BLACK HILLS POWER INC
RISK FACTORS     The following specific risk factors and other risk factors that we discuss in our periodic reports from time to time should be considered for a better understanding of our Company.  These factors and other matters discussed herein are important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward looking statements included elsewhere in this document.   Our credit ratings could be lowered in the future.  If this were to occur, our access to capital and our cost of capital and other costs would be negatively affected.   Our issuer credit rating is “Baa2” by Moody’s Investor Services, Inc., or Moody’s and “BBB-” by Standard & Poors.  Our credit rating on our First Mortgage Bonds is “Baa1” by Moody’s and “BBB” by Standard & Poor’s.  Any reduction in our ratings by Moody’s or Standard & Poor’s Rating Service could adversely affect our ability to refinance or repay our existing debt and to complete new financings.  In addition, a downgrade in our credit rating would increase our costs of borrowing under some of our existing debt obligations.  A downgrade could also result in our business counterparties requiring us to provide additional amounts of collateral under new transactions.   We may not raise our retail rates without prior approval of the South Dakota Public Utilities Commission or the Wyoming Public Services Commission.  If we seek rate relief, we could experience delays in obtaining approvals and could have rate recovery disallowed in rate proceedings.   Our rate freeze agreement with the SDPUC expired on January 1, 2005.  Until such time as we petition the SDPUC or the WPSC for rate relief, or either commission requires that we do so, we may not increase our retail rates.  Additionally, we may not invoke any fuel and purchased power adjustment tariff that would take effect prior to the completion of a rate proceeding, absent extraordinary circumstances.  Because we are generally unable to increase our base rates without prior approval from the SDPUC and the WPSC, our returns could be threatened by plant outages, machinery failure, increases in fuel and purchased power costs over which we have no control, acts of nature, acts of terrorism or other unexpected events that could cause operating costs to increase and operating margins to decline.  Moreover, in the event of unexpected plant outages or machinery failures, we may be required to purchase replacement power in wholesale power markets at prices that exceed the rates we are permitted to charge our retail customers.  Finally, our costs would be subject to the review of the SDPUC or the WPSC, and the commissions could find certain costs not to be recoverable, thus negatively affecting our revenues.   Because prices in the wholesale power markets are volatile, our revenues and expenses may fluctuate.   A portion of the variability of our net income in recent years has been attributable to wholesale electricity sales.  The related power prices are influenced by many factors outside our control, including:      •      fuel prices;     •      transmission constraints;     •      supply and demand;     •      weather;     •      economic conditions; and     •      the rules, regulations and actions of the system operators in those markets.       8         Moreover, unlike most other commodities, electricity cannot be stored and therefore must be produced concurrently with its use.  As a result, wholesale power markets are subject to significant price fluctuations over relatively short periods of time and can be unpredictable.   Construction, expansion, refurbishment and operation of power generating and transmission and resource recovery facilities involve significant risks which could lead to lost revenues or increased expenses.   The construction, expansion, refurbishment and operation of power generating and transmission facilities involve many risks, including:      •     the inability to obtain required governmental permits and approvals;     •     the unavailability of equipment;     •     supply interruptions;     •     work stoppages;     •     labor disputes;     •     social unrest;     •     weather interferences;     •     unforeseen engineering, environmental and geological problems; and     •     unanticipated cost overruns.     The ongoing operation of our facilities involves all of the risks described above, in addition to risks relating to the breakdown or failure of equipment or processes and performance below expected levels of output or efficiency.  New plants may employ recently developed and technologically complex equipment, especially in the case of newer environmental emission control technology.  Any of these risks could cause us to operate below expected capacity levels, which in turn could result in lost revenues, increased expenses, higher maintenance costs and penalties.  While we maintain insurance, obtain warranties from vendors and obligate contractors to meet certain performance levels, the proceeds of such insurance and our rights under warranties or performance guarantees may not be adequate to cover lost revenues, increased expenses or liquidated damage payments.   Our business is subject to substantial governmental regulation and permitting requirements as well as on-site environmental liabilities we assumed when we acquired some of our facilities.  We may be adversely affected by any future inability to comply with existing or future regulations or requirements or the potentially high cost of complying with such requirements.   Our business is subject to extensive energy, environmental and other laws and regulations of federal, state and local authorities.  We generally are required to obtain and comply with a wide variety of licenses, permits and other approvals in order to operate our facilities.  In the course of complying with these requirements, we may incur significant additional costs.  If we fail to comply with these requirements, we could be subject to civil or criminal liability and the imposition of liens or fines.  In addition, existing regulations may be revised or reinterpreted, new laws and regulations may be adopted or become applicable to us or our facilities, and future changes in laws and regulation may have a detrimental effect on our business.    9         We strive at all times to be in compliance with all applicable environmental laws and regulations.  However, steps to bring our facilities into compliance, if necessary, could be expensive, and thus could adversely affect our results of operation and financial condition.  Furthermore, with the continuing trends toward stricter standards, greater regulation, more extensive permitting requirements and an increase in the assets we operate, we expect our environmental expenditures to be substantial in the future.   Ongoing changes in the United States utility industry, such as state and federal regulatory changes, a potential increase in the number of our competitors or the imposition of price limitations to address market volatility, could adversely affect our profitability.   The United States electric utility industry is currently experiencing increasing competitive pressures as a result of:      •      the Energy Policy Act of 2005 and the repeal of the Public Utility Holding Company Act of 1935;     •      consumer demands;     •      technological advances; and     •      greater availability of natural gas-fired power generation, and other factors.     FERC has implemented and continues to propose regulatory changes to increase access to the nationwide transmission grid by utility and non-utility purchasers and sellers of electricity.  In addition, a number of states have implemented or are considering or currently implementing methods to introduce and promote retail competition.  Industry deregulation in some states has led to the disaggregation of some vertically integrated utilities into separate generation, transmission and distribution businesses, and deregulation initiatives in a number of states may encourage further disaggregation.  As a result, significant additional competitors could become active in the generation, transmission and distribution segments of our industry, which could negatively affect our ability to expand our asset base.   In addition, the independent system operators who oversee many of the wholesale power markets have in the past imposed, and may in the future continue to impose, price limitations and other mechanisms to address some of the volatility in these markets.  These types of price limitations and other mechanisms may adversely affect the profitability of those generating facilities that sell energy into the wholesale power markets.  Given the extreme volatility and lack of meaningful long-term price history in some of these markets and the imposition of price limitations by independent system operators, we may not be able to operate profitably in all wholesale power markets.
