FINANCIAL DIRECTORY Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . .12 Report of Management . . . . . . . . . . . .19 Report of Independent Public Accountants . .19 Consolidated Statements of Income . . . . .20 Consolidated Statements of Retained Earnings . . . . . . . . . . . . . . . . .20 Consolidated Statements of Cash Flows. . . .21 Consolidated Balance Sheets . . . . . . . .22 Consolidated Statements of Capitalization .23 Notes to Consolidated Financial Statements .24 Financial Statistics . . . . . . . . . . . .30 Electric Operation Statistics . . . . . . .31 Investor Information . . . . . . . . . . . .32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Black Hills Corporation (the Company) is an energy services company consisting of three principal businesses: electric, coal mining, and oil and gas production. Under the assumed name of Black Hills Power and Light Company, the Company provides electric service to customers in the states of South Dakota, Wyoming, and Montana; Wyodak Resources Development Corp. (WRDC) mines and sells coal via long-term contracts; and Western Production Company (WPC) explores and produces oil and gas. FINANCIAL CONDITION An important analysis of the Company's financial condition is its overall ability to generate cash to fund its operations and to pay dividends. Of particular importance in the management of liquidity are: funds generated by operations, changes in working capital, fixed asset additions, and the financial flexibility to attract short and long-term financing on competitive terms. Net cash provided from operating and investing activities for the years ended December 31, 1993, 1992, and 1991, was $6,496,000, $15,359,000, and $(4,666,000), respectively. Except for the Company's current construction of Neil Simpson Unit #2 (NSS #2), a new power plant, and acquisition of a 20% interest in the Wyodak Plant in 1991, property additions from 1991 through 1993 were primarily for replacement of equipment and modernization of facilities. Cash used for property additions in 1993 totaled $39,957,000 compared to $27,821,000 in 1992 and $25,587,000 in 1991. Major property additions in 1993 included $12,675,000 for NSS #2 (see Construction of Neil Simpson Unit #2), $6,000,000 for distribution projects, $2,000,000 for transmission projects, $2,000,000 for a computer conversion, $4,800,000 for a new coal conveying system, $2,200,000 for coal mining equipment, and $6,933,000 for oil and gas investments. Property additions in 1992 included $2,227,000 for NSS #2, $1,300,000 for the dual fuel conversion of two combustion turbines, $6,700,000 for distribution projects, $2,600,000 for coal haulers, $2,000,000 for an electric shovel, and $5,000,000 for oil and gas investments. Property additions in 1991 included $1,300,000 for remodeling the General Office, $1,500,000 for transmission lines, $2,500,000 for a 230/69 KV substation, $6,700,000 for distribution projects, $1,500,000 for new information services technology, $1,000,000 for the purchase of surface rights over the Fortin Draw Tract coal lease, and $6,000,000 for oil and gas investments. On April 8, 1991, the Company purchased a 20% interest and PacifiCorp an 80% interest in the Wyodak Plant, a 330 MW coal-fired electric generating station located in Campbell County, Wyoming. PacifiCorp is the operator of the Wyodak Plant. The total acquisition cost of the Company's 20% interest was approximately $42,022,000. The Company financed its 20% interest with the issuance of first mortgage bonds, therefore, the acquisition is not included above in the amount of cash used for property additions. In 1990 the Company received a rate order from the South Dakota Public Utilities Commission that allows the capitalization of the full cost of the Wyodak Plant for rate making purposes in South Dakota. Electric sales to South Dakota customers represent approximately 82% of total electric sales. The Company and PacifiCorp had leased the Wyodak Plant since 1978 under a leveraged lease agreement. The capital asset and associated debt were previously amortized over the original term of the lease. The net effect of terminating the lease and purchasing the Wyodak Plant was approximately an $11,300,000 increase in debt. The Company purchased the 20% interest in the Wyodak Plant in order to provide its customers a reasonable cost of power from the plant after the term of the original lease. The purchase of the Wyodak Plant also gives the Company more control over the use of common facilities in the operation of any new plants which may be constructed at the site. Other financial requirements during the period included dividends of $17,720,000, $16,977,000, and $16,045,000 and retirement of long-term debt totaling $4,166,000, $3,725,000, and $1,921,000 for the years 1993, 1992, and 1991, respectively. Capital requirements for projected construction, capital improvements, and oil and gas production are estimated to be as follows: 1994 1995 1996 (in thousands) NSS #2 $65,113 $45,035 $ - Other electric 14,470 9,793 18,605 Coal mining 2,129 853 2,042 Oil and gas production 5,000 6,000 6,000 $86,712 $61,681 $26,647 Major capital expenditures forecasted for the electric operations in the 1994-1996 time frame include approximately $110,148,000 for additional capacity (See Construction of Neil Simpson Unit #2). The coal mining operations forecasted expenditures include the replacement of mining equipment. Forecasted expenditures for the oil and gas operations include an active development and exploratory drilling program and acquisition of existing producing properties. Long-term debt and sinking fund requirements are as follows: 1994 1995 1996 (in thousands) Electric $2,028 $2,136 $2,255 Coal mining 1,514 8 - $3,542 $2,144 $2,255 Under its mining permit, WRDC is required to reclaim all land where it has mined coal reserves. 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 $7,290,000. The Company's capitalization for the three years ended December 31 was as follows: 1993 1992 1991 Long-term debt 34% 37% 40% Common equity 66 63 60 100% 100% 100% The Company sold 525,000 shares of Common Stock, $1 par value, at a price of $25-3/8 per share in 1993 through a public stock offering. Proceeds from the sale were used to finance NSS #2. Net proceeds from the sale were approximately $12,700,000. During 1993 the Company also revised its Dividend Reinvestment and Stock Purchase Plan, under which shareholders may purchase additional shares of Common Stock through dividend reinvestment or optional cash payments at 100% of the recent average market price. The Company has the option of issuing new shares or purchasing the shares on the open market. Proceeds from the sale of new shares will be used to finance capital expenditures. The Company issued $12,300,000 Pollution Control Revenue Refunding Bonds in 1992 to redeem $12,300,000 Pollution Control and Industrial Revenue Bonds which were collateralized as first mortgage bonds. The refunding bonds have no sinking fund requirements and are longer term than the redeemed bonds maturing in 2010, thereby preserving the lower tax exempt interest rate for a longer period of time. The redeemed bonds had sinking fund provisions which were to begin in 1993 and would have retired the principal in approximately equal amounts until their final due date in 2007. The refunding bonds are not secured under the Company's Indenture of Mortgage, therefore this refunding transaction increased the Company's ability to issue first mortgage bonds. During 1992, the Company also entered into a refunding agreement to refund the existing August 1, 1984, $12,200,000, 10.5% Pollution Control Revenue Bonds in July 1994 with 7.5% Pollution Control Revenue Bonds. The refunding agreement obligates the Company to call and satisfy in full the existing bonds as of August 1, 1994, including a redemption premium of 2% or $240,000 on the existing bonds. Because of the forward nature of this transaction it will not be reflected in the Company's financial statements until 1994. ______________________________________________________________________ (TABLE IN ANNUAL REPORT) COMMON STOCK DATA 1993 1992 1991 Net Income $22,946,000 $23,638,000 $22,681,000 Earnings Per Average Share $1.66 $1.73 $1.66 Weighted Average Shares Outstanding 13,810,912 13,689,105 13,674,983 Dividends Paid Per Share $1.28 $1.24 $1.17 Five Year Dividend Growth Rage 6.6% 8.4% 9.1% Payout Ratio 77.1% 71.7% 70.7% Book Value $11.78 $10.89 $10.38 Year-end Stock Price $22-3/4 $27-1/2 $27-1/2 Dividend Yield on Market Value 5.6% 4.5% 4.3% Price Earning Ratio 14 16 17 Return on Common Equity at Year-End 13.7% 15.8% 16.0% _____________________________________________________________________ During 1991, the Company issued $48,806,000 of first mortgage bonds. The bonds were issued in two series, $35,000,000 at 9.35% due 2021 and $13,806,000 at 9.00% due 2003. The funds were primarily used for the purchase of the Company's 20% interest in the Wyodak Plant. At December 31, 1993, the Company had $40,000,000 of unsecured short- term lines of credit which provides for interim borrowings and the opportunity for timing of permanent financing, with borrowings outstanding of $11,700,000. Average borrowings during 1993, 1992, and 1991 were $11,059,000, $5,616,000, and $4,552,000, respectively. The average interest rate on these borrowings was 5.2%, 6.0%, and 8.3% in 1993, 1992, and 1991, respectively. The Company anticipates that the average borrowings in 1994 and 1995 will increase significantly directly related to the financing of the construction of NSS #2. There are no compensating balance requirements associated with these lines of credit. The Company pays a 0.125% facility fee on $10,000,000 of the existing lines. ______________________________________________________________________ (CHART IN ANNUAL REPORT) CONSOLIDATED DEBT RATIOS (in percent) 1993 33.7 1992 37.3 1991 39.6 1990 36.9 1989 38.3 ______________________________________________________________________ Credit ratings for the Company's First Mortgage Bonds remained at an A1 level at Moody's Investors Service, Inc., a 5 (High Single A) at Duff & Phelps, Inc., and at an A+ level with a negative outlook at Standard & Poor's Corporation in 1993. These ratings reflect the opinion of the respective agencies as to the credit quality of the Company's bonds. Standard & Poor's stated that the negative outlook was issued reflecting a burdensome future construction program which will pressure financials and will require supportive rate treatment to maintain current credit worthiness. In the past the Company has depended upon internally generated funds, issuance of short and long-term debt, and sales of preferred and common stock to finance its activities. Additional long-term financing will be necessary in the 1994-1995 time period to finance NSS #2 (See Construction of Neil Simpson Unit #2). CONSTRUCTION OF NEIL SIMPSON UNIT #2 Construction of NSS #2, an 80 MW coal fired generating plant located adjacent to WRDC's coal mine, commenced in August 1993. The plant construction is scheduled to be completed by the end of 1995. Purchased power will be utilized by the Company in the interim to meet load growth not satisfied by existing resources. The construction costs of the plant are estimated at $124,889,000 which will increase net utility plant by approximately 58%. As of December 31, 1993, the Company has incurred approximately $15,000,000 of costs related to the plant. NSS #2 will be air cooled, and will meet all Clean Air Act requirements. NSS #2 will be fueled by coal from WRDC's mine and will increase the amount of tons sold annually by approximately 10%. The coal pricing methodology will continue to restrict WRDC's earnings on all coal sales to the Company to a return on its investment base and to further reduce the price for coal to be used in any of the Company's power plants during a 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. Additional long-term financing will be needed in the 1994-1995 time period to finance NSS #2. The Company estimates that approximately $87,000,000 of debt and $4,000,000 of additional equity will need to be issued. The Company plans to raise the additional equity through the Company's Employee Stock Purchase Plan and Dividend Reinvestment Plan. These additional financings are expected to increase the debt component of the Company's capital structure from 34% at December 31, 1993 to approximately 45% to 48% by 1996. The Company has guaranteed to the South Dakota Public Utilities Commission (SDPUC) and the Wyoming Public Service Commission that the Company will never include in rate base for the determination of electric rates those costs of NSS #2 which exceed $124,889,000 including allowance for funds used during construction. Due to the guarantee, the Company would likely be forced to write off against earnings any construction costs of NSS #2 in excess of the guaranteed costs except to the extent that those costs could be recovered through performance guarantees and damage provisions in the contracts with the vendors and contractors. The Company estimates that over 85% of the completion costs of the project has been contracted. The $124,889,000 estimated cost of the plant currently includes a $4,800,000 unallocated contingency. During 1993, the Company withdrew its application to the SDPUC for a rate stability plan that had requested rate increases to be phased in during construction of NSS #2. The Company reassessed the probable rate impact of NSS #2 and determined that a phased-in plan would not be necessary. The Company estimates that due to lower capital costs, coal cost concessions, and cost containment, an overall rate increase of approximately 10% in 1996, along with adjustments during construction as a result of the purchased power and automatic fuel adjustment tariff, should be sufficient to incorporate NSS #2 into the Company's electrical rates. ROSEBUD QUALIFYING FACILITY CHALLENGE DISMISSED In May 1993, the SDPUC issued an order denying a request by Rosebud Enterprises, Inc. (Rosebud) that the SDPUC determine the Company's resource needs, the avoided costs of the needed resource, and to force the Company to purchase power from Rosebud. Rosebud had proposed to sell the Company power 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 the Company may be imprudent to proceed with construction of NSS #2. The SDPUC did find that the Company had in good faith planned and permitted NSS #2 in order to fulfill the Company's duty to serve its customers. The SDPUC's bench ruling stated that in order to be able to defer or cancel the construction of new generation, a utility must obtain a sufficient commitment from a qualifying facility ahead of the lead time for the construction of its own new capacity. By its late qualifying facility proposal to the Company and its failure to move its project forward, Rosebud had not enabled the Company to avoid NSS #2. The SDPUC further ruled that the risk of building NSS #2 was on the Company, and the Commission would not rule on the prudency and need for the plant until the Company applied for a rate increase that included NSS #2 in rate base. ______________________________________________________________________ (CHART IN ANNUAL REPORT) FIRM ELECTRIC SALES (Millions of KWH) 1993 1,594 1992 1,540 1991 1,532 1990 1,479 1989 1,433 ______________________________________________________________________ RESULTS OF OPERATIONS: CONSOLIDATED RESULTS Consolidated net income for 1993 was $22,946,000 compared to $23,638,000 in 1992 and $22,681,000 in 1991 or $1.66, $1.73, and $1.66 per average common share, respectively. This equates to a 13.7% return on year-end common equity in 1993, 15.8% in 1992, and 16.0% in 1991. The Company recognized a non-recurring $940,000 after-tax non-cash gain in 1992 related to the PacifiCorp Settlement (see PacifiCorp Settlement) which was equivalent to $0.07 per share. Without this gain, earnings per share would have been flat for the three year period with 1% more average common shares outstanding in 1993. Consolidated revenue and income provided by the three businesses as a percentage of the total were as follows: Revenue 1993 1992 1991 Electric 71% 72% 73% Coal mining 21 21 20 Oil and gas production 8 7 7 100% 100% 100% Net Income Electric 49% 47% 54% Coal mining 46 49 42 Oil and gas production 5 4 4 100% 100% 100% Dividends paid on Common Stock totaled $1.28 per share in 1993. This reflected increases approved by the Board of Directors from $1.24 per share in 1992 and $1.17 per share in 1991. Dividends have increased at a 5.5% average annual compound growth rate over the last three years. All dividends were paid out of current earnings. In January 1994 the Board of Directors increased the quarterly dividend 3.1% to 33 cents per share. If this dividend is maintained during 1994, the increase is equivalent to an annual increase of 4 cents per share. In January 1992 the Board of Directors declared a three-for-two common stock split in the form of a 50% stock dividend, payable March 2, 1992. All per share information included herein gives retroactive effect for the stock split for all periods presented. WYODAK PLANT MAINTENANCE SCHEDULE The Wyodak Plant was out of operation for six weeks in 1991 for scheduled maintenance and is scheduled for maintenance again in the spring of 1994. Fiscal 1992 and 1993 represent whole years of operations from the Wyodak Plant. When the Wyodak Plant is out of service, replacement power is provided from purchased power and increased generation from the Company's other generating plants. Additional purchased power costs are recovered by the utility through the fuel adjustment clauses. The loss of coal sales to the Wyodak Plant is partially mitigated through greater coal sales to the Company's other generating plants and reduced operating costs. PACIFICORP SETTLEMENT In 1987 WRDC and the Company entered into settlement agreements with PacifiCorp canceling PacifiCorp's obligation to purchase coal commencing in 1990 for a second plant scheduled to be constructed adjacent to the Wyodak Plant but which had been canceled, and settling a dispute over the quantity of coal PacifiCorp was required to purchase to operate the Wyodak Plant. These settlements resulted in an increase in the Company's net income in 1993, 1992, and 1991 of approximately $1,500,000, $2,800,000, and $2,600,000 or $0.11, $0.20, and $0.19 per share of common stock, respectively. The settlements provided for, among other things, payments to WRDC of $2,000,000 each on January 2, 1988 through 1991 for an option to purchase 50,000,000 tons of coal if PacifiCorp should construct a second Wyodak power plant and require PacifiCorp to pay up to $15,000,000, such amount to be adjusted for inflation and deflation, for the cost of new coal handling facilities. Construction of the coal handling facilities occurred in 1992 and 1993. As a result of a definitive agreement entered into with PacifiCorp in 1992 regarding the construction of these facilities, the Company recognized a nonrecurring $940,000 after-tax non-cash gain in 1992. The gain was due to the assumption by PacifiCorp of certain liabilities related to the existing coal handling facilities that were replaced by the construction of the new facilities. Other benefits from the PacifiCorp Settlement will continue to have a positive effect on earnings for the life of the agreements. The exact amount of earnings each year will depend largely upon the continued successful operation of the Wyodak Plant. ______________________________________________________________________ (CHART IN ANNUAL REPORT) TONS OF COAL SOLD (thousands of tons) 1993 3,027 1992 2,958 1991 2,742 1990 2,908 1989 2,349 ______________________________________________________________________ Electric Operations 1993 1992 1991 (in thousands) Revenue $98,155 $97,448 $98,158 Operating expenses 74,173 74,056 73,522 Operating income $23,982 $23,392 $24,636 Net income $11,171 $11,041 $12,156 Electric revenue increased 0.7% in 1993 compared to a 0.7% decrease in 1992 and a 6.4% increase in 1991. Firm kilowatthour sales increased 3.5% in 1993 compared to a 0.5% increase in 1992 and a 3.6% increase in 1991 and have averaged an annual 2.5% growth rate over the last three years. Homestake Mining Company, the Company's largest customer, reduced its energy usage by 22,000 megawatt hours in 1993 by concentrating on more efficient production areas in a depressed gold market. Sales growth in 1992 was reduced by mild weather conditions. The revenue increase in 1993 from additional electric sales was offset by a decrease in the fuel and purchased power adjustment passed on to electric customers. The decrease in purchased power was due to a $2,000,000 refund received from PacifiCorp on the 40-year power purchase agreement. Revenue decreased in 1992 due to a decrease in the fuel and purchased power adjustment passed on to electric customers. This decrease was a result of a $600,000 increase in the refund accrued for the limitation on the return allowed on WRDC coal sales to the Company's power plants and a $600,000 decrease in fuel and purchased power expense. Purchased power decreased in 1992 compared to 1991 due to a full year of operations at the Wyodak Plant. In South Dakota, the Company may not include in rates any cost of coal which allows WRDC to earn a return on equity on sales of coal to the Company's utility operations in excess of a percentage equal to the rate on long-term "A" rated utility bonds plus 400 basis points (4%). The investment base on which the return is calculated includes all of WRDC's investment base except for investments in subsidiary companies and other non-mining interests. The maximum return on equity to be applied in 1994 for the 1993 adjustment will be approximately 11.6%. The returns applied in 1992 and 1991 were 12.7% and 13.4%, respectively. The Company has recorded an accrual for the 1994 refund for sales in 1993 of approximately $1,060,000. The 1993 and 1992 refunds were approximately $1,538,000 and $940,000, respectively. Tons of WRDC's coal sold to Black Hills represent approximately 35% of its total coal sales. The refund increased in 1994 and 1993 compared to 1992 primarily due to the decrease in long-term "A" rated utility bond interest rates. The decrease in the allowed return in 1993 was offset by an increase in WRDC's investment base primarily due to its investment in an electric shovel and new coal conveying facilities. Revenue per kilowatt sold was 6.0 cents in 1993 down from 6.2 cents in 1992 and 6.1 cents in 1991. The number of customers in the service area increased to 53,330 in 1993 from 52,535 in 1992 and 51,775 in 1991. Operating expenses were relatively flat in 1993 compared to 1992 as a result of the $2,000,000 purchased power refund. Operating expenses increased 0.7% in 1992, and decreased slightly in 1991. The decrease in 1991 reflects the effect of buying out the Wyodak Plant Lease and a decrease in administrative and general expenses and property taxes. The Wyodak Plant Lease payment was recorded as an operating expense in the past. Since the purchase of the Plant in April 1991, the cost of ownership is now reflected in depreciation and interest expense. The Company went through a corporate reorganization during the first quarter of 1991 resulting in a $600,000 reduction in administrative and general expenses. Eleven existing positions and several vacant positions were eliminated. During 1991 the South Dakota Department of Revenue instituted the unit valuation method in determining property values for those entities whose property is centrally assessed for tax purposes resulting in a decrease in property taxes of approximately $1,050,000 from 1990 levels. Property taxes increased $540,000 in 1993 and $600,000 in 1992 as a result of increased valuations. COAL MINING OPERATIONS 1993 1992 1991 (in thousands) Revenue $29,822 $28,296 $26,138 Operating expenses 17,462 16,724 16,667 Operating income $12,360 $11,572 $ 9,471 Net income $10,648 $11,695 $ 9,623 Revenue increased 5.4% in 1993 and 8.3% in 1992 due to a 2.3% and 7.9% increase, respectively in tons of coal sold. The increase in tons of coal sold reflects two whole years of operations at the Wyodak Plant. Operating expense increased 4.4% in 1993 reflecting an increase in depreciation expense as a result of an increase in capital investments and higher taxes associated with increased revenues. Operating expenses remained relatively flat in 1992 caused by a decrease in administrative and general expenses offset by an increase in coal production. Operating income increased 6.8% in 1993 and 22.2% in 1992 reflecting the increase in coal revenue. ______________________________________________________________________ (CHART IN ANNUAL REPORT) EQUIVALENT BARRELS OF OIL SOLD (thousands of barrels) 1993 465 1992 315 1991 262 1990 205 1989 207 ______________________________________________________________________ Revenue decreased 1.5% in 1991 due to a 5.7% decrease in tons of coal sold offset by a 4.5% increase in the average price per ton sold. The decrease in tons of coal sold was primarily due to the Wyodak Plant's scheduled six week maintenance period during the year. The increase in the average price was due to increases in the government indices used in the coal contract price calculations and 1990 coal audit adjustments. Operating expenses decreased 4.1% in 1991 due to the decrease in coal production and a decrease in ad valorem taxes and administrative expenses. Administrative expenses decreased due to the corporate reorganization that occurred during the year. Operating income increased 3.4% primarily due to the decrease in administrative expenses. Non-operating income was $2,226,000 in 1993 compared to $3,894,000 in 1992 and $3,677,000 in 1991. Non-operating income includes the PacifiCorp Settlement, a coal contract settlement from Grand Island, Nebraska, and interest income from investments. Non-operating income decreased in 1993 due to a decrease in interest income attributable to lower interest rates and a non-recurring $940,000 after-tax non-cash gain recognized in 1992 related to the PacifiCorp Settlement. In late 1987 WRDC agreed to the termination of a long-term coal supply agreement with the City of Grand Island, Nebraska. Grand Island was granted a 14 year option to purchase coal and in return WRDC receives payments of approximately $155,000 each year. WRDC has reserved sufficient coal in the eventuality the City of Grand Island exercises its option. Oil and Gas Production 1993 1992 1991 (in thousands) Revenue $11,396 $9,599 $9,077 Operating expenses 9,952 8,214 7,717 Operating income $ 1,444 $1,385 $1,360 Net income $ 1,127 $ 902 $ 902 The 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% or less of the Company's consolidated amounts over the last three years. Revenue, primarily comprised of oil and gas sales, is supplemented by field services in the Finn-Shurley oil field in eastern Wyoming. Equivalent barrels of oil sold increased approximately 48% to 465,000 barrels in 1993 from 315,000 barrels in 1992 and 262,000 barrels in 1991. The average sales price of oil per barrel was $16.69 in 1993 compared to $19.10 in 1992 and $20.03 in 1991. WPC's operating expenses increased 21% in 1993 compared to 6.4% in 1992 and 9.6% in 1991. Operating expenses increased primarily due to increased depletion expense as a result of increased oil and gas production and lower oil prices. WPC recognized $3,725,000, $2,291,000, and $1,350,000 of depletion expense in 1993, 1992, and 1991, respectively. Low commodity prices reduce the value of the Company's oil and gas assets and will cause the Company to increase its depletion expense. Management estimates that oil prices must average $14 to $15 per barrel for its oil and gas operations to remain profitable. WPC's proved reserves, and the revenues generated from production, will decline as production occurs, except to the extent WPC conducts successful exploration and development activities or acquires additional proved reserves. WPC has been in an active exploration and development drilling program during 1991, 1992, and 1993. Much of WPC's production growth in 1993 was the result of its horizontal drilling program in the Austin Chalk formation in Texas. WPC intends to increase its net proved reserves by selectively increasing its oil and gas exploration and development activities and by acquiring additional interests in the Finn- Shurley oil field and Rocky Mountain region primarily with the use of internally generated funds. WPC's reserves are based on reports prepared by Ralph E. Davis Associates, Inc. in 1993 and 1992 and Huddleston & Co., Inc. in 1991, independent engineering companies, selected by the Company. Reserves were determined using constant product prices at the end of the respective years. Estimates of economically recoverable reserves and future net revenues are based on a number of variables which may differ from actual results. WPC's unaudited reserves, principally proved developed and undeveloped properties, were estimated to be 1.1, 2.2, and 2.5 million barrels of oil and 2.8, 3.2, and 4.8 billion cubic feet of natural gas as of December 31, 1993, 1992, and 1991, respectively. The decrease in the reserves was caused by price decreases, production increases, and engineering revisions. WPC has interests in 386 oil and gas properties in seven states. WPC operates a total of 347 wells in Wyoming, Colorado, and South Dakota. WPC's non-operated properties are located in Wyoming, Colorado, North Dakota, Montana, Kansas, and Texas. EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS On January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This new standard requires that the expected cost of these benefits must be accrued for during the years employees render service. The Company prospectively adopted the new standard effective January 1, 1993, and is amortizing the discounted present value of the accumulated postretirement benefit obligation of $2,996,000 to expense over a 20 year period. The net periodic postretirement cost charged to expense in 1993 was $527,000 (pre-tax). For measurement purposes, an 11.5% annual rate of increase in healthcare benefits was assumed for 1994; the rate was assumed to decrease gradually to 6% in 2005 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amount reported. A 1% increase in the health care cost trend assumption would increase the net periodic postretirement benefit cost by approximately $140,000 annually or 20.8%. ACCOUNTING FOR INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of the liability method in accounting for income taxes. Under the liability method, deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial reporting and tax basis of assets and liabilities. 