EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

We sponsor a 401(k) retirement savings plan (the 401(k) Plan). Participants in the 401(k) Plan may elect to invest a portion of their eligible compensation to the 401(k) Plan up to the maximum amounts established by the IRS. The 401(k) Plan provides employees the opportunity to invest up to 50% of their eligible compensation on a pre-tax or after-tax basis. The 401(k) Plan provides a Company Matching Contribution for all eligible participants and for certain eligible participants a Company Retirement Contribution based on the participant’s age and years of service. Vesting of all Company contributions ranges from immediate vesting to graduated vesting at 20% per year with 100% vesting when the participant has 5 years of service with the Company.

Funded Status of Benefit Plans

The funded status of postretirement benefit plans is required to be recognized in the statement of financial position. The funded status for pension plans is measured as the difference between the projected benefit obligation and the fair value of plan assets. The funded status for all other benefit plans is measured as the difference between the accumulated benefit obligation and the fair value of plan assets. A liability is recorded for an amount by which the benefit obligation exceeds the fair value of plan assets or an asset is recorded for any amount by which the fair value of plan assets exceeds the benefit obligation. Except for our regulated utilities, the unrecognized net periodic benefit cost is recorded within AOCI, net of tax. For our regulated utilities, these costs are recoverable in our rates, and accordingly, the unrecognized net periodic benefit cost was alternatively recorded as a regulatory asset or regulatory liability, net of tax (see Note 1). The measurement date for all plans is December 31, 2015. As of December 31, 2015, the unfunded status of our Defined Benefit Pension Plans was $68 million; the unfunded status of our Supplemental Non-qualified Defined Benefit Plans was $40 million; and the unfunded status of our Non-pension Defined Benefit Postretirement Healthcare Plans was $43 million.

Defined Benefit Pension Plans (Pension Plans)

We have two defined benefit pension plans. Our BHC Pension Plan covers certain eligible employees of Black Hills Service Company, Black Hills Power, WRDC, BHEP and Cheyenne Light. The Black Hills Utility Holdings, Inc. Pension Plan covers certain eligible employees of Black Hills Energy. The benefits for the Pension Plans are based on years of service and calculations of average earnings during a specific time period prior to retirement. Both Pension Plans have been closed to new employees and certain employees who did not meet age and service based criteria.

Pension Plan assets are held in a Master Trust. Each Plan holds an undivided interest in the Master Trust. Our Board of Directors has approved the Plans’ investment policy. The objective of the investment policy is to manage assets in such a way that will allow the eventual settlement of our obligations to the Pension Plans’ beneficiaries. To meet this objective, our pension assets are managed by an outside adviser using a portfolio strategy that will provide liquidity to meet the Plans’ benefit payment obligations. The Pension Plans’ assets consist primarily of equity, fixed income and hedged investments. The expected long-term rate of return for investments was 6.75% for the 2015 and 2014 plan years, respectively. Our Pension Plan funding policy is in compliance with the federal government’s funding requirements.

Plan Assets

The percentages of total plan asset fair value by investment category for our Pension Plans at December 31 were as follows:



	2015	2014
Equity	26%	27%
Real estate	5	5
Fixed income	59	58
Cash	1	2
Hedge funds	9	8
Total	100%	100%

Supplemental Non-qualified Defined Benefit Plans

We have various supplemental retirement plans for key executives of the Company. The plans are non-qualified defined benefit and defined contribution plans (Supplemental Plans). The Supplemental Plans are subject to various vesting schedules and are not funded by the Company.

Plan Assets

We do not fund our Supplemental Plans. We fund on a cash basis as benefits are paid.

Non-pension Defined Benefit Postretirement Healthcare Plans

We sponsor three retiree healthcare plans (Healthcare Plans) for employees who meet certain age and service requirements at retirement. Healthcare Plan benefits are subject to premiums, deductibles, co-payment provisions and other limitations. A portion of the Healthcare Plans is pre-funded via VEBAs. Effective January 1, 2014, health care coverage for Medicare-eligible retirees is provided through an individual market health care exchange for BHC and Black Hills Utility Holdings retirees.

Plan Assets

We fund the Healthcare Plans on a cash basis as benefits are paid. The Black Hills Energy Plan provides for partial pre-funding via VEBAs. Assets related to this pre-funding are held in trust and are for the benefit of the union and non-union employees of Black Hills Energy located in the states of Kansas and Iowa. We do not pre-fund the Postretirement Healthcare Plans for those employees outside Kansas and Iowa.

