
natural gas processing plant.
Information as to the continuing lines of business of the
Company for the calendar years 1991-1993 is as follows:
<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
(in thousands)
<S>
Revenue from sales to unaffiliated customers:
<C> <C> <C>
Electric $97,885 $97,232 $97,922
Coal mining 19,775 18,485 16,918
Oil and gas production 11,396 9,599 9,077
Revenue from intercompany sales:
Electric $ 270 $ 216 $ 236
Coal mining 10,047 9,811 9,220
</TABLE>
Reference is made to the Consolidated Statements of Income
and Note 11 of "Notes to Consolidated Financial Statements"
appended hereto.
ELECTRIC POWER SALES AND SERVICE TERRITORY
ELECTRIC POWER SALES--RETAIL. Even though Black Hills'
service area again experienced milder than normal summer weather,
Black Hills Power's firm kilowatt hour sales increased in 1993 by
3.5 percent over 1992. The increase in energy sales is largely
due to an increase in the number of customers and their use of
electricity. Firm energy sales are forecast to increase over the
next ten years at an annual compound growth rate of approximately
2.5 percent. During the next ten years the peak system demand is
forecast to increase at an annual compound growth rate of 2.6
percent. These forecasts are from studies conducted by Black
Hills Power with the help of outside consultants whereby the
service territory of Black Hills Power is carefully examined and
analyzed to estimate changes in the needs for electrical energy
and demand over a 20-year period. These forecasts are only
estimates, and the actual changes in electric sales may be
substantially different. In the past Black Hills Power's
forecasts have tracked actual sales within a band of reasonable
performance.
Electric sales are materially affected by weather. Like
1992, Black Hills Power's electric service territory again
experienced a cool summer in 1993, resulting in degree days that
were 59 percent lower than normal for the 1993 summer months.
Consequently, energy sales and peak demand were substantially
less during the cooling season than they would have been in a
normal weather year.
RETAIL ELECTRIC SERVICE TERRITORY. Black Hills Power's
service territory is currently protected by assigned service area
and franchises that generally grant to Black Hills Power the
exclusive right to sell all electric power consumed therein,
subject to providing adequate service. See--COMPETITION IN
ELECTRIC UTILITY BUSINESS--COMPETITION IN SERVICE AT RETAIL under
this Item 1.
At the end of 1993, Black Hills served electric energy to
53,330 customers in a population island that includes the major
population centers of the Black Hills area in western South
Dakota and northeastern Wyoming and a small oil field in
southeastern Montana. (See--GENERAL under this Item 1 for a
general description of the service territory.)
<PAGE>
Black Hills Power's electric service territory is
experiencing modest business and population growth. In 1993 the
value of commercial building permits in Rapid City increased by
91 percent, and residential building permits increased 10.5
percent. South Dakota's unemployment rate in 1993 averaged 3.4
percent. Personal income in South Dakota increased 7.3 percent
in 1993 and visitor spending in South Dakota increased by 14
percent.
The Company believes that this growth in its electric
service territory will continue; however, the Company can give no
assurances. One of the major employers in the Rapid City area is
the United States Defense Department's EAFB. EAFB is a military
air force base near Rapid City, South Dakota. Its current
mission is to serve as the training, operation and maintenance
base for the Air Force's B-1 bombers. There are now stationed at
EAFB 30 B-1 bombers, out of the Defense Department's total of 96
B-1s, of which 80 are operational.
Black Hills Power does not provide electric service to EAFB.
However, currently EAFB employs approximately 5,200 military and
600 civilian personnel. In addition to these direct employees,
additional nongovernmental employees residing in Rapid City and
the surrounding area depend upon the continual operation of EAFB.
Many of the persons with these jobs reside in the service
territory of Black Hills Power. Many businesses in Black Hills
Power's service territory are at least partially dependent upon
the operations at EAFB. The exact economic impact from a closing
of EAFB on Black Hills Power's electric sales cannot be
estimated. While the impact would be felt, there are other
businesses that would not be affected and are experiencing growth
for other reasons in Black Hills Power's electric service
territory.
While the future of EAFB is not certain, management believes
that the mission of EAFB assures that the base will continue.
Emphasis on reducing the budget deficit and the deemphasis of
military spending are expected to result in additional military
base closings. The independent commission that recommends base
closings is expected to make its recommendations in 1995 for the
next base closings. If the United States Congress or the
Administration does not interfere with those recommendations,
those bases as recommended for closing are expected to be
subsequently closed. There are many criteria used by the
independent commission in making its decision, but three of the
most important considerations are the strategic importance of the
mission of the base, civilian encroachments interfering with the
safe operation of the base, and the amount and timing of the
savings or payback to the government resulting from such
closings. EAFB personnel have been complaining about certain
civilian business and housing encroachments to the flight line of
the base. The City of Box Elder and the State of South Dakota
are expected to take corrective action to satisfy those
complaints, but no assurances can be given that the encroachments
will be eliminated. Box Elder has already placed a moratorium on
new buildings in the encroachment zone. Because of the large
number of employees at EAFB and the cost of maintaining EAFB, a
large savings would result to the Department of Defense from the
closing. The Company believes, however, that the strategic
mission of the base (the training, maintenance and operation of
the B-1 bombers) and the open, low-populated area in western
South Dakota and eastern Wyoming that is available for practicing
bombing runs along with strong community support of the base
should result in no EAFB closing. This may depend, however, upon
the continual support by the Department of Defense and Congress
of the B-1 bomber program. Due to cost overruns and failures of
<PAGE>
some tactical ancillary equipment along with debates on the need
for long-range bombing capability in light of the end of the cold
war have caused the B-1 bomber program to be somewhat
controversial. This controversy has led to a decision to run the
B-1 through extensive tests during 1994. EAFB has announced that
those tests will be conducted at EAFB.
Currently the Clinton Administration's budget provides for
the Air Force to maintain an active, operational B-1 bomber fleet
of 50. A fleet of 50 is believed to require the B-1s to be
operated from two bases. The current Air Force plan is to base
its operational B-1s only at EAFB and Dyess Air Force Base,
Texas.
The EAFB receives strong support from the Black Hills
communities and the State of South Dakota and is the only major
military establishment of the Department of Defense located in
South Dakota. For all of these reasons, the Company believes
that the EAFB will survive the next round of base closings, but
the Company can give no assurances.
Two other major industries in Black Hills' service territory
suffering some stress are the lumbering industry and gold mining
industry. The lumbering industry has already suffered
substantial cutbacks due to government cutbacks in timber
harvesting. Some impact has already occurred. The gold mining
industry, including Homestake Mining Company (representing 11.8
percent of Black Hills' total firm KWH sales in 1993 and 8.2
percent of firm electric sales revenue) depends largely upon the
price of gold and continuing to find economically minable ore
reserves. Homestake has gradually over the years reduced the
number of employees, and this impact has substantially occurred.
Homestake recently abandoned a deep exploration program 6,000
feet underground to a location north of its present mine to
locate another ore body that would have economically justified
the construction of another shaft and the extension of the
underground mine for several years. However, Homestake did
recently report the discovery of some additional deep reserves at
its present underground mining location below the 7,000-foot
level. Unless a substantial reduction in the current price of
gold occurs, the Company believes that the gold mining industry
will be stable in the Black Hills area for at least the next ten
years; however, the life of mines cannot be predicted, and no
assurances can be given.
The new industry of low stakes casino gambling at Deadwood
(located in Black Hills Power's service territory) continues to
experience modest growth despite the South Dakota voters'
rejection of raising the $5 betting limit to $100.
The Black Hills area continues to attract new small
businesses and retirees who are attracted by a quality place to
live.
ELECTRIC SALES--WHOLESALE. At this time the only firm
wholesale customer of Black Hills Power is the municipal electric
system at Gillette, Wyoming. Service is rendered under a long-
term contract expiring July 1, 2012 wherein Black Hills Power
undertakes the obligation to serve the City of Gillette 60
percent of its highest demand and that associated energy as if
the demand served by Black Hills Power was always Gillette's
first demand. The agreement also allows Gillette to obtain the
benefits of a 4,000 kilowatt average firm power purchase
agreement from WAPA. Gillette's highest demand to date is
38.78 megawatts, making Black Hills' current base load obligation
to serve 23 megawatts. The most recent average yearly capacity
factor of this 23 megawatt demand has been approximately 80
<PAGE>
percent. Revenue from sales to Gillette represented 8 percent of
revenue from total sales in 1993.
Black Hills Power is further obligated to serve the next
increment of 10 megawatts of Gillette's demand above 33 megawatts
if Gillette is unable to obtain other sources. Subject to
certain emergency conditions, once Black Hills Power serves a
full increment of another 10 megawatts, that increment is added
to Black Hills Power's firm obligation to serve. When Gillette
serves 10 megawatts, that increment is added to Gillette's firm
obligation to serve. At this time Gillette has obtained
resources to serve its load above the 60 percent of base load
obligation of Black Hills Power. However, Gillette's resources
come from short-term contracts, so Black Hills Power is required
to stand by to serve a 10 megawatt increment of capacity to
Gillette.
Other than this firm sale to the City of Gillette, Black
Hills Power has made only minimal energy sales to other
utilities.
FUTURE WHOLESALE OPPORTUNITIES. Black Hills Power has not
had sufficient surplus resources in the past to effectively
engage in the wholesale electric market. Therefore, to date
Black Hills Power has not developed any wholesale markets other
than the Gillette sale. If utility retail sales do not increase
as expected, the addition of Neil Simpson Unit #2 may result in
surplus power and energy. In that event, Black Hills Power would
explore all possible avenues to sell that surplus power. Due to
the inability to serve firm power to the east of Black Hills
Power's service territory without high-cost AC-DC-AC converter
stations because of the incompatibility of the east and west
transmission systems, Black Hills Power's opportunities for
wholesale sales are restricted to the western system. Black
Hills Power maintains two firm interconnections to the western
system, one with WAPA's western transmission system at Stegall,
Nebraska and one with Pacific Power's transmission system at the
Wyodak Plant. These two interconnections give Black Hills Power
the potential ability to sell power wholesale to any utility
entity in the western part of the United States if transmission
charges are paid. See--COMPETITION IN ELECTRIC UTILITY BUSINESS
- --TRANSMISSION ACCESS under this Item 1.
