UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) November 16, 2015

Black Hills Corporation

(Exact name of registrant as specified in its charter)

South Dakota

(State or other jurisdiction of incorporation)

605.721-1700

(Registrants telephone number, indicating area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o                     Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o                     Soliciting materials pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o                     Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(d))

o                     Pre-commencement communications pursuant to Rule 13e-e(c) under the Exchange Act (17 CFR 240.13e-4(c)

Item 8.01                                        Other Events.

Black Hills Corporation is filing this Current Report on Form 8-K to provide certain pro forma financial information with respect to SourceGas Holdings LLC (“SourceGas”), and the pending acquisition by Black Hills Corporation of SourceGas and related financings related thereto.  As previously disclosed in its’ Current Report on Form 8-K filed on July 14, 2015, Black Hills Corporation has entered into a definitive agreement to acquire SourceGas from investment funds managed by Alinda Capital Partners and GE Energy Financial Services, a unit of General Electric Co. for a purchase price of approximately $1.89 billion.  In connection with entering into the agreement to acquire SourceGas, Black Hills Corporation entered into a bridge term loan agreement with Credit Suisse as the Administrative Agent and 10 additional banks, collectively, for commitments totaling $1.17 billion.

The agreement for the acquisition of SourceGas is subject to regulatory approvals from public utility regulators in Wyoming, Colorado, Nebraska and Arkansas.  Completion of the acquisition is also subject to various provisions including representations, warranties, and covenants with respect to Wyoming, Colorado, Nebraska and Arkansas utility businesses that are subject to customary conditions and limitations.  The acquisition received Hart-Scott-Rodino clearance from the Federal Trade Commission on August 18, 2015.  On August 10, 2015, Black Hills filed joint applications with the public utility regulators in Wyoming, Colorado, Nebraska and Arkansas.  The discovery process with all four state commissions is ongoing and the acquisition is expected to close during the first half of 2016.

Black Hills Corporation is filing the information under this Item 8.01 solely to file historical financial statements of SourceGas and the unaudited pro forma combined condensed financial statements, which give pro forma effect to the SourceGas acquisition described above and related financings as if the acquisition of SourceGas and the related financings occurred on January 1, 2014.

This Item 8.01 contains:

·                  Historical financial statements of SourceGas in accordance with Rule 3-05 of Regulation S-X, included as exhibits 99.1 and 99.2, which are incorporated herein by reference; and

·                  Pro forma financial information of Black Hills Corporation and SourceGas on a combined basis in accordance with Article 11 of Regulation S-X giving effect to certain pro forma events relating to Black Hills Corporation’s pending acquisition of SourceGas, included as Exhibit 99.3 hereto, which is incorporated by reference.

This Current Report on Form 8-K contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements.”  We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.  All statements, other than statements of historical facts, included in this Current Report on Form 8-K that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.  This includes, without limitations, completion of the acquisition of SourceGas and the related financings.  These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business.  However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including without limitation, the risk factors described in Item 1A of Part I of our 2014 Annual Report on Form 10-K for the year ended December 31, 2014, as amended by Form 10-K/A filed on August 7, 2015, in Item 1A of Part II of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, and in other reports that we file with the SEC from time to time.

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Item 9.01                                        Financial Statements and Exhibits.

(a)         Financial Statements of Business acquired

Filed herewith are the following financial statements of SourceGas

·                  Audited Financial Statements of SourceGas as of and for the year ended December 31, 2014 attached hereto; and

·                  Unaudited Financial Statements of SourceGas as of and for the nine months ended September 30, 2015.

(b)         Pro Forma Financial Information

Filed herewith is the following pro forma financial information:

Unaudited Pro Forma Combined Condensed Statements of Income for the nine months ended September 30, 2015 and for the year ended December 31, 2014 and Unaudited Pro Forma Combined Condensed Balance Sheet as of September 30, 2015.

(d)         Exhibits

The following exhibits are filed herewith:

23.1                        Consent of Independent Registered Public Accounting Firm

99.1                        Audited financial statements of SourceGas Holdings LLC as of and for the year ended December 31, 2014

99.2                        Unaudited financial statements of SourceGas Holdings LLC as of and for the nine months ended September 30, 2015

99.3                        Unaudited Pro Forma Combined Condensed Statements of Income for the nine months ended September 30, 2015 and for the year ended December 31, 2014 and Unaudited Pro Forma Combined Condensed Balance Sheet as of September 30, 2015 of Black Hills Corporation and SourceGas Holdings LLC

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

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Exhibit Index

5

Exhibit 23.1

Consent of Independent Auditors

The Board of Directors

SourceGas Holdings LLC:

We consent to the incorporation by reference in the registration statements (Nos. 333-197895 and 333-197894) on Form S-3 and (Nos. 333-61969, 333-170451, 333-125697, 333-170448 and 333-170452) on Form S-8 of Black Hills Corporation of our report dated March 26, 2015, with respect to the consolidated balance sheet of SourceGas Holdings LLC as of December 31, 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year ended December 31, 2014, which report appears in the Form 8-K of Black Hills Corporation dated November 16, 2015 and the reference to our firm under the heading “Experts” in the registration statement No. 333-197895 on Form S-3.

(Signed) KPMG LLP

Denver, Colorado

November 13, 2015

Exhibit 99.1

SOURCEGAS HOLDINGS LLC

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2014

AND REPORT OF INDEPENDENT AUDITORS

Independent Auditors’ Report

The Board of Directors

SourceGas Holdings LLC:

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of SourceGas Holdings LLC and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SourceGas Holdings LLC and its subsidiaries as of December 31, 2014, and the results of their operations and their cash flows for the year then ended in accordance with U.S. generally accepted accounting principles.