UNRESOLVED STAFF COMMENTS     None.
LEGAL PROCEEDINGS     Information regarding our legal proceedings is incorporated herein by reference to the “Legal Proceedings” subcaption within Item 8, Note 10, “Commitments and Contingencies”, of our Notes to Financial Statements in this Annual report on Form 10-K.       10         PART II
MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS     All of our common stock is held by our parent company, Black Hills Corporation.  Accordingly, there is no established trading market for our common stock.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS     In 2003, we made a non-cash dividend to our parent company, Black Hills Corporation, consisting of our 100 percent ownership in Black Hills Generation, Inc., formerly known as Black Hills Energy Capital, Inc.  As a result, we no longer have any subsidiaries and operate only in the electric utility business.          2005   2004   2003         (in thousands)                                   Revenue   $   189,500   $   173,745   $   171,019     Operating expenses       152,961       129,936        119,920      Operating income   $   36,044   $   43,809   $   51,099     Income from continuing                             operations   $   18,005   $   19,209   $   24,089     The following table provides certain electric utility operating statistics:      Electric Revenue     (in thousands)                                       Percentage       Percentage         Customer Base   2005   Change   2004   Change   2003                                           Commercial   $   49,185   5%    $   46,791   (2)%    $   47,777     Residential       39,348   8           36,536   (3)           37,716     Industrial       19,982   1           19,796   1            19,589     Municipal sales       2,268   3           2,200   5            2,102     Contract wholesale       23,384   3           22,720   6            21,451     Wholesale off-system       47,647   25           38,228   13            33,743     Total electric sales       181,814   9           166,271   2            162,378     Other revenue       7,191   (4)          7,474   (14)          8,641     Total revenue   $   189,005   9%    $   173,745   2%     $   171,019         11              Megawatt Hours Sold                                       Percentage       Percentage         Customer Base   2005   Change   2004   Change   2003                               Commercial   655,076   4%    627,326   (2)%   641,779     Residential   480,053   7       447,166   (3)      463,290     Industrial   417,628   3       406,209   —       404,341     Municipal sales   30,084   4       28,934   5       27,426     Contract wholesale   619,369   1       614,700   5       614,888     Wholesale off-system   869,161   (6)      926,461   15       773,801     Total electric sales   3,071,371   1%    3,050,796   4%    2,925,525     We established a new summer peak load of 401 megawatts in July 2005 and a new winter peak load of 356 megawatts in December 2005.  We own 435 megawatts of electric utility generating capacity and purchase an additional 50 megawatts under a long-term agreement expiring in 2023.                Percentage       Percentage         Resources   2005   Change   2004   Change   2003                               Megawatt-hours generated:                         Coal   1,728,823   (1)%    1,753,693   (3)%    1,806,444     Gas   37,239   34        27,825   (82)       156,703         1,766,062   (1)       1,781,518   (9)       1,963,147                               Megawatt-hours purchased   1,399,212   3        1,361,409   30        1,048,076     Total resources   3,165,274   1%     3,142,927   4%     3,011,223                                2005    2004    2003                        Heating and cooling degree days                 Actual                 Heating degree days   6,488    6,553    7,065      Cooling degree days   830    522    891                        Variance from normal                 Heating degree days   (10)%    (9)%    (2)%      Cooling degree days   39 %    (13)%    49 %          12         2005 Compared to 2004   Electric revenue increased 9 percent for the year ended December 31, 2005 compared to the same period in the prior year.  Firm commercial, residential and contract wholesale sales increased 5 percent, 8 percent and 3 percent, respectively.  Cooling degree days for the year were 59 percent higher than 2004 and heating degree days were 1 percent lower than 2004.  Wholesale off-system sales increased 25 percent due to a 33 percent increase in average price received partially offset by a 6 percent decrease in megawatt-hours sold.     Electric operating expenses increased 18 percent for the year ended December 31, 2005, compared to the prior year.  Higher operating expenses were primarily the result of an $18.5 million increase in fuel and purchased power costs.  The increase in fuel and purchased power was due to a $16.9 million increase in purchased power, which includes $2.8 million of additional purchase power costs to cover the outage of Neil Simpson II, as well as a 31 percent increase in average price per megawatt-hour, and a 3 percent increase in megawatt-hours purchased.  Fuel costs increased $1.6 million due to a 12 percent increase in average cost, partially offset by a 1 percent decrease in megawatt-hours generated.  Megawatt-hours produced through coal-fired generation decreased while higher cost gas generation was utilized in 2005.  Purchased power and gas generation were utilized for firm load demand and peaking needs due to unscheduled plant outages and warmer weather.  The increase in operating expense was also affected by increased power marketing legal expense, compensation costs and corporate allocations, partially offset by lower maintenance costs due to scheduled and unscheduled plant maintenance in 2004.   Income from continuing operations decreased $1.2 million primarily due to increased fuel and purchased power costs, legal expense, compensation costs and corporate allocations, partially offset by increased revenues, lower maintenance costs, lower interest expense due to the pay down of debt, and a $1.9 million benefit from a deferred tax adjustment.   2004 Compared to 2003   Electric revenue increased 2 percent in 2004 compared to 2003, primarily due to a 13 percent increase in wholesale off-system sales offset by decreased transmission revenues due to lower approved rates and higher load share of our Open Access Transmission Tariff revenues.   Residential and commercial sales decreases of 3 percent and 2 percent, respectively, in 2004 accounted for a $1.7 million decrease in revenue.  These decreases were partially offset by a 1 percent increase in industrial sales.  The 15 percent increase in wholesale off-system megawatt-hours accounted for a $4.5 million increase in revenues.  Cooling degree days were 41 percent lower than 2003 and heating degree days were 7 percent lower than 2003.   Electric utility operating expenses increased $10.0 million due to a $5.9 million increase in fuel and purchased power cost, a $4.5 million increase in certain operations and maintenance costs, including scheduled and unscheduled maintenance costs, increased group insurance and corporate allocations and increased costs associated with the increase in wholesale off-system sales, partially offset by decreased interest expense of $0.9 million, primarily due to retirement of debt.   The increase in fuel and purchased power cost was due to an $11.8 million increase in purchased power costs, offset by a $5.9 million decrease in fuel costs, as prevailing gas prices made it more economical for us to purchase power for our peaking needs and increased off-system sales, rather than generate energy utilizing our gas turbines.   13
