EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

BHC sponsors 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. Certain eligible participants who are not currently accruing a benefit in the Pension Plan also receive a Company retirement contribution based on the participant’s age and years of service. Vesting of all Company and matching contributions occurs at 20% per year with 100% vesting when the participant has 5 years of service with the Company.

Defined Benefit Pension Plan (Pension Plan)

We have a defined benefit pension plan (“Pension Plan”) covering certain eligible employees. The benefits for the Pension Plan are based on years of service and calculations of average earnings during a specific time period prior to retirement. The Pension Plan has been closed to new employees and certain employees who did not meet age and service based criteria.

The Pension Plan assets are held in a Master Trust. Our Board of Directors has approved the Pension Plan’s 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 Plan’s 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 Pension Plan’s benefit payment obligations. The Pension Plan’s assets consist primarily of equity, fixed income and hedged investments.

The expected rate of return on the Pension Plan assets is determined by reviewing the historical and expected returns of both equity and fixed income markets, taking into account asset allocation, the correlation between asset class returns, and the mix of active and passive investments. The Pension Plan utilizes a dynamic asset allocation where the target allocation range to return-seeking and liability-hedging assets is determined based on the funded status of the Plan. As of December 31, 2018, the expected rate of return on pension plan assets is based on the targeted asset allocation range of 29% to 37% return-seeking assets and 63% to 71% liability-hedging assets.

Our Pension Plan is funded in compliance with the federal government’s funding requirements.

Plan Assets

The percentages of total plan asset by investment category of our Pension Plan assets at December 31 were as follows:



	2018		2017
Equity securities	17	%	26	%
Real estate	4		4
Fixed income funds	71		63
Cash and cash equivalents	3		1
Hedge funds	5		6
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

BHC sponsors 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. Pre-65 retirees receive their retiree medical benefits through the Black Hills self-insured retiree medical plans. Healthcare coverage for Medicare-eligible BHP retirees is provided through an individual market healthcare exchange.

Plan Assets

We fund our Healthcare Plans on a cash basis as benefits are paid.

Plan Contributions

Contributions to the Pension Plan are cash contributions made directly to the Master Trust. Healthcare benefits include company and participant paid premiums.

Contributions for the years ended December 31 were as follows (in thousands):



	2018		2017
Defined Contribution Plans
Company Retirement Contribution	$	876	$	861
Matching Contributions	$	1,272	$	1,306



	2018		2017
Defined Benefit Plans
Defined Benefit Pension Plan	$	1,795	$	4,000
Non-Pension Defined Benefit Postretirement Healthcare Plans	$	388	$	348
Supplemental Non-qualified Defined Benefit Plan	$	238	$	246

While we do not have required contributions, we expect to make approximately $1.8 million in contributions to our Pension Plan in 2019.

Fair Value Measurements

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):



Pension Plan	December 31, 2018
	Level 1		Level 2		Level 3		Total Investments Measured at Fair Value		NAV ^(a)		Total Investments
AXA Equitable General Fixed Income	$	—	$	261	$	—	$	261	$	—	$	261
Common Collective Trust - Cash and Cash Equivalents	—		1,388		—		1,388		—		1,388
Common Collective Trust - Equity	—		9,436		—		9,436		—		9,436
Common Collective Trust - Fixed Income	—		39,047		—		39,047		—		39,047
Common Collective Trust - Real Estate	—		9		—		9		1,896		1,905
Hedge Funds	—		—		—		—		2,627		2,627
Total investments measured at fair value	$	—	$	50,141	$	—	$	50,141	$	4,523	$	54,664



Pension Plan	December 31, 2017
	Level 1		Level 2		Level 3		Total Investments Measured at Fair Value		NAV ^(a)		Total Investments
AXA Equitable General Fixed Income	$	—	$	184	$	—	$	184	$	—	$	184
Common Collective Trust - Cash and Cash Equivalents	—		314		—		314		—		314
Common Collective Trust - Equity	—		15,749		—		15,749		—		15,749
Common Collective Trust - Fixed Income	—		37,732		—		37,732		—		37,732
Common Collective Trust - Real Estate	—		249		—		249		2,258		2,507
Hedge Funds	—		—		—		—		3,398		3,398
Total investments measured at fair value	$	—	$	54,228	$	—	$	54,228	$	5,656	$	59,884

________________________

(a)

Certain investments that are measured at fair value using Net Asset Value “NAV” per share (or its equivalent) for practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in these tables for these investments are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the reconciliation of changes in the plan’s benefit obligations and fair value of plan assets above.

