SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 30, 1995
BLACK HILLS CORPORATION
State of South Dakota File Number 1-7978 IRS Number 46-0111677
625 Ninth Street
Rapid City, South Dakota 57709
Registrant's telephone number (605) 348-1700
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Item 5. Other Events
BLACK HILLS CORPORATION'S SOUTH DAKOTA RATE CASE IS SETTLED
Black Hills Corporation's utility operations, Black Hills Power and
Light Company (Company) was authorized a 6.76 percent overall increase in
its electric rates to be charged to its South Dakota customers beginning
August 1, 1995. The Company derives approximately 85 percent of its total
electric sales revenues from its South Dakota customers. Based on test
year ending September 30, 1994, this increase would result in additional
annual revenues from South Dakota customers of approximately $5,725,000 and
represents two-thirds of the Company's requested increase. The increase
will become effective August 1, 1995, the anticipated in-service date of
Neil Simpson Unit #2, the Company's new 80 MW coal-fired power plant which
has been constructed and is now in the testing phase at the site of Wyodak
Resources Development Corp.'s coal mine in Wyoming. Wyodak Resources is a
subsidiary of the Company.
The rate increase was approved by the South Dakota Public Utilities
Commission (Commission) as a part of its approval of a settlement agreement
among the Company, all intervenors and the Commission's Staff. The Company
filed the application for a rate increase on February 1, 1995.
The settlement further provides that unless a specified extraordinary
event occurs, the Company will not file for any increase in rates or invoke
any fuel and purchased power automatic adjustment tariff to take effect
during a freeze period ending January 1, 2000. The specified extraordinary
events are any of the following: material increases in taxes, forced
outages of both the Wyodak Plant and Neil Simpson Unit #2 caused by damages
and projected to continue at least 60 days, forced outages for any reason
to either plant projected to last 9 months, inflation of 10 percent or more
and failure of the Federal Energy Regulatory Commission to approve the
contract providing for the Company to sell power commencing January 1, 1997
to Montana-Dakota Utilities Co. (MDU) for its 45 MW Sheridan, Wyoming
service territory.
The Company recognizes that during the freeze period it is undertaking
the risks of machinery failure, load loss caused either by an economic
downturn or changes in regulation, increased costs under existing power
purchase contracts over which the Company has no control, governmental
interferences, acts of nature and many other unexpected events that could
cause material losses of income or decreases in costs of doing business
with nowhere to seek relief.
However, the agreement will allow the Company to retain during that
period of time earnings realized from more efficient operations, sales from
load growth and off-system sales of power and energy, including the sale to
MDU.
The approved tariffs will also result in the Company obtaining all
requirements five-year contracts with its South Dakota industrial customers
with an incentive for the customers to continue to renew the contracts on a
three-year running term basis. With the new contracts, the Company will
have an estimated 35 percent of its entire system's load under term
contracts, and after the MDU/Sheridan sale starts, approximately 45
percent. If deregulation in retail electric sales occurs, the contracts
will assist the Company to make the transition to full competition, guard
against stranded investment and protect other customers from unexpected
load loss.
The Commission also authorized the Company to utilize a business
development service tariff that will allow the Company to negotiate rates
with certain eligible customers. If the opportunity arises, this tariff
will allow the Company to compete for new large retail loads where
competition is allowed under present law.
The Company agreed to spend $400,000 during the freeze period in the
promotion of industrial development in South Dakota.
Daniel P. Landguth, the Company's Chairman, President and Chief
Executive Officer, commenting on the settlement, stated:
"We estimate that the rate increase will initially result in a
return on equity on utility rate base, including the entire new
plant (a 55% increase in the rate base) of 10 to 10.5 percent.
This is below what regulators will normally allow. However,
commencing January 1, 1997, when the MDU/Sheridan sale starts, we
estimate the deficiency will be restored to a return on equity on
utility rate base in the 11.5 to 12 percent range.
"However, the Company now has an opportunity to do better. We
now have Neil Simpson 2 which will produce energy at a cost that
we believe will be among the lowest in the country. When coupled
with the rate freeze, the abeyance of the automatic adjustment
tariff for fuel and purchased power, the long-term contracts with
industrial customers, and the business development service
tariff, the Company has in effect been placed on performance-
based management. If our plants perform well and we are able to
improve the efficiencies of our operations and successfully
market our energy and barring unavoidable catastrophes, we expect
to gradually improve our earnings during the freeze period above
what is normally allowed by regulators.
"The electric utility industry is in transition toward
competition. This settlement and Neil Simpson 2 allow the
Company more opportunities to compete and to be better prepared
when full competition occurs.
"The settlement assures our South Dakota customers that barring
unusual and unexpected events, their electric rates will not
increase until at least the turn of the twenty-first century."
Mr. Landguth further stated that Neil Simpson Unit #2's total capital
cost is expected to be $121,000,000, less than the $124,800,000 cost which
the Company guaranteed to Wyoming and South Dakota regulators prior to
construction. The plant's anticipated in-service date of August 1, 1995 is
approximately five months ahead of schedule.
Landguth concluded:
"For our customers we have improved the reliability of our system
with a new power plant providing energy at low cost and badly
needed support to the transmission system. In return, our South
Dakota customers will bear an overall rate increase of only 6.76%
and assurances of no further increases for four and a half years.
"For our shareholders we expect to be able to gradually increase
earnings through efficient management and increased sales from
load growth in our service territory and off-system sales.
"We are aware of the risks of rate freezes. In the past the
Company has always relied on the safety net of being able to
return to the regulators for rate relief or pass increased
purchased power costs through automatic adjustment tariffs to
remedy adverse events. At least for the next four and a half
years, we are proceeding without that safety net. We will face
operating and market risks that could cause material losses of
income or increases in costs of doing business with nowhere to
seek relief. All businesses face similar risks. But on the up
side, with Neil Simpson 2, this is the first time the Company is
positioned to meet the competition for new sales; and the South
Dakota Commission has, through this settlement structure and with
the agreement of all intervenors, provided the Company an
opportunity to increase its earnings through performance. We
accept the challenge."
The Company and the City of Gillette, Wyoming, the Company's only firm
power wholesale customer, representing approximately 7 percent of the
Company's total electric sales, have agreed to a new contract providing for
rate increases commencing September 1, 1995 as reported in the 1994 10-K
Annual Report to Shareholders. The Gillette contract is subject to
approval by the Federal Energy Regulatory Commission.
Action by the Wyoming Public Service Commission is pending on the
Company's application for a rate increase for the Company's Wyoming retail
customers, representing approximately 7 percent of the Company's total
electric sales. The Company expects final resolution of the Wyoming
application before September 1, 1995.
The Company does not plan to file for an increase in rates at this
time for its Montana customers, representing less than 1 percent of its
total electric sales.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
BLACK HILLS CORPORATION
By /s/ DALE E. CLEMENT
Dale E. Clement, Senior Vice
President - Finance
Dated: June 30, 1995
