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Lower Oil, Gas Prices Leave Black Hills Seeing Red

Rapid City, SD-based Black Hills Corp.'s profits were battered in the fourth quarter by sinking oil and natural gas prices. The company last Tuesday reported a net loss of $98.8 million, or a negative $2.58/share, for the fourth quarter, compared to net income of $23.8 million, or 62 cents/share, for the same period in 2007.

For all of 2008 net income was $105.1 million, or $2.75/share, compared to $98.8 million, or $2.64/share for 2007. Lowered crude oil and natural gas prices at the end of last year caused Black Hills to record noncash ceiling test impairment charges for its oil/gas assets totaling $59 million, or $1.54/share, and separately another $61.4 million, or $1.60/share, net loss resulting from an unrealized mark-to-market charge for certain interest rate hedges that went bad when some long-term debt issuances anticipated for the end of last year had to be postponed, the company said.

Calling 2008 a "transformational" year because of the company's sale of seven independent power plants and acquisition of five Aquila utilities, CEO David Emery talked bullishly about operations in 2009 despite rescinding previous earnings projections for the year because of the uncertainty of oil/gas prices. Action by Colorado regulators on the company's plans for five new natural gas-fired power plants, along with some solar and wind projects, is expected later this month, Emery said.

"We've reached tentative settlements in both our Colorado natural gas rate case and a Black Hills Power transmission rate case at the Federal Energy Regulatory Commission [FERC]," said Emery, noting that he expected regulatory action on those settlements later in February. "This is real positive news."

The $3.8 million FERC settlement on the transmission rate (implemented last Jan. 1 subject to refund) involves a "formulaic-based rate," allowing Black Hills to add continued investment in transmission, which the company intends to do, and recover the investments automatically with an annual true-up process to account for overcollections and undercollections, Emery said. "This is a very positive way of getting regulatory recovery of our transmission investments going forward."

Emery said the company is well positioned, with overall lower corporate risk and higher levels of predictable cash flow now that two-thirds of the Black Hills assets are investor-owned utility operations. Oil and gas for 2009 still looks problematic, based on what he and CFO Tony Cleberg told a conference call with financial analysts Tuesday.

"Our [oil/gas] reserve reductions were primarily driven by price," said Emery, noting that production was down about 7.5% last year and it is difficult early in the new year to predict what will happen in 2009. "It will really depend on what we end up doing with capital spending," he said in response to an analyst's question about whether production might rebound this year.

"Right now we're not real enthused about spending a lot of capital [on oil/gas]," Emery said. "It is very difficult for us to give accurate guidance on future production. We did have a decline in 2008 and going forward we are hoping to replace some of our production, but it is very difficult to say that we can do that, given the current levels of prices, and how that contributes to our willingness to make investments."

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