Whether physical transmission limitations exist that would
restrict such sales by Black Hills Power is unknown for any
particular sale, but Black Hills Power believes that the western
transmission system is adequate at this time to accommodate the
relatively small sale of wholesale power required for Black Hills
Power to sell any surplus resulting from Neil Simpson Unit #2.
The revenue received from such a sale would depend on
transmission costs, the type of sale Black Hills Power would make
(i.e., firm long-term or short-term, capacity sale with minimum
energy or base load sale with maximum energy, unit power from
Neil Simpson Unit #2 only or system power with reserves), and the
competitive market at the time such sale is made. The needs of
Black Hills to serve its present retail and wholesale commitments
and the regulatory treatment of Neil Simpson Unit #2 will govern
the type of power and energy sale Black Hills Power would be able
to make. All of these conditions are unknown at this time, but
Black Hills Power will be carefully studying these conditions as
the operating date for Neil Simpson Unit #2 approaches.
<PAGE> ELECTRIC POWER SUPPLY
GENERAL. In 1993 Black Hills Power retired three 5 megawatt
low-pressure units at the Kirk Station. Obsolescence and high
costs of operation made these units no longer economical to
operate and maintain.
Black Hills Power owns generation with a nameplate rating
totalling 283.21 megawatts. See--UTILITY PROPERTIES under Item
2.
Black Hills Power also purchases electric power from other
entities. See--PACIFIC POWER COLSTRIP CONTRACT, TRI-STATE
CONTRACT, RESERVE CAPACITY INTEGRATION AGREEMENT, and SUNFLOWER
AGREEMENT following.
RESERVES. Black Hills Power is not a member of a power
pool. To meet its reserve margin, Black Hills Power utilizes the
criteria established by the Western System Coordinating Council,
a voluntary technical review and standard setting association
composed of all electric utilities in the western United States.
This criteria generally requires resources in reserve that are
capable of (i) replacing the most severe single contingency,
(ii) plus 5 percent of the utility's firm load responsibilities
without firm purchased power and (iii) an allowance for auxiliary
operations for the lost generator. Currently the most severe
single contingency for Black Hills Power is the loss of its 20
percent interest in the 330 megawatt Wyodak Plant. Neil Simpson
Unit #2 with a normal capability of 80 megawatt will be Black
Hills Power's largest generation resource when it comes into
commercial operation in late 1995 or early 1996 and, therefore,
the most severe single contingency.
Generating plants' capabilities to generate power will
change depending on ambient air temperatures. Generally, a power
plant's net output capability is higher in the winter and lower
in the summer. Therefore, the reserve margin, the loss of the
largest unit, is less in summer (because the unit generates less
power) than in the winter. One reserve margin test is to
determine the reserve margin based on a summer rating, a time
when generators are producing less power and the utilities'
requirements are at their peak.
<PAGE>
The following chart illustrates a Black Hills Power
estimated summer rating reserve calculation for 1994 as compared
to 1996 when Neil Simpson Unit #2 is expected to be in commercial
operation.
<TABLE>
Reserve Analysis--Estimated
(1)Net Dependable Capability--
Summer Rating
<CAPTION>
1994 1996
Base Load Resources kilowatts kilowatts
<S> <C> <C>
Osage Station--3 units 30,450 30,450
Kirk Plant 16,100 16,100
Ben French Station--Coal unit 21,600 21,600
Neil Simpson Unit #1 14,600 14,600
Wyodak Plant (20%) 59,000 59,000
Neil Simpson Unit #2 (4) 72,000
Pacific Power Colstrip Contract 75,000 75,000
Tri-State Contract(2) 20,000
Total Base Load Resources 236,750 288,750
Peaking Resources
Ben French Station
--Combustion Turbines 67,200 67,200
--Diesel Units 10,000 10,000
Pacific Reserve Integration
Agreement 32,800 32,800
Sunflower Peaking Contract(3) 40,000
Total Peaking Resources 150,000 110,000
Total Base Load and Peaking
Resources 386,750 398,750
Less: Reserves 71,000 82,000
Resources to Serve Load, less
reserves 315,750 316,750
_________________________
<FN>
(1)
See--UTILITY PROPERTIES under Item 2 for the nameplate rating
of Black Hills Power's generating resources.
(2)
Tri-State contract can be extended for 40 megawatts of firm
capacity and energy to December 31, 1997. Black Hills Power
can cancel agreement for 1996.
(3)
Sunflower contract expires September 30, 1996.
(4)
This assumes Neil Simpson Unit #2 is in production in 1996.
</TABLE>
<PAGE>
PACIFIC POWER COLSTRIP CONTRACT. Additional base load power
was acquired by Black Hills Power through a 40-year purchased
power agreement executed in 1983 with Pacific Power. The
agreement provides that Black Hills Power purchase from Pacific
Power 75 megawatts of electric power and associated energy until
December 31, 2023. The price for the power and energy is based
on Pacific Power's annual levelized fixed cost and variable cost
in Units 3 and 4 of the Colstrip coal-fired generating plant
located near Colstrip, Montana and a fixed payment for
transmission. Although Black Hills Power's payments are based
upon Units 3 and 4, Pacific Power has agreed to deliver the power
and energy from its system, notwithstanding the operational
capabilities of Units 3 and 4, at a load factor varying from a
minimum of 41 percent to a maximum of 80 percent as scheduled
monthly by Black Hills Power. Under the agreement, Black Hills
Power would not be obligated to pay capacity and energy charges
for power not delivered because of a default by Pacific Power in
delivering electric power. The Company has incurred capacity
charges of $18,000 to $19,000 per megawatt month and $13 per
megawatt hour over the last three years of this agreement. The
Company's load factor related to this contract has been
approximately 68 percent over the last three years. The energy
purchased under this agreement in 1993 was approximately 23
percent of Black Hills Power's expected total requirements. See
RATE REGULATION under this Item 1.
TRI-STATE CONTRACT. In 1992 Black Hills Power entered into
a firm capacity and energy purchase agreement under which
Tri-State Generation and Transmission Association, Inc., a rural
electric cooperative headquartered in Colorado, has agreed to
supply Black Hills Power 20 megawatts of firm capacity and
associated energy up to a 75 percent capacity factor
commencing October 1, 1993 and continuing to December 31, 1997
for a capacity charge of $8,400 per megawatt month and $16 per
megawatt hour. Black Hills Power has the option to be exercised
by September 1, 1995 to terminate the contract at a date earlier,
but not before December 31, 1995, if Black Hills Power
anticipates that Neil Simpson Unit #2 will commence commercial
operations at the time of termination. Black Hills Power further
has the option to purchase an additional 20 megawatts up to
December 31, 1997 at a capacity charge of $8,900 per megawatt
month if a one-year notice is given and $9,400 per megawatt month
if a six-month notice is given.
<PAGE>
RESERVE CAPACITY INTEGRATION AGREEMENT. Black Hills Power
entered into a reserve capacity integration agreement in 1987
with Pacific Power under the terms of which for a period of 25
years Pacific Power shall have the right to schedule power that
is produced from Black Hills Power's four 25 megawatt combustion
turbines; and in return Pacific Power shall make available to
Black Hills Power during the 25 years, at Black Hills Power's
option, 100 megawatts of reserve capacity from Pacific Power's
system. Black Hills Power shall have the right to schedule power
from this reserve only at such times when Black Hills Power,
under prudent utility practice, would have operated the
combustion turbines. At such times that Black Hills Power
schedules Pacific Power's reserves, it has agreed to pay
(i) Pacific Power's incremental costs of generation (largely the
cost of coal) from a Pacific Power coal-fired plant operating as
of the time of the schedule or (ii) the cost of fuel (oil or
natural gas) for the combustion turbines, whichever is lower in
price. Notwithstanding Pacific Power's rights to the combustion
turbines, Black Hills Power reserves a prior right to schedule
power from the combustion turbines if required to serve its
customers because of transmission outages or low voltage
conditions. The agreement further requires Pacific Power to pay
the operation and maintenance expenses of the combustion
turbines, except for property taxes and insurance, during the 25
years, and pay Black Hills Power $50,000 per month for the entire
25-year period. This reserve integration agreement was a part of
the PacifiCorp Settlement as outlined in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" of the Annual Report to Shareholders of the Company
for the year ended December 31, 1993, on pages 12 through 18,
incorporated herein by reference.
SUNFLOWER AGREEMENT. In 1993 Black Hills Power entered into
a Peaking Capacity Agreement with Sunflower Electric Power
Cooperative ("Sunflower"), a rural electric cooperative
headquartered in Kansas. Sunflower agreed to supply Black Hills
Power for a period of three years commencing October 1, 1993,
seasonal firm peaking capacity with a monthly load factor of 15
percent. For winter seasons the contract provides for
15 megawatts in the 1993-94 winter and 20 megawatts and
30 megawatts in the next two winter seasons, respectively. For
the summer season, the contract provides 40 megawatts for 1994,
50 megawatts for 1995 and 20 megawatts for 1996. The term of the
sale may be extended from year to year if neither party cancels
the agreement. The sale is conditioned upon WAPA agreeing to
maintain a transmission path for Sunflower for delivery to Black
Hills Power at Stegall, Nebraska. Black Hills agreed to pay
Sunflower for the capacity purchased $3,200/megawatt month for
1993, $3,780/megawatt month for 1994, $4,410/megawatt month for
1995 and $4,630/megawatt month for 1996. For the energy
purchased Black Hills agreed to pay Sunflower's peaking fuel cost
plus a charge for operation and maintenance costs and overhead,
estimated to be $34.20/megawatthour.
<PAGE>
The cost of all power purchased is either included in rates
or is substantially being passed through to customers under
automatic fuel and purchased power adjustment provisions in Black
Hills Power's rates. See RATE REGULATION--SOUTH DAKOTA
REGULATION under this Item 1. Black Hills Power purchased
additional non-firm, short-term power during 1993 from other
electric power suppliers.
NEIL SIMPSON UNIT #2. Neil Simpson Unit #2, an 80 megawatt
coal-fired electric generating plant to be located adjacent to
Wyodak Resources' coal mine near Gillette, Wyoming, is now under
construction by Black Hills Power. The new plant will increase
Black Hills Power's current utility rate base approximately 58
percent. See--RATE REGULATION--GUARANTEE OF THE CONSTRUCTION
COSTS OF NEIL SIMPSON UNIT #2 under this Item 1.