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA       INDEX TO FINANCIAL STATEMENTS        Report of Independent Registered Public Accounting Firm   15               Statements of Income for the three years ended December 31, 2005   16               Balance Sheets as of December 31, 2005 and 2004   17               Statements of Cash Flows for the three years ended December 31, 2005   18               Statements of Common Stockholder’s Equity and          for the three years ended December 31, 2005   19               Notes to Financial Statements   20-43     14           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Stockholder of Black Hills Power, Inc. Rapid City, South Dakota   We have audited the accompanying balance sheets of Black Hills Power, Inc. (the Company) as of December 31, 2005 and 2004, and the related statements of income, common stockholder’s equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2005.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.   In our opinion, such financial statements present fairly, in all material respects, the financial position of Black Hills Power, Inc. as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.   As discussed in Note 1, the accompanying 2003 Statement of Cash Flows has been restated.   DELOITTE & TOUCHE LLP   Minneapolis, Minnesota, March 16, 2006         15         BLACK HILLS POWER, INC. STATEMENTS OF INCOME      Years ended December 31,   2005    2004    2003          (in thousands)                                   Operating revenues   $   189,005    $   173,745    $   171,019                                    Operating expenses:                             Fuel and purchased power       80,886        60,668        54,815      Operations and maintenance       22,586        26,030        25,207      Administrative and general       22,685        16,570        12,965      Depreciation and amortization       19,543        18,873        18,999      Taxes, other than income taxes       7,261        7,795        7,934              152,961        129,936        119,920                                    Operating income       36,044        43,809        51,099                                    Other (expense) income:                             Interest expense       (12,907)       (16,019)       (17,044)     Interest income       258        696        1,512      Other expense       (110)       (213)       (286)     Other income       463        448        430              (12,296)       (15,088)       (15,388)                                   Income from continuing operations before income taxes        23,748        28,721        35,711      Income taxes       (5,743)       (9,512)       (11,622)                                   Income from continuing operations        18,005        19,209        24,089      Discontinued operations, net of income taxes (Note 11)       —        —        1,906                                    Net income   $   18,005    $   19,209    $   25,995                    The accompanying notes to financial statements are an integral part of these financial statements.     16         BLACK HILLS POWER, INC. BALANCE SHEETS      At December 31,   2005        2004          (in thousands, except share amounts)     ASSETS                         Current assets:                         Cash and cash equivalents   $   685        $   344      Restricted cash       —            3,069      Receivables (net of allowance for doubtful accounts of $830 and $912, respectively) -                         Customers       19,297            17,233      Affiliates       1,964            891      Other       996            1,264      Materials, supplies and fuel       14,236            11,513      Prepaid income taxes       —            1,872      Deferred income taxes       835            703      Other current assets       820            474              38,833            37,363                                Investments       3,340            3,275                                Property, plant and equipment       653,679            637,630      Less accumulated depreciation       (250,583)           (232,401)             403,096            405,229      Other assets:                         Regulatory asset       6,941            7,237      Other       11,448            13,204              18,389            20,441          $   463,658        $   466,308      LIABILITIES AND STOCKHOLDER’S EQUITY                         Current liabilities:                         Current maturities of long-term debt   $   1,996        $   1,991      Accounts payable       10,290            7,551      Accounts payable – affiliate       1,624            331      Note payable - affiliate       1,842            25,074      Accrued liabilities       14,866            13,814              30,618            48,761                                Long-term debt, net of current maturities       155,219            157,215                                Deferred credits and other liabilities:                         Deferred income taxes       67,942            69,938      Regulatory liability       5,740            6,021      Other       15,460            13,537              89,142            89,496      Commitments and contingencies (Notes 8 and 10)                                                   Stockholder’s equity:                         Common stock $1 par value; 50,000,000 shares authorized;                         Issued: 23,416,396 shares in 2005 and 2004       23,416            23,416      Additional paid-in capital       39,549            39,549      Retained earnings       127,312            109,307      Accumulated other comprehensive loss       (1,598)           (1,436)             188,679            170,836          $   463,658        $   466,308      The accompanying notes to financial statements are an integral part of these financial statements.    17         BLACK HILLS POWER, INC. STATEMENTS OF CASH FLOWS                  Restated                  (see Note 1)      Years ended December 31,   2005    2004    2003          (in thousands)     Operating activities:                             Income from continuing operations   $   18,005    $   19,209    $   24,089      Adjustments to reconcile net income to net cash                             provided by operating activities-                             Depreciation and amortization       19,543        18,873        18,999      Provision for valuation allowances       (82)       14        16      Deferred income taxes       (2,558)       3,781        8,918      Change in operating assets and liabilities-                             Accounts receivable and other current assets       (4,206)       (3,895)       (2,304)     Accounts payable and other current liabilities       4,373        (8,833)       (2,284)     Other operating activities       4,331        3,005        (3,209)     Net cash provided by operating activities of continuing operations       39,406        32,154        44,225      Net cash provided by operating activities of                              discontinued operations       —        —        8,544      Net cash provided by operating activities       39,406        32,154        52,769      Investing activities:                             Property, plant and equipment additions       (16,918)       (12,946)       (25,427)     Notes receivable from associated companies, net       —        37,710        14,798      Other investing activities       3,076        (3,424)       (239)     Net cash provided by (used in) investing activities of                              continuing operations       (13,842)       21,340        (10,868)     Net cash used in investing activities of discontinued operations       —        —        (8,212)     Net cash provided by (used in) investing activities       (13,842)       21,340        (19,080)     Financing activities:                             Dividends paid on common stock       —        (24,000)       (29,728)     Note payable to associated companies       (23,232)       25,074        —      Long-term debt – issuance       —        18,650        —      Long-term debt – repayments       (1,991)       (71,486)       (3,095)     Subsidiary cash included in stock dividend to Parent (Note 11)       —        —        (29,034)     Other financing activities       —        (2,440)       —      Net cash used in financing activities of continuing operations       (25,223)       (54,202)       (61,857)     Net cash used in financing activities of discontinued operations       —        —        (15,518)     Net cash used in financing activities       (25,223)       (54,202)       (77,375)                                   Increase (decrease) in cash and cash equivalents       341        (708)       (43,686)     Cash and cash equivalents:                             Beginning of year       344        1,052        44,738*     End of year   $   685    $   344    $   1,052      Supplemental disclosure of cash flow information:                             Cash paid during the period for-                             Interest   $   11,993    $   17,351    $   17,120      Income taxes   $   5,295    $   5,753    $   6,745      Stock dividend distribution to Black Hills Corporation, the                             parent company of Black Hills Power, Inc. (Note 11)   $   —    $   —    $   46,450    _________________________    *   Includes $44.2 million of cash included in discontinued operations.   