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. The new standard required adjustments to existing balances of accumulated deferred income taxes to reflect changes in income tax rates. To the extent such income taxes are recoverable or payable through future rates, a $6,912,000 net regulatory liability has been recorded in the accompanying consolidated balance sheets. Initial application of the statement had no material impact on the Company's results of operations. INFLATION Inflation may have a significant impact on replacement of property and capital improvements in the future due to the capital intensive nature of the utility business. The rate making process gives no recognition to the fair value of existing plant; however, in the past, the Company has been allowed to recover and earn on the increased cost of its net investment when the addition to or replacement of facilities occurred. The majority of the mining operations' coal contracts provide for the adjustment over time of components of the sales price through indexes, formulas, or direct pass-through of costs. REPORT OF MANAGEMENT Management of Black Hills Corporation is responsible for the preparation, integrity, and objectivity of the consolidated financial statements of the Company and its subsidiaries. The consolidated financial statements are prepared in conformity with generally accepted accounting principles and reflect management's informed judgments and best estimates with due consideration given to materiality. Information contained elsewhere in the Annual Report is consistent with the consolidated financial statements. The Company's system of internal controls is designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with management's authorization, and the consolidated financial statements are prepared in accordance with generally accepted accounting principles. The internal controls are continually reviewed and evaluated for effectiveness. No internal control system can prevent the occurrence of errors and irregularities with absolute assurance due to the inherent limitations of any system. Management's objective is to maintain a system that meets its goals in a cost effective manner. The Audit Committee, composed exclusively of outside directors, is responsible for overseeing the Company's financial reporting process and reporting the results of its activities to the Board of Directors. This committee, management, and the internal auditor periodically review matters associated with financial reporting, audit activities, and internal controls. As part of their audit of the Company's 1993 consolidated financial statements, the Company's independent auditors, Arthur Andersen & Co., considered the Company's system of internal controls to the extent they deemed necessary to determine the nature, timing, and extent of their audit tests. The independent and internal auditors have free access to the Audit Committee to discuss the results of their audits without the presence of management. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Black Hills Corporation: We have audited the accompanying consolidated balance sheets and statements of capitalization of BLACK HILLS CORPORATION AND SUBSIDIARIES as of December 31, 1993 and 1992, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Black Hills Corporation and Subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Notes 8 and 9 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for post retirement benefits other than pensions and its method of accounting for income taxes. ARTHUR ANDERSEN & CO. Minneapolis, Minnesota, January 28, 1994 BLACK HILLS CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31 1993 1992 1991 (in thousands) Operating revenues: Electric . . . . . . . . . . .$ 98,155 $ 97,448 $ 98,158 Coal mining. . . . . . . . . . 29,822 28,296 26,138 Oil and gas production . . . . 11,396 9,599 9,077 139,373 135,343 133,373 Operating expenses: Fuel and purchased power . . . 36,946 38,209 38,851 Operations . . . . . . . . . . 23,368 23,337 23,825 Maintenance . . . . . . . . . 6,869 6,513 6,729 Administrative and general . . 8,144 7,811 7,910 Depreciation, depletion, and amortization . . . . . . . . 16,051 13,860 12,012 Taxes, other than income taxes (Note 12) . . . . . . . 10,209 9,264 8,579 101,587 98,994 97,906 Operating income: Electric . . . . . . . . . . . 23,982 23,392 24,636 Coal mining . . . . . . . . . 12,360 11,572 9,471 Oil and gas production . . . . 1,444 1,385 1,360 37,786 36,349 35,467 Other income (expense): Interest expense . . . . . . . (8,817) (8,965) (8,001) Investment income . . . . . . 1,739 3,149 2,956 Allowance for funds used during construction . . . . 729 378 177 Other, net (Note 12) . . . . . 474 1,233 631 (5,875) (4,205) (4,237) Income before income taxes . . . 31,911 32,144 31,230 Income taxes (Note 9). . . . . . (8,965) (8,506) (8,549) Net income . . . . . . . .$ 22,946 $ 23,638 $ 22,681 Weighted average common shares outstanding (Note 2) . . . . . 13,811 13,689 13,675 Earnings per share of common stock (Note 2) . . . . . . . .$ 1.66 $ 1.73 $ 1.66 <FN> The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Years ended December 31 1993 1992 1991 (in thousands) Balance, beginning of year . . . . . . $105,173 $ 98,512 $91,876 Net income . . . . . . . . . . . . . . 22,946 23,638 22,681 Cash dividends on common stock ($1.28, $1.24, and $1.17 per share, respectively) . . . . . . . . (17,720) (16,977) (16,045) Balance, end of year . . . . . . . . . $110,399 $105,173 $98,512 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31 1993 1992 1991 (in thousands) Cash flows provided from (used for) operating activities: Net income . . . . . . . . . . . . . $ 22,946 $23,638 $22,681 Principal non-cash items- Depreciation, depletion, and amortization . . . . . . . . . . 16,051 13,860 12,012 Deferred income taxes and investment tax credits. . . . . . 1,042 761 (801) Gain on coal settlement . . . . . . - (940) - Allowance for other funds used during construction . . . . . . . . . . (333) (94) (65) (Increase) decrease in receivables, inventories, and other current assets (1,556) 1,378 488 Increase (decrease) in current liabilities . . . . . . . . . . . . (2,562) 4,814 1,847 Other, net . . . . . . . . . . . . . . 4,259 1,091 (470) 39,847 44,508 35,692 Cash flows provided from (used for) investing activities: Neil Simpson Unit #2 construction costs, excluding allowance for other funds used during construction (Note 7) . . (12,675) (2,227) - Other property additions, excluding allowance for other funds used during construction . . . . . . . . . (27,282) (25,594) (25,587) Short-term investments purchased . . . (33,622) (33,938) (14,771) Short-term investments sold . . . . . . .25,504 32,610 - Proceeds from sale of long-term investments . . . . . . . . . . . . . 14,724 - - (33,351) (29,149) (40,358) Cash flows provided from (used for) financing activities: Dividends paid . . . . . . . . . . . . (17,720) (16,977) (16,045) Common stock issued . . . . . . . . . . 13,705 534 - Net short-term borrowings . . . . . . . 3,784 900 (500) Long-term debt issued . . . . . . . . . - - 8,768 Long-term debt retired . . . . . . . . (4,166) (3,725) (1,921) (4,397) (19,268) (9,698) Increase (decrease) in cash and cash equivalents. . . . . . . . . . 2,099 (3,909) (14,364) Cash and cash equivalents: Beginning of year . . . . . . . . . . . 5,767 9,676 24,040 End of year . . . . . . . . . . . . . .$ 7,866 $ 5,767 $ 9,676 Supplemental disclosure of cash flow information: Cash paid during the period for - Interest . . . . . . . . . . . . . .$ 9,283 $ 9,296 $ 6,837 Income taxes. . . . . . . . . . . . .$ 8,000 $ 7,440 $ 8,700 Non-cash investing and financing activities (Notes 3 and 6) <FN> The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS December 31 1993 1992 (in thousands) ASSETS Current assets: Cash and cash equivalents . . . . .$ 7,866 $ 5,767 Short-term investments . . . . . . . 24,217 16,099 Receivables, net Customers . . . . . . . . . . . . 12,415 10,246 Other . . . . . . . . . . . . . . 901 1,807 Materials, supplies, and fuel. . . . 6,765 6,448 Prepaid expenses . . . . . . . . . . 1,638 1,662 Total current assets . . . . . 53,802 42,029 Property and investments: Electric . . . . . . . . . . . . . . 341,852 318,270 Coal mining. . . . . . . . . . . . . 51,670 44,483 Oil and gas production . . . . . . . 32,371 28,465 Investments . . . . . . . . . . . . 