Neil Simpson Unit #2 will be equipped with a pulverized coal
boiler with low NOx burners and overfire air to control NOx
emissions, a circulating dry scrubber and electrostatic
precipitator to control SO2 and particulate emissions.
See--ENVIRONMENTAL REGULATIONS--AIR QUALITY--EMISSION LIMITATIONS
AT NEIL SIMPSON UNIT #2 under this Item 1. The plant is being
designed to be capable of generating at 70 degrees F ambient air
temperature a minimum of 80 megawatts net of the power required
to operate the plant.
The new plant, in the opinion of management, will allow
Black Hills Power to keep its rates competitive, to provide for
an orderly retirement of existing generation, to capture low
construction and financing costs and to stabilize the Company's
earnings. While benefiting the Company and its shareholders,
Black Hills Power's electric customers will also benefit from
what management believes to be its lowest cost alternative to
continue providing reliable electric service on a long-term
basis.
Black Hills Power commenced construction of Neil Simpson
Unit #2 in August of 1993, and commercial operation is scheduled
by December 31, 1995.
The estimated capital costs of Neil Simpson Unit #2 are
$113,624,000 plus $11,265,000 of allowance for funds used during
construction for a total estimated capital cost of $124,889,000.
All governmental construction permits required to construct
Neil Simpson Unit #2 were obtained by Black Hills Power. The
construction permits are all in full force and effect, and there
is currently no litigation or appeals pending affecting those
permits.
Whether the SDPUC and WPSC allow the new facility in rates
will be determined at a later time. See--RATE REGULATION--1995
RATE CASES under this Item 1.
In obtaining all governmental permits to construct Neil
Simpson Unit #2, Black Hills Power committed to maintain certain
levels of pollutant emissions (see--ENVIRONMENTAL REGULATION--AIR
QUALITY--EMISSION LIMITATIONS AT NEIL SIMPSON UNIT #2 under this
Item 1), committed to a guarantee of the construction costs (see
- --RATE REGULATION--GUARANTEE OF THE CONSTRUCTION COSTS OF NEIL
SIMPSON UNIT #2 under this Item 1), committed Wyodak Resources to
a coal contract (see--COAL SALES--CONTRACT TO SUPPLY COAL TO NEIL
SIMPSON UNIT #2 under this Item 1) and committed to certain other
regulatory studies (see--RATE REGULATION--OTHER REGULATORY
CONDITIONS OF APPROVING OF NEIL SIMPSON UNIT #2 under this Item
1). See--CONSTRUCTION AND CAPITAL PROGRAMS--FINANCING NEIL
SIMPSON UNIT #2 under this Item 1.
<PAGE>
RATE REGULATION
GUARANTEE OF THE CONSTRUCTION COSTS OF NEIL SIMPSON UNIT #2.
The Company has guaranteed to the WPSC and the SDPUC that the
Company will never include in rate base for the determination of
electric rates in those jurisdictions those capital costs of Neil
Simpson Unit #2 which exceed $124,889,000 (the "Guaranteed
Cost"), including allowance for funds used during construction.
The Company currently receives from retail sales in South Dakota
and Wyoming approximately 91 percent of all electric revenues.
The Guaranteed Cost does not include the costs of additions to
Neil Simpson Unit #2 subsequent to commercial operation or the
operating costs of the plant. Due to the Guaranteed Cost, the
Company would likely be forced to write off against earnings any
construction costs of Neil Simpson Unit #2 in excess of the
Guaranteed Cost.
Black & Veatch Architects/Engineers of Kansas City, Missouri
is furnishing the Neil Simpson Unit #2 design, engineering, and
construction management services for a fixed fee. Contracts have
been entered into with a general contractor and with other
contractors and vendors to provide the various components of Neil
Simpson Unit #2, such as the boiler, the turbine generator, the
air quality control system, the condenser, the distributive
control information system, the structural steel, the
transformers, the coal silo and the coal conveying system. All
contracts provide for either fixed contract sums or fixed unit
prices. The Company estimates that as of March 1, 1994,
contracts have been entered into with contractors and vendors
providing approximately 90 percent of the completion costs of the
project. The balance of the contracts yet to be entered into are
for certain supplies and small components and are expected to be
finalized by April 1994.
The contract between the Company and the architect/engineer
provides that Black & Veatch will furnish the Company an estimate
of the costs of completing the construction of Neil Simpson Unit
#2 on which the engineer represents that the Company can rely
with a high level of confidence. The contract provides for
damages, both direct and consequential, not to exceed $35 million
for any damages incurred by the Company arising out of the
negligence of the architect/engineer in performing the contract.
Each of the contracts for the various components of the
construction of Neil Simpson Unit #2 provide for certain
obligations to correct defective work, warranties and liquidated
damages provisions which the Company believes will provide some
compensation to the Company for damages resulting from any
failure of the various contractors and vendors to perform.
Performance bonds from reputable surety companies have also been
required to guarantee performance of all of the erection
contracts. However, notwithstanding that the Company believes it
has negotiated contracts with reputable businesses requiring
damages for breach of performance and sureties to guarantee
performance of erection contracts, the Company can give no
assurances that Neil Simpson Unit #2 will be constructed on time
and within the Guaranteed Cost, and if not, that the Company
would be adequately compensated for all damages incurred due to
any breaches of contracts. The contracts contain defenses to
paying damages if the failure to perform was caused by events
beyond the control of the contractors. Unexpected costs can
result from various causes beyond the control of any party such
as labor unrest, transportation delays, weather conditions,
governmental interference and other causes. While the Company
believes it has properly protected itself to the extent
reasonably possible through its contracts with its
architect/engineer and contractors and vendors, the Company,
through its guarantee to the SDPUC and the WPSC, did
<PAGE>
assume the risk of not being able to earn a return on any costs
in excess of the Guaranteed Cost caused by (i) events beyond the
control of any contracting party, (ii) uncompensated
consequential damages and direct damages in excess of contractual
liquidated damages and litigation costs resulting from contract
breaches, (iii) any inability to enforce contracts or performance
bonds due to any unexpected lack of financial responsibility of
contractors, vendors or sureties and (iv) costs in excess of
estimates for the remaining 10 percent of Neil Simpson Unit #2
for which contracts have yet to be let.
As of the date of finalizing this 10-K, the construction of
Neil Simpson Unit #2 is proceeding as scheduled. Based upon all
current contracts and the estimate furnished by the
architect/engineer, the Company expects to construct Neil Simpson
Unit #2 within the time as scheduled and at a cost not to exceed
the Guaranteed Cost. As of the date of finalizing this 10-K, the
guaranteed construction cost of $124,889,000 includes an
unallocated contingency of approximately $4,400,000.
Black Hills Power receives no bonus or incentive ratemaking
benefit if it is able to bring Neil Simpson Unit #2 into
commercial operation at total capital costs of less than the
Guaranteed Cost.
OTHER REGULATORY CONDITIONS OF APPROVING NEIL SIMPSON UNIT
#2. As a condition to the WPSC granting a certificate of public
convenience and necessity allowing Black Hills Power to build
Neil Simpson Unit #2, Black Hills Power agreed to certain
regulatory procedures consisting of implementing a cost-effective
demand-side management program, establishing and perpetuating an
Integrated Resource Planning Advisory Group, studying the
feasibility of wind generation and pursuing all reasonable cost
containment measures in the construction and operation of Neil
Simpson Unit #2 and the overall electric utility operations of
Black Hills Power.
Management is of the opinion that while these conditions are
important and Black Hills Power will comply with all of the
conditions, such conditions do not constitute anything more than
what Black Hills is required to do as an electric utility under
today's regulatory environment. Black Hills Power is in the
process of implementing a demand-side management program in
attempting to find cost-effective programs that would reduce the
demand on Black Hills' system, thereby postponing to that degree
the need for further electric power resources. Black Hills Power
has implemented the Integrated Resource Planning Advisory Group
consisting of members of the staffs of the SDPUC and the WPSC as
well as representatives of Black Hills Power and its customers.
This group will serve as a communication conduit for Black Hills
Power to keep all regulators advised of its continuing integrated
resource planning process.
1995 RATE CASES. Black Hills Power expects to file general
rate cases during 1995 to request a rate increase which would
include the full costs, including allowance for funds during
construction, of Neil Simpson Unit #2. Based upon assumptions of
load growth, inflation and costs, Black Hills Power anticipates
gradual small rate increases during construction of Neil Simpson
Unit #2 totaling 2.5 percent by the operation of automatic fuel
and power purchased adjustment tariffs that have been approved in
all jurisdictions in Black Hills Power's service area. Neil
Simpson Unit #2 is expected to increase Black Hills Power's
electric utility rate base approximately 58 percent. Taking into
account the reduction of purchased power expense when Neil
Simpson Unit #2 is placed into operation and other
<PAGE>
projections, the 1995 general rate filing is projected to result
in a 10 percent increase in total revenue. Percentages of
increases for different customer classes will vary depending upon
final approved cost of service allocations.
In granting Black Hills Power's application to the WPSC for
a certificate of public convenience and necessity on June 2, 1993
authorizing Black Hills Power to construct Neil Simpson Unit #2,
the WPSC found that Neil Simpson Unit #2 provides Black Hills
Power the least cost approach, consistent with adequate and
reliable service, to the resource needs of Black Hills Power and
its customers; and Neil Simpson Unit #2 is a sensible resource
addition choice for Black Hills Power.
On May 26, 1993, the SDPUC issued an order denying a request
by Rosebud Enterprises, Inc. ("Rosebud") that the SDPUC determine
Black Hills Power's resource needs and the avoided costs of the
needed resource and to establish a legally enforceable obligation
requiring Black Hills Power to purchase power from Rosebud to be
generated from a waste fuel facility that would be qualified
under the Public Utility Regulatory Policies Act. The SDPUC
further denied Rosebud's request to issue an order finding that
Black Hills Power may be imprudent to proceed to construct Neil
Simpson Unit #2. The SDPUC did find that Black Hills Power has
in good faith planned and permitted Neil Simpson Unit #2 in order
to fulfill Black Hills Power's duty to serve its customers.
