BLACK HILLS CORP /SD/BKH
BLACK HILLS CORP /SD/ Commitments Disclosure
COMMITMENTS AND CONTINGENCIES
Power Purchase and Transmission Services Agreements
Through our subsidiaries, we have the following significant long-term power purchase contracts with non-affiliated third-parties:
• | Colorado Electric’s PPA with PRPA to purchase up to 60 MW of wind energy upon construction of a new wind project, which is expected in mid-2020. This agreement will expire May 31, 2030. |
• | Colorado Electric’s PPA with PRPA to purchase 25 MW of unit contingent energy. This agreement will expire June 30, 2024. |
• | South Dakota Electric’s PPA with PacifiCorp, expiring December 31, 2023, for the purchase of 50 MW of electric capacity and energy from PacifiCorp’s system. The price paid for the capacity and energy is based on the operating costs of one of PacifiCorp’s coal-fired electric generating plants. |
• | South Dakota Electric’s firm point-to-point transmission service agreement with PacifiCorp expiring December 31, 2023. The agreement provides 50 MW of capacity and energy to be transmitted annually by PacifiCorp. |
• | South Dakota Electric’s PPA with PRPA to purchase up to 12 MW of wind energy through PRPA’s agreement with Silver Sage. This agreement will expire September 30, 2029. |
• | Wyoming Electric’s PPA with Happy Jack, expiring September 3, 2028, provides up to 30 MW of wind energy. Under a separate intercompany agreement, Wyoming Electric sells 50% of the facility output to South Dakota Electric. |
• | Wyoming Electric’s PPA with Silver Sage, expiring September 30, 2029, provides up to 30 MW of wind energy. Under a separate intercompany agreement, Wyoming Electric sells 20 MW of energy from Silver Sage to South Dakota Electric. |
• | Black Hills Wyoming sold its CTII 40 MW natural gas-fired generating unit to the City of Gillette, Wyoming on September 3, 2014. Under the terms of the sale, Black Hills Wyoming entered into ancillary agreements to operate CTII, provide use of shared facilities including a ground lease and dispatch generation services. In addition, the agreement includes a 20-year economy energy PPA that contains a sharing arrangement in which the parties share the savings of wholesale power purchases made when market power prices are less than the cost of operating the generating unit. |
Costs under these power purchase contracts for the years ended December 31 were as follows (in thousands):
2019 | 2018 | 2017 | |||||||
Colorado Electric PPA with PRPA - Unit Contingent Energy | $ | 1,802 | $ | — | $ | — | |||
Colorado Electric PPA Busch Ranch I (a) | $ | — | $ | — | $ | 1,966 | |||
South Dakota Electric PPA with PacifiCorp | $ | 7,477 | $ | 13,681 | $ | 13,218 | |||
South Dakota Electric Transmission services agreement with PacifiCorp | $ | 1,741 | $ | 1,742 | $ | 1,671 | |||
South Dakota Electric PPA with PRPA | $ | 688 | $ | 223 | $ | — | |||
Wyoming Electric PPA with Happy Jack | $ | 3,936 | $ | 3,884 | $ | 3,846 | |||
Wyoming Electric PPA with Silver Sage | $ | 5,366 | $ | 5,376 | $ | 4,934 | |||
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(a) | On December 11, 2018, Black Hills Electric Generation purchased a 50% ownership interest of the Busch Ranch I. Black Hills Electric Generation and Colorado Electric now collectively own 100% of the wind farm. |
Power Purchase Agreements - Related Party
On November 26, 2019, Black Hills Electric Generation completed and placed in service Busch Ranch II. Black Hills Electric Generation provides the wind energy generated from Busch Ranch II to Colorado Electric under a new PPA, which expires in November 2044.
On December 11, 2018, Black Hills Electric Generation purchased a 50% ownership interest in Busch Ranch I. Black Hills Electric Generation provides its 14.5 MW share of energy from the wind farm to Colorado Electric through a PPA, which expires in October 2037.
Colorado Electric’s PPA with Black Hills Colorado IPP expiring on December 31, 2031, provides 200 MW of power to Colorado Electric from Black Hills Colorado IPP’s combined-cycle turbines. Effective January 1, 2019, we changed how we account for this PPA at the segment level and now recognize on an accrual basis, rather than a finance lease. See Note 5 for additional information.