7,250 21,974 433,143 413,192 Less accumulated depreciation and depletion. . . . . . . . . . .(144,492) (132,890) Net property and investments. . 288,651 280,302 Deferred charges: Federal income taxes . . . . . . . . 7,271 2,153 Other . . . . . . . . . . . . . . . 3,129 5,718 10,400 7,871 $352,853 $330,202 LIABILITIES AND CAPITALIZATION Current liabilities: Current maturities of long-term debt. . . . . . . . . . .$ 3,542 $ 4,166 Notes payable (Note 4) . . . . . . . 11,768 7,984 Accounts payable . . . . . . . . . . 9,535 8,939 Accrued liabilities- Taxes. . . . . . . . . . . . . . . 5,583 5,544 Fuel and purchased power refunds 1,375 4,120 Interest . . . . . . . . . . . . . 1,700 2,167 Other. . . . . . . . . . . . . . . 6,023 6,008 Total current liabilities . . . 39,526 38,928 Deferred credits: Federal income taxes . . . . . . . . 36,705 37,687 Investment tax credits . . . . . . . 6,027 6,532 Reclamation costs. . . . . . . . . . 7,290 6,651 Regulatory liability . . . . . . . . 6,912 - Other. . . . . . . . . . . . . . . . 3,030 2,430 Total deferred credits. . . . . 59,964 53,300 Commitments and contingent liabilities (Notes 7 and 8). . . . . . . . . . . Capitalization, per accompanying statements: Common stock equity. . . . . . . . . 168,089 149,158 Long-term debt . . . . . . . . . . . 85,274 88,816 Total capitalization. . . . . . 253,363 237,974 $352,853 $330,202 <FN> The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31 1993 1992 (in thousands) Common stock equity (Note 2): Common stock, $1 par value; 50,000,000 shares authorized; 14,269,580 and 13,701,287 shares outstanding, respectively . . . . . . . . . . . . . .$ 14,270 $ 13,701 Additional paid-in capital . . . . . . . . 43,420 30,284 Retained earnings . . . . . . . . . . . . . 110,399 105,173 Total common stock equity . . . . . . 168,089 149,158 Cumulative preferred stock: No par value; 400,000 shares authorized; no shares outstanding . . . . . . . . . . - - $100 par value; 270,000 shares authorized; no shares outstanding . . . . - - Long-term debt (Note 3): First mortgage bonds- 4.75% due 1993. . . . . . . . . . . . . . - 854 8.375% due 1998 . . . . . . . . . . . . . 3,340 4,005 8.05% due 1999. . . . . . . . . . . . . . 4,875 4,900 6.625% and 6.85% pollution control and industrial development revenue bonds, collateralized with first mortgage bonds, due 2007 . . . . . . . 1,840 2,000 9.00% due 2003. . . . . . . . . . . . . . 11,739 12,818 9.49% due 2018. . . . . . . . . . . . . . 6,000 6,000 9.35% due 2021 . . . . . . . . . . . . . 35,000 35,000 62,794 65,577 Other- 6.7% pollution control revenue bonds, due 2010. . . . . . . . . . . . . . . . 12,300 12,300 10.50% pollution control revenue bonds, due 2014 . . . . . . . . . . . . 12,200 12,200 Other long-term obligations . . . . . . . 1,522 2,905 26,022 27,405 Total long-term debt 88,816 92,982 Current maturities . . . . . . . . . . . . (3,542) (4,166) Net long-term debt . . . . . . . . . . 85,274 88,816 Total capitalization . . . . . . . . .$253,363 $237,974 <FN> The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1992, AND 1991 (1) BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS DESCRIPTION Black Hills Corporation and its Subsidiaries (the Company) operate in three primary business segments: electric, coal mining, and oil and gas production. The Company's electric utility operation is engaged in the generation, purchase, transmission, distribution, and sale of electric power and energy in western South Dakota, northeastern Wyoming, and southeastern Montana. Sales of electric power to the three largest electric customers represented 20% of the Company's electric revenue in 1993, 22% in 1992, and 21% in 1991. The coal mining operation of the Company, located in northeastern Wyoming, mines and sells sub-bituminous coal primarily under long-term coal supply agreements. As described in Note 6, a substantial portion of the coal mining operation's sales are to the Wyodak Plant. Sales of coal to the Company and to PacifiCorp represent 89% of total coal sales. The Company's oil and gas exploration and production business operates and has working interests in oil wells principally located in the Rocky Mountain region and Texas. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Black Hills Corporation and its wholly owned subsidiaries. All significant inter- company balances and transactions have been eliminated in consolidation except for revenues and expenses associated with intercompany coal sales in accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." Total intercompany coal sales not eliminated were $10,047,000, $9,811,000, and $9,220,000 in 1993, 1992, and 1991, respectively. PROPERTY AND INVESTMENTS Property is recorded at cost which includes an allowance for funds used during construction where applicable. The cost of electric property retired, together with removal cost less salvage, is charged to accumulated depreciation. Repairs and maintenance of property are charged to operations as incurred. Investments, consisting principally of tax exempt municipal bonds held for corporate development purposes, are carried at cost which approximates market. DEPRECIATION AND DEPLETION Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Depreciation provisions for the electric property were equivalent to annual composite rates of 3.2% in 1993 and 1992, and 3.3% in 1991. Composite depreciation rates for other property were 9.6%, 7.5%, and 8.2% in 1993, 1992, and 1991, respectively. Depletion of coal and oil and gas properties is computed using the cost method for financial reporting and the gross income method or cost method, whichever is applicable, for federal income tax reporting. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash of the Company is invested in money market investments such as municipal put bonds, money market preferreds, commercial paper, Euro-dollars, and certificates of deposit. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents and short-term investments are stated at cost which approximates market. REVENUE RECOGNITION Revenue from sales of electric energy is based on rates filed with applicable regulatory authorities. Electric revenue includes an accrual for estimated unbilled revenue for services provided through year-end. Revenue from other business segments is recognized at the time the products are delivered or the services are rendered. OIL AND GAS EXPLORATION The Company accounts for its oil and gas exploration activities under the full cost method. Capitalized costs associated with unsuccessful wells are amortized over future periods as the reserves from successful wells are produced. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Allowance for funds used during construction (AFDC) represents the approximate composite cost of borrowed funds and a return on capital used to finance construction expenditures and is capitalized as a component of the electric property. The AFDC was computed at an annual composite rate of 7.7% in 1993, 10.5% in 1992, and 12% in 1991. INCOME TAXES Deferred taxes are provided on all significant temporary differences, principally depreciation. Investment tax credits have been deferred in the electric operation and the accumulated balance is amortized as a reduction of income tax expense over the useful lives of the related electric property which gave rise to the credits. (2) CAPITAL STOCK Common Stock Common shares issued at $1.00 par value during the years indicated were: 1993 1992 Public offering 525,000 - Employee Stock Purchase Plan 16,402 24,332 Dividend Reinvestment and Stock Purchase Plan 26,891 - 568,293 24,332 There were no shares issued in 1991. At December 31, 1993, 74,209 shares of unissued common stock were available for future offerings under the Employee Stock Purchase Plan. During 1993, the Board of Directors adopted a new Dividend Reinvestment and Stock Purchase Plan, under which shareholders may purchase additional shares of common stock through dividend reinvestment and/or optional cash payments at 100% of the recent average market price. The Company has the option of issuing new shares or purchasing the shares on the open market. At December 31, 1993, 973,109 shares of unissued common stock were available for future offerings under the Plan. On January 30, 1992, the Board of Directors declared a three-for-two common stock split in the form of a 50% stock dividend, payable March 2, 1992, to shareholders of record on February 10, 1992. The common stock and per share information in the accompanying consolidated financial statements and notes have been restated to reflect the stock distribution. ADDITIONAL PAID-IN CAPITAL Changes in additional paid-in capital for the years indicated were: 1993 1992 1991 (in thousands) Balance, beginning of year $30,284 $29,776 $34,336 Premium, net of expenses, received from sales of common stock 13,136 508 - Three-for-two stock split - - (4,560) Balance, end of year $43,420 $30,284 $29,776 (3) LONG-TERM DEBT Substantially all of the Company's utility property is subject to the lien of the Indenture securing its first mortgage bonds. First mortgage bonds of the Company may be issued in amounts limited by property, earnings, and other provisions of the mortgage indentures. In 1992, the Company issued $12,300,000, 6.7% Unsecured Pollution Control Refunding Revenue Bonds, due 2010. The proceeds were used to redeem $12,300,000 of 6.625% and 6.85%, Pollution Control Revenue Bonds, due 2007. The Company entered into a refunding agreement in 1992 to refund the existing $12,200,000, 10.5% Pollution Control Revenue Bonds in 1994 with 7.5% Pollution Control Revenue Bonds. The refunding agreement obligates the Company to call and satisfy in full the existing bonds in 1994, including a redemption premium of 2% or $240,000 on the existing bonds. Because of the forward nature of this transaction, the