| Business Description and Summary of Significant Accounting Policies | BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Description Black Hills Power, Inc., doing business as South Dakota Electric (the “Company”, “we”, “us” or “our”) is a regulated electric utility serving customers in South Dakota, Wyoming and Montana. We are a wholly-owned subsidiary of BHC or the Parent, a public registrant listed on the New York Stock Exchange. Basis of Presentation The financial statements include the accounts of Black Hills Power, Inc. and also our ownership interests in the assets, liabilities and expenses of our jointly owned facilities (Note 3 ) and are prepared in accordance with GAAP. Use of Estimates and Basis of Presentation The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Changes in facts and circumstances or additional information may result in revised estimates and actual results could differ materially from those estimates. Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2018 and 2017, we have no cash equivalents. Regulatory Accounting Our regulated electric operations are subject to regulation by various state and federal agencies. The accounting policies followed are generally subject to the Uniform System of Accounts of FERC. If rate recovery becomes unlikely or uncertain due to competition or regulatory action, these accounting standards may no longer apply which could require these net regulatory assets to be charged to current income or OCI. Our regulatory assets represent amounts for which we will recover the cost, but generally are not allowed a return, except as described below. In the event we determine that our regulated net assets no longer meet the criteria for accounting standards for regulated operations, the accounting impact to us could be an extraordinary non-cash charge to operations, which could be material. We had the following regulatory assets and liabilities as of December 31 (in thousands): 2018 2017 Regulatory assets Loss on reacquired debt (a) $ 1,259 $ 1,534 Deferred taxes on AFUDC (b) 5,020 5,095 Employee benefit plans and related deferred taxes (c) 19,868 19,465 Deferred energy and fuel cost adjustments (a) 20,334 19,602 Deferred taxes on flow through accounting (c) 8,749 7,579 Decommissioning costs (b) 8,196 10,252 Vegetation management (a) 10,366 12,669 Other regulatory assets (a) 1,940 2,507 $ 75,732 $ 78,703 Less current regulatory assets (19,052 ) (18,993 ) Regulatory assets, non-current $ 56,680 $ 59,710 Regulatory liabilities Cost of removal for utility plant (a) $ 52,366 $ 44,056 Employee benefit plans and related deferred taxes (c) 7,518 6,808 Excess deferred income taxes (c) 100,276 97,101 TCJA revenue reserve 2,523 — Other regulatory liabilities (c) 533 890 $ 163,216 $ 148,855 Less current regulatory liabilities (2,574 ) (842 ) Regulatory liabilities, non-current $ 160,642 $ 148,013 ____________________ (a) We are allowed a recovery of costs but we are not allowed a rate of return. (b) In addition to recovery of costs, we are allowed a rate of return. (c) In addition to recovery or repayment of costs, we are allowed a return on a portion of this amount or a reduction in rate base. Regulatory assets represent items we expect to recover from customers through probable future increases in rates. Loss on Reacquired Debt - The early redemption premium on reacquired debt is being amortized over the remaining term of the original bonds. Deferred Taxes on AFUDC - The equity component of AFUDC is considered a permanent difference for tax purposes with the tax benefit being flowed through to customers as prescribed or allowed by regulators. If, based on a regulator’s action, it is probable the utility will recover the future increase in taxes payable represented by this flow-through treatment through a rate revenue increase, a regulatory asset is recognized. This regulatory asset itself is a temporary difference for which a deferred tax liability must be recognized. Accounting standards for income taxes specifically address AFUDC-equity, and require a gross-up of such amounts to reflect the revenue requirement associated with a rate-regulated environment. Employee Benefit Plans - Employee benefit plans include the unrecognized prior service costs and net actuarial loss associated with our defined benefit pension plan and other post-retirement benefit plans in regulatory assets rather than in accumulated other comprehensive income. In addition, this regulatory asset includes the income tax effect of the adjustment required under accounting for compensation-defined benefit plans to record the full pension and post-retirement benefit obligations. Such amounts have been grossed-up to reflect the revenue requirement associated with a rate regulated environment. Deferred Energy and Fuel Cost Adjustments - Deferred energy and fuel cost adjustments represent the cost of electricity delivered to our customers that is either higher or lower than the current rates and will be recovered or refunded in future rates. Deferred energy and fuel cost adjustments are recorded and recovered or amortized as approved by the appropriate state commission. We file periodic quarterly, semi-annual and/or annual filings to recover these costs based on the respective cost mechanisms approved by the applicable state utility commissions. Deferred Taxes on Flow-Through Accounting - Under flow-through accounting, the income tax effects of certain tax items are reflected in our cost of service for the customer in the year in which the tax benefits are realized and result in lower utility rates. A regulatory asset was established to reflect that future increases in income taxes payable will be recovered from customers as the temporary differences reverse. As a result of this regulatory treatment, we continue to record a tax benefit for costs considered currently deductible for tax purposes, but are capitalized for book purposes. Decommissioning Costs - We received