However, the SDPUC made no finding of prudency or imprudency
concerning Black Hills Power's decision to proceed with the
construction of Neil Simpson Unit #2. The Commission did find
that it had no authority under South Dakota law to make its own
determination as to a utility's need for additional capacity or
the timing of that need. The Commission found that it has
established a strong precedent of placing the risk of determining
the need for construction of new facilities and the timing of
that need on each utility serving in South Dakota. It stated
that South Dakota utilities have a duty to serve their respective
service areas under South Dakota law, including the decision to
add capacity. The Commission found that it would review the
prudency of capacity additions only when a utility attempts to
include the additional capacity in rates.
Neither the WPSC nor the SDPUC has made any determinations
of rate treatment resulting from Neil Simpson Unit #2. These
decisions are expected to be made in response to the 1995 general
rate filings when Black Hills Power will request the full
inclusion of Neil Simpson Unit #2 into rate base. While Black
Hills Power believes that both the WPSC's and the SDPUC's orders
were supportive of Neil Simpson Unit #2, the Company can give no
assurances that the regulatory commissions will allow the full
cost of Neil Simpson Unit #2 in rate base. Questions concerning
the prudency of Black Hills Power to construct Neil Simpson Unit
#2 may arise in the rate proceedings, and Black Hills Power
assumes the risk of being able to prove to the regulatory
commissions that Black Hills Power did need Neil Simpson Unit #2
and was prudent to construct the plant.
If the impact of rate increases is high on a customer class,
some regulatory commissions will find reasons to phase in the
rate increases over a period of time after construction.
Sometimes regulatory commissions will initially allow only the
debt portion of the cost of new plant and disallow all or a part
of the equity portion if the commissions find that management was
either imprudent in building a power plant or the utility assumed
the risk that the plant would be needed when completed. The
result of such rulings would be to deny the Company a return on a
portion of their investment in new plant until such time as the
entire plant is included in the rate base. The justification of
regulatory commissions in second-guessing utilities as to the
<PAGE>
need for new plant is that the risk of building new plant is on
the utility and not the customer. While Black Hills Power will
urge that such rulings would be unfair and the Company should not
be penalized if an unforeseen event occurs beyond the control of
the Company, the Company can give no assurances that it will be
successful in getting the entire construction cost of Neil
Simpson Unit #2 in rate base if to do so will result in what may
be considered as onerous rate increases to some of the customer
classes.
If Black Hills Power is not in a surplus power condition at
the time of the rate case, management believes that they should
be successful in getting the entire plant into rate base. Black
Hills Power does not believe it will be in a surplus condition.
See--ELECTRIC POWER SALES AND SERVICE TERRITORY and ELECTRIC
POWER SUPPLY--RESERVES under this Item 1. If, on the other hand,
Black Hills Power is perceived by the regulators to be in a
surplus power condition at the time Neil Simpson Unit #2 comes
into commercial operation, there is a higher probability of the
disallowance of a portion of Neil Simpson Unit #2 in rate base
for a period of time.
The Company believes that even if Black Hills Power is in a
surplus power condition at the time Neil Simpson Unit #2 comes
into commercial operation and a portion of Neil Simpson Unit #2
is not allowed in rate base, Black Hills Power should be able to
make up the deficit in revenue by sales of the surplus power to
other utilities until such time that the power is needed for
Black Hills Power's customers or sell a portion of Neil Simpson
Unit #2. Management believes that there will be a sufficient
need for power in the area that such sales are probable.
However, management can give no assurances that such market will
exist and that the market prices for the power contract terms
Black Hills Power could offer will be satisfactory.
See--ELECTRIC POWER SALES AND SERVICE TERRITORY--FUTURE WHOLESALE
OPPORTUNITIES and ELECTRIC POWER SUPPLY--RESERVES under this Item
1.
SOUTH DAKOTA REGULATION. In South Dakota, representing 84
percent of revenue from total 1993 electric sales, Black Hills
Power has not had a formal rate case before the SDPUC since 1982.
However, as a result of an investigation by the SDPUC concerning
the effect of the reduced corporate income tax rates under the
Tax Reform Act of 1986 and affiliated transactions, the SDPUC in
1988 allowed Black Hills Power to include in its base rates the
full cost of purchased power under the Pacific Power 40-year
contract.
South Dakota law and the SDPUC allow Black Hills Power to
incorporate in its rates automatic adjustment clauses which allow
all increases and decreases in the cost of purchased power and
fuel to be added to or subtracted from rates without a rate case
or order from the SDPUC. However, the clauses place a limitation
on that portion of the cost of coal purchased by Black Hills
Power from its affiliate Wyodak Resources which can be allowed in
rates. This limitation provides that Black Hills Power may not
include in rates any cost of coal which allows Wyodak Resources
to earn a return on equity on sales to Black Hills Power in
excess of a percentage equal to (i) the average interest rate
paid by electric utilities with an "A" rating on long-term bonds
plus (ii) 400 basis points (4%). The return on equity is
calculated as of each April 1 and applied to determine if any
refund is due for the cost of coal passed on to rate payers
<PAGE>
during the previous calendar year. If a refund is due, the
refund is credited without interest over the 12 months following
the April 1 date of calculation. Black Hills Power estimates
that the return on equity to be applied in 1993 to determine the
refund will be 11.6 percent. The Company has accrued $1,060,000
in 1993 in anticipation of what Black Hills Power estimates the
refund to be for 1993 under this adjustment clause. The SDPUC
rate order specifically provides that the limitation applies only
to purchases by Black Hills Power, which tonnage sales
represented 33 percent of Wyodak Resources' total sales of coal
in 1993.
Retail rates in South Dakota decreased approximately 4
percent in 1993 over 1992.
WYOMING--RETAIL. In Wyoming, where revenue from retail
sales represented 7 percent of revenue from total electric sales
in 1993, Black Hills has not had a formal rate case before the
WPSC since 1981. Every three months, Black Hills Power files an
application to adjust rates to reflect changes in the cost of
purchased power. The WPSC has been consistently approving these
applications.
Retail electric rates in Wyoming averaged 0.7 percent lower
in 1993 than 1992.
MONTANA. Black Hills Power's revenue from sales of electric
power in Montana in 1993 represented only 1 percent of revenues
from total sales. The last formal rate application in Montana
was in 1983. Every three months, Black Hills Power files an
application to adjust rates to reflect changes in the cost of
fuel and purchased power. The Montana Public Service Commission
has been consistently approving these applications.
WYOMING--WHOLESALE. The only wholesale customer of Black
Hills Power is the City of Gillette, Wyoming. See--ELECTRIC
POWER SALES AND SERVICE TERRITORY--ELECTRIC SALES--WHOLESALE.
The rates paid by Gillette are subject to regulation by the FERC.
Either party may apply to the FERC for rate modifications. The
current rates were determined by negotiations between Gillette
and Black Hills Power.
None of the above-referenced rate orders and rate
adjustments caused Black Hills Power to earn less than a rate of
return which would have been allowed by any of the regulatory
commissions through a general rate case filing.
Black Hills Power has not experienced major problems in the
recent past with regulatory bodies allowing it to increase its
rates on a timely basis and allowing all operating costs and
electric plant in rate base, but no assurances can be given that
major problems will not occur in the future.
COMPETITION IN ELECTRIC UTILITY BUSINESS
COMPETITION IN SERVICE AT RETAIL. In addition to Black
Hills Power, RECs and the federal government through WAPA provide
electric service in and around the service territory of Black
Hills Power. WAPA retails electric service to certain government
facilities. Black Hills Power and the RECs serve in territories
which are protected by state laws or regulations which generally
give each entity the exclusive right to serve retail in its
respective territory; however, these laws or regulations are
subject to change and there are certain exceptions. In South
Dakota, the SDPUC may allow a new customer with a load of over
2,000 kilowatts to choose to be served by a utility other than
the utility in whose territory the new customer locates.
<PAGE>
Each municipality in Black Hills Power's service territory
has the right upon meeting certain conditions to acquire or
construct a municipally-owned electric system and to serve the
customers within its city. Black Hills Power is not aware of any
such movement by any municipality in its service territory, which
does not already have a municipally-owned electric system, to
create one.
In Wyoming, public utilities operate in service territories
assigned by the WPSC, and a franchise granted by the
municipality's governing body is required to serve within the
said municipality. Black Hills Power's franchise for the City of
Newcastle, Wyoming, representing approximately 2,000 customers
and 6 percent of Black Hills Power's electric revenue, expires in
1999. The franchise may be renewed by action of the city's
common council. Black Hills Power may apply for and obtain the
right to serve in another utility's electric service territory if
it is found to be in the public interest to do so, but such
applications are rarely granted.
The respective service territories of Black Hills Power and
the RECs were assigned originally on the basis of where each was
serving at the time of assignment. Since the RECs were serving
in rural areas (the purpose for which they were formed), a large
portion of the rural area surrounding the municipalities in which
Black Hills Power serves constitutes REC service territory.
Although Black Hills Power has traditionally served considerable
territory outside of municipalities and, therefore, has been
assigned a large amount of such territory, the RECs have the
largest portion of such area and, if the laws are not changed,
will over a long period of time tend to receive a larger portion
of the growth of the population centers.
To assist in the planning of new resources and to minimize
the risk of the loss of large loads, Black Hills Power does
endeavor to contract with its large industrial users to serve all
electric power needs for a term of years. Currently Homestake
Mining Company is under a 9-year contract to purchase all of its
electric power requirements, the South Dakota State Cement Plant
is under a similar 6-year contract and the City of Gillette
(See--ELECTRIC POWER SALES AND SERVICE TERRITORY--ELECTRIC
SALES--WHOLESALE) is under an 18-year contract for 60 percent of
its base load. These three customers together in 1993 accounted
for 29 percent of Black Hills' total firm KWH sales and 21
percent of firm electric sales revenue.
The primary competing fuel in Black Hills Power's territory
is natural gas which is available to approximately 80 percent of
its customers.
COMPETITION IN ELECTRIC GENERATION. Under the Public
Utility Regulatory Policies Act, certain small power generators
burning waste fuel and renewable fuel and certain cogenerators
that utilize excess steam for a purpose other than power
generation are deemed to be qualified facilities and the owner
can force an electric utility such as Black Hills Power to
purchase power for its avoided costs. Generally avoided costs
are those costs that would be avoided if it purchased power from
the qualifying facility. To date Black Hills Power's only
interface with qualifying facilities under PURPA was the attempt
by Rosebud Enterprises, Inc. to build a waste fuel facility and
sell power to Black Hills Power to avoid the building of Neil
Simpson Unit #2. See--RATE REGULATION--1995 RATE CASES under
this Item 1.