The accompanying notes to financial statements are an integral part of these financial statements.   18         BLACK HILLS POWER, INC. STATEMENTS OF COMMON STOCKHOLDER’S EQUITY AND COMPREHENSIVE INCOME                      Accumulated                 Additional       Other             Common Stock   Paid-In   Retained   Comprehensive             Shares   Amount   Capital   Earnings   Income (Loss)   Total         (in thousands)                                                       Balance at December 31, 2002   23,416   $   23,416   $   80,961    $   131,906    $   (18,055)   $   218,228      Comprehensive Income:                                                 Net income   —       —       —        25,995        —        25,995      Other comprehensive income,                                                 net of tax (see Note 7)   —       —       —        —        7,524        7,524      Total comprehensive income   —       —       —        25,995        7,524        33,519                                                        Non-cash dividend to Parent   —       —       (41,412)       (14,075)       9,037        (46,450)     Dividends on common stock   —       —       —        (29,728)       —        (29,728)                                                       Balance at December 31, 2003   23,416       23,416       39,549        114,098        (1,494)       175,569      Comprehensive Income:                                                 Net income   —       —       —        19,209        —        19,209      Other comprehensive income,                                                 net of tax (see Note 7)   —       —       —        —        58        58      Total comprehensive income   —       —       —        19,209        58        19,267                                                        Dividends on common stock   —       —       —        (24,000)       —        (24,000)                                                       Balance at December 31, 2004   23,416       23,416       39,549        109,307        (1,436)       170,836      Comprehensive Income:                                                 Net income   —       —       —        18,005        —        18,005      Other comprehensive income,                                                 net of tax, (see Note 7)   —       —       —        —        (162)       (162)     Total comprehensive income   —       —       —        18,005        (162)       17,843                                                        Balance at December 31, 2005   23,416   $   23,416   $   39,549    $   127,312    $   (1,598)   $   188,679        The accompanying notes to financial statements are an integral part of these financial statements.     19         NOTES TO FINANCIAL STATEMENTS December 31, 2005, 2004 and 2003      (1)   BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES     Business Description   Black Hills Power, Inc. (the Company) is an electric utility serving customers in South Dakota, Wyoming and Montana.  The Company is a wholly owned subsidiary of the publicly traded Black Hills Corporation (the Parent).   Basis of Presentation   The financial statements include the accounts of Black Hills Power, Inc. and also the Company’s ownership interests in the assets, liabilities and expenses of its jointly-owned facilities (see Note 3.).  As discussed in Note 11, the Company has distributed the stock held in its subsidiaries in the form of non-cash dividends to the Parent.  These distributions represented 100 percent ownership of the subsidiaries.  Activity at the subsidiaries was recorded up to the date of distribution and has been reclassified into “Discontinued operations” in the accompanying statements of income.    Use of Estimates   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates relate to allowance for uncollectible accounts receivable, long-lived asset values and useful lives, employee benefits plans and contingencies.  Actual results could differ from those estimates.   Regulatory Accounting   The Company’s regulated electric operations are subject to regulation by various state and federal agencies.  The accounting policies followed are generally subject to the Uniform System of Accounts of the Federal Energy Regulatory Commission (FERC).   The Company’s electric operations follow the provisions of the Financial Accounting Standards Board (FASB) of Statement of Financial Accounting Standards (SFAS) No. 71, “Accounting for the Effects of Certain Types of Regulation” (SFAS 71), and its financial statements reflect the effects of the different ratemaking principles followed by the various jurisdictions regulating its electric operations.  If rate recovery becomes unlikely or uncertain, due to competition or regulatory action, these accounting standards may no longer apply to the Company’s regulated generation operations.  In the event the Company determines that it no longer meets the criteria for following SFAS 71, the accounting impact to the Company would be an extraordinary non-cash charge to operations of an amount that could be material.  Criteria that give rise to the discontinuance of SFAS 71 include increasing competition that could restrict the Company’s ability to establish prices to recover specific costs and a significant change in the manner in which rates are set by regulators from cost-based regulation to another form of regulation.  The Company periodically reviews these criteria to ensure the continuing application of SFAS 71 is appropriate.   20         At December 31, 2005 and 2004, the Company had regulatory assets of $6.9 million and $7.2 million and regulatory liabilities of $5.7 million and $6.0 million, respectively.  Regulatory assets are primarily recorded for the probable future revenue to recover future income taxes related to the deferred tax liability for the equity component of allowance for funds used during construction of utility assets and for unamortized losses on reacquired debt.  Regulatory liabilities include the probable future decrease in rate revenues related to a decrease in deferred tax liabilities for prior reductions in statutory federal income tax rates and also the cost of removal for utility plant, recovered through the Company’s electric utility rates.   Cash Equivalents   The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.   Reclassifications    Certain 2004 and 2003 amounts in the consolidated financial statements have been reclassified to conform to the 2005 presentation.  These reclassifications had no effect on the Company's stockholders' equity or results of operations, as previously reported.  The reclassifications include an adjustment to the 2004 Statement of Cash Flows for the increase in restricted cash of $3.1 million that was previously included in other financing activities when it should have been included in other investing activities.     Cash Flow Statement Restatement   Subsequent to the issuance of its financial statements for the year ended December 31, 2003, the Company determined that the cash flows associated with discontinued operations should have been presented within the Statements of Cash Flows.  As a result, during 2005, the Company changed the presentation of cash flows from discontinued operations to present separate disclosure of the cash flows from operating, investing and financing activities.  In addition, beginning of year cash and cash equivalents in the 2003 Statement of Cash Flows was adjusted to include cash and cash equivalents from discontinued operations.  