Retail Operations

Our retail services consist of our two regulated utilities, Black Hills Power and Cheyenne Light, Fuel & Power. Combined, they provided approximately one-third of our 2006 income from continuing operations. These earnings come from a more stable and predictable portion of our overall revenue mix, and comprise the foundation, along with other contracted wholesale businesses, for our tradition of dividend payouts.

 

CUSTOMER SERVICE COUNTS
We believe reliable delivery and responsive customer service are key to successful utility operations. In 2006, we conducted a customer survey at Black Hills Power, and its results demonstrate our commitment to service and value. Nearly all – 98 percent gave the Company an overall favorable rating. About the same percentage were pleased with the reliability of our utility service. Our customers also gave us high marks on the value of our power, and 74 percent thought the Company was doing its part to contain costs. To the credit of our outstanding employee team’s dedication and effort, all of these customer service marks are much better than industry standards, as reported through trade association sources. Superior customer service standards apply to all of our operations, as our corporate culture is customer-focused. We believe satisfied customers are long-term assets that contribute to our strong future.

STRONG RELATIONSHIPS BUILD STRONG COMMUNITIES
Our focus of service does not end with customers. Our utilities are integral to their communities as well. We support our neighbors and communities as volunteers and contributors, to the benefit of local and regional civic, charitable and economic development organizations. Our relationship-based approach to our community participation applies to regulatory interactions as well, where we seek a partnership with the public sector in our quest to deliver long-term quality service and value to our customers.

OPERATIONS REVIEW
Our legacy business, Black Hills Power, earned $18.7 million in 2006 – 4 percent more than the previous year. That earnings increase overcame the additional expenses associated with a six-week, major planned maintenance outage at the Wyodak plant, which provides 72 megawatts of base-load power. Our customer base grew by about 1 percent, while overall megawatt-hour sales increased 5 percent. For the first time in 11 years, we requested, and obtained, a rate increase from the South Dakota Public Utilities Commission, effective January 1, 2007. A $7.9 million revenue increase was granted. In addition, we received approval for automatic annual cost adjustments for certain transmission, fuel and purchased power costs. Similar to previous arrangements, we will share in the burden of costs related to natural gas expense and purchased power, in exchange for the opportunity to sell surplus power in wholesale markets. This practice allows us to operate our business efficiently, for the benefit of both customers and shareholders. Cheyenne Light earnings more than doubled to $5.5 million, due primarily to a base rate increase effective January 1, 2006 and the addition of income related to the advancing construction of the Wygen II power plant through allowance for funds used during construction (AFUDC). At year-end 2006, we had nearly 39,000 electric and 33,000 natural gas customers on our distribution systems. We are planning for continued energy demand growth in this service territory as its economic base expands. For example, Cheyenne is now home to a large regional discount retail distribution center and warehouse, and was recently selected as the site of the new National Center for Atmospheric Research (NCAR) supercomputer facility. These two projects are indicative of the growth potential of this region. Wygen II, a 90 megawatt, coal-fired, base load power plant being built for Cheyenne Light, is on schedule for full commercial operations beginning January 1, 2008. A rate case was filed with the Wyoming Public Service Commission in March 2007 requesting that it be added as a rate-base asset of Cheyenne Light, effective next year. This plant will be a source of reliable, economical power for decades to come. This facility will be fitted with best available emissions control technology, including mercury abatement processes. On that front, we believe Wygen II will be the first coal plant in service in the nation with mercury reduction. We are proud of our record of environmental responsibility, and that accomplishment is illustrative of our long list of innovative engineering achievements over the decades throughout our Company.

Looking to the future, we seek to expand our customer base significantly and establish a multi-state regional utility presence. We are confident that we will continue to offer the kind of quality service that helped us earn our reputation.

MORE POWER TO COME
Wygen II is a notable milestone in our long history of producing economical, reliable power, but already on the drawing board is a companion power plant, Wygen III. To be sited as a mirror-image to Wygen II and joined by a common control room and shared facilities, this plant will be an updated version of three predecessor plants of similar design: Neil Simpson II, Wygen I and Wygen II. In February 2007, an air permit was issued for Wygen III, a prerequisite to other important steps toward final regulatory approval and the commencement of construction. If all goes as planned, we could break ground in late 2007 or early 2008. We look forward to the development of another excellent asset at our Wyodak energy complex. In addition, we signed a long-term purchase power contract for 30 megawatts of wind power to serve our customers. We expect power delivery to begin in 2008.

RELIABILITY AND SERVICE EXCELLENCE
Our power plants are very well run and maintained. Characteristically, we report availability exceeding 95 percent at our coal-fired plants, compared to an industry average of about 90 percent. Our gas-fired fleet availability is commanding as well. Overall, our regulated fleet was available 97 percent of the time in 2006. Reflecting such an impressive record, our Neil Simpson plant ran non-stop – 24/7 – for 13 consecutive months, an incredible feat for a coal-fired facility of its kind. We’re proud of that achievement, and of the fine staff that made it possible. Just as important, the power transmission and distribution functions at our utilities operate at the peak of performance, providing continuous energy service to our customers. Looking to the future, we seek to expand our customer base significantly and establish a multi-state regional utility presence. We are confident that we will continue to offer the kind of quality service that helped us earn our reputation.