<PAGE>
In addition to competition from RECs and the federal
government from central station sources, Black Hills Power could
face the competition of industrial and public customers
constructing self-generation facilities using alternative fuels,
such as waste material, natural gas or oil. To date Black Hills
Power has not faced any material competition from such sources.
Management does not believe that such sources are cost effective
but can give no assurances that material competition from these
sources will not occur.
Under the new federal Energy Policy Act of 1992, a new class
of wholesale-only electric generators, referred to as exempt
wholesale generators (EWGs) was created. The EWGs are now exempt
from the Public Utility Holding Company Act of 1935 (PUHCA).
Under PUHCA, the parent company of a participant in a power
project could become a public utility holding company subject to
PUHCA, resulting in unacceptable restrictions and regulations.
To some extent this impediment to creating EWGs as a subsidiary
of a nonutility company has now been removed. An EWG must be
engaged exclusively in the ownership and/or operation of
"eligible facilities." An "eligible facility" is an electric
generating facility whose output is sold only at wholesale. An
EWG is not subject to restrictions relating to type of fuel,
maximum size, technology or permissible utility ownership as a
qualifying facility is under PURPA. An EWG is subject to
regulation by the FERC. A regulated electric utility may
purchase power from an EWG in which the utility has an interest
if each state commission with regulatory authority over the
purchasing utility's retail rates approves such transaction.
The Energy Policy Act of 1992 encourages independent power
producers to effectively compete with qualifying facilities under
PURPA and the electric utility itself to construct the future
electric generation as it is needed.
Black Hills Power's experience with competing qualified
facilities and the effect of the new Energy Policy Act of 1992
indicate that Black Hills Power will be challenged by other
alternatives each time it proposes to build generation. To be
able to build its own generation, Black Hills Power will have to
demonstrate under an integrated resource plan that its proposal
is the least cost and most reliable of all other proposals. As a
result of this competition, Black Hills Power is not necessarily
going to be the sole generator of its future power requirements
as it was in the past. The Energy Policy Act of 1992 does not
prevent the Company from engaging in the business of an
independent power producer in other utilities' service
territories and could lead to additional opportunities for the
Company in the future due to the Company's coal fuel supply with
mine-mouth plants that have been permitted.
TRANSMISSION ACCESS. The Energy Policy Act of 1992 granted
the FERC broad authority to mandate transmission access to the
EWGs as well as others engaged in wholesale power transactions.
Under the new law, any electric utility or any other entity
generating wholesale energy may apply to FERC for an order
requiring a utility to transmit such energy, including
enlargement of relevant facilities. If the utility refuses to
wheel or furnish transmission service to an independent power
producer, the FERC may, but is not required, order wheeling in
response to an application. FERC is not to order wheeling if to
do so would impair the transmitting utility's reliability of
service. The new law does provide for the transmitting utility
to obtain its full cost of transmission service, to be determined
by the FERC.
The new Energy Policy Act of 1992 specifically prevents the
FERC from ordering wheeling to end users (retail wheeling).
<PAGE>
Black Hills Power does now furnish transmission service for
competing RECs and for its only wholesale customer, the City of
Gillette, Wyoming. Therefore, the Energy Policy Act is not
likely to have any effect in allowing transmission access by
other electric utilities serving at retail. However, the Energy
Policy Act can require Black Hills Power to furnish transmission
service for competing EWGs and qualifying facilities, thereby
increasing competition for Black Hills Power. As long as the
states in which Black Hills Power operates continue to grant
exclusive service territories and the federal government does not
preempt this state jurisdiction, the increase in transmission
access through the Energy Policy Act of 1992 through Black Hills
Power's transmission system is likely not to have an effect upon
Black Hills Power. However, if the electric rates of Black Hills
Power become noncompetitive with alternative sources of power or
such a trend develops throughout the country, further pressure on
both Congress and the state legislators for more competition
could result in modifications to the utility's service territory
and retail wheeling could be mandated, all of which could have an
adverse effect upon Black Hills Power's electric business. On
the other hand, if Black Hills Power can continue to acquire low-
cost new generation and can offer power at competitive rates,
retail wheeling may become a positive opportunity for the
Company.
PRICE COMPETITION. Each of Black Hills Power and the RECs
serving around its service territory offers a package of rates
and services designed to recognize the costs and needs of various
customer classes. The following rate comparisons are provided to
show the difference in cost that typical customers are currently
experiencing.
REGULAR RESIDENTIAL SERVICE
Percentage That
REC is Higher (+)
Monthly Cost or Lower (-)
(500kWh) Than BHP
SD - Black Hills Power $41.59 ---
SD - Black Hills Electric (REC) $61.70 +48
SD - Butte Electric (REC) $57.64 +39
SD - West River Electric (REC) $52.50 +26
WY - Black Hills Power $38.19 ---
WY - Tri-County Electric (REC) $35.34 -8
Small Commercial Service
Percentage That
REC is Higher (+)
Monthly Cost or Lower (-)
(6,000 kWh,30 kW) Than BHP
SD - Black Hills Power $507.44 ---
SD - Black Hills Electric (REC) $410.90 -19
SD - Butte Electric (REC) $389.70 -23
SD - West River Electric (REC) $631.80 +25
WY - Black Hills Power $451.55 ---
WY - Tri-County Electric (REC) $300.02 -34
<PAGE>
Large Commercial/Industrial Service
Percentage That
REC is Higher(+)
Monthly Cost or Lower(-)
(120,000 kWh, 300 kW) Than BHP
SD - Black Hills Power $6,406.20 ---
SD - Black Hills Electric (REC) $7,053.00 +10
SD - Butte Electric (REC) $8,283.00 +29
SD - West River Electric (REC) $7,827.80 +22
WY - Black Hills Power $6,681.63 ---
WY - Tri-County Electric (REC) $6,523.90 -2
Of the group, only Black Hills Power and Tri-County Electric
have their rates established by commission order. This allows
the South Dakota RECs the opportunity to offer incentive rates
and services to commercial and industrial users designed to
attract new customers without regulatory review while Black Hills
Power may be denied this opportunity by regulation of its rates.
As Black Hills Power constructs new generation, its electric
rates will need to be increased. (See RATE REGULATION--1995 RATE
CASES under this Item 1.) While its REC competitors also have
continual needs for new construction, the RECs serving in Black
Hills Power's service territory do have available surplus power
from Basin Electric at this time. Depending on the timing of
construction costs and other economic factors such as power sale
fluctuations and other costs and loss or gain of customers of
Black Hills Power and its competitors, Black Hills Power's rates
could become less competitive with other electric suppliers.
However, the RECs could experience higher costs of financing due
to government attempts to balance the budget to offset the
surplus power advantage.
Black Hills Power's management forecasts that its
construction program and anticipated load growth will result in
rate increases higher than inflation during the next three years
but will be lower than inflation when averaged over ten years.
If this forecast is accurate, management believes Black Hills
Power's rates will remain favorably competitive with other
electric suppliers in its service territory. Many factors beyond
the control of the Company could affect this, such as higher than
expected construction costs, unfavorable regulatory treatment and
unexpected loss of load. No assurances can be given in this
area.
CONSTRUCTION AND CAPITAL PROGRAMS
The construction and capital costs for 1993 for its
electric, mining and oil and gas production operations were
$25,932,000, $7,425,000 and $6,933,000, respectively.
The Company reviews its construction and capital program
annually. Current estimates of construction and capital
expenditures for 1994 through 1996 are as follows:
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Electric
Neil Simpson Unit #2 $65,113 $45,035 $------
Other Production 2,255 859 897
Transmission 4,128 1,617 8,478
Distribution 6,511 6,503 6,876
General 1,448 814 2,354
Total $79,583 $54,828 $18,605
Coal mining $ 2,129 $ 853 $ 2,042
Oil and gas production $ 5,000 $ 6,000 $ 6,000
Total $86,712 $61,681 $26,647
</TABLE>
BLACK HILLS POWER. The 1993 construction costs for the
Company were financed primarily with internally generated funds,
common stock sales and short-term borrowings.
The above capital budget includes approximately $110,148,000
for the completion of the design and construction of Neil Simpson
Unit #2. See--ELECTRIC POWER SUPPLY--NEIL SIMPSON UNIT #2 under
this Item 1.
FINANCING NEIL SIMPSON UNIT #2. The Company's plans to
finance the construction of Neil Simpson Unit #2 and its other
construction program include the sale of additional shares of
common stock, the issuance of long-term bonds and the increasing
of dividends paid by Wyodak Resources to the Company.
In 1993 the Company sold 525,000 shares of additional common
stock in a public offering at 25 3/8. Net proceeds to the
Company from this sale were approximately $12.7 million. The
Company also modified its dividend reinvestment program so that
the Company can elect to either issue new stock or purchase stock
on the market to satisfy the shareholders' requests to reinvest
dividends. The Company's expectations at this time are to raise
an additional $4 million of equity capital from the dividend
reinvestment program by the time Neil Simpson Unit #2 is
operational.
To complete the equity portion of the capital budget, the
Company plans to cause Wyodak Resources to upstream $45 million
of dividends during 1994 and 1995.
To finance the debt portion of the construction program, the
Company is planning to issue approximately $87 million of long-
term bonds under the Company's first mortgage Indenture. The
bonds are expected to be issued commencing in mid-1994 and
continuing through 1995, probably in two or three issues.
Based upon its projections, the financing program is
designed to create a capital ratio at the time Neil Simpson Unit
#2 becomes operational of 50 percent equity and 50 percent debt
for the consolidated Company and 55 percent debt and 45 percent
equity for Black Hills Power's capital structure for ratemaking
purposes.
<PAGE>
WYODAK RESOURCES. The capital program of Wyodak Resources
includes coal handling facilities and replacement of other mining
equipment. Wyodak Resources plans to finance these additions
with internally generated funds.
During 1993 Wyodak Resources constructed new coal handling
facilities in conjunction with Pacific Power. See--MINING
PROPERTIES under Item 2.