(signed) KPMG LLP

Denver, Colorado

March 26, 2015

SOURCEGAS HOLDINGS LLC

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 2014

See accompanying notes to consolidated financial statements.

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SOURCEGAS HOLDINGS LLC

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 2014

See accompanying notes to consolidated financial statements.

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SOURCEGAS HOLDINGS LLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2014

See accompanying notes to consolidated financial statements.

4

SOURCEGAS HOLDINGS LLC

CONSOLIDATED STATEMENT OF EQUITY

YEAR ENDED DECEMBER 31, 2014

(In thousands)

See accompanying notes to consolidated financial statements.

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SOURCEGAS HOLDINGS LLC
CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 2014

See accompanying notes to consolidated financial statements.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

1.              Organization and Business

SourceGas Holdings LLC (“SourceGas Holdings”) and its wholly owned subsidiary, SourceGas LLC, were formed as Delaware limited liability companies in September 2006.  As used herein, the terms “the Company” and “SourceGas” refer to SourceGas Holdings and its consolidated subsidiaries, collectively.

SourceGas is a natural gas utility company providing distribution, transportation, storage and sales to a diverse mix of customers in the Rocky Mountains and Midwest United States.  The Company’s primary business is the operation of regulated natural gas local distribution companies located in Arkansas, Colorado, Nebraska and Wyoming.  The Company is also engaged in the regulated transportation of natural gas for third parties through its intrastate pipeline systems.  In addition to its regulated activities, the Company (i) provides unbundled natural gas sales in Nebraska and Wyoming and (ii) sells, installs and services appliances and equipment.  The Company operates primarily through the four subsidiaries of SourceGas LLC as described below.

SourceGas Distribution LLC (“SGD”).  SGD is a regulated public utility consisting of retail natural gas distribution operations that serves approximately 263,000 customers in Colorado, Nebraska and Wyoming.  SGD also sells appliances and heating equipment and provides associated repair services and appliance protection plans.

SourceGas Arkansas (“SGA”).  SGA is a regulated public utility consisting of retail natural gas distribution operations that serves approximately 161,000 customers in Arkansas.  SGA also sells appliances and heating equipment and provides associated repair services and appliance protection plans.

Rocky Mountain Natural Gas LLC (“RMNG”).  RMNG is a regulated public utility that provides regulated transmission and wholesale natural gas service to SGD at town border stations in western Colorado and also provides intrastate transportation services for natural gas producers, shippers and industrial customers.  RMNG generates additional revenues from the processing and sale of natural gas liquids.

SourceGas Energy Services Co. (“SGES”).  SGES is an unregulated natural gas marketer providing retail distribution customers in Nebraska and Wyoming with unbundled natural gas commodity offerings under the regulatory-approved Choice Gas program.

2.              Summary of Significant Accounting Policies

Principles of Consolidation

These consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of SourceGas Holdings and its subsidiaries, all of which are wholly owned.  All material intercompany transactions have been eliminated.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures.  Estimates are based on historical experience and various other assumptions that the Company believes to be reasonable under the circumstances.  These estimates

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

may involve complex situations requiring a high degree of judgment either in the application and interpretation of existing literature or in the development of estimates that impact the financial statements. The most significant estimates relate to the accounting for regulatory infrastructure program accruals, uncollectible accounts and other allowances for contingent losses, valuation of goodwill and intangible assets, retirement plan benefit obligations, derivative and hedging activities and provisions for income taxes.  SourceGas evaluates its estimates on an ongoing basis and actual results could differ from estimates.

Effects of Regulation

SourceGas’ natural gas utility operations are subject to regulation with respect to rates, service, maintenance of accounting records, pipeline integrity and various other matters by the respective regulatory authorities in the states in which the Company operates.  The Company’s accounting policies reflect the financial effects of the ratemaking and accounting practices and policies of those regulatory authorities, where appropriate.  As a result, SourceGas recognizes certain costs as regulatory assets that would otherwise be charged to expense and recognizes certain proceeds as regulatory liabilities that would otherwise be recorded as revenue.  The Company records regulatory assets when it is probable that costs will be recovered through rates charged to customers and records regulatory liabilities when it is probable that credits will be provided to customers as a result of the ratemaking process.

Revenue Recognition

Revenue from Regulated Operations. Regulated retail natural gas distribution revenues, derived primarily from the sale and transportation of natural gas, are recognized when gas is delivered to and received by the customer.  SourceGas bills customers of its regulated retail natural gas distribution businesses on a monthly billing cycle basis; however, the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes.  The Company estimates and accrues revenues applicable to gas delivered to customers, but not yet billed.  Estimated unbilled revenue was $58.6 million at December 31, 2014.  Payments received from customers who participate in budget billing, whose balance represents the amount paid in excess of gas delivered, are included in deferred revenue.

SourceGas’ revenues for its regulated transmission operations are recognized in the period in which actual volumes are transported.  The Company also provides various types of natural gas transportation services to its customers in which the natural gas remains the property of these customers at all times.  The customer pays a two-part rate that includes a fixed fee and a per-unit rate for volumes actually transported.  The fixed-fee component of the overall rate is recognized as revenue ratably over the contract period.  The per-unit charge is recognized as revenue when the volumes are transported.

