• a $3.5 million, or $0.10 per share, increase in power generation earnings; and
• a $1.6 million, or $0.05 per share, decrease in unallocated corporate costs; offset by
• a $6.6 million, or $0.20 per share, decrease in energy marketing earnings;
• a $1.6 million, or $0.05 per share, decrease in retail services earnings; and
• a $1.3 million, or $0.04 per share, decrease in oil and gas production earnings.

For the 12 months ended December 31, 2006, net income was $81.0 million, or $2.42 per share, compared to $33.3 million, or $1.00 per share for the same period ended December 31, 2005. Net income for 2006 reflected $0.21 per share from discontinued operations, including an after-tax gain on the sale of certain oil marketing and transportation assets completed in March 2006. Net income for 2005 was negatively affected by certain special items, including an after-tax charge of $(0.98) per share affecting power generation business segment earnings, related to the impairment of the Las Vegas I power plant, and other items netting to approximately $(0.29) per share. Income from continuing operations for the 12 months ended December 31, 2006 was $74.0 million, or $2.21 per share, compared to $32.8 million, or $0.98 per share for the same period ended December 31, 2005. Compared to the year 2005, income from continuing operations in the year 2006 reflected the following:

• a $32.4 million, or $0.97 per share, increase in power generation earnings;
• an $ 8.0 million, or $0.24 per share, decrease in unallocated corporate costs;
• a $ 4.1 million, or $0.12 per share, increase in retail services earnings; and
• a $ 3.5 million, or $0.10 per share, increase in energy marketing earnings; offset by
• a $ 1.0 million, or $0.03 per share, decrease in coal mining earnings; and
• a $ 5.2 million, or $0.15 per share, decrease in oil and gas production earnings.

YEAR IN REVIEW

David R. Emery, Chairman, President and CEO of Black Hills Corporation, said, “Results for 2006 reflect solid utility performance, improving power generation operations and strong energy marketing results. The year also had its challenges, in particular plant outages, which affected unregulated power generation, electric utility and coal mining operations, and lower natural gas prices in the second half of the year, which affected oil and gas results.

“Our retail utilities are in excellent operational and financial condition. The South Dakota Public Utilities Commission approved a $7.9 million rate increase at our electric utility effective January 1, 2007. We also obtained approval for automatic cost adjustments related to transmission, purchased power and fuel costs. We agreed to continue absorbing a portion of the cost increases on purchased power and non-coal fuel costs, as we did under the 1995 rate freeze. We are particularly pleased that we are able to continue our proven business model, where customers benefit from cost-containment and operational efficiency incentives and investors benefit from off-system sales.” Emery added, “With major power plant maintenance completed this year, our fleet of regulated power plants improved its characteristic high level of availability this year to an impressive 97.1 percent.”

Emery said, “The 90-megawatt, coal-fired Wygen II power plant at our Gillette, Wyoming energy and coal mine complex is on schedule to be in full commercial service beginning January 1, 2008. We expect to submit a rate filing in the first quarter of 2007 to include Wygen II in the rate base of Cheyenne Light, Fuel & Power.” Emery continued, “We recently made significant progress on our proposed Wygen III power plant, as an air permit has been issued by the Wyoming Department of Environmental Quality. This approval enables us to move forward with other regulatory processes with the goal of commencing construction in late 2007 or early 2008.

“Our oil and gas business achieved its ninth consecutive year of production growth. We produced 14.4 billion cubic feet equivalent (Bcfe) in 2006, a 5 percent increase over 2005 results,” Emery said. “While our annual growth did not hit our long-term target, production figures for the fourth quarter of 2006 were up 15 percent overall, and up 16 percent for natural gas, reflecting successful drilling efforts, primarily in the San Juan Basin. We expect to extend our poduction growth trend in the next few years as well. Much of that growth is expected to come from the San Juan Basin, where we are encouraged by recent production results. The commencement of our drilling program in the Piceance Basin should also begin to yield results late in 2007 and beyond.” Emery continued, “While production and revenues were up in 2006, financial results reflected lower gas prices and increased lease operating expense, depletion expense, allocated corporate costs and interest expense.”

Emery continued, “Year-end 2006 oil and gas reserves were approximately 199 Bcfe. Both price and technical performance results contributed to a lower-than-expected year-end calculation, which included a significant revision of 2005 year-end reserves. Additions to reserves were less than expected, primarily for two reasons. First, our deep well testing in the San Juan Basin is still in the evaluation stage and consequently minimal reserves were booked. Second, we did not receive final approval for an increased density spacing order in the East Blanco Field in the San Juan Basin during 2006, as originally anticipated. On January 30, 2007, however, we received the approval order. Our estimates on increased density drilling add about 10 Bcfe to 2007 reserves and potentially another 20 Bcfe over the next several years of drilling. We believe our existing development program has several years of drilling opportunity without the need to acquire significant additional leasehold.