A summary of the effects of these changes on the Statement of Cash Flows for the year ended December 31, 2003, is as follows (in thousands):            2003                   Net cash flows from operating activities as previously reported   $   44,225      Change in net cash flows from discontinued operations       8,544      Net cash flows from operating activities as currently reported   $   52,769                    Net cash flows used for investing activities as previously reported   $   (10,868)     Change in net cash flows used for discontinued operations       (8,212)     Net cash flows used for investing activities as currently reported   $   (19,080)                   Net cash flows used for financing activities as previously reported   $   (32,823)     Subsidiary cash included in stock dividend      (29,034)     Change in net cash flows used for discontinued operations      (15,518)     Net cash flows used for financing activities as currently reported   $   (77,375)                   Cash and cash equivalents beginning of year as previously reported   $   518      Cash and cash equivalents included in assets of discontinued             operations beginning of year       44,220      Cash and cash equivalents beginning of year as currently reported   $   44,738          21         Materials, Supplies and Fuel   Materials, supplies and fuel used for construction, operation and maintenance purposes are generally stated at cost on a weighted-average basis.  To the extent fuel has been designated as the underlying hedged item in a “fair value” hedge transaction, those volumes are stated at market value using published industry quotations.  As of December 31, 2005, market adjustments related to fuel were $(0.2) million.   Deferred Financing Costs   Deferred financing costs are amortized using the effective interest method over the term of the related debt.   Property, Plant and Equipment   Additions to property, plant and equipment are recorded at cost when placed in service.  Included in the cost of regulated construction projects is an allowance for funds used during construction (AFUDC) which represents the approximate composite cost of borrowed funds and a return on capital used to finance the project.  The amount of AFUDC was approximately $0.2 million, $0.2 million, and $0.1 million in 2005, 2004 and 2003, respectively.  The cost of regulated electric property, plant and equipment retired, or otherwise disposed of in the ordinary course of business, less salvage, is charged to accumulated depreciation.  Repairs and maintenance of property are charged to operations as incurred.   Depreciation provisions for regulated electric property, plant and equipment is computed on a straight-line basis using an annual composite rate of 3.1 percent in 2005, 3.0 percent in 2004 and 3.1 percent in 2003.   Derivatives and Hedging Activities   The Company, from time to time, utilizes risk management contracts including forward purchases and sales and fixed-for-float swaps to hedge the price of fuel for its combustion turbines, maximize the value of its natural gas storage or to fix the interest on its variable rate debt.  Certain of the contracts qualify as derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133).  SFAS 133 requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value.  SFAS 133 requires that changes in the derivative instrument’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met.   SFAS 133 allows hedge accounting for qualifying fair value and cash flow hedges.  SFAS 133 provides that the gain or loss on a derivative instrument designated and qualifying as a fair value hedging instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk be recognized currently in earnings in the same accounting period.  SFAS 133 provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings.  The remaining gain or loss on the derivative instrument, if any, is recognized currently in earnings.       22         Impairment of Long-Lived Assets   The Company periodically evaluates whether events and circumstances have occurred which may affect the estimated useful life or the recoverability of the remaining balance of its long-lived assets.  If such events or circumstances were to indicate that the carrying amount of these assets was not recoverable, the Company would estimate the future cash flows expected to result from the use of the assets and their eventual disposition.  If the sum of the expected future cash flows (undiscounted and without interest charges) was less than the carrying amount of the long-lived assets, the Company would recognize an impairment loss.  No impairment loss was recorded during 2005, 2004 or 2003.   Income Taxes   The Company uses the liability method in accounting for income taxes.  Under the liability method, deferred income taxes are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between the financial and tax basis of assets and liabilities.  Such temporary differences are the result of provisions in the income tax law that either require or permit certain items to be reported on the income tax return in a different period than they are reported in the financial statements.  The Company classifies deferred tax assets and liabilities into current and non-current amounts based on the classification of the related assets and liabilities.   The Company files a federal income tax return with other affiliates.  For financial statement purposes, federal income taxes are allocated to the individual companies based on amounts calculated on a separate return basis.    Revenue Recognition    Revenue is recognized when there is persuasive evidence of an arrangement with a fixed or determinable price, delivery has occurred or services have been rendered, and collectibility is reasonably assured.       23            (2)   PROPERTY, PLANT AND EQUIPMENT     Property, plant and equipment at December 31, consisted of the following (in thousands):              2005       2004                 Weighted       Weighted                 Average       Average                 Useful       Useful   Lives         2005   Life   2004   Life   (in years)                                       Electric plant:                                 Production   $   317,792   45   $   315,613   45   25-58     Transmission*       69,998   45       83,488   44   35-50     Distribution*       222,305   32       198,583   32   20-40     Plant acquisition adjustment       4,870   —       4,870   —   —     General       32,030   18       31,010   18   7-40     Total electric plant       646,995           633,564             Less accumulated depreciation and amortization       250,583           232,401             Electric plant net of accumulated                                  depreciation and amortization       396,412           401,163             Construction work in progress       6,684           4,066             Net electric plant*   $   403,096       $   405,229           __________________________    *   As part of the Common Use Transmission Open-Access Transmission Tariff FERC filing that was made, the majority of 69KV lines and substation costs were reclassified from Transmission to Distribution assets.        (3)   JOINTLY OWNED FACILITIES     The Company uses the proportionate consolidation method to account for its percentage interest in the assets, liabilities and expenses of the following facilities:   The Company owns a 20 percent interest and PacifiCorp owns an 80 percent interest in the Wyodak Plant (Plant), a 362 megawatt coal-fired electric generating station located in Campbell County, Wyoming.  PacifiCorp is the operator of the Plant.  The Company receives 20 percent of the Plant’s capacity and is committed to pay 20 percent of its additions, replacements and operating and maintenance expenses.  As of December 31, 2005, the Company’s investment in the Plant included $73.8 million in electric plant and $38.8 million in accumulated depreciation, and is included in the corresponding captions in the accompanying Balance Sheets.  The Company’s share of direct expenses of the Plant was $6.1 million, $6.0 million and $5.8 million for the years ended December 31, 2005, 2004 and 2003, respectively, and is included in the corresponding categories of operating expenses in the accompanying Statements of Income.       24         The Company also owns a 35 percent interest and Basin Electric Power Cooperative owns a 65 percent interest in the Converter Station Site and South Rapid City Interconnection (the transmission tie), an AC-DC-AC transmission tie placed into service in the fourth quarter of 2003.  