Revenue from Unregulated Operations.  Revenue from unregulated natural gas marketing operations is recognized when gas is delivered to the customer.  The Company also offers a pricing option known as WinterGuard® under which the customer pays a fixed amount per month over a one- or two-year contract period from June to May for the customer’s gas consumption during the contract period.  The total contract fee is recognized as revenue over the contract period based on the delivered portion of the customer’s total estimated consumption.  Future consumption is estimated based on the customer’s historical gas consumption and normalized weather patterns.  Amounts billed to those customers in excess of revenue recognized are recorded as deferred revenue.  In January 2015, SGES acquired new Choice Gas Program customers in Nebraska and Wyoming, which increased its customer base by approximately 9,500.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

In both regulated and unregulated operations, SourceGas bills and collects from its customers certain taxes based on revenues that are imposed by governmental authorities in the jurisdictions in which the Company operates.  SourceGas records revenues net of such taxes.

Trade Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable arise primarily from natural gas sales to residential, commercial, industrial and other customers.  Merchandise loans with maturities of less than one year relating to the sales of appliances and heating equipment are included in the trade accounts receivable balance.  These receivables are stated on the consolidated balance sheet net of a $2.1 million allowance for doubtful accounts at December 31, 2014.  The allowance for doubtful accounts reflects the Company’s estimate of probable losses in its receivable balance determined on the basis of historical experience, specific allowances for high credit risk accounts and other currently available evidence.  When specific accounts are determined to be uncollectible, the allowance and receivable are relieved.

Gas in Underground Storage

The Company uses underground gas storage facilities to help manage the seasonality of its business and to optimize the prices for which gas is purchased.  SourceGas’ natural gas inventories for unregulated operations are generally carried at the lower of cost or market value using the weighted average cost method.  The Company’s natural gas inventories for regulated utility operations are generally stated at the lower of average cost or net realizable value.  The regulatory treatment of utility gas inventories provides for cost recovery in customer rates.

Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):

Property, plant and equipment are stated at original cost, net of contributions in aid of construction.  For constructed plant, original cost includes indirect costs from shared resource activities, allowance for funds used during construction (“AFUDC”) and other costs that clearly relate to plant construction.  AFUDC represents the estimated cost of funds used to finance the construction of major projects and is capitalized when the completed projects are placed in service.  Interest expense of $1.4 million was capitalized in the year ended December 31, 2014.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Expenditures that increase capacity, improve efficiency or extend service lives are capitalized.  Repairs and maintenance costs are expensed as incurred.  The original cost of retirements of depreciable regulated property, plant and equipment, plus the cost of removal, less salvage, is recorded in accumulated depreciation with no effect on current period earnings.  Gains or losses are recognized upon retirement of unregulated and regulated property, plant and equipment constituting an operating unit or system when sold or abandoned.

Regulated plant depreciation is computed on the straight-line remaining life method at composite rates considered sufficient to amortize costs over estimated service lives.  Depreciation rates include components that compensate for nonlegal costs of removal (net of salvage value), and retirements, as approved by the appropriate regulatory agency.  The composite weighted average depreciation rate was 3.49 percent for the year ended December 31, 2014.  Depreciation on unregulated property, plant and equipment is generally computed on the straight-line method based upon estimated service lives ranging from 3 to 52 years.

Asset Retirement Obligations

The Company records a liability at fair value for an asset retirement obligation (“ARO”) and corresponding accretion expense when the legal obligation to retire the asset has been incurred with an offsetting increase to the carrying value of the related asset.  SourceGas has recorded an ARO in other liabilities of $0.3 million as of December 31, 2014.

Impairment of Long-lived Assets

SourceGas reviews the carrying values of its long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable.  For any assets with carrying values that are determined to be unrecoverable, the Company records an impairment charge to write down the carrying amount of the asset to its estimated fair value.  SourceGas has not recorded any material asset impairments for the year ended December 31, 2014.

Goodwill and Intangible Assets

Goodwill is assigned to reporting units as of the date of the related business combination.  SourceGas’ reporting units include SGD, SGA, RMNG and SGES.  In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350 Intangibles — Goodwill and Other, goodwill and other intangible assets with indefinite lives, such as trademarks and trade names, are reviewed for impairment annually during the fourth fiscal quarter and whenever an event or a change in circumstances indicates that impairment may have occurred.  This standard provides companies the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test.  If this is the case, the two-step goodwill impairment test is required.  The Company’s reporting units’ fair value exceeded their carrying value, therefore, only step one of the analysis was performed.  An impairment loss is recorded when the carrying amount of goodwill and other intangibles exceeds their fair value.  No impairment was recorded for the year ended December 31, 2014.

Derivative Instruments

SourceGas utilizes derivative instruments for the purpose of mitigating risks resulting from changes in interest rates, energy commodity prices and volumetric load variances.  The objectives and strategies for using derivatives have been tailored to the Company’s regulated and unregulated businesses.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

SourceGas records all derivative instruments at fair value in the consolidated balance sheets as either an asset or liability unless they qualify for certain exceptions, including the normal purchases and normal sales exception.  Changes in a derivative’s fair value are ultimately recognized in earnings.  The timing of when the changes in fair value are recorded in earnings depends on whether the derivative has been designated and qualifies as part of a hedging relationship or if authoritative guidance for rate-regulated entities allows an alternative accounting treatment.  Changes in fair value for derivatives that do not meet one of these criteria are recognized in earnings as they occur.

Note 7 describes SourceGas’ use of derivative instruments and the related effect on its consolidated financial statements.

