Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. BLACK HILLS CORP /SD/ (1130464) 10-K published on Feb 19, 2019 at 3:46 pm
Reporting Period: Dec 30, 2018
The Company has provided energy and served customers for 135 years, since the 1883 gold rush days in Deadwood, South Dakota. Throughout our history, the common thread that unites the past to the present is our commitment to serve our customers and communities. Our strategic focus has not changed in over a century - serving customers with affordable, reliable and safe energy. Our strategy today continues that emphasis on serving customers, but with a renewed focus on better engaging with the people and communities we serve. Customer expectations are rapidly changing with the advancement of technology and customers are demanding simpler, faster and more convenient solutions to their energy needs. We are ready to serve as we have done for the past 135 years.
The commodity contracts for the Electric and Gas Utilities, valued using the market approach, include exchange-traded futures, options, basis swaps and over-the-counter swaps (Level 2) for natural gas contracts. For exchange-traded futures, options and basis swap Level 2 assets and liabilities, fair value was derived using broker quotes validated by the Chicago Mercantile Exchange pricing for similar instruments. For over-the-counter swaps and options Level 2 assets and liabilities, fair value was derived from, or corroborated by, observable market pricing data. In addition, the fair value for the over-the-counter swaps and option derivatives, if material, include a CVA component. The CVA considers the fair value of the derivative and the probability of default based on the life of the contract. For the probability of a default component, we utilize observable inputs supporting Level 2 disclosure by using our credit default spread, if available, or a generic credit default spread curve that takes into account our credit ratings.
Jointly Owned facility - Related Party
Colorado Electric owns 50% of the Busch Ranch I Wind Farm while Black Hills Electric Generation owns the remaining 50% ownership interest. Each company is obligated to make payments for costs associated with their proportionate share of the costs of operating the wind farm over the life of the facility. On December 11, 2018, Black Hills Electric Generation purchased its 50% ownership interest in the 29 MW Busch Ranch I Wind Farm from AltaGas for $16 million. Colorado Electric retains responsibility for operations of the wind farm. We recorded this purchase as an asset acquisition at fair value with $8.7 million of the purchase price recorded as wind generation assets, and $7.6 million recorded as an intangible asset, reflective of the fair value of the PPA. Black Hills Electric Generation will provide its share of energy from the wind farm to Colorado Electric through a new PPA, which replaces the PPA Colorado Electric had with AltaGas, expiring in October 2037.
As of December 31, 2018 and 2017, we have a regulatory liability associated with TCJA related items of approximately $311 million and $301 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 majority 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 $2.1 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 15 for more information.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA reduced the U.S. federal corporate tax rate from 35% to 21%. As such, the Company remeasured the deferred income taxes at the 21% federal tax rate as of December 31, 2017. The entities subject to regulatory construct have made their best estimate regarding the probability of settlements of net regulatory liabilities established pursuant to the TCJA. The amount of the settlements may change based on decisions and actions by the rate regulators, which could have a material impact on the Company’s future results of operations, cash flows or financial position. As a result of the revaluation at December 31, 2017, deferred tax assets and liabilities were reduced by approximately $309 million. Of the $309 million, approximately $301 million is related to our regulated utilities and is reclassified to a regulatory liability. During the year ended December 31, 2018 we recorded approximately $11 million of additional regulatory liability associated with TCJA related items primarily related to property, completing the revaluation of deferred taxes pursuant to the TCJA. A majority 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 $2.1 million of the 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.