approval in 2014 for regulatory treatment on the remaining net book values and decommissioning costs of our decommissioned coal plants. Vegetation Management Costs - We received approval in 2013 for regulatory treatment on vegetation management maintenance costs for our distribution system rights-of-way. Regulatory liabilities represent items we expect to refund to customers through probable future decreases in rates. Cost of Removal for Utility Plant - Cost of removal for utility plant represents the estimated cumulative net provisions for future removal costs included in depreciation expense for which there is no legal obligation for removal. Employee Benefit Plans - Employee benefit plans represent the cumulative excess of pension and other postretirement benefit costs recovered in rates over pension expense recorded in accordance with accounting standards for compensation-retirement benefits. In addition, this regulatory liability includes the income tax effect of the adjustment required under accounting for compensation-defined benefit plans, to record the full pension and post-retirement benefit obligations. Such income tax effect has been grossed-up to account for the revenue requirement associated with a rate regulated environment. Excess Deferred Income Taxes - The revaluation of our deferred tax assets and liabilities due to the passage of the TCJA is recorded as an excess deferred income tax to be refunded to customers primarily using the normalization principles as prescribed in the TCJA. See additional details below. TCJA Revenue Reserve - Revenue subject to refund at December 31, 2018, represents revenue reserved as a result of the TCJA. See below “ TCJA Revenue Reserve ” under Revenue recognition for further disclosure. Excess Deferred Income Taxes As of December 31, 2018 and 2017 , we have a regulatory liability associated with TCJA related items of approximately $100 million and $97 million , respectively. The majority of this regulatory liability relates to excess deferred taxes resulting from the remeasurement of deferred tax assets and liabilities in 2017. A significant portion of the excess deferred taxes are subject to the average rate assumption method, as prescribed by the IRS, and will generally be amortized as a reduction of customer rates over the remaining lives of the related assets. As of December 31, 2018, the Company has amortized $0.9 million of this regulatory liability. The portion that was eligible for amortization under the average rate assumption method in 2018, but is awaiting resolution of the treatment of these amounts in future regulatory proceedings, has not been recognized and may be refunded in customer rates at any time in accordance with the resolution of pending or future regulatory proceedings. See Note 6 for more information. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable consists of sales to residential, commercial, industrial, municipal and other customers all of which do not bear interest. These accounts receivable are stated at billed and unbilled amounts, net of write-offs or payment received. We maintain an allowance for doubtful accounts which reflects our best estimate of uncollectible trade receivables. We regularly review our trade receivable allowances by considering such factors as historical experience, credit worthiness, the age of the receivable balances and current economic conditions that may affect collectibility. In specific cases where we are aware of a customer’s inability or reluctance to pay, we record an allowance for doubtful accounts to reduce the net receivable balance to the amount we reasonably expect to collect. However, if circumstances change, our estimate of the recoverability of accounts receivable could be affected. Circumstances which could affect our estimates include, but are not limited to, customer credit issues, the level of commodity prices, customer deposits and general economic conditions. Accounts are written off once they are deemed to be uncollectible or the time allowed for dispute under the contract has expired. Following is a summary of accounts receivable as of December 31 (in thousands): 2018 2017 Accounts receivable, trade $ 16,236 $ 15,994 Unbilled revenue 12,333 13,280 Less Allowance for doubtful accounts (138 ) (224 ) Accounts receivable, net $ 28,431 $ 29,050 Changes to allowance for doubtful accounts for the years ended December 31, were as follows (in thousands): Balance at beginning of year Additions charged to costs and expenses Deductions charged to costs and expenses Balance at end of year 2018 $ 224 $ 911 $ (997 ) $ 138 2017 $ 157 $ 882 $ (815 ) $ 224 2016 $ 207 $ 644 $ (694 ) $ 157 Revenue Recognition Revenues are recognized in an amount that reflects the consideration we expect to receive in exchange for goods or services, when control of the promised goods or services is transferred to our customers. Our primary types of revenue contracts are: • Regulated electric utility services tariffs - Our regulated operations, as defined by ASC 980, provide services to regulated customers under rates, charges, terms and conditions of service, and prices determined by the jurisdictional regulators designated for our service territories. Collectively, these rates, charges, terms and conditions are included in a tariff, which governs all aspects of the provision of our regulated services. Our regulated services primarily encompass single performance obligations material to the context of the contract for delivery of commodity electricity and electric transmission services. These service revenues are variable based on quantities delivered, influenced by seasonal business and weather patterns. Tariffs are only permitted to be changed through a rate-setting process involving the regulator-empowered statute to establish contractual rates between the utility and its customers. All of our regulated utility sales are subject to regulatory-approved tariffs. • Power sales