Fair Value of Financial Instruments

Certain assets and liabilities are recognized or disclosed at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  GAAP established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value.  These levels are as follows:

·                  Level 1 — Quoted prices in active markets for identical assets or liabilities

·                  Level 2 — Pricing inputs other than quoted prices included within Level 1, which are either directly or indirectly observable for the asset or liability as of the reporting date. These inputs are derived principally from, or corroborated by, observable market data.

·                  Level 3 — Pricing based upon inputs that are generally unobservable, based on the best information available and reflect management’s assumptions on how market participants would price the asset or liability.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, long-term debt and derivative instruments.  Except for the Senior Notes the fair values of SourceGas’ financial instruments approximate their respective carrying amounts in the consolidated balance sheets.  As a result of changes in market interest rates and other factors, the fair value of the Company’s fixed-rate Senior Notes was approximately $351.0 million compared with a net carrying amount of approximately $324.8 million as of December 31, 2014.  SourceGas determined the fair value of the Senior Notes based on the mid-range market price as determined by the bond dealer, which is based on significant other observable inputs within Level 2 of the fair value hierarchy.

See Note 7 for fair value measurements of the Company’s derivative instruments.

Income Taxes

SourceGas’ operations are conducted in the United States through limited liability companies and corporations.  The Company is treated as a partnership for federal and state income tax purposes, with each partner taxed separately on its allocated share of the Company’s taxable income. Accordingly, the accompanying consolidated financial statements do not include a provision or liability for federal income taxes except for the Company’s corporate subsidiaries that are subject to federal or state income taxes.  SourceGas accounts for these income taxes using the asset and liability method in accordance with ASC 740, Accounting for Income Taxes.  The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change is enacted.  The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.  Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above are reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties payable to the taxing authorities.

The Company records interest related to unrecognized tax benefits in interest expense and penalties in general and administrative expenses.

See Note 8 for income tax disclosures and the tax effects of temporary differences that impact deferred tax assets and liabilities.

Concentration of Credit Risk

Credit risk is the risk of financial loss to the Company if a customer fails to perform its contractual obligations.  SourceGas engages in transactions for the purchase and sale of products and services with companies in the natural gas industry and with industrial, commercial and residential natural gas consumers.  These transactions principally occur in the Rocky Mountain and Midwest regions of the United States.  SourceGas believes that this geographic concentration does not contribute significantly to its overall exposure to credit risk.  Credit risk associated with trade accounts receivable is mitigated by the large number of individual customers and the diversity in the Company’s customer base.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

SourceGas also has credit risk exposure to counterparties with whom the Company has open derivative instruments in asset positions.  The Company’s over-the-counter financial commodity derivatives are with a number of counterparties each of which has an investment-grade credit rating.  SourceGas’ physical commodity derivatives with nonrated counterparties are reviewed in accordance with the Company’s credit risk policy.  SourceGas enters into interest swaps only with counterparties whose debt securities are rated investment-grade by the major rating agencies, and the Company actively monitors the counterparties’ credit ratings.  Based on the external credit rating and internal credit review of the counterparties, SourceGas believes the risk of default is remote.

New Accounting Standards

Recent Accounting Pronouncements

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue depicting the transfer of goods or services to customers at amounts expected to be entitled to in exchange for those goods or services.  The standard provides a five-step approach to revenue recognition: (1) identify the contract(s) with the customer; (2) identify the separate performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; (5) recognize revenue when (or as) each performance obligation is satisfied.  The new requirements are effective for nonpublic companies beginning January 1, 2018.  Early adoption is not permitted.  SourceGas is currently assessing the impact of this standard on its financial statements and disclosures.

There were no other new significant accounting standards applicable to the Company that have been issued but not yet adopted by the Company as of December 31, 2014 and through the issuance of these financial statements.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

3.              Regulatory Matters

Regulatory Assets and Liabilities

The following regulatory assets and liabilities are reflected in the consolidated balance sheet (in thousands):

SourceGas defers purchased gas costs that otherwise would be charged to expense in accordance with gas cost adjustment mechanisms set forth in filings approved by the public utility commissions.  The Company is permitted to recover such costs through rates charged to customers.  The Company records an asset when purchased gas costs cumulatively exceed related billings and records a liability when billings cumulatively exceed related costs.

At December 31, 2014, purchased gas costs in regulatory assets include $13.1 million in unrecovered gas costs related to the Litigated Settlement Special Rate Surcharge approved by the Colorado Public Utilities Commission (“CPUC”).  RMNG is authorized to recover these amounts from customers through rate surcharges before November 1, 2017.  Other purchased gas costs included in regulatory assets and regulatory liabilities are being recovered or refunded in rates, or are deferred pending regulatory review and approval.  Generally, the applicable gas cost adjustment mechanisms provide for recovery or refund of deferred purchased gas costs over a 12-month period following the approval of a filing with the state public utility commissions with respect to such costs.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

The following table presents the purchased gas costs by state in an under or (over) collected gas position:

(1) Excludes the Litigated Settlement Special Rate Surcharge discussed above.

At December 31, 2014, regulatory assets also include (i) unamortized costs incurred in connection with various regulatory applications that the Company is permitted to amortize and recover in its rates, (ii) unrealized gains and losses on derivative instruments that are used to mitigate the volatility in purchased gas costs for regulated utility customers and (iii) uncollectible customer accounts that the Company is permitted to recover in its rates.  As discussed further in Note 6, SourceGas also has recorded regulatory assets for actuarial losses that have not yet been recognized in periodic benefit cost for the Company’s pension and other postretirement benefit plans.  The amounts recorded as regulatory assets at December 31, 2014 are not earning a rate of return.

Rate Filings and Other Matters

SourceGas Arkansas Inc.