“Energy marketing operations benefited from volatile market conditions in 2006,” Emery stated. “The strong increase in earnings in this business reflects both higher gross margins and an increase in daily average physical natural gas volumes marketed, which were 12 percent higher than 2005 volumes. We celebrated our 10th anniversary of energy marketing operations last summer. Our customer-focused, risk-controlled business approach, and our record of outstanding producer, origination, transportation and storage services out of the Rocky Mountain and Canadian regions has worked very well for us. Our expansion into crude oil marketing services from our Golden, Colorado-based operations supports our plan to expand our regional producer services marketing presence.

“Our non-regulated power generation segment experienced solid performance in 2006. We overcame maintenance outages earlier in the year and returned our Las Vegas power plants to strong power plant availability.
As a result, fleet-wide availability exceeded 93 percent for the year,” Emery said.

“Coal mining operations delivered stable production in 2006, with 4.7 million tons sold. Lower earnings were a result of expensing overburden as incurred due to an accounting change and higher mineral taxes. Our production will begin to increase later in 2007 to accommodate the fuel needs for the Wygen II power plant, which is expected to run intermittently in test mode prior to full commercial service on January 1, 2008. On an annual basis, Wygen II will consume approximately 0.5 million tons of coal.”

Emery stated, “We begin 2007 in excellent condition, financially and operationally. Recently, we raised our dividend, as we have for 37 consecutive years. We are very proud of our record of consistently rewarding our shareholders with a growing dividend while also retaining earnings to fund our future. We are well-positioned to create shareholder value by adding Wygen II to our Cheyenne Light rate base, beginning construction of another mine-mouth, coal-fired power plant, Wygen III, and increasing oil and gas production and reserves on our existing leasehold in the San Juan, Piceance and Powder River Basins. Last week, we announced the largest transaction in our Company’s history. The pending purchase of an electric utility, four gas utilities and related operations in Colorado, Kansas, Nebraska and Iowa will define our direction and add to our longer-term growth potential. This transaction will transform our future as a much larger regional retail utility while we continue to advance our diversified wholesale energy operations.” Emery concluded, “We are excited about our strategy, as we continue to seek ways to provide economic value and reliable service to both retail utility and wholesale energy customers.”

CONSOLIDATED FINANCIAL RESULTS

BUSINESS UNIT PERFORMANCE SUMMARY

Retail Services Group

Quarterly results. Income from continuing operations from the Retail Services business group for the three-month period ended December 31, 2006 was $7.9 million, compared to $9.5 million in 2005. Business segment results were as follows:

• Net income from the Electric utility business segment for the three months ended December 31, 2006 was $5.6 million, compared to $8.4 million in 2005. The decrease in 2006 earnings is primarily from lower off-system sales margins and higher administrative costs from corporate allocations compared to 2005. The 2005 results also include a $1.9 million benefit from a deferred tax adjustment.
• Net income from the Electric and gas utility business segment for the three months ended December 31, 2006 was $2.3 million, compared to $1.1 million for the same period in 2005. The increase is primarily due to an increase in base rates, effective January 1, 2006 and increased demand, partially offset by higher depreciation expense and general and administrative costs. Earnings in 2006 were also positively impacted by increased income from allowance for funds used during construction (AFUDC) associated with the advancing construction of the Wygen II power plant.

Annual results. Income from continuing operations from the Retail Services business group for the year ended December 31, 2006 was $24.2 million, compared to $20.1 million in 2005. Business segment results were as follows:

• Net income from the Electric utility business segment for 2006 was $18.7 million, compared to $18.0 million in 2005. In 2006, revenues increased 2 percent primarily due to increased retail sales. Operating expenses were flat with the prior year as increased costs associated with the 2006 Wyodak power plant outage and increased corporate allocations and compensation expense were offset primarily by decreased power marketing legal costs. Net income in 2005 was also impacted by a deferred tax benefit adjustment of $1.9 million.
• Net income from the Electric and gas utility business segment for the twelve months ended December 31, 2006 was $5.5 million, compared to $2.1 million for the same period in 2005. The increase is primarily due to an increase in base rates, effective January 1, 2006 and a full-year of operations, partially offset by increased depreciation expense, corporate allocations and the write-off of uncollectible accounts. Earnings in 2006 were also positively impacted by increased income from AFUDC associated with the advancing construction of the Wygen II power plant.

The following tables provide certain Retail Services operating statistics: