Utilities

For 125 years, our primary mission has not changed: to deliver quality service and energy value to our customers. We also are committed to the people we serve through participation and volunteerism in many civic and charitable causes supported by our neighbors, friends and customers. We believe the way we create long-term rewards for our shareholders is through just that kind of connection to our customers and communities. Quite simply, we believe satisfied customers are the key to a successful future.

OPERATIONS HAVE EXCELLENT YEAR
Black Hills Power and Cheyenne Light, Fuel & Power had excellent financial results this year. Operations were normal with no significant service disruptions, and both utilities advanced long-term growth prospects through effective planning and execution.

Black Hills Power earned $24.9 million in 2007, a 33 percent increase over 2006 results. Financial performance benefited from the first rate increase in 11 years and a 3 percent increase in retail electric
sales. Off-system wholesale power sales were down significantly for the year due to market conditions;
however, margins from such sales were up 7 percent. Maintenance costs increased in 2007, as we invested
in keeping our infrastructure and power plant fleet in good working condition. As a result, our overall plant availability increased to 97.4 percent – an outstanding level compared to national statistical benchmarks. Earnings at Cheyenne Light increased 23 percent to $6.7 million. Stable operations produced gross margins similar to 2006, and earnings benefited from income and tax effects related to the allowance for funds used during construction for the Wygen II project. The Cheyenne vicinity is experiencing an economic boom, and electric load growth reflects that trend, with a 4 percent increase in megawatt-hours sold in 2007 compared to 2006.

We note that a number of other commercial and industrial expansions are under way, so we believe load growth will continue to be strong for a number of years to come.

BUILDING FOR THE FUTURE
A notable achievement for Cheyenne Light in 2007 was the completion of the Wygen II power plant, which was built to serve its growing electric load and to replace expiring power purchase agreements. This 95-megawatt, mine-mouth coal-fired facility is situated at our Wyodak energy complex near Gillette, Wyo. It began commercial service on January 1, 2008. This plant is now a rate base asset of Cheyenne Light, through a rate case approved last year. We are confident that Wygen II will contribute to long-term rate stability, compared to volatile energy market conditions that can expose customers to unstable and undesirable prices.

Illustrating our cooperation with state and federal environmental authorities, Wygen II is among the first coal-fired plants in the nation to feature mercury emissions abatement. Its emissions control technology also significantly reduces sulfur and nitrogen byproducts. This plant demonstrates clean coal technology at work.

In 2007, we made progress on permitting for a twin plant, Wygen III. This facility is to be located adjacent to and share a control room with Wygen II – an efficiency design proven several years ago when Wygen I was built adjoining Neil Simpson II. All four of these plants originate from the same basic blueprint, with latest available technology improving their energy capacity and emissions reduction with each new plant. Wygen III will take advantage of advanced air-cooled condensing technology, raising its expected energy capacity to 100 megawatts, as compared to 95 for Wygen II and 90 for Wygen I.

Wygen III is anticipated to serve the growing load of Black Hills Power, which has not had a capacity addition since 2001. We also are contemplating the merits of equity investments from other parties. If that were to occur, we would retain the operating interest and majority ownership, and require coal purchases under long-term contract from our Wyodak Resources coal mine.

Reliable, efficient base load power assures that we are cost-conscious for our customers, but we are also keeping our eye on renewable resources to supplement energy needs. We have contracted for the purchase of wind power from a 30-megawatt facility under construction in Cheyenne under a long-term purchase power agreement. This power is capable of serving customers of Cheyenne Light and Black Hills Power through our transmission system.

UTILITY ACQUISITION PROGRESSING
Last year, we announced our plans to acquire one electric utility and four gas utilities in the neighboring states of Colorado, Kansas, Nebraska and Iowa. Temporary financing for this deal has been secured, giving us flexibility to optimize our capital structure through permanent financing arrangements. When completed, this purchase will transform our retail operations with a doubling of utility assets and a quadrupling of utility customers. Our new size will enable us to harness economies of scale and adopt new customer care technology and processes. We are excited to serve even more communities with the kind of customer service that has been synonymous with the Black Hills brand.