On August 1, 2013, SGA filed an “Act 310” Surcharge with the Arkansas Public Service Commission (“APSC”).  The purpose of the surcharge is to recover expenditures that SGA has reasonably incurred as a direct result of legislative or regulatory requirements relating to the protection of the public health, safety or the environment.  The surcharge, which was projected to recover annual expenses of approximately $1.4 million through revenues, became effective upon filing.  On January 14, 2014, an Administrative Law Judge issued an order approving SGA’s Act 310 Surcharge.  That order became the final order of the APSC on February 13, 2014.  Between August 1, 2013 and early July 2014, when SGA stopped billing its customers under its Act 310 Surcharge (see below), SGA recovered approximately $1.6 million under that surcharge.

On September 9, 2013, SGA made a general rate case filing with the APSC, seeking approval of revised rates, which would increase annual revenues by approximately $18.7 million.  After filing all of their testimony, the parties to the rate case reached a settlement agreement which increased SGA’s annual revenues by approximately $13.8 million, reflecting a 9.30 percent return on equity.  On July 7, 2014, the APSC approved that settlement agreement and the Company began billing its customers and recognizing revenues on that date.  The increased rates provided SGA with, among other things, recovery of expenditures, which it had been recovering under its Act 310 Surcharge.  Therefore, SGA stopped billing customers under that surcharge when the rates went into effect.

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SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

The settlement agreement approved by the APSC also provided SGA with two new riders:  The Main Replacement Program Rider (“MRP Rider”); and the At-Risk Meter Relocation Program Rider (“ARMRP Rider”).  Through the MRP Rider, SGA will recover the costs of replacing bare steel mains, coated steel mains that are not catholically protected and mains that are the subject of an advisory issued by a federal or state agency and which SGA has determined to be in unsatisfactory condition.  Through the ARMRP Rider, SGA will recover the costs of relocating meters susceptible to being struck by a motor vehicle.  As of December 31, 2014 through the issuance of these financial statements, it is not possible to determine how much SGA will recover under these two riders.

On January 20, 2015, SGA filed a notice with the APSC of SGA’s intent to make a general rate case filing no sooner than 60 days and no later than 90 days from the date of the notice.  SGA is currently preparing that rate case filing.

SourceGas Distribution LLC

On September 9, 2013, SGD filed an application with the Wyoming Public Service Commission (“WPSC”) to construct major facilities consisting of a new compressor station (called “Chokecherry”), natural gas transmission pipeline and other facilities that will interconnect SGD’s facilities with adjacent interstate pipelines.  SGD is also seeking authority to implement new unbundled storage services, market center services and a revenue sharing mechanism.  At its hearing on March 27, 2014, the WPSC approved the major elements of SGD’s application with revisions to the revenue sharing agreement and on August 14, 2014 issued its written order reflecting such approval.

SGD periodically files with the Nebraska Public Service Commission (“NPSC”) seeking approval of an infrastructure system replacement cost recovery charge (“ISR Charge”).  The purpose of the ISR Charge is to recover capital expenditures that SGD has incurred as a result of legislative or regulatory requirements relating to the protection of the public health, safety or the environment and is in addition to SGD’s currently effective base rates.  On June 25, 2013, the NPSC approved, and SGD implemented an ISR Charge, which generated annual revenues of $0.7 million effective July 1, 2013.  On May 1, 2014, SGD filed an application with the NPSC seeking approval of a second ISR Charge.  A hearing on the stipulation between SGD and the Public Advocate was held on July 30, 2014.  The NPSC approved the SGD’s second ISR Charge which was implemented September 1, 2014, and it is designed to generate annual revenues of $0.5 million.

On May 1, 2014, SGD filed an application with the NPSC seeking approval to put into effect a System Safety and Integrity Rider (“SSIR”) and initial SSIR charges designed to collect $1.5 million of revenue requirement for SSIR projects completed in 2014. The NPSC granted SGD’s SSIR application with certain conditions.

On November 10, 2014, SGD filed an application with the NPSC seeking approval to put into effect a 2015 SSIR to collect $1.4 million of revenue requirement for SSIR projects that will be completed in 2015.  The NPSC approved the application but reduced the amount to be recovered to $1.3 million.

16

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Rocky Mountain Natural Gas LLC

On January 31, 2013, RMNG filed a general rate case with CPUC requesting a net annual revenue increase of approximately $1.4 million.  On November 13, 2013, parties, including RMNG filed a stipulation with the CPUC for a $0.4 million revenue decrease, a 10.60 percent return on equity, an SSIR, a straight-fixed variable rate structure, the elimination of RMNG’s bundled service, RMNG’s exit from the merchant function, a new suite of unbundled and open access transportation, storage and market center services and a revenue adjustment mechanism associated with those services.  On January 30, 2014, the CPUC issued a Recommended Decision approving the stipulation including the 10.60 percent return on equity.  On March 1, 2014, the rates went into effect and the Company began billing its customers and recognizing revenue on that date.

On March 31, 2014, RMNG filed an advice letter proposing an SSIR rate designed to collect $1.8 million of revenue requirement for SSIR projects to be completed in 2014.  The rate went into effect on June 1, 2014, on an interim basis, subject to refund.  On September 17, 2014, a settlement was reached and the CPUC approved most of the SSIR projects for inclusion in the SSIR rate.  RMNG issued a refund of $0.5 million to ratepayers on December 16, 2014.  On October 31, 2014, RMNG filed an advice letter proposing an SSIR rate to collect $0.4 million of revenue requirement for SSIR projects that will be completed in 2015.  This SSIR rate went into effect on January 1, 2015.