WESTERN PRODUCTION. Western Production's capital program is
planned to be devoted primarily to oil and gas development
drilling in Texas and the Rocky Mountain Region. Secondary
emphasis will be on production acquisitions and exploration
drilling. The capital program is planned to be financed with
internally generated funds and approximately $3 million of short-
term bank borrowings.
COAL SALES
CONTRACT TO SUPPLY COAL TO NEIL SIMPSON UNIT #2. Black
Hills Power and Wyodak Resources entered into the Restated and
Amended Coal Supply Agreement for Neil Simpson Unit #2 on
February 12, 1993. Under this agreement, Wyodak Resources agrees
to supply all of the fuel requirements for Neil Simpson Unit #2
for its useful life and reserve 20 million tons of coal reserves
for that purpose. Black Hills Power made a commitment to both
the SDPUC and the WPSC that coal would be furnished and priced as
provided by this agreement for the life of the plant.
Under this agreement, Wyodak Resources agrees that its
earnings from coal sales to Black Hills Power (including the 20
percent share on the Wyodak Plant and all sales to Black Hills
Power's other plants) will be limited to a return on Wyodak
Resources' original cost, depreciated investment base. The
return agreed to is 4 percent (400 basis points) above A-rated
utility bonds to be applied to a new investment base each year.
In addition, Wyodak Resources committed to further reduce the
coal price for coal to be used in any of Black Hills' power
plants during the period of time that under prudent dispatch that
power plant would not have been operated if it were not for the
discounted price of coal. In South Dakota (84 percent of Black
Hills Power's electric revenues), Black Hills Power is currently
precluded from passing on to its customers any cost of coal from
Wyodak Resources which would exceed the same rate of return, but
the dispatch discount is an additional accommodation not applied
at this time.
Since Wyodak Resources is expected to incur only minimal
additional capital costs to fulfill the coal supply agreement for
Neil Simpson Unit #2, Wyodak Resources is not expected to
increase its earnings from such sale.
Since Wyodak Resources is a subsidiary of the Company,
regulators limit the amount of Black Hills Power's coal costs it
can include in electric rates charged to its customers. The
Company believes that the above methodology requiring Wyodak
Resources' return on sales to Black Hills Power to be based on an
original cost depreciated investment base will continue to be
applied by the SDPUC and the WPSC which regulate approximately 89
percent of the Company's electric sales. However, regulatory
commissions may in the future apply a different methodology such
as limiting Black Hills Power to include in rates only what the
commission determines to be a fair market purchase price of coal.
Such fair market
<PAGE>
purchase price could be less than what Wyodak Resources requires
to earn a rate of return on its investment base. Earnings from
the intercompany sales of coal at this time represent
approximately 7 percent of the Company's consolidated earnings.
OTHER SALES. The coal mining industry is highly competitive
and significant new sales opportunities are limited. Wyodak
Resources operates in an area with many other mining companies
which have substantial unused capacity. They, like Wyodak
Resources, have the permits and capability for large increases in
production. Wyodak Resources has no train load-out facilities
and is not able to compete for large coal sales which require
unit train (usually 110 cars) loading capabilities, and the
current market price for such sales does not support the cost of
constructing the necessary facilities. Until coal prices
substantially improve, Wyodak Resources' coal sales will be
confined to a size less than a unit train and to sales for
consumption at or near the mine. Wyodak Resources will have some
increased coal sales to fuel Neil Simpson Unit #2, but increased
profits from those sales are unlikely. See--COAL SALES--CONTRACT
TO SUPPLY COAL TO NEIL SIMPSON UNIT #2 under this Item 1. No
assurances can be given that there will be new plants or the
degree of profitability of any such new coal sales.
See--CORPORATE DEVELOPMENT in this Item 1.
Sales and production statistics for the last five calendar
years are as follows:
Revenue From Sale % Revenue
of Coal Derived From Tons of Coal Sold
Year (in thousands) Black Hills Power (in thousands)
1993 $29,822 34% 3,027
1992 28,296 35 2,958
1991 26,138 35 2,742
1990 26,528 36 2,908
1989 21,456 37 2,349
Wyodak Resources furnishes all of the fuel supply for the
Wyodak Plant in which Black Hills Power owns a 20 percent
interest and Pacific Power an 80 percent interest. See Note 6 of
"Notes to Consolidated Financial Statements" appended hereto.
The price for unprocessed coal sold to the Wyodak Plant is based
on a coal supply agreement entered into by Black Hills Power,
Pacific Power and Wyodak Resources in 1974 and terminating in the
year 2013. This agreement was amended and restated in 1987 as
discussed below.
Wyodak Resources, Black Hills Power and Pacific Power
entered into settlement agreements in 1987 which settled a
dispute over the quantity of coal Pacific Power was required to
purchase to operate the Wyodak Plant and Pacific Power's
obligation to purchase additional coal commencing in 1990 under a
contract which would have provided coal for a since canceled
second unit at the Wyodak Plant. Said agreements are referred to
as the PacifiCorp Settlement which is discussed in "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" of the 1993 Annual Report to Shareholders of the
Company on pages 12 through 18, incorporated herein by reference.
<PAGE>
Revenue from coal sales to the Wyodak Plant totaled
$21,438,000 in 1993 or 72 percent of revenue for all coal sold by
Wyodak Resources. The quantity of coal sold in 1993 for the
Wyodak Plant was 2,118,000 tons, as compared to 2,079,000 tons
sold in 1992. Barring unusual periods of maintenance, the
quantity of coal for the maximum consumption capability of the
Wyodak Plant for one year is approximately 2,100,000 tons and the
average yearly consumption is 1,900,000. The average consumption
is expected to continue during the remaining 20 years of the coal
agreement. However, from time to time, the plant's physical
operating capabilities will affect the quantity of coal burned.
Wyodak Resources sells coal to Black Hills Power pursuant to
an agreement entered into in 1977 and last amended in 1987 which
is approximately the same as the original Wyodak Plant agreement
except for an additional amount for processing the coal and a
discount for all coal delivered in a year in excess of 500,000
tons. Wyodak Resources has reserved sufficient coal, presently
estimated at 9,000,000 tons, for the generating plants of Black
Hills Power until such plants are retired.
Black Hills Power expects its power plants, with the
exception of the Wyodak Plant, to continue to consume
approximately the same quantity of coal as in 1993 unless
unexpected mechanical failures occur. Of the 3,027,000 tons of
coal sold by Wyodak Resources in 1993, 1,009,000 tons were sold
to Black Hills Power, 1,696,000 tons were sold to Pacific Power
and 322,000 tons were sold to others.
Wyodak Resources' revenue from sales of coal to Pacific
Power and Black Hills Power as compared to its revenue from all
sales to other customers for the last three years was as follows:
Revenue from
All Sales to
Unaffiliated
Revenue from Revenue from Customers
Sales to Sales to(1) (includes
Pacific Power Black Hills Power Pacific Power)
Year (in thousands)
1993 $17,448 $10,047 $19,775
1990 16,541 9,811 18,485
1991 14,632 9,220 16,918
(1) Is not adjusted for refunds under South Dakota rate order.
See--RATE REGULATION of this Item 1.
In addition to the coal sold to the Wyodak Plant and to
Black Hills Power, Wyodak Resources sells coal to the South
Dakota State Cement Plant under an all requirements contract
expiring on December 1, 1997. Wyodak Resources sold 240,000 tons
under this contract in 1993. Smaller amounts of coal are sold to
various businesses and for residential use. All long-term
contracts contain adjustment clauses based upon certain costs and
government indices.
In 1988 Wyodak Resources agreed to the termination of a
long-term coal supply agreement with the City of Grand Island,
Nebraska. Under this agreement, Wyodak Resources will receive
approximately $155,000 per year for 14 years during which Grand
Island will have an option to purchase coal. Wyodak Resources
has reserved sufficient coal in the eventuality that Grand Island
exercises its option.
<PAGE>
Many factors can significantly affect sales of coal and
revenue under the existing contracts. Examples include the
seller's or buyer's inability to perform due to machinery
breakdown, damage to equipment, governmental impositions, labor
strikes, coal quality problems, transportation problems and other
unexpected events.
OIL AND GAS OPERATIONS
SIZE AND COMPETITION. Oil and gas operations have not been
a significant percent of the Company's total operations. Net
income and assets related to oil and gas operations have been 7
percent or less of the Company's consolidated amounts over the
last five years. The oil and gas industry is highly competitive.
Western Production encounters strong competition from many oil
and gas producers, including many which possess substantial
resources, in acquiring drilling prospects and producing
properties.
MARKETS AND SALES. The Company's oil and gas production is
sold at or near the wellhead, generally at posted prices. Gas
production is generally sold in the spot market at prevailing
prices. Western Production has been able to market all of its
oil and gas production. Operating revenue by source for the last
five years is as follows:
Oil and Gas Gas Plant Field
Sales Revenue Services
(in thousands)
1993 $7,489 $ 759 $3,148
1992 5,640 701 3,258
1991 4,789 693 3,595
1990 4,240 876 3,480
1989 3,681 1,082 3,581
Quantities and sale prices for oil and gas production are
affected by market factors beyond the control of the Company.
Such factors include the extent of domestic production, level of
imports of foreign oil and gas, general economic conditions that
determine levels of industrial production, political events in
foreign oil-producing regions and variations in governmental
regulations and tax laws. There can be no assurance that oil and
gas prices will not decrease in the future. Such declines would
decrease net revenues from oil and gas properties and reduce the
value of such assets. These declines could result in the write
down of certain oil and gas assets. Management estimates that
oil prices must average $14 to $15 per barrel for its oil
operations to remain profitable.
PRODUCTION. Western Production produced approximately
456,000 equivalent barrels of oil in 1993. Approximately 48
percent of this production came from the Finn-Shurley Field which
is comprised primarily of stripper wells (wells producing less
than 10 barrels per day).
DRILLING ACTIVITY. Western Production participated in the
drilling of 24 wells in 1993. Western Production's average
working interest in such wells was 53.1 percent, or 12.74 net
wells. Approximately 83 percent of the wells were classified as
development wells and 17 percent were classified as exploratory
wells. A development well is a well drilled within the presently
proved productive area of an oil and gas reservoir, as indicated
by reasonable interpretation of available data, with the
objective of completing in that reservoir. An exploratory well
is a well drilled in search of a new, as yet undiscovered oil or
gas reservoir or to greatly extend the known limits of a
previously discovered reservoir.