Other Gas Supply Agreements
Our Utilities also purchase natural gas, including transportation and storage capacity to meet customers’ needs, under short-term and long-term purchase contracts. These contracts extend to 2044.
Purchase Commitments
We maintain natural gas supply contracts with several vendors that generally cover a period of up to one year. Commitments for estimated baseload gas volumes are established prior to the beginning of the month under these contracts on a monthly basis at contractually negotiated prices. Commitments for incremental daily purchases are made as necessary during the month based on requirements in accordance with the terms of the individual contract.
Our Gas Utilities segment has commitments to purchase physical quantities of natural gas under contracts indexed to various forward natural gas price curves. A portion of our gas purchases are purchased under evergreen contracts and are therefore, for purposes of this disclosure, carried out for 60 days. At December 31, 2019, the long-term commitments to purchase quantities of natural gas under contracts indexed to the following forward indices were as follows (in MMBtus):
NNG-Ventura | NWPL-Wyoming | |
2020 | 3,660,000 | 1,520,000 |
2021 | 3,650,000 | 1,510,000 |
2022 | 1,810,000 | 1,510,000 |
2023 | 0 | 1,510,000 |
2024 | 0 | 910,000 |
Thereafter | 0 | 0 |
Purchases under these contracts totaled $6.7 million, $27 million and $65 million for 2019, 2018 and 2017, respectively.
The following is a schedule of unconditional purchase obligations required under the power purchase, transmission services and natural gas transportation and storage agreements (in thousands):
Power purchase and transmission services agreements | Natural gas transportation and storage agreements | |||||
2020 | $ | 25,476 | $ | 156,297 | ||
2021 | $ | 11,678 | $ | 148,149 | ||
2022 | $ | 11,678 | $ | 122,340 | ||
2023 | $ | 11,678 | $ | 93,905 | ||
2024 | $ | 2,738 | $ | 51,360 | ||
Thereafter | $ | — | $ | 126,147 | ||
Future Purchase Agreement - Related Party
Wyoming Electric has a PPA with Black Hills Wyoming expiring on December 31, 2022, which provides 60 MW of unit-contingent capacity and energy from Black Hills Wyoming’s Wygen I facility. On August 2, 2019, Black Hills Wyoming and Wyoming Electric jointly filed a request with FERC for approval of a new 60 MW PPA. The agreement would fulfill the capacity need for Wyoming Electric at the expiration of the current agreement on December 31, 2022. If approved, Black Hills Wyoming will continue to deliver 60 MW of energy to Wyoming Electric from its Wygen I power plant starting January 1, 2023, and continuing for an additional 20 years to December 31, 2042. On December 23, 2019, the Company filed a response to questions from the FERC and awaits a decision from FERC.
Power Sales Agreements
Through our subsidiaries, we have the following significant long-term power sales contracts with non-affiliated third-parties:
• | During periods of reduced production at Wygen III in which MDU owns a portion of the capacity, or during periods when Wygen III is off-line, South Dakota Electric will provide MDU with 25 MW from our other generation facilities or from system purchases with reimbursement of costs by MDU. This agreement expires January 31, 2023. |
• | South Dakota Electric has an agreement to provide MDU capacity and energy up to a maximum of 50 MW in excess of Wygen III ownership. This agreement expires December 31, 2023. |
• | During periods of reduced production at Wygen III in which the City of Gillette owns a portion of the capacity, or during periods when Wygen III is off-line, South Dakota Electric will provide the City of Gillette with its first 23 MW from our other generating facilities or from system purchases with reimbursement of costs by the City of Gillette. Under this agreement which is renewed annually on September 3, South Dakota Electric will also provide the City of Gillette their operating component of spinning reserves. |
• | South Dakota Electric has an amended agreement, effective January 1, 2019, to supply up to 20 MW of energy and capacity to MEAN under a contract that expires May 31, 2028. The contract terms are from June 1 through May 31 for each interval listed below. This contract is unit-contingent based on the availability of our Neil Simpson II and Wygen III plants, with decreasing capacity purchased over the term of the agreement. The unit-contingent capacity amounts from Wygen III and Neil Simpson II are as follows: |
Contract Years | Total Contract Capacity | Contingent Capacity Amounts on Wygen III | Contingent Capacity Amounts on Neil Simpson II | ||||||||
2019-2020 | 15 | MW | 10 | MW | 5 | MW | |||||
2020-2022 | 15 | MW | 7 | MW | 8 | MW | |||||
2022-2023 | 15 | MW | 8 | MW | 7 | MW | |||||
2023-2028 | 10 | MW | 5 | MW | 5 | MW | |||||
• | South Dakota Electric has an agreement that expires December 31, 2021 to provide 50 MW of energy to Macquarie Energy, LLC during heavy and light load timing intervals. |
Reimbursement Agreement
We have a reimbursement agreement in place with Wells Fargo on behalf of Wyoming Electric for the 2009A bonds of $10 million due in 2027 and the 2009B bonds of $7.0 million due in 2021. In the case of default, we hold the assumption of liability for drawings on Wyoming Electric’s Letter of Credit attached to these bonds.
Environmental Matters
We are subject to costs resulting from a number of federal, state and local laws and regulations which affect future planning and existing operations. Laws and regulations can result in increased capital expenditures, operating and other costs as a result of compliance, remediation and monitoring obligations. Due to the environmental issues discussed below, we may be required to modify, curtail, replace or cease operating certain facilities or operations to comply with statutes, regulations and other requirements of regulatory bodies.
Reclamation Liability
For our Pueblo Airport Generation site, we posted a bond of $4.1 million with the State of Colorado to cover the costs of remediation for a waste water containment pond permitted to provide wastewater storage and processing for this zero discharge facility. The reclamation liability is recorded at the present value of the estimated future cost to reclaim the land.
Under our land leases for our wind generation facilities, we are required to reclaim all land where we have placed wind turbines. The reclamation liabilities are recorded at the present value of the estimated future cost to reclaim the land.
Under its mining permit, WRDC is required to reclaim all land where it has mined reserves. The reclamation liability is recorded at the present value of the estimated future cost to reclaim the land.
Manufactured Gas Processing
In 2008, we acquired whole and partial liabilities for former manufactured gas processing sites in Nebraska and Iowa which were previously used to convert coal to natural gas. The acquisition provided for an insurance recovery, now valued at $1.1 million recorded in Other assets, non-current on our Consolidated Balance Sheets, which will be used to help offset remediation costs. We also have a $1.5 million regulatory asset for manufactured gas processing sites; see Note 13 for additional information.
As of December 31, 2019, our estimated liabilities for Iowa’s manufactured gas processing site currently range from approximately $2.6 million to $10 million for which we had $2.6 million accrued for remediation of the site as of December 31, 2019 included in Other deferred credits and other liabilities on our Consolidated Balance Sheets. The remediation cost estimate could change materially due to results of further investigations, actions of environmental agencies or the financial viability of other responsible parties.
Legal Proceedings
In the normal course of business, we are subject to various lawsuits, actions, proceedings, claims and other matters asserted under laws and regulations. We believe the amounts provided in the consolidated financial statements to satisfy alleged liabilities are adequate in light of the probable and estimable contingencies. However, there can be no assurance that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims and other matters discussed, and to comply with applicable laws and regulations will not exceed the amounts reflected in the consolidated financial statements.
In the normal course of business, we enter into agreements that include indemnification in favor of third parties, such as information technology agreements, purchase and sale agreements and lease contracts. We have also agreed to indemnify our directors, officers and employees in accordance with our articles of incorporation, as amended. Certain agreements do not contain any limits on our liability and therefore, it is not possible to estimate our potential liability under these indemnifications. In certain cases, we have recourse against third parties with respect to these indemnities. Further, we maintain insurance policies that may provide coverage against certain claims under these indemnities.
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About Commitments Disclosures
Commitments and contingencies disclosures catalog a company's off-balance-sheet obligations and legal exposures — purchase commitments, guarantee arrangements, pending litigation, and regulatory proceedings. These items represent potential future cash outflows that may not appear as liabilities on the balance sheet until they become probable and estimable.
Key signals: litigation reserves and disclosed loss ranges quantify management's estimate of legal exposure, but unquantified "reasonably possible" losses often represent the larger risk. Watch for changes in language around pending cases — shifts from "remote" to "reasonably possible" or increases in estimated loss ranges signal deteriorating outcomes. Unconditional purchase obligations and take-or-pay contracts create fixed cost structures that reduce operational flexibility. Guarantee arrangements for subsidiaries or joint ventures can create cascading obligations. Compare the total commitment schedule against projected free cash flow to assess whether the company can meet its obligations without additional financing.