refunding will not be reflected in the Company's consolidated financial statements or capital structure until 1994. In 1991 the Company issued two series of first mortgage bonds, $35,000,000 at 9.35% due 2021 and $13,806,000 at 9.00% due 2003. The funds were primarily used for the purchase of the Wyodak Plant as described in Note 6. Scheduled maturities of long-term debt for the next five years are: $3,542,000 in 1994, $2,144,000 in 1995, $2,255,000 in 1996, $2,384,000 in 1997, and $2,196,000 in 1998. (4) NOTES PAYABLE TO BANKS At December 31, 1993, the Company had $40,000,000 of unsecured short-term lines of credit. Borrowings outstanding under these lines of credit were $11,700,000 and $6,000,000 as of December 31, 1993 and 1992, respectively. Average borrowings during 1993, 1992, and 1991 were $11,059,000, $5,616,000, and $4,552,000, respectively. The average interest rate on these borrowings was 5.2%, 6.0%, and 8.3% in 1993, 1992, and 1991, respectively. The Company has no compensating balance requirements associated with these lines of credit. The Company pays a 0.125% facility fee on $10,000,000 of the existing lines. The lines of credit are subject to periodic review and renewal during the year by the banks. (5) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of the Company's financial instruments. Cash and Cash Equivalents The carrying amount approximates fair value due to the short maturity of those instruments. Short-Term and Other Investments The fair value of the Company's short-term and other investments equals the quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Long-Term Debt The fair value of the Company's long-term debt is estimated based on quoted market rates for utility debt instruments having similar maturities and similar debt ratings, with an exception for debt associated with the federal coal lease modifications. The fair value of the bonus payments for the federal coal lease modifications equals the discounted future cash flows using the prime rate as the discount rate. The final federal bonus payment is due February 1, 1994. The estimated fair values of the Company's financial instruments are as follows: 1993 (in thousands) Carrying Fair Amount Value Cash and cash equivalents $ 7,866 $ 7,866 Short-term investments 24,217 24,217 Other investments 7,250 7,257 Long-term debt 88,816 105,639 1992 (in thousands) Carrying Fair Amount Value Cash and cash equivalents $ 5,767 $ 5,767 Short-term investments 16,099 16,177 Other investments 21,974 22,023 Long-term debt 92,982 101,885 The majority of the Company's outstanding bonds are currently subject to make-whole provisions which would eliminate any economic benefits for the Company to call and refinance the bonds. (6) WYODAK PLANT On April 8, 1991, the Company purchased a 20% interest and PacifiCorp an 80% interest in the Wyodak Plant (the Plant), a 330 MW coal-fired electric generating station located in Campbell County, Wyoming. PacifiCorp is the operator of the Plant. The total acquisition cost of the Company's 20% interest was approximately $42,022,000. The Company financed its 20% interest through the issuance of first mortgage bonds. The Company and PacifiCorp had leased the Plant since 1978 under a leveraged lease agreement. The lease was recorded by the Company as a capital asset with corresponding debt at the present value of the lease payments. Non-cash investing and financing activities associated with the acquisition were as follows: Acquisition of interest in Wyodak Plant through debt issuance and assumption $42,022,000 Elimination of capital lease asset and obligation relating to the Wyodak Plant 30,694,000 The Company received a rate order from the South Dakota Public Utilities Commission that allows the capitalization of the full cost of the Plant for rate making purposes in South Dakota. Electric sales to South Dakota customers represent approximately 82% of total electric sales. The Company receives 20% of the Plant's capacity and is committed to pay 20% of its additions, replacements, and operating and maintenance expenses. As of December 31, 1993, the Company's investment in the Plant included $71,207,000 in electric plant and $18,844,000 in accumulated depreciation. The Company's share of direct expenses of the Plant is included in the corresponding categories of operating expenses in the accompanying consolidated statements of income. Wyodak Resources Development Corp. (WRDC) supplies coal to the Plant under an agreement expiring in 2013 with a 10 year renewal option. This coal supply agreement is collateralized by a mortgage on and a security interest in some of WRDC's coal reserves. At December 31, 1993, approximately 32,250,000 tons were covered under this agreement. WRDC's sales to the Plant were $21,438,000, $20,317,000, and $17,775,000 for the years ended December 31, 1993, 1992, and 1991, respectively. (7) COMMITMENTS AND CONTINGENT LIABILITIES NEW POWER PLANT Construction of Neil Simpson Unit #2 (NSS #2), an 80 MW coal fired generating plant located adjacent to the Wyodak coal mine, commenced in August 1993. The Company has committed to the South Dakota Public Utilities Commission and the Wyoming Public Service Commission to construct NSS #2 at a capital cost not to exceed $124,889,000 including AFDC and to not include in rate base any capital costs in excess thereof. The construction of the plant is scheduled to be completed by the end of 1995. The Company has incurred approximately $15,000,000 of costs related to the plant as of December 31, 1993. WRDC has committed to supply all of the coal requirements for the life of the plant. The coal pricing methodology would restrict WRDC's earnings on all coal sales to the Company to a return on its investment base. WRDC has committed to further reduce the price for coal to be used in any of the Company's power plants during a 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. COAL OBLIGATIONS In addition to the 32,250,000 tons of coal reserved under the agreement with the Wyodak Plant, WRDC has reserved 30,000,000 tons of coal under existing contracts and 52,000,000 tons of coal under future purchase options. None of the purchase options are expected to be exercised because the option price is substantially higher than the market price. An option for 50,000,000 tons can be exercised only if WRDC has not committed the coal reserves to other buyers prior to the exercise of the option. POWER PURCHASE AGREEMENT In 1983, the Company entered into a 40 year power agreement with PacifiCorp providing for the purchase of 75 megawatts of electric capacity and energy. Although the price paid for the capacity and energy is based on the operating costs of one of PacifiCorp's coal-fired electric generating plants, the power can come from anywhere in PacifiCorp's system. Costs incurred under this agreement were $21,106,000, $21,507,000, and $22,280,000 in 1993, 1992, and 1991, respectively. RECLAMATION Under its mining permit, WRDC is required to reclaim all land where it has mined coal reserves. 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. OTHER The Company is subject to various legal proceedings and claims which arise in the ordinary course of operations and in the sales of formerly owned companies. In the opinion of management, the amount of liability, if any, with respect to these actions would not materially affect the consolidated financial position or results of operations of the Company. (8) EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan (the Plan) covering substantially all employees. The benefits are based on years of service and compensation levels during the highest five consecutive years of the last ten years of service. The Company's funding policy is in accordance with the federal government's funding requirements. The Plan's assets consist primarily of equity and debt securities and cash equivalents. Net pension expense (income) for the Plan was as follows: 1993 1992 1991 (in thousands) Service cost $ 651 $ 535 $ 499 Interest cost 1,899 1,687 1,510 Return on assets: Actual (2,852) (2,224) (5,210) Deferred 333 (215) 3,203 Net pension expense (income) $ 31 $ (217) $ 2 Funding information for the Plan as of October 1 of each year was as follows: 1993 1992 (in thousands) Fair value of plan assets $25,186 $23,602 Projected benefit obligation 28,367 22,969 (3,181) 633 Unrecognized: Net loss (gain) 3,779 (13) Prior service cost 1,105 1,204 Transition asset (631) (721) Prepaid pension cost $ 1,072 $ 1,103 Accumulated benefit obligation $22,464 $18,885 Vested benefit obligation $21,507 $18,123 Actuarial assumptions: Discount rate 7.5% 8.5% Expected long-term rate of return on assets 11% 11% Rate of increase in compensation levels 5% 5% The change in the assumed discount rate from 8.5% in 1992 to 7.5% in 1993 resulted in an increase in the accumulated benefit obligation and projected benefit obligation of $2,260,000 and $3,403,000, respectively. The Company has various supplemental retirement plans for outside directors and key executives of the Company. The plans are nonqualified defined benefit plans. Costs incurred under the plans were $633,000, $735,000, and $570,000 in 1993, 1992, and 1991, respectively. On January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The new standard requires that the expected cost of these benefits must be charged to expense during the years that the employees render service. Prior to adopting the standard the Company expensed these benefits as they were paid. The Company is amortizing the transition obligation of $2,996,000 over a 20 year period. Employees retiring from the Company on or after attaining age 55 who have rendered at least five years of service to the Company are entitled to postretirement healthcare benefits coverage. These benefits are subject to premiums, deductibles, copayment provisions, and other limitations. The Company may amend or change the plan periodically. The Company is not pre- funding its retiree medical plan. The net periodic postretirement cost for the Company was as follows: 1993 (in thousands) Service cost $127 Interest cost 250 Amortization of transition obligation 150 Net periodic postretirement benefit cost $527 Funding information as of October 1 was as follows: 1993 (in thousands) Accumulated postretirement benefit obligation: Retirees $1,316 Fully eligible active participants 865 Other active participants 1,921 Unfunded accumulated postretirement benefit obligation 4,102 Unrecognized net loss (892) Unrecognized transition obligation (2,846) Accrued postretirement benefit cost $ 364 For measurement purposes, an 11.5% annual rate of increase in healthcare benefits was assumed for 1994; the rate was assumed to decrease gradually to 6% in 2005 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. A 1% increase in the healthcare cost trend assumption would increase the net periodic postretirement cost by approximately $140,000 annually or 20.8%. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.5%. (9) INCOME TAXES Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which requires the use of the liability method in accounting for income taxes. Under the liability method, deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial reporting and tax basis of assets and liabilities. 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. To implement the statement, certain adjustments were made to accumulated deferred income taxes. To the extent such income taxes are recoverable or payable through future rates, regulatory assets and liabilities have been recorded in the accompanying consolidated balance sheets. Initial application of the statement had no material impact on the Company's results of operations. Income tax expense for the years indicated was: 1993 1992 1991 (in thousands) Current $7,923 $7,745 $9,350 Deferred 1,547 1,273 (289) Investment tax credits, net (505) (512) (512) $8,965 $8,506 $8,549 The sources of temporary differences and the tax effect of each are summarized as follows: 1993 1992 1991 (in thousands) Tax in excess of book depreciation $ 662 $ 566 $ 257 Inventory accounting method (184) (179) (308) Mining development and oil exploration costs 1,315 848 61 Other (246) 38 (299) $1,547 $1,273 $ (289) The temporary differences which gave rise to the net deferred tax liability at December 31, 1993 were as follows: Net Deferred Income Tax Asset Assets Liabilities (Liability) (in thousands) Accelerated depreciation and other plant-related differences $ - $32,507 $(32,507) AFUDC-equity - 461 (461) Regulatory asset 2,350 - 2,350 Unamortized investment tax credits 2,109 - 2,109 Mining development and oil exploration 746 2,383 (1,637) Employee benefits 1,227 455 772 Other 839 899 (60) $7,271 $36,705 $(29,434) The effective tax rate differs from the federal statutory rate for the years ended December 31, as follows: 1993 1992 1991 Federal statutory rate 35.0% 34.0% 34.0% Percentage depletion in excess of cost (2.8) (2.3) (2.3) Amortization of investment tax credits (1.6) (1.5) (1.6) Tax exempt interest income (1.7) (2.3) (2.8) Other (0.8) (1.4) 0.1 28.1% 26.5% 27.4% (10) OIL AND GAS RESERVES (Unaudited) The following table summarizes Western Production Company's (WPC) estimated quantities of proved developed and undeveloped oil and natural gas reserves at December 31, 1993 and 1992, and a reconciliation of the changes between these dates using constant product prices for the respective years. These estimates are based on reserve reports by an independent engineering company selected by the Company. Such reserve estimates are based upon a number of variable factors and assumptions which may cause these estimates to differ from actual results. 1993 1992 Oil Gas Oil Gas (in thousands of barrels of oil and MCF of gas) Proved developed and undeveloped reserves: Balance at beginning of year 2,199 3,243 2,524 4,799 Production (327) (777) (247) (379) Additions 259 1,847 193 272 Revisions to previous estimates due to changed economic conditions (1,015) (1,554) (271) (1,449) Balance at end of year 1,116 2,759 2,199 3,243 Proved developed reserves at end of year included above 1,116 2,759 1,630 2,633 Year end prices $13.00 $ 2.35 $18.75 $ 1.65 WPC has interests in 386 oil and gas properties in seven states. WPC operates a total of 347 wells in Wyoming, Colorado, and South Dakota. WPC's non-operated properties are located in Wyoming, Colorado, North Dakota, Montana, Kansas, and Texas. WPC also holds leases on approximately 74,000 gross and 50,000 net undeveloped acres. (11) SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY'S BUSINESS The three primary segments of the Company's business are its electric, coal mining, and oil and gas production operations. The following table summarizes certain information specifically identifiable with each segment as of or for the years ended December 31. 1993 1992 1991 (in thousands) Assets at year end: Electric $259,680 $238,378 $228,788 Coal mining 72,328 71,194 71,873 Oil and gas 20,845 20,630 19,234 $352,853 $330,202 $319,895 Depreciation, depletion, and amortization: Electric $ 9,952 $ 9,614 $ 8,644 Coal mining 1,953 1,482 1,572 Oil and gas 4,146 2,764 1,796 $ 16,051 $ 13,860 $ 12,012 Capital expenditures: NSS #2 (includes AFDC) $12,792 $ 2,227 $ - Other electric 13,140 15,507 29,865* Coal mining 7,425 5,001 1,129 Oil and gas 6,933 5,180 5,987 $ 40,290 $ 27,915 $ 36,981 <FN> * Includes the acquisition of the Wyodak Plant (See Note 6). (12) SUPPLEMENTARY INCOME STATEMENT INFORMATION PACIFICORP COAL SETTLEMENT In 1987, WRDC entered into an agreement with PacifiCorp which (a) settled PacifiCorp's obligation to purchase coal commencing in 1990 for a second plant to be located at Wyodak, the construction of which had been canceled, (b) provided for, among other things, increases in the coal price and minimum coal purchase obligations by PacifiCorp for the Wyodak Plant, and (c) provided for payments to WRDC of $2,000,000 each on January 2, 1988 through 1991 for an option to purchase additional coal. These settlements resulted in an increase in the Company's net income in 1993, 1992, and 1991 of approximately $1,500,000, $2,800,000, and $2,600,000 or $0.11, $0.20, and $0.19 per share of common stock, respectively. OTHER COAL SETTLEMENTS In late 1987, WRDC agreed to the termination of a long-term coal supply agreement with the city of Grand Island, Nebraska. Grand Island was granted a 14 year option to purchase coal and in return WRDC will receive payments of approximately $155,000 each year. TAXES OTHER THAN INCOME TAXES 1993 1992 1991 (in thousands) Property $ 3,549 $2,996 $2,366 Production and severance 2,982 2,622 2,820 Payroll 1,195 1,225 1,164 Black lung 1,256 1,191 1,099 Federal reclamation 1,060 1,035 960 Other 167 195 170 $10,209 $9,264 $8,579 COMPONENTS OF OTHER INCOME (EXPENSE): 1993 1992 1991 (in thousands) Coal settlements PacifiCorp $ - $ 940 $ 802 Grand Island 155 155 125 Other 319 138 (296) $ 474 $1,233 $ 631 (13) QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years indicated are summarized as follows: First Second Third Fourth (in thousands, except per share amounts) YEAR ENDED DECEMBER 31, 1993 Operating revenues $34,375 $32,924 $36,304 $35,770 Operating income 9,980 7,793 10,087 9,926 Net income 6,103 4,575 6,011 6,257 Earnings per share of common stock 0.45 0.33 0.44 0.44 Common stock prices High $28-1/4 $27-1/4 $27-1/8 $26-1/8 Low $24-7/8 $24-5/8 $25-1/8 $21-7/8 Dividends paid per share of common stock $ 0.32 $ 0.32 $ 0.32 $ 0.32 YEAR ENDED DECEMBER 31, 1992 Operating revenues $32,463 $32,175 $35,359 $35,346 Operating income 8,826 7,608 10,050 9,865 Net income 5,588 5,581 6,276 6,193 Earnings per share of common stock 0.41 0.41 0.46 0.45 Common stock prices High $29-1/2 $32-1/4 $29-5/8 $29-1/4 Low $25-3/8 $25-1/2 $27-1/2 $23-3/4 Dividends paid per share of common stock $ 0.31 $ 0.31 $ 0.31 $ 0.31 SELECTED FINANCIAL DATA (unaudited) Years ended December 31 1993 1992 1991 1990 1989 (in thousands, except per share amounts) Operating revenues $139,373 $135,343 $133,373 $127,498 $120,004 Net income from continuing operations 22,946 23,638 22,681 22,938 21,957 Per share of common stock: Earnings from continuing operations 1.66 1.73 1.66 1.68 1.60 Dividends paid 1.28 1.24 1.17 1.09 1.01 Total assets 352,853 330,202 319,895 294,929 272,523 Total long-term obligations 85,274 88,816 92,982 78,978 78,939 FINANCIAL STATISTICS Years ended December 31 1993 1992 1991 TOTAL ASSETS (in thousands) $352,853 $330,202 $319,895 PROPERTY AND INVESTMENTS (in thousands) Total property and investments . . .$433,143 $413,192 $390,766 Accumulated depreciation and depletion. . . . . . . . . . . . 144,492 132,890 122,574 Capital expenditures (includes AFDC) . . . . . . . . . . 40,290 27,915 36,981 CAPITALIZATION (in thousands) Long-term debt . . . . . . . . . . .$ 85,274 $ 88,816 $ 92,982 Common stock equity . . . . . . . . . 168,089 149,158 141,963 Total . . . . . . . . . . . . .$253,363 $237,974 $234,945 CAPITALIZATION RATIOS Long-term debt . . . . . . . . . . . 33.7% 37.3% 39.6% Common stock equity . . . . . . . . . 66.3 62.7 60.4 Total . . . . . . . . . . . . . . 100.0% 100.0% 100.0% AVERAGE INTEREST RATE ON LONG-TERM DEBT 9.0% 8.9% 8.9% NET INCOME AVAILABLE FOR COMMON STOCK (in thousands) . . . . $ 22,946 $ 23,638 $ 22,681 DIVIDENDS PAID ON COMMON STOCK (in thousands) . . . . . . . . . . . $ 17,720 $ 16,977 $ 16,045 COMMON STOCK DATA (in thousands)* Shares outstanding, average. . . . . . 13,811 13,689 13,675 Shares outstanding, end of year. . . . 