<PAGE>
ENVIRONMENTAL REGULATION
The Company is subject to present and developing laws and
regulations with regard to air and water quality, land use, land
reclamation and other environmental matters by various federal
and state authorities.
AIR QUALITY
EMISSION LIMITATIONS AT NEIL SIMPSON UNIT #2. One of the
governmental permits required to build Neil Simpson Unit #2 was a
prevention of significant deterioration permit to be granted by
the DEQ, Division of Air Quality. On April 14, 1993, Black Hills
Power received the permit ("PSD Permit") allowing Black Hills to
proceed with the construction of Neil Simpson Unit #2.
The PSD Permit sets certain emission rate limitations for
pollutants which cannot be exceeded during the operation of Neil
Simpson Unit #2. Wyoming law requires that after a 120-day
start-up period, Black Hills will require an operating permit.
During the start-up period, performance tests are conducted to
determine if the plant can be operated within the emission
limitations of the PSD Permit.
The PSD Permit sets emission rate limitations on
particulate, sulfur dioxide (SO2), nitrogen oxides (NOx), carbon
monoxide and particulate emissions and opacity limitations. The
PSD Permit requires constant monitoring to determine continual
compliance with the SO2, NOx and opacity limitations.
The SO2 emissions are not to exceed 0.20 lbs./MMBtu on a
two-hour rolling average and 0.17 lbs./MMBtu on a 30-day rolling
average. To control SO2 and particulate emissions, Neil Simpson
Unit #2 will include a circulating dry scrubber and electrostatic
precipitator wherein the flue gases from the pulverized coal
boiler will be treated in the scrubber with a lime reagent and
the matter will be removed by the precipitator. The manufacturer
of the scrubber and precipitator has guaranteed particulate and
SO2 limitation emission rates sufficient to meet the PSD Permit
limitations. The guarantee requires a six-month 100 percent
availability and compliance period. The manufacturer further
guaranteed under certain conditions for a period of five years
corrosion minimums and operation and maintenance costs.
The PSD Permit sets the initial NOx emission rate limitation
at 0.23 lbs./MMBtu; however, the permit provides that during the
first two years of operation if Black Hills Power demonstrates
that the 0.23 lbs./MMBtu limitation can be lowered to the
manufacturer's guarantee of 0.17 lbs./MMBtu, the Wyoming
Department of Environmental Quality reserves the right to lower
the NOx emissions limitation permanently.
The method of control of NOx for Neil Simpson Unit #2 are
low NOx burners with overfire-air controls. The PSD Permit does
not require any further devices to remove NOx such as selective
catalytic reduction or selective noncatalytic reduction systems.
The manufacturer of the boiler for Neil Simpson Unit #2 has
guaranteed that the boiler will meet the NOx limitations. The
guarantee is based upon tests to be conducted under ideal
operating conditions during the 12 months after commercial
operation. The boiler is being designed so that a selective
catalytic reduction system could be installed if later required
to meet the NOx limitations.
<PAGE>
The Company believes that Neil Simpson Unit #2 is being
designed to meet all emission limitations. However, both the SO2
and NOx emission limitations are some of the lowest emission
rates in the United States, and flaws in design or unexpected
coal quality or other events could cause additional unexpected
capital costs in being able to operate with these limitations.
EMISSIONS FROM OTHER PLANTS. All of Black Hills Power's
generating plants are believed by management to be operating in
full compliance with air quality laws and regulations.
Applications for continued operation of the Kirk power plant has
been submitted for the approval of the South Dakota Department of
Environment and Natural Resources ("DENR").
ASBESTOS. Black Hills Power completed the majority of the
asbestos removal work at the Osage power plant in 1993. This
included that removal work being performed in conjunction with
the reinforcement of the walls of the three boiler units. The
remaining asbestos at the Osage, Neil Simpson, Kirk and Ben
French facilities is believed to be adequately encapsulated. Its
removal will occur as other projects necessitate or as
deterioration occurs. No cost determination has been made for
the additional work required.
THE CLEAN AIR ACT AMENDMENTS. Legislation enacted by the
Congress of the United States in late 1990 to amend the Clean Air
Act will have an impact on Black Hills Power's power plants.
All of the power plants other than the Wyodak Plant are made
up of units with generating capacity of 25 megawatts or less and
are believed to be exempt from most of the limitations and
requirements of the Act. All facilities, however, are subject to
the payment of fees calculated on the basis of tons per year of
emissions of sulfur dioxide, nitrous oxide and particulate. The
annual fees for those facilities located in South Dakota totaled
approximately $25,000 for 1993. Fee assessments have not yet
been made for Wyoming facilities, however, it is estimated that
they will not exceed $90,000.
According to analyses of emissions from the plant stacks,
all four of the power plants operated by Black Hills Power are
believed to be operating in compliance with current federal and
state law. Black Hills Power does not maintain continuous
monitoring on all of these four plants, and unexpected changes in
coal quality or problems with plant operations can cause
violations which could result in penalties being imposed in the
future. Black Hills Power endeavors to operate the plants to
prevent such excursions, but the potential remains for human
error and equipment failure.
The Wyodak Plant is equipped with sulfur removal equipment
and the plant is already in compliance with the new sulfur
emissions requirements of the Clean Air Act. New equipment is
not necessary to bring the facility in compliance with the NOx
requirements of the Act, but continuous monitoring equipment for
NOx has been purchased and installed at a cost to
<PAGE>
Black Hills Power of $147,000. The amendments do require a
three-year study on designated hazardous pollutants which may
result in future regulations, but the impact of that study on the
Wyodak Plant is not yet known.
AIR ALLOWANCES. The Clean Air Act Amendments put into place
a program designed to allow each affected facility to emit into
the atmosphere on an annual basis only that quantity of sulfur
dioxide for which it has authorization by virtue of its control
of air allowances. An air allowance is a right to emit one ton
of sulfur dioxide. These allowances are transferable between
facilities and can be sold to other owners of power production
facilities. As a result of the pollution control equipment
already in place at the Wyodak Plant, the Company will be granted
beginning in the year 2000 approximately 1,800 allowances per
year in excess to the needs of its 20 percent interest in the
Wyodak Plant.
None of the Company's existing wholly owned power plants
will require air allowances. Neil Simpson Unit #2 will require
approximately 850 air allowances each year beginning in 2000.
Allowances required for Neil Simpson Unit #2 will come from the
allowances allocated as the Company's share of the Wyodak Plant.
By voluntarily complying with the requirements of Phase I of
the Clean Air Act Amendments, and obtaining approval from the
Environmental Protection Agency, the Company is expected to be
able to receive an advance of its air allowances at the Wyodak
Plant for the years 1995 and 1996, that can in turn be sold.
This requires a host unit Phase I facility to substitute the
Wyodak Plant air allowances for its requirements. The Company
has located a host unit Phase I facility and entered into an
agreement for the sale of a portion of the Company's allowances
as a substitution unit, with the allowances to be taken by the
host unit sometime after 1995. This transaction is subject to
EPA approval, which is expected to require the Company to then
pay these allowances back to EPA ten to twenty years after the
sale.
Additional sales of allowances prior to the year 2000 by
facilities voluntarily complying with Phase I appear to be in
serious doubt in view of recent Environmental Protection Agency
proposed action.
Whether funds received from the sale of air allowances can
be retained by the electric utility or flowed through to the
benefit of the customers has yet to be determined in the
Company's regulatory jurisdictions.
NEW MAJOR EMITTING FACILITIES. The Federal Clean Air Act
Amendments of August 7, 1977, require states, among other things,
to classify their land into control areas to prevent significant
deterioration of air quality wherein certain limitations in
ambient air quality will be established so as to allow new major
emitting facilities (as defined) to be constructed in those areas
only if the particulate emissions therefrom together with
existing emissions would not cause the ambient air in that area
to exceed those limitations. Wyodak Resources is presently
authorized to mine up to 10,000,000 tons per year under its
permit and existing clean air laws and regulations and the Neil
Simpson #2 power plant has been permitted at that site.
WATER QUALITY
All of the power plants operated by Black Hills Power
require permits under the National Pollutant Discharge
Elimination System. Renewal applications for the permits for the
Ben French and the Kirk power plants have been submitted to the
DENR, and the permits for the other facilities are current,
including authorizations for storm water discharge.
<PAGE>
The Osage plant has recently experienced an inability to
meet the permit levels for pH at one of its discharge points.
The nature of the ash generated at the facility is believed to be
the source of the high pH values. The utilization of the new
discharge pond at the site has resulted in a shorter period of
time to allow the pH to neutralize.
Black Hills Power has been working closely with the DEQ and
has hired a consultant in an effort to resolve the problem. In-
plant treatment efforts have not proven successful. CO2
injection equipment currently being installed at the discharge
point is expected, however, to return the effluent to an
acceptable pH level. In the event this effort fails, it will be
necessary to seek a modification of the permit and utilize a
sulfuric acid treatment. The cost of the project including the
CO2 equipment is not expected to exceed $20,000.
No penalties, claims or actions have been taken against the
Company because of the discharge levels, and none are expected.
The other plants are in compliance with their stated permit
discharge levels.
Pollution prevention plans are in place for the plant
facilities, and the current Spill Prevention Control and
Countermeasures plans are in the process of being updated, and
will include hazardous materials contingency plans.
LAND QUALITY
SOLID WASTE DISPOSAL. Black Hills Power disposes of power
plant wastes from its Ben French, Kirk and Osage power plants at
several locations at or near each of said plants. Such disposal
is done under authority of permits either issued or under
temporary authority pending action on applications. An
application has been submitted seeking the expansion of the
current ash disposal site for the Ben French power plant and is
under consideration by the DENR. At Osage, a permit was granted
for the new ash dam facility, and use began in October 1993.
Applications are pending for reclamation of a historic disposal
site at Osage, for renewal and expansion of its landfill permit,
and for closure of the old ash dam. Management is not aware of
any unusual problems which may arise from locating new sites or
from maintaining the existing disposal sites in full compliance
with the law.