Plan Contributions

Contributions to the Pension Plans are cash contributions made directly to the Pension Plan Trust accounts. Healthcare and Supplemental Plan contributions are made in the form of benefit payments. Contributions for the years ended December 31 were as follows (in thousands):



	2015		2014
Defined Contribution Plan
Company Retirement Contribution	$	5,564	$	4,187
Matching contributions - Defined Contribution Plans	$	9,616	$	9,254



	2015		2014
Defined Benefit Plans
Defined Benefit Pension Plans	$	10,200	$	10,200
Non-Pension Defined Benefit Postretirement Healthcare Plans	$	3,771	$	3,163
Supplemental Non-Qualified Defined Benefit Plans	$	1,564	$	1,553

While we do not have required contributions, we expect to make approximately $10 million in contributions to our Defined Benefit Pension Plans in 2016.

Fair Value Measurements

As required by accounting standards for Compensation - Retirement Benefits, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect their placement within the fair value hierarchy levels.

The following tables set forth, by level within the fair value hierarchy, the assets that were accounted for at fair value on a recurring basis (in thousands):



Defined Benefit Pension Plans	December 31, 2015
	Level 1		Level 2		Level 3		Total
AXA Equitable General Fixed Income	$	—	$	1,072	$	—	$	1,072
Common Collective Trust - Cash and Cash Equivalents	—		1,556		—		1,556
Common Collective Trust - Equity	—		74,885		—		74,885
Common Collective Trust - Fixed Income	—		172,016		—		172,016
Common Collective Trust - Real Estate	—		2,204		11,143		13,347
Hedge Funds	—		—		25,746		25,746
Total investments measured at fair value	$	—	$	251,733	$	36,889	$	288,622



Defined Benefit Pension Plans	December 31, 2014
	Level 1		Level 2		Level 3		Total
AXA Equitable General Fixed Income	$	—	$	541	$	—	$	541
Common Collective Trust - Cash and Cash Equivalents	—		4,013		—		4,013
Common Collective Trust - Equity	—		81,636		—		81,636
Common Collective Trust - Fixed Income	—		174,726		—		174,726
Common Collective Trust - Real Estate	—		3,864		9,719		13,583
Hedge Funds	—		—		25,034		25,034
Total investments measured at fair value	$	—	$	264,780	$	34,753	$	299,533



Non-pension Defined Benefit Postretirement Healthcare Plans	December 31, 2015
	Level 1		Level 2		Level 3		Total
Registered Investment Company Trust - Money Market Mutual Fund	$	—	$	4,681	$	—	$	4,681
Total investments measured at fair value	$	—	4,681		$	—	$	4,681



Non-pension Defined Benefit Postretirement Healthcare Plans	December 31, 2014
	Level 1		Level 2		Level 3		Total
Registered Investment Company Trust - Money Market Mutual Fund	$	—	$	4,705	$	—	$	4,705
Total investments measured at fair value	$	—	$	4,705	$	—	$	4,705

The following table sets forth a summary of changes in the fair value of the Defined Benefit Pension Plans’ Level 3 assets for the period ended December 31 (in thousands):



	2015		2014
Balance, beginning of period	$	34,753	$	38,188

Purchase	491		454
Unrealized gain (loss)	1,644		1,789
Realized gain (loss)	1		322
Settlements	—		(6,000		)
Balance, end of period	$	36,889	$	34,753

The following table presents the quantitative information about Level 3 fair value measurements (dollars in thousands):



	Fair Value at		Valuation	Level 3	Range (Weighted)
	December 31, 2015		Technique	Input	Average
Assets:
Common Collective Trust - Real Estate ^(a)	$	11,143	Market Approach	Redemption Restriction	N/A
Hedge Funds ^(b)	$	25,746	Market Approach	Redemption Restriction	N/A

_____________

(a)

The underlying net asset value in the Common Collective Trust - Real Estate fund is determined by appraisal of the properties held in the Trust. As part of the Trustee's valuation process, properties are externally appraised generally on an annual basis. The appraisals are conducted by reputable independent appraisal firms and signed by appraisers that are members of the Appraisal Institute, with the professional designation of Member, Appraisal Institute. All external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. We receive monthly statements from the Trustee along with the annual schedule of investments and rely on these reports for pricing the units of the fund. The fund does contain a participant withdrawal policy.