14,270 13,701 13,675 Earnings per average share, in dollars. . . . . . . . . . . . . $ 1.66 $ 1.73 $ 1.66 Dividends paid per share, in dollars $ 1.28 $ 1.24 $ 1.17 Book value per share, end of year, in dollars. . . . . . . . . . $ 11.78 $ 10.89 $ 10.38 RETURN ON COMMON STOCK EQUITY. . . . . 13.7% 15.8% 16.0% ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AS PERCENT OF NET INCOME. . . . . . . . . . . . . . . . 3.2% 1.6% 0.8% (continued) Years ended December 31 1990 1989 1988 TOTAL ASSETS (in thousands) $294,929 $272,523 $270,258 PROPERTY AND INVESTMENTS (in thousands) Total property and investments. . . .$355,276 $331,310 $304,445 Accumulated depreciation and depletion. . . . . . . . . . . . 111,111 101,591 92,661 Capital expenditures (includes AFDC) . . . . . . . . . . 22,336 10,176 12,950 CAPITALIZATION (in thousands) Long-term debt . . . . . . . . . . .$ 78,978 $ 78,939 $ 82,709 Common stock equity . . . . . . . . . 135,329 127,338 120,100 Total . . . . . . . . . . . . .$214,307 $206,277 $202,809 CAPITALIZATION RATIOS Long-term debt . . . . . . . . . . . 36.9% 38.3% 40.8% Common stock equity . . . . . . . . . 63.1 61.7 59.2 Total . . . . . . . . . . . . . 100.0% 100.0% 100.0% AVERAGE INTEREST RATE ON LONG-TERM DEBT 8.6% 8.5% 8.5% NET INCOME AVAILABLE FOR COMMON STOCK (in thousands) . . . . $ 22,938 $ 21,096 $ 22,191 DIVIDENDS PAID ON COMMON STOCK (in thousands) . . . . . . . . . . . $ 14,947 $ 13,858 $ 12,756 COMMON STOCK DATA (in thousands)* Shares outstanding, average. . . . . . 13,675 13,675 13,665 Shares outstanding, end of year. . . . 13,675 13,675 13,675 Earnings per average share, in dollars. . . . . . . . . . . . . $ 1.68 $ 1.54 $ 1.62 Dividends paid per share, in dollars.$ 1.09 $ 1.01 $ 0.93 Book value per share, end of year, in dollars . . . . . . . . . $ 9.90 $ 9.31 $ 8.78 RETURN ON COMMON STOCK EQUITY . . . . 16.9% 16.6% 18.5% ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AS PERCENT OF NET INCOME . . . . . . . . . . . . 1.2% 0.5% 0.7% <FN> * Common stock data have been adjusted retroactively to reflect the three- for-two stock split in March 1992. ELECTRIC OPERATION STATISTICS Years ended December 31 1993 1992 1991 ELECTRIC ENERGY GENERATED AND PURCHASED (megawatt hours) Generated, net station output . . . 1,227,084 1,226,153 1,148,259 Purchased and net interchange . . . 435,990 397,478 444,848 Total generated and purchased . 1,663,074 1,623,631 1,593,107 Non-firm sales . . . . . . . . . . . (7,780) (10,405) (1,040) Company use and losses . . . . . . . (61,336) (73,627) (59,896) Total electric energy sales . . 1,593,958 1,539,599 1,532,171 ELECTRIC ENERGY SALES (megawatt hours) Residential . . . . . . . . . . . . 370,736 339,341 355,691 General and commercial . . . . . . . 469,496 446,036 440,043 Industrial . . . . . . . . . . . . . 568,316 572,244 550,999 Public authorities . . . . . . . . . 22,621 21,798 21,347 Sales for resale . . . . . . . . . . 162,789 160,180 164,091 Total electric energy sales . . 1,593,958 1,539,599 1,532,171 ELECTRIC REVENUE (in thousands) Residential . . . . . . . . . . . . $ 27,064 $ 25,366 $ 27,053 General and commercial . . . . . . . 32,295 30,742 31,227 Industrial . . . . . . . . . . . . . 25,901 27,106 26,812 Public authorities . . . . . . . . . 1,537 1,586 1,593 Sales for resale . . . . . . . . . . 7,122 7,002 7,223 Total electric revenue . . . . 93,919 91,802 93,908 Other revenue. . . . . . . . . . . . 4,236 5,646 4,250 Total revenue $ 98,155 $ 97,448 $ 98,158 ELECTRIC CUSTOMERS (end of year) Residential . . . . . . . . . . . . 44,657 44,100 43,539 General and commercial . . . . . . . 8,507 8,279 8,083 Industrial . . . . . . . . . . . . . 41 38 40 Public authorities . . . . . . . . . 124 117 112 Other electric utilities . . . . . . 1 1 1 Total . . . . . . . . . . . . . 53,330 52,535 51,775 RESIDENTIAL STATISTICS Average annual KWH usage: With electric heating. . . . . . . 17,601 15,380 16,773 Without electric heating . . . . . 6,428 6,172 6,502 All residential. . . . . . . . . . 8,351 7,743 8,218 Average price per KWH, in cents . . 7.2 7.6 7.6 AVERAGE PRICE PER KWH, ALL CUSTOMERS (in cents) . . . . . . . . . . . . . . 6.0 6.2 6.1 (continued) Years ended December 31 1990 1989 1988 ELECTRIC ENERGY GENERATED AND PURCHASED (megawatt hours) Generated, net station output . . . 1,169,054 1,046,971 1,119,073 Purchased and net interchange . . . 379,268 468,768 388,394 Total generated and purchased . 1,548,322 1,515,739 1,507,467 Non-firm sales . . . . . . . . . . . (5,576) (29,087) (45,943) Company use and losses . . . . . . . (64,031) (53,282) (56,869) Total electric energy sales . . 1,478,715 1,433,370 1,404,655 ELECTRIC ENERGY SALES (megawatt hours) Residential . . . . . . . . . . . . 338,391 343,645 337,375 General and commercial . . . . . . . 415,635 395,712 396,366 Industrial . . . . . . . . . . . . . 542,312 529,703 509,036 Public authorities . . . . . . . . . 20,819 20,980 24,574 Sales for resale . . . . . . . . . . 161,558 143,330 137,304 Total electric energy sales . . 1,478,715 1,433,370 1,404,655 ELECTRIC REVENUE (in thousands) Residential . . . . . . . . . . . . $ 25,498 $ 25,456 $ 24,768 General and commercial . . . . . . . 29,027 27,815 26,884 Industrial . . . . . . . . . . . . . 25,917 25,153 23,359 Public authorities . . . . . . . . . 1,540 1,563 1,656 Sales for resale . . . . . . . . . . 6,532 5,745 5,740 Total electric revenue . . . . 88,514 85,732 82,407 Other revenue . . . . . . . 3,762 4,650 3,838 Total revenue $ 92,276 $ 90,382 $ 86,245 ELECTRIC CUSTOMERS (end of year) Residential . . . . . . . . . . . . 43,020 42,505 41,880 General and commercial . . . . . . . 7,866 7,703 7,512 Industrial . . . . . . . . . . . . . 44 40 37 Public authorities . . . . . . . . . 114 111 105 Other electric utilities . . . . . . 1 1 1 Total . . . . . . . . . . . . . 51,045 50,360 49,535 RESIDENTIAL STATISTICS Average annual KWH usage: With electric heating. . . . . . . 15,978 16,881 16,218 Without electric heating . . . . . 6,288 6,421 6,461 All residential. . . . . . . . . . 7,897 8,171 8,056 Average price per KWH, in cents . . 7.5 7.4 7.3 AVERAGE PRICE PER KWH, ALL CUSTOMERS (in cents) . . . . . . . . . . . . . . 6.0 6.0 5.9 DIRECTORY COMMON STOCK Transfer Agent, Registrar, and Dividend Disbursing Agent Chemical Bank 450 West 33rd Street New York, New York 10001 FIRST MORTGAGE BONDS Trustee and Paying Agent Chemical Bank 450 West 33rd Street New York, New York 10001 POLLUTION CONTROL AND INDUSTRIAL DEVELOPMENT REVENUE BONDS Trustee and Paying Agent Norwest Bank Minnesota, N.A. Eighth Street and Marquette Avenue Minneapolis, Minnesota 55479 GENERAL COUNSEL Morrill Brown & Thomas P.O. Box 8108 Rapid City, South Dakota 57709 CORPORATE OFFICES Black Hills Corporation P.O. Box 1400 Rapid City, South Dakota 57709 (605) 348-1700 The Company's common stock ($1 par value) is traded on The New York Stock Exchange. Quotations for the common stock are reported under the symbol BKH. At year-end the Company had 7,243 common stockholders of record. All fifty states and the District of Columbia plus twelve foreign countries are represented. The continued interest and support of equity owners is appreciated. The Company has declared common stock dividends payable in cash in each year since its incorporation in 1941. At its January 1994 meeting, the Board of Directors raised the quarterly dividend to 33 cents per share, equivalent to an annual increase of 4 cents per share. This regular quarterly dividend is payable March 1, 1994. All dividends are reportable for federal income tax purposes as ordinary dividend income. The Annual Report is mailed to each shareholder in accordance with government rules. Dividend payments and interim reports of the Company are mailed quarterly. Dividend payment dates are March 1, June 1, September 1, and December 1. You may receive more than one copy of the Annual Report if there are variations in your name or address in which your stock is registered. Duplicate mailings of annual and interim reports can be eliminated upon written request of the shareholder. A copy of the Company's Annual Report on Form 10-K, filed with the Securities and Exchange Commission, is available to shareholders without charge upon written request to Roxann R. Basham, Secretary, P.O. Box 1400, Rapid City, South Dakota 57709. 1994 ANNUAL MEETING The Annual Meeting of Stockholders will be held at the Holiday Inn - Rushmore Plaza Hotel, 505 North Fifth Street, Rapid City, South Dakota, at 9:30 A.M., on May 24, 1994. Prior to the meeting, formal notice, proxy statement, and proxy will be mailed to shareholders. DIRECT DEPOSIT OF DIVIDENDS The Company encourages you to consider the direct deposit of your dividends. With direct deposit, your quarterly dividend payment can be automatically transferred on the dividend payment date to the bank, savings and loan, or credit union of your choice. Direct deposit assures payments are credited to shareholders' accounts without delay. A form is attached to your dividend check where you can request information about this method of payment. Questions regarding direct deposit should be directed to Chemical Bank, Security Holder Relations, P. O. Box 24935, Church Street Station, New York, New York 10249. DIVIDEND REINVESTMENT PLAN A Dividend Reinvestment and Stock Purchase Plan (the Plan) is available to common shareholders. The Company revised its plan in November 1993. The new Plan provides a method of investing common stock dividends and optional cash payments in additional shares of common stock of the Company at 100 percent of the recent average market price. The participant may elect to continue to receive cash dividends on shares registered in their names and invest by making optional cash payments only. Questions regarding the Plan should be directed to the Secretary of the Company or Chemical Bank, Dividend Reinvestment Department, J.A.F. Building, P.O. Box 3069, New York, New York 10116-3069 or by calling the Bank toll free at 1-800-279-1246.