Various other matters affecting SourceGas’ regulated utility operations are subject to proceedings before the state public utility regulatory commissions in Arkansas, Colorado, Nebraska and Wyoming, as well as the Federal Energy Regulatory Commission.

17

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

4.              Debt

Long-term Debt

Long-term debt consisted of the following (in thousands):

(1) Variable rate based on one, two, three, or six-month LIBOR

On June 30, 2014, SourceGas Holdings borrowed additional funds on its existing $200.0 million term loan in the amount of $20.0 million.  The borrowings under this term loan bear interest at a variable rate based on one, two, three, or six-month LIBOR plus a margin dependent upon the Senior Notes’ rating.  Upon closing, the applicable margin was 1.75 percent.  SourceGas Holdings received proceeds totaling $20.0 million from the majority of its existing lenders.  All proceeds were used to pay down a portion of the revolving credit agreement held at SourceGas LLC.

On September 29, 2014, SourceGas Holdings issued the 3.98% Senior Secured Notes (the “Notes”) with an aggregate principal amount of $95.0 million due in September 2019.  The Notes are secured by substantially all assets of SourceGas Holdings.  The interest payments are payable bi-annually, beginning March 29, 2015.  Of the proceeds, $70.0 million were used to pay down the $220.0 million term loan at SourceGas Holdings and the remainder paid down the revolving credit agreement held at SourceGas LLC.

On January 15, 2015, SourceGas LLC entered into a term loan with an aggregate principal amount of $275.0 million due July 2016, which bears interest at a variable rate based on one, two, three, or six-month LIBOR plus a margin dependent upon the Senior Notes’ rating.  Upon closing, the applicable margin rate was 0.75 percent.  The interest payments are payable quarterly, beginning March 31, 2015.  Initial proceeds were used to pay down the $150.0 million term loan and the remainder was

18

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

used to pay down a portion of the revolving credit agreement, both held at SourceGas LLC. Through March 26, 2015, SourceGas paid down $30.0 million of the $275.0 million term loan.

The Notes, term loans and revolving credit agreement contain certain covenants, including financial covenants that require SourceGas to maintain ratios of indebtedness to total capitalization below specified levels and an interest coverage ratio above a specified level.  At December 31, 2014, the Company was in compliance with these covenants.

At December 31, 2014, the aggregate maturities of long-term debt are as follows (in thousands):

(1) The issuance of the January 2015 term loan will increase the long-term debt that matures in 2016 to $534.1 million.

5.              Commitments and Contingencies

Lease and Purchase Commitments

SourceGas leases certain property, plant and equipment under operating leases.  Rent expense related to these leases totaled $2.4 million for the year ended December 31, 2014.  Future minimum lease payments under noncancelable operating leases are as follows (in thousands):

SourceGas assumed agreements, executed under previous ownership, that require the Company to purchase all of the natural gas produced over the productive life of specific leaseholds in the Bowdoin field in Montana.  The majority of these purchases are committed to distribution customers of the Company’s regulated utility companies in Colorado, Nebraska and Wyoming, which are subject to regulatory cost recovery mechanisms.  The prices to be paid under these agreements vary and currently exceed market prices in certain instances.  For the year ended December 31, 2014, SourceGas’ purchases under these agreements totaled $11.9 million.  Based on estimated production and forecasted prices, the Company estimates that purchases under these agreements will range from $8.8 million to $11.4 million for each of the next five years.  However, the volumes and cost of purchases under these agreements after five years cannot be reasonably estimated.

19

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

SourceGas has signed agreements providing for the reservation of firm pipeline capacity under which the Company is required to make fixed monthly payments for contracted capacity. SourceGas enters into short-term sale agreements to release certain firm pipeline capacity on an annual basis to natural gas marketers in conjunction with the Choice Gas program.  However, as the release agreements are of a short-term nature, they are not reflected on the following schedule.

At December 31, 2014, the Company’s commitments for the reservation of firm pipeline capacity are as follows (in thousands):

SourceGas’ total obligations of fixed charges under the Company’s pipeline capacity purchase agreements was $34.4 million as of December 31, 2014, and amounts paid during the year for these contracts was $17.9 million for the year ended December 31, 2014.

SourceGas also enters into gas purchase agreements, which are short-term or long-term in nature.  At December 31, 2014, the long-term commitments to purchase physical quantities of natural gas under contracts indexed to the forward Colorado Interstate Gas (“CIG”), Panhandle Eastern Pipeline (“PEPL”) and Northwest Wyoming Pool (“NWWY Pool”) Natural Gas indices are as follows:

SourceGas’ total payments under long-term gas purchase agreements were $16.5 million as of December 31, 2014.