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 placed 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 of loans with similar characteristics. 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. The Plan’s investments in the AXA Equitable General Fixed Income Fund are categorized as Level 2.

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. The funds without participant withdrawal limitations are categorized as Level 2.

The following investments are measured at NAV and are not classified in the fair value hierarchy, in accordance with accounting guidance.

Common Collective Trust-Real Estate Fund: This is the same fund as above except that certain of the funds’ assets contain participant withdrawal policies with restrictions on redemption and are therefore not included in the fair value hierarchy.

Hedge Funds: These 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. 20% of the shares may be redeemed at the end of each month with a 10-day notice and full redemptions are available at the end of each quarter with 45-day notice, and is limited to a percentage of the total net assets 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.

Other Plan Information

The following tables provide a reconciliation of the employee benefit plan obligations, fair value of assets and amounts recognized in the Balance Sheets, components of the net periodic expense and elements of AOCI:

Benefit Obligations



	Defined Benefit Pension Plan						Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plans
As of December 31 (in thousands)	2018			2017			2018			2017			2018			2017
Change in benefit obligation:
Projected benefit obligation at beginning of year	$	67,562		$	64,973		$	3,418		$	3,404		$	5,970		$	5,843
Service cost	516			545			—			—			193			206
Interest cost	2,194			2,341			108			116			179			176
Actuarial loss (gain)	(2,878		)	4,008			(296		)	144			(889		)	130
Benefits paid	(3,562		)	(3,445		)	(238		)	(246		)	(389		)	(348		)
Plan participants transfer to affiliate	(1,913		)	(860		)	—			—			(129		)	(137		)
Plan participants’ contributions	—			—			—			—			120			100
Projected benefit obligation at end of year	$	61,919		$	67,562		$	2,992		$	3,418		$	5,055		$	5,970

Employee Benefit Plan Assets



	Defined Benefit Pension Plan						Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plans
As of December 31 (in thousands)	2018			2017			2018			2017			2018			2017
Beginning fair value of plan assets	$	59,884		$	53,888		$	—		$	—		$	—		$	—
Investment income (loss)	(1,884		)	6,150			—			—			—			—
Employer contributions	1,795			4,000			238			246			268			248
Retiree contributions	—			—			—			—			120			100
Benefits paid	(3,563		)	(3,445		)	(238		)	(246		)	(388		)	(348		)
Plan participants transfer to affiliate	(1,568		)	(709		)	—			—			—			—
Ending fair value of plan assets	$	54,664		$	59,884		$	—		$	—		$	—		$	—

The funded status of the plans and amounts recognized in the Balance Sheets at December 31 consist of (in thousands):



	Defined Benefit Pension Plan				Supplemental Non-qualified Defined Benefit Plans				Non-pension Defined Benefit Postretirement Healthcare Plans
	2018		2017		2018		2017		2018		2017
Regulatory asset	$	19,099	$	18,998	$	—	$	—	$	—	$	—
Current liability	$	—	$	—	$	230	$	245	$	466	$	534
Non-current liability	$	7,255	$	7,676	$	2,762	$	3,173	$	4,589	$	5,436
Regulatory liability	$	—	$	—	$	—	$	—	$	2,441	$	1,758

Accumulated Benefit Obligation



	Defined Benefit Pension Plan				Supplemental Non-qualified Defined Benefit Plans				Non-pension Defined Benefit Postretirement Healthcare Plans
As of December 31 (in thousands)	2018		2017		2018		2017		2018		2017
Accumulated benefit obligation	$	59,987	$	64,782	$	2,992	$	3,418	$	5,055	$	5,970

