Coal photoNon-Regulated Energy

For more than five decades, Black Hills Corporation has supplemented its revenue and earnings streams through non-regulated energy investments. These operations are logical adjuncts to our utility roots in many respects.

For example, our experience in power generation planning, construction, compliance and operation made it possible for us to enter the independent power production sector in 2000. Our production of coal, natural gas and crude oil serves as a direct and indirect hedge for the fuel consumption of our power generation fleet. Likewise, the market intelligence we gather and knowledge we possess through our energy marketing operations benefit our entire organization, such as optimizing prices for either selling or purchasing energy commodities. Most of all, at the core of our non-regulated energy performance is customer care, consistent with our utilities’ focus.

ACHIEVEMENTS IN 2007
A number of records were set in our non-regulated business group last year. Our coal mine eclipsed the 5.0 million ton production mark for the first time. This record likely will be broken in 2008, too, as additional production will supply our new Wygen II power plant, and our recently renewed contract to provide fuel to PacifiCorp’s Dave Johnston power plant included increased tonnage. Our oil and gas operations increased production for the 10th consecutive year in 2007, reaching 14.6 billion cubic feet equivalent. Proven oil and gas reserves attained a new record as well – 207.8 Bcfe. Energy marketing operations achieved another record average daily volumes of natural gas marketed, exceeding the 1.7 million MMBtu threshold. In addition to this record setting, we began construction on the Valencia power plant, which is under long-term contract with Public Service Company of New Mexico.

OPERATIONS REVIEW
Income from continuing operations for non-regulated energy in 2007 was $74.4 million, a 34 percent increase over 2006 results. All non-regulated business segments had increased earnings, except oil and gas operations, which had earnings similar to 2006. Here is a summary of 2007 annual performance, compared to 2006:

oil rig photo• Energy marketing earnings nearly doubled to $34.2 million. Our various marketing strategies benefited from extraordinary natural gas market volatility that prevailed throughout the year and a 9 percent increase in average daily
gas volumes marketed.

• Power generation earnings increased 7 percent to $21.4 million. Our power plant fleet operated at its normally high level of availability (97.3 percent) compared to industry standards. Results also reflect a charge to earnings of $1.8 million after-tax, related to the impairment of the Ontario plant, a small-scale "qualifying facility” whose thermal host contract expired with no long-term extension. In addition, investment partnership earnings from our smaller Idaho power plants decreased significantly, related to a partnership impairment charge. Results for 2007 also include $1.6 million after-tax from an insurance reimbursement for repairs made in 2006 to the Las Vegas II power plant.

• Oil and gas earnings were $12.7 million. Proved reserves increased 4 percent to 207.8, Bcfe and production increased 1.5 percent to 14.6 Bcfe. Along with increased production, financial results were affected by higher prices received, offset by higher operating and maintenance costs and higher interest expense on increased borrowings for acquisitions and funding of drilling activities.

• Coal mining earnings increased 4 percent to $6.1 million. Increased revenues were due to increased volumes sold at higher average prices, offset largely by higher costs related to increased mining and overburden removal costs and higher royalties.

As a corporation, we are focused on optimizing the value of our assets for the benefit of our shareholders.

EVOLVING THROUGH OPPORTUNITY
Our examination of long-term asset value aligns, reinforces and complements our long-term strategy. Such evaluation is an ongoing, evolutionary process at Black Hills, ultimately contributing to shareholder value, balance sheet and capital structure strength, investment-grade credit ratings and corporate-wide risk management.

Our examination of long-term asset value aligns, reinforces and compliments our long-term strategy.