20

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Litigation

SGD is a complainant in SGD LLC vs. Bitter Creek Pipelines, LLC (“Bitter Creek”).  Bitter Creek provides natural gas gathering services to SGD in the Bowdoin field in Montana under a written gas gathering agreement.  SGD initiated arbitration on December 18, 2009 claiming that Bitter Creek breached the gathering agreement by wrongfully installing compression, failing to operate the gathering system at the proper pressure and noncompliance with other requirements of the agreement.  Arbitration occurred in August 2010.  The arbitration panel agreed that Bitter Creek had breached the agreement and awarded damages in the amount of $26.0 million and attorney fees and expenses in the amount of $0.6 million to SGD.  On April 20, 2011, the District Court, Yuma County Colorado confirmed the award and certified the judgment in favor of SGD.  On May 4, 2011, Bitter Creek posted a $25.0 million supersedeas bond and initiated an appeal of this judgment.  On May 24, 2012, the Colorado Court of Appeals issued an order reversing the judgment and remanding the matter back to the district court for trial.  On August 2, 2012, SourceGas filed a petition for review of this decision. On July 22, 2013, the Colorado Court of Appeals denied SourceGas’ petition.  The Bitter Creek (now known as “WBI Energy Midstream”) case is remanded to the Yuma County District for a retrial before the Court instead of an arbitration panel.  In August 2013, WBI Energy Midstream filed motions to recover certain costs in the Yuma County District Court case.  On April 18, 2014, SGD and WBI Energy Midstream stipulated to a 150 day stay of the District Court proceeding while the parties engaged in settlement discussions.  On November 17, 2014, SGD and WBI Energy Midstream entered into an additional 91 day stay which will allow the parties to continue to engage in settlement negotiations.  The gas gathering agreement provides gathering services for gas purchased through an agreement between Noble Energy and SGD (the “P-802 Contract”). On January 19, 2015, SGD submitted a written offer to Noble Energy to terminate the P-802 Contract.  If the P-802 Contract is terminated, WBI Energy and SGD will negotiate termination of the gathering agreement for the Bowdoin field and settlement of SGD’s claims against WBI Energy Midstream.

SourceGas is involved in other litigation and claims arising from the day-to-day operations of the Company’s business.  SourceGas believes that the ultimate resolution of those matters will not have a material adverse impact on the Company’s business, consolidated balance sheets, cash flows or results of operations.

Environmental Matters

SourceGas is subject to federal, state and local laws and regulations governing environmental quality. RMNG is in the process of upgrading facilities at its Wolf Creek Storage Field.  Soil and water sampling was requested by the United States Forest Service (“USFS”) and the Bureau of Land Management (“BLM”) in response to discolored soil found onsite.  Small levels of contaminants were found in the immediate area around three of the well pads sampled.  RMNG remediated the contamination; however, subsequent samplings requested by the USFS and BLM demonstrated low levels of contamination which will be remediated in the spring of 2015.  RMNG continues monitoring efforts.  SourceGas accrues liabilities related to these efforts when it is reasonable to estimate the amount, or range of amounts, of probable costs related to these efforts.  Management does not believe that it is reasonably possible that there will be a material change in the Company’s estimated liability in the near term and does not currently anticipate the disposition of any known efforts to have a material effect on the Company’s financial position, results of operations or cash flows.

21

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

6.              Pension and Other Postretirement Benefits

Retirement Savings Plan

The SourceGas LLC Retirement Savings Plan (“Savings Plan”) is a defined contribution retirement plan qualified under Section 401(k) of the Internal Revenue Code and covers substantially all of SourceGas’ employees.  Savings Plan participants may contribute a portion of their pretax compensation to the plan, subject to limitations as defined in the Savings Plan or by the Internal Revenue Service.  The Company makes nonelective and elective employer contributions to the Savings Plan that totaled $4.5 million for the year ended December 31, 2014.

Defined Benefit Pension Plan

The SourceGas LLC Retirement Plan (“Retirement Plan”) covers only employees that were eligible for benefits under similar plans sponsored by previous ownership prior to acquisition by SourceGas.

The Retirement Plan provides for defined pension benefits based on employment group.  Employment groups are determined based on the acquisition that brought the eligible employees to the Company.  As of December 31, 2014, SourceGas has the following employment groups: SG Participants (March 2007 acquisition) and SGA Participants (July 2008 acquisition).  The benefits for these groups are based on the participant’s compensation rate and years of participation.

SourceGas established a trust that accumulates assets to pay benefits under the Retirement Plan.  The Company’s funding policy is to contribute annually at least the minimum required contribution under federal law using the actuarial cost method and assumptions used for determining annual funding requirements.

Assets in the trust are invested in cash, fixed income and equity investments in accordance with a written investment policy, which may be revised based on the actions of the SourceGas LLC Retirement Plan Committee (the “Committee”).  The Committee monitors actual performance against target allocations and adjusts actual allocations and targets in accordance with the investment policy.  The Committee uses outside consultants and investment managers to aid in the determination of asset allocation and the management of actual plan assets.  The Retirement Plan seeks to match the long-term nature of its funding obligations with investment objectives for long-term growth and income.

The asset allocation strategy reflects the Retirement Plan’s return objectives and risk tolerance.  Asset allocations, target and actual, expressed as a percentage of the market value of the Retirement Plan are as follows:

The Company’s pension liability balance (the unfunded status) represents the difference between the projected benefit obligation for pensions and the market value of the pension assets.  This difference is made up of the unamortized actuarial gain or loss that arises during the period but is not recognized as a component of net periodic pension cost and would typically be recognized as a component of

22

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

accumulated other comprehensive income (“AOCI”).  SourceGas’ regulated utility subsidiaries recover pension costs in rates; therefore, the Company has reported the unamortized actuarial gain or loss in regulatory liabilities or regulatory assets, respectively (see Note 3).

Postretirement Medical Plan

The SourceGas Employee Benefits Plan (“Medical Plan”) provides for subsidized healthcare benefits for certain retirees that were covered by similar plans under previous ownership prior to acquisition by SourceGas.

The Medical Plan provides for subsidized healthcare benefits to eligible participants based on two employment groups, SG Participants and SGA Participants.  Based on the employment group, the Company has varied levels of discretion in determining (i) the specific benefits to be provided, (ii) the required participant contributions and (iii) other variables that affect the net cost of its Medical Plan benefits.