Components of Net Periodic Expense

Net periodic expense consisted of the following for the year ended December 31 (in thousands):



	Defined Benefit Pension Plan									Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plan
	2018			2017			2016			2018		2017		2016		2018			2017			2016
Service cost	$	516		$	545		$	606		$	—	$	—	$	—	$	193		$	206		$	204
Interest cost	2,194			2,341			2,499			108		116		122		179			176			187
Expected return on assets	(3,545		)	(3,591		)	(3,632		)	—		—		—		—			—			—
Amortization of prior service cost (credits)	43			43			43			—		—		—		(336		)	(336		)	(337		)
Recognized net actuarial loss (gain)	2,063			1,230			1,995			103		87		82		—			—			—
Net periodic expense	$	1,271		$	568		$	1,511		$	211	$	203	$	204	$	36		$	46		$	54

For the year ended December 31, 2018, service costs were recorded in Operations and maintenance expense while non-service costs were recorded in Other expense, on the Statements of Income. For the years ended December 31, 2017 and 2016, service costs and non-service costs were recorded in Operations and maintenance expense. Because prior years’ costs were not considered material, they were not reclassified on the Statements of Income. See Note 1 for additional information.

AOCI

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 Plan				Supplemental Non-qualified Defined Benefit Plans				Non-pension Defined Benefit Postretirement Healthcare Plan
	2018		2017		2018		2017		2018		2017
Net (gain) loss	$	—	$	—	$	391	$	707	$	—	$	—
Total AOCI	$	—	$	—	$	391	$	707	$	—	$	—

Assumptions



	Defined Benefit Pension Plan						Supplemental Non-qualified Defined Benefit Plans						Non-pension Defined Benefit Postretirement Healthcare Plan
	2018		2017		2016		2018		2017		2016		2018		2017		2016
Weighted-average assumptions used to determine benefit obligations:
Discount rate	4.40	%	3.71	%	4.27	%	4.30	%	3.62	%	4.12	%	4.28	%	3.60	%	3.84	%
Rate of increase in compensation levels	3.52	%	3.43	%	3.47	%	N/A		N/A		N/A		N/A		N/A		N/A

Weighted-average assumptions used to determine net periodic benefit cost for plan year:
Discount rate^(a)	3.71	%	4.27	%	4.63	%	3.62	%	4.12	%	4.29	%	3.60	%	3.84	%	4.03	%
Expected long-term rate of return on assets ^(b)	6.25	%	6.75	%	6.75	%	N/A		N/A		N/A		3.93	%	N/A		N/A
Rate of increase in compensation levels	3.43	%	3.47	%	3.57	%	N/A		N/A		N/A		N/A		N/A		N/A

_____________________________


(a)	The estimated discount rate for the Defined Benefit Pension Plan is 4.40% for the calculation of the 2019 net periodic pension costs.


(b)	The expected rate of return on plan assets is 6.00% for the calculation of the 2019 net periodic pension cost.

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



	2018		2017
Trend Rate - Medical
Pre-65 for next year	6.70	%	7.00	%
Pre-65 Ultimate trend rate	4.50	%	4.50	%
Trend Year	2027		2027

Post-65 for next year	4.94	%	5.00	%
Post-65 Ultimate trend rate	4.50	%	4.50	%
Trend Year	2026		2026

Beginning in 2016, we changed 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. See “Pension and Postretirement Benefit Obligations” within our Critical Accounting Policies in Item 7 on this Form 10-K for additional details.

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



	Defined Benefit Pension Plan		Supplemental Non-qualified Defined Benefit Plans		Non-Pension Defined Benefit Postretirement Healthcare Plan
2019	$	3,660	$	230	$	466
2020	$	3,774	$	227	$	534
2021	$	3,924	$	322	$	566
2022	$	4,031	$	319	$	577
2023	$	4,102	$	315	$	554
2024-2028	$	20,759	$	1,274	$	2,243