The transmission tie provides an interconnection between the Western and Eastern transmission grids, which provides us with access to both the Western Electricity Coordinating Council (WECC) region and the Mid-Continent Area Power Pool, or “MAPP” region.  The total transfer capacity of the tie is 400 megawatts – 200 megawatts West to East and 200 megawatts from East to West.  The Company is committed to pay 35 percent of the additions, replacements and operating and maintenance expenses.  The Company’s share of direct expenses was $0.2 and $0.1 million for years ended December 31, 2005 and 2004, respectively.  As of December 31, 2005, the Company’s investment in the transmission tie was $19.7 million, with $0.9 million of accumulated depreciation and is included in the corresponding captions in the accompanying Balance Sheets.      (4)   LONG-TERM DEBT     Long-term debt outstanding at December 31 is as follows:          2005   2004         (in thousands)     First mortgage bonds:                     8.06% due 2010   $   30,000   $   30,000     9.49% due 2018       3,680       3,970     9.35% due 2021       26,640       28,305     7.23% due 2032       75,000       75,000             135,320       137,275     Other long-term debt:                     Pollution control revenue bonds at 4.8% due 2014(a)       6,450       6,450     Pollution control revenue bonds at 5.35% due 2024(a)       12,200       12,200     Other(b)       3,245       3,281             21,895       21,931                           Total long-term debt       157,215       159,206     Less current maturities       (1,996)       (1,991)     Net long-term debt   $   155,219   $   157,215            __________________________    (a)   In the fourth quarter of 2004, the Company called and refinanced $18.7 million of pollution control revenue bonds.     (b)   At December 31, 2004, the Company had $3.1 million of cash restricted to maintain liquidity for our $2.9 million Series 94A bond issue.     Substantially all of the Company’s property is subject to the lien of the indenture securing its first mortgage bonds.  First mortgage bonds of the Company may be issued in amounts limited by property, earnings and other provisions of the mortgage indentures.   Scheduled maturities are approximately $2.0 million a year for the years 2006 through 2009, and $32.0 million for the year 2010.       25            (5)   FAIR VALUE OF FINANCIAL INSTRUMENTS     The estimated fair values of the Company’s financial instruments at December 31 are as follows (in thousands):          2005   2004         Carrying Amount   Fair Value   Carrying Amount   Fair Value                                           Cash and cash equivalents   $   685   $   685   $   344   $   344     Long-term debt   $   157,215   $   183,491   $   159,206   $   190,273     The following methods and assumptions were used to estimate the fair value of each class of the Company’s financial instruments.   Cash and Cash Equivalents and Restricted Cash The carrying amount approximates fair value due to the short maturity of these instruments.   Long-Term Debt   The fair value of the Company’s long-term debt is estimated based on quoted market rates for debt instruments having similar maturities and similar debt ratings.  The Company’s outstanding first mortgage bonds are either currently not callable or are subject to make-whole provisions which would eliminate any economic benefits for the Company to call and refinance the first mortgage bonds.      (6)   INCOME TAXES     Income tax expense from continuing operations for the years ended December 31 was (in thousands):          2005    2004    2003                                    Current   $   8,301    $   5,731    $   $3,550      Deferred       (2,558)       3,781        8,072          $   5,743    $   9,512    $   $11,622          26         The temporary differences which gave rise to the net deferred tax liability were as follows (in thousands):      Years ended December 31,   2005       2004                               Deferred tax assets, current:                         Asset valuation reserve   $   291       $   319     Employee benefits       550           382     Items of other comprehensive income       76           —     Other       110           157             1,027           858                               Deferred tax liabilities, current:                         Prepaid expenses       192           155                               Net deferred tax asset, current   $   835       $   703                               Deferred tax assets, non-current:                         Plant related differences   $   949       $   598     Regulatory asset       898           1,025     ITC       271           362     Employee benefits       2,929           2,602     Items of other comprehensive income       217           184     Other       204           213             5,468           4,984                               Deferred tax liabilities, non-current:                         Accelerated depreciation and other plant related differences       65,459           66,371     AFUDC       2,640           2,712     Regulatory liability       1,422           1,460     Employee benefits       2,880           3,307     Items of other comprehensive income       —           22     Other       1,009           1,050             73,410           74,922                               Net deferred tax liability, non-current   $   67,942       $   69,938                               Net deferred tax liability   $   67,107       $   69,235     The following table reconciles the change in the net deferred income tax liability from December 31, 2004, to December 31, 2005, to the deferred income tax benefit (in thousands):          2005                   Decrease in deferred income tax liability from the preceding table   $   (2,128)     Deferred taxes associated with ITC       (517)     Deferred taxes associated with other comprehensive loss       87      Deferred income tax benefit for the period   $   (2,558)         27         The effective tax rate differs from the federal statutory rate for the years ended December 31, as follows:          2005   2004   2003                       Federal statutory rate   35.0%   35.0%   35.0%     Amortization of excess deferred and investment tax credits   (1.7)   (1.5)   (1.3)     Deferred tax adjustments primarily related to                  plant-related changes in estimate   (8.2)   —   —     Research and development credit   —   —   (0.1)     Other   (0.9)   (0.4)   (1.1)         24.2%   33.1%   32.5%        (7)   OTHER COMPREHENSIVE INCOME (LOSS)     The following tables display the related tax effects allocated to each component of Other Comprehensive Income (Loss) for the years ended December 31, (in thousands):          2005         Pre-tax       Net-of-tax         Amount   Tax Expense   Amount                                   Minimum pension liability adjustment   $   (94)   $   33    $   (61)     Amortization of cash flow hedges settled and deferred in                              accumulated other comprehensive income (loss) and                              reclassified into interest expense       64        (22)       42      Net change in fair value of derivatives designated as                              cash flow hedges       (219)       76        (143)     Other comprehensive loss   $   (249)   $   87    $   (162)              2004         Pre-tax       Net-of-tax         Amount   Tax Expense   Amount                                   Minimum pension liability adjustment   $   25   $   (9)   $   16     Amortization of cash flow hedges settled and deferred in                              accumulated other comprehensive income (loss) and                              reclassified into interest expense       64       (22)       42     Other comprehensive income   $   89   $   (31)   $   58         28                  2003         Pre-tax       Net-of-tax         Amount   Tax Expense   Amount                                   Minimum pension liability adjustment   $   10,892   $   (3,813)   $   7,079     Net change in fair value of derivatives designated as                              cash flow hedges associated with discontinued operations       672       (269)       403     Amortization of cash flow hedges settled and deferred in                              accumulated other comprehensive income (loss) and                              reclassified into interest expense       64       (22)       42     Other comprehensive income   $   11,628   $   (4,104)   $   7,524        (8)   EMPLOYEE BENEFIT PLANS     Defined Benefit Pension Plan   The Company has a noncontributory defined benefit pension plan (Plan) covering the employees of the Company.  