(b)

The fair value of the Hedge Funds is determined based on pricing provided or reviewed by the third-party administrator to our investment managers. While the input amounts used by the pricing vendor in determining fair value are not provided, and therefore, unavailable for our review, the asset results are reviewed and monitored to ensure the fair values are reasonable and in line with market experience in similar asset classes. Additionally, the audited financial statements of the funds are reviewed at the time they are issued.

Additional information about assets of the Pension Plans, including methods and assumptions used to estimate the fair value of these assets, is as follows:

AXA Equitable General Fixed Income Fund: This fund is a diversified portfolio, primarily composed of fixed income instruments. Assets are invested in long-term holdings, such as commercial, agricultural and residential mortgages, publicly traded and privately place bonds and real estate as well as short-term bonds. Fair values of mortgage loans are measured by discounting future contractual cash flows to be received on the mortgage loans using interest rates at which loans with similar characteristics have. The discount rate is derived from taking the appropriate U.S. Treasury rate with a like term. The fair value of public fixed maturity securities are generally based on prices obtained from independent valuation service providers with reasonableness prices compared with directly observable market trades. The fair value of privately placed securities are determined using a discounted cash flow model. These models use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries and industry sector of the issuer.

Common Collective Trust Funds: These funds are valued based upon the redemption price of units held by the Plan, which is based on the current fair value of the common collective trust funds’ underlying assets. Unit values are determined by the financial institution sponsoring such funds by dividing the fund’s net assets at fair value by its units outstanding at the valuation dates. The Plan’s investments in common collective trust funds, with the exception of shares of the common collective trust-real estate are categorized as Level 2.

Common Collective Trust-Real Estate Fund: This fund is valued based on various factors of the underlying real estate properties, including market rent, market rent growth, occupancy levels, etc. As part of the trustee’s valuation process, properties are externally appraised generally on an annual basis. The appraisals are conducted by reputable independent appraisal firms and signed by appraisers that are members of the Appraisal Institute, with professional designation of Member, Appraisal Institute. All external appraisals are performed in accordance with the Uniform Standards of Professional Appraisal Practices. We receive monthly statements from the trustee, along with the annual schedule of investments, and rely on these reports for pricing the units of the fund. Certain of the funds’ assets contain participant withdrawal policy and, therefore, are categorized as Level 3. The funds without participant withdrawal limitations are categorized as Level 2.

Hedge Funds: Hedge funds represent investments in other investment funds that seek a return utilizing a number of diverse investment strategies. The strategies, when combined aim to reduce volatility and risk while attempting to deliver positive returns under all market conditions. Amounts are reported on a one-month lag. The fair value of hedge funds is determined using net asset value per share based on the fair value of the hedge fund’s underlying investments. Generally, shares may be redeemed at the end of each quarter, with a 65 day notice and are limited to a percentage of total net asset value of the fund. The net asset values are based on the fair value of each fund’s underlying investments. There are no unfunded commitments related to these hedge funds. The Plan’s investment in the hedge fund is categorized as Level 3.

Other Plan Information

The following tables provide a reconciliation of the employee benefit plan obligations, fair value of assets and amounts recognized in the statement of financial position, components of the net periodic expense and elements of AOCI (in thousands):

Benefit Obligations



		Defined Benefit Pension Plans						Supplemental Non-qualified Defined Benefit Retirement Plans						Non-pension Defined Benefit Postretirement Plans
		2015			2014			2015			2014			2015			2014
Change in benefit obligation:
Projected benefit obligation at beginning of year		$	377,772		321,400			$	41,211		$	32,960		$	49,042		$	45,778
Service cost		6,093			5,448			1,300			2,543			1,808			1,700
Interest cost		15,522			15,852			1,455			1,447			1,801			1,919
Actuarial (gain) loss	^(a)	(28,229		)	55,384			(2,072		)	5,814			(1,206		)	2,275
Benefits paid	^(b)	(14,583		)	(20,312		)	(1,675		)	(1,553		)	(3,771		)	(3,163		)
Medicare Part D accrued		—			—			—			—			(178		)	(99		)
Plan participants’ contributions		—			—			—			—			581			632
Projected benefit obligation at end of year		$	356,575		$	377,772		$	40,219		$	41,211		$	48,077		$	49,042

____________________


(a)	Change from 2014 reflects an increase in the discount rate and a change in the mortality tables used in employee benefit plan estimates.


(b)	Benefits paid include payments of $6.1 million in 2014 made to terminated vested employees who elected lump-sum offerings.

