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Black Hills Improves, But Low Gas Prices Hurt

February 1, 2010
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Rapid City, SD-based Black Hills Corp. showed a profit for all of last year and in the fourth quarter, compared to a sea of red ink for the same 12-month and fourth-quarter periods in 2008. The company attributed the turnaround to successful utility and hedging initiatives. Nonutility oil and gas operations suffered in both periods last year due to substantial impact from low wholesale natural gas prices.

Even with the return to profits, CEO David Emery during a conference call described 2009 as one of the toughest years ever for the company, primarily due to depressed wholesale energy prices for much of the year. Black Hills' oil/natural gas reserves declined in volume and value from the start of the year at 185 Bcfe, valued at $4.40/MMBtu for gas and $33/bbl for oil, to an end-of-2009 total of 119 Bcfe, valued at $2.52/MMBtu for gas and $53/bbl for oil, Emery said.

CFO Tony Cleberg said he expects "some recovery" in the oil/gas and energy marketing areas in 2010, but not all of what was lost in those areas last year.

Income from continuing operations for fourth-quarter 2009 was $32.4 million, or 84 cents/ share, compared to a loss from continuing operations for fourth quarter 2008 of $96.6 million or minus $2.52/share. Net income for the three months ending Dec. 31, 2009 was $32.8 million, or 85 cents/ share compared to a net loss of $98.8 million, or minus $2.58/share for the same period in 2008. The 2009 fourth quarter results include an $11.6 million, or 30 cents/share, noncash mark-to-market gain for certain interest rate swaps.

From an earnings perspective, 2009 was "the most challenging year we have had in a very long time," Emery said. "The impacts from the worst recession in 75 years generally and particularly the affects on natural gas demand and prices reduced our earnings considerably, contributing to earnings declines in oil/gas and energy marketing operations, and even in reductions to some of our off-system sales in some of our electric utilities." The gas price decline applied pressures in all of those areas, he said, and expectations for 2010 are for only modest improvements.

While there was substantial earnings improvement after the 2008 losses caused by several one-time charges, much of the improvement last year was due to what Emery called unique items, such as the $11 million fourth quarter gain in mark-to-market improvement due to interest rate swaps. In contrast, Black Hills' utilities enjoyed stronger performances, particularly the natural gas utilities, which Emery said exceeded expectations.

As far as spending on exploration and production (E&P), which dropped down to just $20 million last year, Emery said E&P will remain "pretty conservative" in 2010, although it should be "a little bit more" than 2009. "It is going to be price-dependent, and with E&P we scrutinize everything on a project-by-project basis, and it depends on prices [for gas and oil] at each particular location." As gas prices improve, Black Hills plans to do "a little more drilling." Generally, there are few new drilling opportunities at the current low prices, Emery said.

Generally, Emery said Black Hills accomplished its strategic initiatives for the year in 2009, including several financings in an otherwise dour economic landscape. He said the company is in "great position" to continue its capital spending and growth efforts.

"Even during a very challenging year we accomplished many of our key strategic initiatives," Emery said. "Our growth projects are on track with the expected early completion of Wygen III (coal-fired unit) [April 1] and our plans to build an additional 380 MW of gas-fired generation to serve our utility customers in Colorado."

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