The benefits are based on years of service and compensation levels during the highest five consecutive years of the last ten years of service.  The Company’s funding policy is in accordance with the federal government’s funding requirements.  The Plan’s assets are held in trust and consist primarily of equity securities.  The Company uses a September 30 measurement date for the Plan.   Obligations and Funded Status   Change in benefit obligation:          2005       2004         (in thousands)                   Projected benefit obligation at beginning of year   $   46,176        $   44,803      Service cost       991            959      Interest cost       2,700            2,621      Actuarial (gain) loss       9            (182)     Discount rate change       1,630            —     Benefits paid       (2,122)           (2,025)     Asset transfer to affiliate       (592)           —     Mortality assumption change       519            —     Net increase       3,135            1,373      Projected benefit obligation at end of  year   $   49,311        $   46,176                     29         A reconciliation of the fair value of Plan assets (as of the September 30 measurement date) is as follows:          2005       2004         (in thousands)                   Beginning market value of plan assets   $   39,844        $   37,115      Benefits paid       (2,122)           (2,025)     Investment income       6,729            4,754      Asset transfer to affiliate       (592)           —     Ending market value of plan assets   $   43,859        $   39,844      Funding information for the Plan is as follows:          2005       2004         (in thousands)                   Fair value of plan assets    $   43,859        $   39,844      Projected benefit obligation       (49,311)           (46,176)     Funded status       (5,452)           (6,332)                               Unrecognized:                         Net loss       12,915            14,860      Prior service cost       766            922              13,681            15,782                                Net amount recognized   $   8,229        $   9,450      Amounts recognized in statement of financial position consist of:          2005       2004         (in thousands)                   Net pension asset   $   8,229       $   9,450                               Accumulated benefit obligation   $   41,191       $   38,302     The provisions of SFAS No. 87 “Employers’ Accounting for Pensions” (SFAS 87) required the Company to record a net pension asset of $8.2 million and $9.5 million at December 31, 2005 and 2004, respectively and is included in the line item Other in Other assets on the accompanying Balance Sheets.       30         Components of Net Periodic Pension Expense          2005   2004   2003         (in thousands)               Service cost    $   991    $   959    $   714      Interest cost       2,700        2,621        2,500      Expected return on assets       (3,480)       (3,420)       (2,473)     Amortization of prior service cost       156        166        165      Recognized net actuarial loss       854        1,080        1,105      Net pension expense   $   1,221    $   1,406    $   2,011      Assumptions      Weighted-average assumptions used to determine                 benefit obligations:   2005   2004   2003                       Discount rate   5.75%   6.00%   6.00%     Rate of increase in compensation levels   4.34%   4.39%   5.00%                       Weighted-average assumptions used to determine net                 periodic benefit cost for plan year:   2005   2004   2003                       Discount rate   6.00%   6.00%   6.75%     Expected long-term rate of return on assets*   9.00%   9.50%   10.00%     Rate of increase in compensation levels   4.39%   5.00%   5.00%   __________________________    *   The expected rate of return on plan assets was changed from 9.00 percent in 2005 to 8.50 percent for the calculation of the 2006 net periodic pension cost.  This change is expected to increase pension costs in 2006 by approximately $0.3 million.     The Plan’s expected long-term rate of return on assets assumption is based upon the weighted average expected long-term rate of returns for each individual asset class.  The asset class weighting is determined using the target allocation for each asset class in the Plan portfolio.  The expected long-term rate of return for each asset class is determined primarily from long-term historical returns for the asset class, with adjustments if it is anticipated that long-term future returns will not achieve historical results.   The expected long-term rate of return for equity investments was 9.5 percent and 10.0 percent for the 2005 and 2004 plan years, respectively.  For determining the expected long-term rate of return for equity assets, the Company reviewed annual 20-, 30-, 40-, and 50-year returns on the S&P 500 Index, which were, at December 31, 2005, 11.8 percent, 12.5 percent, 10.1 percent and 10.3 percent respectively.  Fund management fees were estimated to be 0.18 percent for S&P 500 Index assets and 0.45 percent for other assets.  The expected long-term rate of return on fixed income investments was 6.0 percent; the return was based upon historical returns on 10-year treasury bonds of 7.0 percent from 1962 to 2005, and adjusted for recent declines in interest rates. The expected long-term rate of return on cash investments was estimated to be 4.0 percent; expected cash returns were estimated to be 2.0 percent below long-term returns on intermediate-term treasury bonds.       31         Plan Assets   Percentage of fair value of Plan assets at September 30:          2005   2004                   Domestic equity   52.9%   59.7%     Foreign equity   40.6   34.5     Fixed income   3.4   2.6     Cash   3.1   3.2     Total   100.0%   100.0%     The Plan’s investment policy includes a target asset allocation as follows:      Asset Class   Target Allocation*               US Stocks   60% (with a variance of no more or less than 10% of target).     Foreign Stocks   30% (with a variance of no more or less than 10% of target).     Fixed Income   5% (with a variance of no more than 10% or no less than 5% of target).     Cash   5% (with a variance of no more than 10% or no less than 5% of target).   ___________________________    *   The Plan’s investment policy has been modified for 2006 to target an allocation of 50 percent U.S. stock, 25 percent foreign stock and 25 percent fixed income.     The Plan’s investment policy includes the investment objective that the achieved long-term rates of return meet or exceed the assumed actuarial rate.  The policy strategy seeks to prudently invest in a diversified portfolio of predominately equity-based assets.  The policy provides that the Plan will maintain a passive core US Stock portfolio based on the S&P 500 Index.  Complementing this core will be investments in US and foreign equities through actively managed mutual funds.     The policy contains certain prohibitions on transactions in separately managed portfolios in which the Plan may invest, including prohibitions on short sales and the use of options or futures contracts.  With regards to pooled funds, the policy requires the evaluation of the appropriateness of such funds for managing Plan assets if a fund engages in such transactions. The Plan has historically not invested in funds engaging in such transactions.   Cash Flows   The Company does not anticipate any employer contributions to the Plan in 2006.       32         Estimated Future Benefit Payments   The following benefit payments, which reflect future service, are expected to be paid (in thousands):      2006   $   2,163     2007       2,215     2008       2,303     2009       2,406     2010       2,558     2011-2015       14,763     Supplemental Nonqualified Defined Benefit Retirement Plans   The Company has various supplemental retirement plans for key executives of the Company.  The plans are nonqualified defined benefit plans.  The Company uses a September 30 measurement date for the Plans.   