Various trusts hold assets for postretirement benefits for the SGA Participants.  Assets in the trusts are invested in cash, fixed-income and equity investments in accordance with a written investment policy. This allocation may be revised based on the actions of the Committee.

The SGA Participants of the Medical Plan qualify to receive the federal subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“Medicare Act”).  The effect of the Medicare Act is reflected assuming (i) the Medical Plan will continue to provide prescription drug benefits to SGA Participants that are at least actuarially equivalent to the Medicare Act and (ii) the Medical Plan will continue to receive the federal subsidy.

SourceGas’ liability (the unfunded status) for the Medical Plan represents the difference between the accumulated postretirement benefit obligation and the market value of other post retirement assets. This difference is made up of the unamortized actuarial gain or loss that arises during the period but is not recognized as a component of net periodic benefit cost and would typically be recognized as a component of AOCI.  SourceGas’ regulated utility subsidiaries recover postretirement costs in rates; therefore, the Company has reported the unamortized actuarial gain or loss in regulatory liabilities or regulatory assets, respectively (see Note 3).

Actuarial Assumptions

SourceGas determines periodic pension and postretirement benefit costs using certain actuarial assumptions and methods.  These assumptions include demographic and economic assumptions.  In determining the discount rate, which is used to determine the actuarial present value of plan benefits, SourceGas considers the yields of high-quality fixed-income investments with maturities corresponding to the timing of expected benefit payments.  The Company’s assumptions about the long-term rate of return on plan assets are based on historical and projected rates of return for current and planned asset classes in the investment portfolio.  Assumed projected rates of return for each asset class were selected after analyzing historical experience and future expectations of the returns.  The overall expected rate of return for the portfolio was developed based on the target allocation for each asset class.  In determining the rate of increase in healthcare costs, the Company considers historical and projected healthcare costs and also the effects of plan provisions that enable SourceGas to limit increases in the net cost of benefits to the general inflation rate by adjusting participant contributions, deductibles and copayments.

23

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

The measurement dates used to determine pension and other postretirement benefit measurements for the Retirement Plan and Medical Plan are December 31, 2014.  The actuarial assumptions used to compute the net periodic pension cost and postretirement benefit cost are based upon information available as of the beginning of the year.  Changes in these assumptions may impact future benefit costs and obligations.

The following actuarial assumptions were used to determine the benefit obligations and the net periodic benefit cost for the year ended December 31, 2014:

24

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Benefit Obligation and Funded Status

The following is a reconciliation of the changes in the benefit obligation and fair value and a statement of the funded status of the Retirement Plan and Medical Plan (in thousands):

(1) ABO differs from the projected benefit obligation in that the ABO excludes the effect of salary and wage increases.

25

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Net Periodic Benefit Cost

The components of net periodic benefit cost for the Retirement Plan and Medical Plan are as follows (in thousands):

SourceGas estimates that a total of $1.2 million will be amortized from regulatory assets into net periodic benefit cost during 2015 for the Retirement Plan and the Medical Plan.

Expected Contributions and Benefit Payments

SourceGas expects to contribute $3.9 million to the Retirement Plan and $0.9 million to the Medical Plan in 2015.

Retirement Plan benefits for all participants and Medical Plan benefits for SGA Participants are distributed from the related trusts.  For SG Participants, the Company pays benefits under the Medical Plan directly to participants and receives related contributions directly from participants.  Estimated future benefit payments, net of estimated contributions from participants, excluding the effect of applicable Medicare Act federal subsidy receipts and gross amount of federal subsidy receipts are as follows (in thousands):

Investment Valuation

The Retirement Plan and Medical Plan assets are valued under the current fair value framework.  See Note 7 for further discussion regarding the definition and levels of the fair value hierarchy established by authoritative guidance.

26

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

Below is a listing of the market value of the major categories of plan assets held as of December 31, 2014, as well as the associated level within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety (in thousands):

(1) Includes funds that invest primarily in U.S. common stocks

(2) Includes funds that invest primarily in foreign equity securities

(3) Includes funds that invest in a blend of U.S. government securities, mortgage-backed securities, U.S. corporate bonds,and foreign bonds

(4) Includes funds that invest primarily U.S. corporate bonds

(5) Includes funds that invest only in U.S. government securities

(6) Includes funds that invest only in real estate investment trusts

(7) Includes funds that invest primarily in state and municipal bonds

(8) Includes funds that invest only in international bonds

27

SourceGas Holdings LLC

Notes to Consolidated Financial Statements

Year Ended December 31, 2014

The Retirement Plan funds have been determined to be Level 1 investments within the fair value hierarchy and are valued on the basis of available market quotations in active markets.  The Medical Plan fixed-income securities have been determined to be Level 2 investments within the fair value hierarchy and are valued on significant other observable outputs other than quoted market prices.  The remaining Medical Plan funds have been determined to be Level 1 investments.

7.              Derivatives and Fair Value Measurement

Derivatives

In managing its natural gas supply portfolios, the Company has historically entered into physical fixed- and variable-priced contracts, which qualify as derivatives.  Additionally, the Company purchased over-the-counter financial natural gas swap contracts and options to mitigate risks associated with changes in the market price.  Gas contracts that have firm commitments to purchase a fixed amount of gas in the future at market price, qualify for the normal purchases and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business and are exempt from fair value reporting.  The Company’s natural gas purchases with volumetric swing in their contracts do not qualify for the normal purchases and normal sales exception.  These purchase deals and swap contracts are recorded at fair value.