A reconciliation of the fair value of Plan assets was as follows (in thousands):



	Defined Benefit Pension Plans							Supplemental Non-qualified Defined Benefit Retirement Plans				Non-pension Defined Benefit Postretirement Plans ^(a)
	2015			2014				2015		2014		2015			2014
Beginning market value of plan assets	$	299,533		$	280,362			$	—	$	—	$	4,705		$	4,546
Investment income (loss)	(6,528		)	29,283				—		—		(9		)	(43		)
Employer contributions	10,200			10,200				—		—		3,175			2,733
Retiree contributions	—			—				—		—		581			632
Benefits paid	(14,583		)	(20,312		)	^(b)	—		—		(3,771		)	(3,163		)
Plan administrative expenses	—			—				—		—		—			—
Ending market value of plan assets	$	288,622		$	299,533			$	—	$	—	$	4,681		$	4,705

____________________


(a)	Assets of VEBA.


(b)	Benefits paid include payments of $6.1 million in 2014 made to terminated vested employees who elected lump-sum offerings.

Amounts recognized in the Consolidated Balance Sheets at December 31 consist of (in thousands):



	Defined Benefit Pension Plans				Supplemental Non-qualified Defined Benefit Plans				Non-pension Defined Benefit Postretirement Healthcare Plans
	2015		2014		2015		2014		2015		2014
Regulatory assets	$	68,915	$	78,864	$	—	$	—	$	6,464	$	7,137
Current liabilities	$	—	$	—	$	1,568	$	1,486	$	3,543	$	3,273
Non-current assets	$	—	$	—	$	—	$	—	$	23	$	—
Non-current liabilities	$	67,953	$	78,239	$	38,651	$	39,725	$	39,855	$	41,002
Regulatory liabilities	$	—	$	—	$	—	$	—	$	3,209	$	2,983

Accumulated Benefit Obligation



(in thousands)	Defined Benefit Pension Plans				Supplemental Non-qualified Defined Benefit Plans				Non-pension Defined Benefit Postretirement Healthcare Plans
	2015		2014		2015		2014		2015		2014
Accumulated benefit obligation - Black Hills Corporation	$	129,729	$	135,582	$	30,207	$	29,843	$	13,121	$	12,809
Accumulated benefit obligation - Black Hills Energy	205,194		213,398		351		386		23,796		25,456
Accumulated benefit obligation - Cheyenne Light	—		—		—		—		11,160		10,777
Total Accumulated Benefit Obligation	$	334,923	$	348,980	$	30,558	$	30,229	$	48,077	$	49,042

Components of Net Periodic Expense



(in thousands)	Defined Benefit Pension Plans									Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plans
	2015			2014			2013			2015		2014		2013		2015			2014			2013
Service cost	$	6,093		$	5,448		$	6,433		$	1,380	$	1,498	$	1,392	$	1,808		$	1,700		$	1,674
Interest cost	15,522			15,852			15,300			1,455		1,447		1,328		1,801			1,919			1,669
Expected return on assets	(19,470		)	(18,065		)	(18,615		)	—		—		—		(131		)	(85		)	(79		)
Amortization of prior service cost	58			62			63			2		2		2		(428		)	(428		)	(500		)
Recognized net actuarial loss (gain)	11,037			4,806			12,250			1,081		498		793		408			160			482
Net periodic expense	$	13,240		$	8,103		$	15,431		$	3,918	$	3,445	$	3,515	$	3,458		$	3,266		$	3,246

AOCI

In accordance with accounting standards for defined benefit plans, amounts included in AOCI, after-tax, that have not yet been recognized as components of net periodic benefit cost at December 31 were as follows (in thousands):



	Defined Benefit Pension Plans				Supplemental Non-qualified Defined Benefit Plans				Non-pension Defined Benefit Postretirement Healthcare Plans
	2015		2014		2015		2014		2015			2014
Net (gain) loss	$	8,777	$	10,996	$	6,339	$	8,396	$	1,704		$	1,904
Prior service cost (gain)	41		51		6		8		(1,087		)	(1,218		)
Total AOCI	$	8,818	$	11,047	$	6,345	$	8,404	$	617		$	686

The amounts in AOCI, Regulatory assets or Regulatory liabilities, after-tax, expected to be recognized as a component of net periodic benefit cost during calendar year 2016 are as follows (in thousands):