RECLAMATION. Under federal and state laws and regulations,
Wyodak Resources is required to submit to and receive approval
from the DEQ for a complete mining and reclamation plan (Plan)
which provides for the orderly mining, reclaiming and restoring
of all land in conformity with all laws and regulations relating
thereto. The current approved State Program Permit (Permit)
authorizes Wyodak Resources to mine coal for a period of five
years up to 1995 in compliance with the Plan and all conditions
of the Permit. The Permit is subject to annual reporting and
must be renewed after extensive review every five years, at which
time the DEQ may impose further conditions. In 1992 Wyodak
Resources received a modification of its Permit to include an
additional 37,300,000 tons of reserves acquired through coal
lease modifications.
<PAGE>
The Permit imposes a variety of conditions which the DEQ
believes are required to comply with applicable laws and
regulations and to establish reclamation with a minimal impact on
land, water and air. These conditions are continuing and require
monitoring of water and land that could reveal factors unknown at
this time. The exact costs of complying with these conditions
cannot be accurately ascertained until years later when
reclamation is completed.
Conditions which could result in material unexpected
increases in costs of reclamation relate to three depressions,
the existing south pit depression and an additional north pit
depression and north extension depression which will result from
future mining. Because of the thick coal seam and relatively
shallow overburden, the present Plan for restoration leaves areas
of the mine that will have limited reclamation potential because
of their location in depressions with interior drainage only.
While the DEQ has allowed these depressions in the present Plan
as modified, the DEQ has reserved the right to review and
evaluate future mining plans proposed by Wyodak Resources. Such
plans are reviewed for the feasibility and desirability of
causing Wyodak Resources to place additional overburden generated
elsewhere for the purpose of reducing the depressions if the DEQ
finds that the placement is necessary to prevent degradation of
more acres than expected. Each time Wyodak Resources files an
application to mine additional coal reserves, the DEQ extensively
reviews the reclamation of the depressions. The DEQ has allowed
the depressions at the minimum acres specified, and subject to
the maintenance of water quality at the sites. Exceedence of the
acreage limitations or degradation of water quality could result
in additional requirements being placed upon Wyodak Resources,
including the placement of additional quantities of overburden in
the depressions and restoring water quality. The extent and
costs of reclaiming the depressions and other reclamation
requirements that may be imposed upon Wyodak Resources cannot be
accurately ascertained at this time.
The cost of reclaiming the land is accrued as the coal is
mined. While the reclamation process takes place on a continual
basis, much of the reclamation occurs over an extended period
after the area is mined. Approximately $650,000 is charged to
operations as reclamation expense annually. As of December 31,
1993, accrued reclamation costs were approximately $7,290,000.
Wyodak Resources supports reclamation procedures which are
economically feasible and consistent with sound environmental
practices, but it can give no assurances that it will be
successful in doing so.
GENERAL
PCB's. The Company's electrical system contains an
undetermined number of polychlorinated biphenyl (PCB or PCB's)
contaminated transformers. PCB's are believed to have cancer
causing and toxic effects on humans and are heavily regulated in
their use and disposal as a toxic substance at levels in excess
of 50 parts per million. Black Hills Power is beginning its
third year of a five-year testing program that is intended to
remove PCB contaminated transformers. If PCBs are present in
levels above 50 parts per million, the equipment is removed from
the system and disposed of in accordance with the current federal
Toxic Substances Control Act. A concern is always present that
an incident involving a PCB contaminated transformer could result
in substantial cleanup costs for the Company. Those incidents
which might involve a fire or the release of PCB-contaminated oil
into a waterway are of the greatest concern and result in
substantial damage claims.
<PAGE>
PCB-contaminated equipment and oils at levels below 50 parts
per million are disposed of through a licensed facility located
in Colman, South Dakota. Those items with contamination at
higher levels are transported and disposed of through an EPA
permitted incineration facility located in Deer Park, Texas.
Black Hills Power has exclusively used these facilities for a
number of years, and its management believes the disposal
contractors are operating their respective facilities in full
compliance with governmental regulation.
OIL RELEASES. Two unauthorized oil releases occurred in
1993 as a result of equipment owned by Black Hills Power. Both
involved minor quantities of petroleum products and only minimal
remedial measures were required by the DENR. No penalties,
claims or actions have been taken against the Company because of
the releases, and none are expected.
UNDERGROUND STORAGE TANKS. Black Hills Power does not have
any underground storage tanks in operation at this time. The
residual contamination from underground storage tanks that were
removed from the Wyodak Resources mine site was believed to have
caused some contamination of ground waters. The DEQ, however,
has not required any further remediation action at the site.
BEN FRENCH OIL SPILL. Assessment and remediation efforts
have continued during 1993 on Black Hills Power property located
near the Ben French power plant. The extensive contamination of
the site with fuel oil is historic, but was discovered in 1990
and 1991 when the Company took steps to cleanup a release caused
by an overflow that had resulted from an equipment failure. The
Company hired experts to aid in the assessment and remediation
and has worked closely with the DENR.
Soil borings and the operation of monitoring wells on the
perimeters of Black Hills Power's property show no indication of
contamination beyond Black Hills Power's property at this time.
The confinement of the contamination is attributed to the contour
of the land at the site. The fuel oil is, however, migrating
toward a natural drainage area which could allow it to enter area
waterways. In such event, the clean-up costs could be greatly
increased. In order to prevent such an occurrence, one duct-bank
remediation system is currently in place and a second such system
is expected to be installed in 1994. These systems are designed
to channel the oil to a recovery location.
Additional monitoring wells were installed in the area
during 1993, and fuel oil as a free product continues to be
removed from the site on a weekly basis. Although the quantity
of free product being removed is greatly diminished from that
earlier recovered, no time frame for the completion of the
remediation work has been established.
Costs for the cleanup in excess of $20,000 are expected to
be reimbursed from the South Dakota Petroleum Release
Compensation Fund up to a $1,000,000 limit. To date, no
penalties, claims or actions have been taken or threatened
against the Company because of this release. No assurances can
be given, however, that no actions will be taken or what the
eventual cost of this cleanup will be.
MUSH CREEK CLEANUP. In 1993 Western Production undertook
the clean-up of an unpermitted oil disposal site located near its
facilities outside Newcastle, Wyoming. The initial disposal at
the site is believed to have occurred sometime in 1983 or 1984
before Western Production ownership. The crude oil and some
contaminated soils have been removed from the site and properly
disposed of under the authorizations of the DEQ. The Company
intends to apply for the renewal of the existing solid waste
<PAGE>
permit for the remediation of the site. The extent of the
remaining clean-up effort required is not known at this time.
Western Production plans further testing of soils and groundwater
in the area of the site to determine the potential costs.
The clean-up effort was begun in cooperation with other
businesses who had used the disposal site, but in view of the
higher-than-expected costs, disputes have now surfaced over
responsibility for the cleanup. The cost of the project to date
exceeds $140,000, but future costs remain undetermined pending
further site assessment. To date, only $7,500 of these costs
have been paid by others.
ELECTROMAGNETIC FIELDS
The SDPUC has opened a docket to study electromagnetic
fields ("EMF") issues. A number of studies have examined the
possibility of adverse health effects from EMF. Certain states
have enacted regulations to limit the strength of magnetic fields
at the edge of transmission line rights-of-way. None of the
jurisdictions in which Black Hills Power operates has adopted
formal rules or programs with respect to EMF or EMF
considerations in the siting of electric facilities. Black Hills
Power expects that public concerns will make it more difficult to
site and construct new power lines and substations in the future.
It is uncertain whether Black Hills Power's operations may be
adversely affected in other ways as a result of EMF concerns.
Black Hills Power is designing all new transmission lines under
EMF standards adopted by other states so as to minimize the EMF
effect.
SUMMARY
The Company makes ongoing efforts to comply with new as well
as existing environmental laws and regulations to which it is
subject. It is unable to estimate the ultimate effect of
existing and future environmental requirements upon its
operations.
EMPLOYEES
At December 31, 1993, the number of employees of the Company
(including Black Hills Power), Wyodak Resources and Western
Production were 359, 58 and 42, respectively, for a total of 459
employees.
CORPORATE DEVELOPMENT
The Company's strategic plan for corporate development
includes the plan to search for opportunities for growth in its
present business segments. The Company's primary focus will be
in the development of additional mine-mouth power plants and
Wyodak Resources' coal mine.
To encourage the further development of Wyodak Resources'
coal and to continue to assure the availability of electric
generation in the future, the Company's plan is to cause Black
Hills Power to participate in the construction of new generating
facilities as they are needed by Black Hills Power either
individually, with other traditional electric utilities or non-
utility entities at Wyodak Resources' mine. See--ELECTRIC POWER
SALES AND SERVICE TERRITORY--FUTURE WHOLESALE OPPORTUNITIES and
COMPETITION IN ELECTRIC UTILITY BUSINESS under this Item 1.
<PAGE>
Management believes that surplus power in the western United
States is decreasing and estimates that new plants will be
required in the middle to late 1990's. Due to a four- to six-
year lead time to construct plants, management believes the
planning process should be in process.
Management is continuing to explore the possibility of the
Company engaging in the business, either by itself or in concert
with others, of an exempt wholesale generator. This generation
would be designed to sell power to traditional electric utilities
other than Black Hills Power. (See the discussion of the new
Energy Policy Act of 1992 under COMPETITION IN ELECTRIC UTILITY
BUSINESS--COMPETITION IN ELECTRIC GENERATION under this Item 1.)
The negative aspects of being able to engage in that business are
the small size and lack of resources of the Company. The
independent power producing business is concentrating in
companies of a much larger size than the Company. However, the
Company does have expertise in the power generation business and
the potential for low-cost generation at Wyodak Resources' coal
mine, the site of the Wyodak Plant, Neil Simpson Unit #1 and Neil
Simpson Unit #2. If the Company is precluded from generating its
own electric power needs, it may find a niche in the independent
power business.
Western Production continues to locate opportunities to
acquire existing oil and gas production, to develop additional
oil reserves by drilling and to investigate investing in oil and
gas working interests with other entities. Opportunities depend
on the sensitivity of oil and gas prices that are all beyond the
control of Western Production.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of
1934, the Registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
BLACK HILLS CORPORATION
By ROXANN R. BASHAM
Roxann R. Basham
Corporate Secretary and Treasurer
Dated: March 17, 1994
