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Black Hills Finds Ready Market for Gas-Fired Generation

Rapid City, SD-based Black Hills Corp. CEO David Emery's grin was wide enough to show through his company's first-quarter earnings conference call last Thursday, not because of the quarterly results, which were off compared to the same quarter in 2007, but because of the pending sale of seven independent natural gas-fired generation plants in four western states that collectively fetched $840 million from a joint venture of two asset management firms.

Noting that the deal penciled out to about $862/kWh -- a "phenomenal price" -- Emery said Black Hills learned quickly last year that the market for natural gas-fired independent power plants is "very strong." He said the company had no preconceived idea about the value or how many of the proposed plants it might sell, but after what he called a very detailed two-stage auction it was obvious there was considerable interest in all seven of the plants.

Coming concurrently with Black Hills' pending $940 million purchase of five Aquila power plants, the combined effect is proving to be a "transforming event" for Black Hills, said Emery, noting that the company is not exiting independent power and plans to keep the same mix of fuel (oil/gas exploration and development), generation and electric/gas utilities, but there will be more emphasis on more stable utility-based cash flows.

The seven independent power plants (IPP) represent nearly 1,000 MW for $840 million in cash to separate Australian- and U.S.-based asset investment firms, and the sale price is subject to working capital adjustments.

Collectively representing 974 MW and spread over four western states, the generation facilities represent the largest facilities in Black Hills' fleet, and when the deal is closed with Hastings Funds Management LT and a JP Morgan Asset Management unit, IIF BH Investment LLC (IIF), the energy holding company will retain four plants and various power fund investments totaling 158 MW.

Black Hills said that under terms of the agreement with Hastings and IIF it has the right to retain ownership of its 240 MW Fountain Valley power plant in Colorado -- the largest single unit in the deal -- if closing conditions for the planned acquisition of utility assets from Aquila are not met. Fountain Valley carries a $240 million purchase price in the overall deal, Black Hills said.

"The net proceeds from the pending independent power sale are expected to eliminate or reduce our need to issue equity to finance the pending Aquila purchase," Emery said. "While we remain confident that the Aquila transaction will close, having the flexibility to retain the Fountain Valley plant ensures access to a continued source of strong cash flow and earnings."

Approvals from the Federal Energy Regulatory Commission (FERC) and U.S. Department of Justice, and Australian federal regulators are expected to allow closure of sale by late in the second quarter or early in the third quarter, Emery said.

In addition to Fountain Valley, the plants being sold include two in Nevada, Las Vegas I (53 MW) and II (224 MW); two others in Colorado, Arapahoe (130 MW) and Valmont (80 MW); one in New Mexico, Valencia (149 MW); and one in California, Harbor (98 MW). Harbor is a cogeneration facility, and the Valencia facility in New Mexico is under construction.

Emery said a power purchase agreement Black Hills has with Southern California Edison Co. for its Harbor plant in California expires May 31, and its Las Vegas II plant is only partially contracted, so the timeliness of the sale is very good for those two plants, and again the fact that they were readily included in the deal shows their "underlying value."

The partially constructed Valencia facility in New Mexico will be completed by Black Hills later this year as part of the terms of sale, he said.

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