agreements - We have long-term wholesale power sales agreements with other load serving entities, including affiliates, for the sale of excess power from owned generating units. These agreements include a combination of “take or pay” arrangements, where the customer is obligated to pay for the energy regardless of whether it actually takes delivery, as well as “requirements only” arrangements, where the customer is only obligated to pay for the energy the customer needs. In addition to these long-term contracts, the Company also sells excess energy to other load-serving entities on a short-term basis. The pricing for all of these arrangements is included in the executed contracts or confirmations, reflecting the standalone selling price, and is variable based on energy delivered. The following table depicts the disaggregation of revenue, including intercompany revenue, from contracts with customers by customer type and timing of revenue recognition. Sales tax and other similar taxes are excluded from revenues. Year ended December 31, 2018 (in thousands) Customer types: Retail $ 197,184 Wholesale 33,687 Market - off-system sales 17,691 Transmission/Other 49,015 Revenue from contracts with customers 297,577 Other revenues 503 Total revenues $ 298,080 Timing of revenue recognition: Services transferred over time $ 297,577 Revenue from contracts with customers $ 297,577 The majority of the our revenue contracts are based on variable quantities delivered; any fixed consideration contracts with an expected duration of one year or more are immaterial to our revenues. Variable consideration constraints in the form of discounts, rebates, credits, price concessions, incentives, performance bonuses, penalties or other similar items are not material for our revenue contracts. We are the principal in our revenue contracts, as we have control over the services prior to those services being transferred to the customer. Revenue Not in Scope of ASC 606 Other revenues included in the table above include revenue accounted for under separate accounting guidance, including alternative revenue programs revenue under ASC 980. Significant Judgments and Estimates TCJA revenue reserve The TCJA or “tax reform”, signed into law on December 22, 2017, reduced the federal corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. We have been collaborating with our regulators in the states in which we provide utility service to deliver to customers the benefits of a lower corporate federal income tax rate beginning in 2018 with the passage of the TCJA. We estimated and recorded a revenue reserve of approximately $10 million during the year ended December 31, 2018. On September 4, 2018, the SDPUC approved a settlement agreement for South Dakota Electric allowing the Company to pass on the benefits of a lower corporate federal income tax rate to our South Dakota retail customers. As of December 31, 2018, approximately $7.6 million has been delivered to customers and approximately $2.5 million remains in reserve. Unbilled Revenue To the extent that deliveries have occurred but a bill has not been issued, the Company accrues an estimate of the revenue since the latest billing. This estimate is calculated based on several factors including billings through the last billing cycle in a month and prices in effect in our jurisdictions. Each month the estimated unbilled revenue amounts are trued-up and recorded in Accounts receivable, net on the accompanying Balance Sheets. Contract Balances The nature of our primary revenue contracts provides an unconditional right to consideration upon service delivery; therefore, no customer contract assets or liabilities exist. The unconditional right to consideration is represented by the balance in our Accounts Receivable and is further discussed above. We do not typically incur costs that would be capitalized, to obtain or fulfill a contract. Practical Expedients Our revenue contracts generally provide for performance obligations that are fulfilled and transfer control to customers over time, represent a series of distinct services that are substantially the same, involve the same pattern of transfer to the customer, and provide a right to consideration from our customers in an amount that corresponds directly with the value to the customer for the performance completed to date. Therefore, we recognize revenue in the amount to which we have a right to invoice. We have revenue contract performance obligations with similar characteristics, and we reasonably expect that the financial statement impact of applying the new revenue recognition guidance to a portfolio of contracts would not differ materially from applying this guidance to the individual contracts or performance obligations within the portfolio. Therefore, we have elected the portfolio approach in applying the new revenue guidance. Materials, Supplies and Fuel Materials, supplies and fuel used for construction, operation and maintenance purposes are recorded using the weighted-average cost method. Deferred Financing Costs Deferred financing costs are amortized over the estimated useful life of the related debt. Deferred financing costs are presented on the balance sheet as an adjustment to the related debt liabilities. Property, Plant and Equipment Additions to property, plant and equipment are recorded at cost. Included in the cost of regulated construction projects is AFUDC, when applicable, which represents the approximate composite cost of borrowed funds and a return on equity used to finance a regulated utility project. We also capitalize interest, when applicable, on undeveloped leasehold costs and certain non-regulated construction projects. In addition, asset retirement costs associated with tangible long-lived regulated utility assets are recognized as liabilities with an increase to the carrying amounts of the related long-lived regulated utility assets in the period incurred. The amounts capitalized are included in Property, plant and equipment on the accompanying Balance Sheets. The cost of regulated utility property, plant and equipment retired, or otherwise disposed of in the ordinary course of business, less salvage plus retirement costs, is charged to accumulated depreciation. Estimated removal costs associated with non-legal retirement obligations related to our regulated electric properties are reclassified from accumulated depreciation and reflected as regulatory liabilities. Ordinary repairs and maintenance of property, except as allowed under rate regulations, are charged to operations as incurred. Property, plant and equipment is tested for impairment when it is determined that the carrying value of the assets may not be recoverable. A loss is recognized in the current period if it becomes probable that part of a cost of a plant under construction or recently completed plant will be disallowed for recovery from customers and a reasonable estimate of the disallowance can be made. For investments in property, plant and equipment that are abandoned and not expected to go into service, incurred costs and related deferred tax amounts are compared to the discounted estimated future rate recovery, and a loss is recognized, if necessary. Depreciation provisions for regulated electric property, plant and equipment are computed on a straight-line basis using an annual composite rate of 2.3% in 2018 , 2.1% in 2017 and 2.2% in 2016 . Accrued Liabilities The following amounts by major classification are included in Accrued liabilities on the accompanying Balance Sheets as of December 31 (in thousands): 2018 2017 Accrued employee compensation, benefits and withholdings $ 4,206 $ 4,305 Accrued property taxes 6,332 5,930 Accrued income taxes 12,536 17,472 Customer deposits and prepayments 5,204 4,863 Accrued interest 4,627 4,708 Other (none of which is individually significant) 1,288 927 Total accrued liabilities $ 34,193 $ 38,205 Derivatives and Hedging Activities The accounting standards for derivatives and hedging require that derivative instruments be recorded on the balance sheet as either an asset or liability measured at its fair value and changes in the derivative instruments be recognized in earnings unless specific hedge accounting criteria are met and designated accordingly, including the normal purchase and normal sales exception. Changes in the fair value for derivative instruments that do not meet this exception are recognized in the income statement as they occur. From time to time we utilize risk management contracts including interest rate swaps to fix the interest on variable rate debt, or to lock in the Treasury yield component associated with anticipated issuance of senior notes. For swaps that settled in connection with the issuance of senior debt, the effective portion is deferred as a component in AOCI and recognized as interest expense over the life of the senior note. As of December 31, 2018, we have no outstanding interest rate swap agreements. Revenues and expenses on contracts that qualify as derivatives may be elected to be accounted for under the normal purchases and normal sales exception and are recognized when the underlying physical transaction is completed under the accrual basis of accounting. Normal purchases and normal sales are contracts where physical delivery is probable, quantities are expected to be used or sold in the normal course of business over a reasonable amount of time, and price is not tied to an unrelated underlying derivative. As part of our regulated electric operations, we enter into contracts to buy and sell energy to meet the requirements of our customers. These contracts include short-term and long-term commitments to purchase and sell energy in the retail and wholesale markets with the intent and ability to deliver or take delivery. If it was determined that a transaction designated as a normal purchase or normal sale no longer met the exception, the fair value of the related contract would be reflected as either an asset or liability, under the accounting standards for derivatives and hedging. Fair Value Measurements We use the following fair value hierarchy for determining inputs for our financial instruments. Our financial instruments’ assets and liabilities for financial instruments are classified and disclosed in one of the following fair value categories: Level 1 — Unadjusted quoted prices available in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities. Level 1 instruments primarily consist of highly liquid and actively traded financial instruments with quoted pricing information on an ongoing basis. Level 2 — Pricing inputs include quoted prices for identical or similar assets and liabilities in active markets other than quoted prices in Level 1, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 — Pricing inputs are generally less observable from objective sources. These inputs reflect management’s best estimate of fair value using its own assumptions a market participant would use in pricing the asset or liability. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the fair value hierarchy levels. We record transfers, if necessary, between levels at the end of the reporting period for all of our financial instruments. Transfers into Level 3, if any, occur when significant inputs used to value the derivative instruments become less observable such as a significant decrease in the frequency and volume in which the instrument is traded, negatively impacting the availability of observable pricing inputs. Transfers out of Level 3, if any, occur when the significant inputs become more observable such as the time between the valuation date and the delivery date of a transaction becomes shorter, positively impacting the availability of observable pricing inputs. We currently do not have any Level 3 investments. Income Taxes We file a federal income tax return with other members of the Parent’s consolidated group. For financial statement purposes, federal income taxes are allocated to the individual companies based on amounts calculated on a separate return basis. The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial and tax basis of assets and liabilities as well as operating loss and tax credit carryforwards. Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21% . We use the deferral method of accounting for investment tax credits as allowed by our rate-regulated jurisdictions. Such a method results in the investment tax credit being amortized as a reduction to income tax expense over the estimated useful lives of the underlying property that gave rise to the credit. We recognize interest income or interest expense and penalties related to income tax matters in Income tax (expense) benefit on the Statements of Income. We account for uncertainty in income taxes recognized in the financial statements in accordance with the accounting standards for income taxes. The unrecognized tax benefit is classified in Other, non-current liabilities on the accompanying Balance Sheets. See Note 6 for additional information. Recently Issued Accounting Standards Leases, ASU 2016-02 In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which supersedes ASC 840, Leases. This ASU requires lessees to recognize a right-of-use asset and lease liability on the balance sheet for most leases, whereas today only financing-type lease liabilities (capital leases) are recognized on the balance sheet. In addition, the definition of a lease has been revised in regards to when an arrangement conveys the right to control the use of the identified asset under the arrangement which may result in changes to the classification of an arrangement as a lease. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. The ASU expands the disclosure requirements of lease arrangements. Under the original guidance, lessees and lessors will use a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. In January 2018, the FASB issued amendments to the new lease standard, ASU No. 2018-01, allowing an entity to elect not to assess whether certain land easements are, or contain, leases when transitioning to the new lease standard. The FASB also issued additional amendments to the new lease standard in July 2018, ASU No. 2018-11, allowing companies to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. We adopted this standard on January 1, 2019. For existing or expired land easements that were not previously accounted for as a lease, we elected the practical expedient which provides for no assessment of these easements. Further, we adopted the new standard with a cumulative effect adjustment with prior year comparative financial information remaining as previously reported when transitioning to the new standard. The standard also provides a transition practical expedient, commonly referred to as the “package of three”, that must be taken together and allows entities to (1) not reassess whether existing contracts contain leases, (2) carryforward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases. We elected the “package of three” practical expedient. We have implemented a new lease accounting system and adjusted related procedures and controls accordingly. We will record an operating lease right of use asset and an off-setting operating lease obligation liability as of January 1, 2019 for approximately $14 million , respectively, primarily driven by the intercompany ground lease with WRDC for Wygen III. Adoption of this standard did not have a material impact on our financial position, results of operations or cash flows. Recently Adopted Accounting Standards Revenue from Contracts with Customers, ASU 2014-09 Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , and its related amendments (collectively known as ASC 606). Under this standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We applied the five-step method outlined in the ASU to all in-scope revenue streams and elected the modified retrospective implementation method. Implementation of the standard did not have a material impact on our financial position, results of operations or cash flows. Implementation of the standard did not have a significant impact on the measurement or recognition of revenue; therefore, no cumulative adoption adjustment to the opening balance of Retained earnings at the date of initial application was necessary. The additional disclosures required by the ASU are included in Note 1. Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost, ASU 2017-07 Effective January 1, 2018, we adopted ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost . The standard requires employers to report the service cost component in the same line item(s) as other compensation costs, and requires the other components of net periodic pension and post-retirement benefit costs to be separately presented in the income statement outside of income from operations. Additionally, only the service cost component may be eligible for capitalization, when applicable. However, all cost components remain eligible for capitalization under FERC regulations. The capitalization of only the service cost component of net periodic pension and post-retirement benefit costs in assets was applied on a prospective basis for the year ended December 31, 2018. Retrospective impact was not material and therefore not adjusted. For our rate-regulated entities, we capitalize the other components of net periodic benefit costs into regulatory assets or regulatory liabilities and maintain a FERC-to-GAAP reporting difference for these capitalized costs. The presentation changes required for net periodic pension and post-retirement costs resulted in offsetting changes to Operating income and Other income. Implementation of the standard did not have a material impact on our financial position, results of operations or cash flows. Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, AS |