	Defined Benefit Pension Plans		Supplemental Non-qualified Defined Benefit Plans		Non-pension Defined Benefit Postretirement Healthcare Plans
Net loss	$	4,663	$	539	$	221
Prior service cost (credit)	38		1		(278		)
Total net periodic benefit cost expected to be recognized during calendar year 2016	$	4,701	$	540	$	(57	)

Assumptions



	Defined Benefit Pension Plans						Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plans
Weighted-average assumptions used to determine benefit obligations:	2015		2014		2013		2015		2014		2013		2015		2014		2013

Discount rate	4.59	%	4.20	%	5.05	%	3.92	%	3.64	%	4.21	%	4.26	%	3.92	%	4.62	%
Rate of increase in compensation levels	3.52	%	3.78	%	3.78	%	5.00	%	5.00	%	5.00	%	N/A		N/A		N/A



	Defined Benefit Pension Plans						Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plans
Weighted-average assumptions used to determine net periodic benefit cost for plan year:	2015		2014		2013		2015		2014		2013		2015		2014		2013
Discount rate:
Black Hills Corporation	4.25	%	5.10	%	4.35	%	3.98	%	4.68	%	3.88	%	3.70	%	4.45	%	3.65	%
Black Hills Energy	4.15	%	5.00	%	4.25	%	3.30	%	3.75	%	3.00	%	3.65	%	4.25	%	3.50	%
Cheyenne Light	N/A		N/A		N/A		N/A		N/A		N/A		4.40	%	5.15	%	4.40	%

Expected long-term rate of return on assets ^(a)	6.75	%	6.75	%	7.25	%	N/A		N/A		N/A		3.00	%	2.00	%	2.00	%
Rate of increase in compensation levels	3.78	%	3.78	%	3.78	%	5.00	%	5.00	%	5.00	%	N/A		N/A		N/A

_____________________________


(a)	The expected rate of return on plan assets is 6.75% for the calculation of the 2016 net periodic pension cost.

The healthcare benefit obligation was determined at December 31 as follows:



	Black Hills Corporation		Black Hills Energy		Cheyenne Light
2015
Healthcare trend rate pre-65
Trend for next year	6.35	%	6.35	%	6.35	%
Ultimate trend rate	4.50	%	4.50	%	4.50	%
Year Ultimate Trend Reached	2024		2024		2024

Healthcare trend rate post-65
Trend for next year	5.20	%	5.20	%	5.20	%
Ultimate trend rate	4.50	%	4.50	%	4.50	%
Year Ultimate Trend Reached	2023		2023		2023

2014
Healthcare trend rate pre-65
Trend for next year	7.50	%	7.50	%	7.50	%
Ultimate trend rate	4.50	%	4.50	%	4.50	%
Year Ultimate Trend Reached	2027		2027		2027

Healthcare trend rate post-65
Trend for next year	6.25	%	6.25	%	6.25	%
Ultimate trend rate	4.50	%	4.50	%	4.50	%
Year Ultimate Trend Reached	2024		2024		2024

We do not pre-fund our non-qualified pension plans or two of the three postretirement benefit plans. The table below shows the expected impacts of an increase or decrease to our healthcare trend rate for our Retiree Healthcare Plans (in thousands):



Change in Assumed Trend Rate	Impact on December 31, 2015 Accumulated Postretirement Benefit Obligation			Impact on 2015 Service and Interest Cost
Increase 1%	$	2,471		$	173
Decrease 1%	$	(2,088	)	$	(141	)

Beginning in 2016, the Company will change the method used to estimate the service and interest cost components of the net periodic pension, supplemental non-qualified defined benefit and other postretirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows. Previously, those costs were determined using a single weighted-average discount rate. The change does not affect the measurement of the total benefit obligations as the change in service and interest costs offsets the actuarial gains and losses recorded in other comprehensive income. The new method provides a more precise measure of interest and service costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The Company will account for this change as a change in estimate prospectively beginning in the first quarter of 2016. See “Pension and Postretirement Benefit Obligations” within our Critical Accounting Policies in Item 7 on Form 10-K for additional details.

The following benefit payments, which reflect future service, are expected to be paid (in thousands):



	Defined Benefit Pension Plans		Supplemental Non-qualified Defined Benefit Plan		Non-Pension Defined Benefit Postretirement Healthcare Plans
2016	$	15,700	$	1,568	$	4,270
2017	$	16,666	$	1,628	$	4,337
2018	$	17,620	$	1,682	$	4,331
2019	$	18,809	$	1,808	$	4,309
2020	$	19,764	$	1,539	$	4,292
2021-2025	$	113,480	$	10,024	$	19,552