Obligations and Funded Status          2005       2004         (in thousands)                               Change in benefit obligation:                         Projected benefit obligation at beginning of year   $   1,886        $   1,886      Service cost       —           —     Interest cost       110            110      Actuarial (gains) losses       143            (8)     Benefits paid       (117)           (102)     Net increase       136            —     Projected benefit obligation at end of year   $   2,022        $   1,886                                Fair value of plan assets at end of year   $   —       $   —     Funded status       (2,022)           (1,886)     Unrecognized net loss       858            762      Unrecognized prior service cost       3            3      Contributions       25            36      Net amount recognized   $   (1,136)       $   (1,085)         33                  2005       2004         (in thousands)                               Amounts recognized in statement of  financial position consist of:                         Net pension liability   $   (1,785)       $   (1,650)     Intangible asset       3            3      Contributions       26            36      Accumulated other comprehensive loss       620            526      Net amount recognized   $   (1,136)       $   (1,085)                               Accumulated benefit obligation   $   1,785        $   1,650      The provisions of SFAS 87 required the Company to record an accrued pension liability of $1.8 million and $1.7 million at December 31, 2005 and 2004, respectively, and is included in Deferred credits and other liabilities, Other on the accompanying Balance Sheets.   Components of Net Periodic Benefit Cost          2005   2004   2003         (in thousands)                                   Service cost    $   —   $   —   $   6      Interest cost       109       110       109      Amortization of prior service cost       1       1       (3)     Recognized net actuarial loss       48       53       42      Net periodic benefit cost   $   158   $   164   $   154      Additional Information          2005       2004            (in thousands)        Pre-tax amount included in other comprehensive                         Income (loss) arising from a change in the                         additional minimum pension liability   $   94       $   25                 Assumptions      Weighted-average assumptions used to determine                 benefit obligations at September 30   2005   2004   2003                       Discount rate   5.75%   6.00%   6.00%     Rate of increase in compensation levels   5.00%   5.00%   5.00%                       Weighted-average assumptions used to determine net                 periodic benefit cost for plan year   2005   2004   2003                       Discount rate   6.00%   6.00%   6.75%     Rate of increase in compensation levels   5.00%   5.00%   5.00%       34         Plan Assets   The plan has no assets.  The Company funds on a cash basis as benefits are paid.   Estimated Cash Flows   The estimated employer contribution is expected to be $0.1 million in 2006.   The following benefit payments, which reflect expected future service, are expected to be paid (in thousands):      Fiscal Year Ending                           2006   $   103     2007       109     2008       125     2009       112     2010       115     2011-2015       458     Non-pension Defined Benefit Postretirement Plan   Employees who are participants in the Company’s Postretirement Healthcare Plan and who retire from the Company on or after attaining age 55 after completing at least five years of service to the Company are entitled to postretirement healthcare benefits.  These benefits are subject to premiums, deductibles, co-payment provisions and other limitations.  The Company may amend or change the Plan periodically.  The Company is not pre-funding its retiree medical plan.  The Company uses a September 30 measurement date for the Plan.       35         It has been determined that the Plan’s post-65 retiree prescription drug plans are actuarially equivalent and qualify for the Medicare Part D subsidy.   The effect on the accumulated postretirement benefit obligation for the fiscal year ending December 31, 2005, was an actuarial gain of approximately $1.1 million.  The effect on 2006 net periodic postretirement benefit cost will be a decrease of approximately $0.1 million.   Obligation and Funded Status          2005       2004         (in thousands)     Change in benefit obligation:                         Accumulated postretirement benefit obligation at beginning of year   $   7,861        $   8,197      Service cost       292            300      Interest cost       465            485      Plan participants’ contributions       403            339      Benefits paid and actual expenses       (469)           (516)     Net transfer out       (26)           —     Medicare Part D subsidy       (1,126)           —     Actuarial gains       (233)           (944)     Net decrease       (694)           (336)     Accumulated postretirement benefit obligation at end of year   $   7,167        $   7,861                                Fair value of plan assets at end of year   $   —       $   —     Funded status       (7,167)           (7,861)     Unrecognized net loss       409            1,842      Unrecognized prior service cost       (208)           (227)     Unrecognized transition obligation       817            934      Contributions       13            23      Net amount recognized   $   (6,136)       $   (5,289)               Amounts recognized in statement of financial position consist of:          2005       2004         (in thousands)                               Accrued postretirement liability   $   (6,136)       $   (5,289)         36         Components of Net Periodic Benefit Cost          2005   2004   2003         (in thousands)                                   Service cost    $   292    $   300    $   198      Interest cost       465        486        435      Amortization of transition obligation       117        116        117      Amortization of prior service cost       (19)       (19)       (19)     Recognized net actuarial loss       74        144        78      Net periodic benefit cost   $   929    $   1,027    $   809      Assumptions      Weighted-average assumptions used to determine                 benefit obligations at September 30                     2005   2004   2003                       Discount rate   5.75%   6.00%   6.00%                       Weighted-average assumptions used to determine net                 periodic benefit cost for plan year                     2005   2004   2003                       Discount rate   6.00%   6.00%   6.75%     The healthcare trend rate assumption for the 2005 fiscal year benefit obligation determination and 2006 fiscal year expense is 11 percent for 2005 grading down 1 percent per year until a 5 percent ultimate trend rate is reached in fiscal year 2011.  The healthcare cost trend rate assumption for the 2004 fiscal year benefit obligation determination and 2005 fiscal year expense was 12 percent for 2004 grading down 1 percent per year until a 5 percent ultimate trend rate is reached in fiscal year 2011.   A 1 percent increase in the healthcare cost trend assumption would increase the service and interest cost $0.2 million or 23 percent and the accumulated periodic postretirement benefit obligation $1.3 million or 18 percent.  A 1 percent decrease would reduce the service and interest cost by $0.1 million or 18 percent and the accumulated periodic postretirement benefit obligation $1.0 million or 15 percent.   Plan Assets   The plan has no assets.  The Company funds on a cash basis as benefits are paid.   Estimated Cash Flows   The estimated employer contribution is expected to be $0.2 million in 2006.       37         Estimated Future Benefit Payments   The following benefit payments, which reflect expected future service, are expected to be paid (in thousands):          Expected   Expected Medicare   Expected         Gross   Part D   Net         Benefit   (Prescription Drug   Benefit     Fiscal Year Ending   Payment   Benefit) Subsidy   Payments                                   2006   $   227    $   (24)    $   203      2007       250        (27)        223      2008       267        (31)        236      2009       303        (34)        269      2010       354        (36)        318      2011 - 2015       2,136        (236)        1,900      Defined Contribution Plan   The Company also sponsors a 401(k) savings plan for eligible employees.  Participants elect to invest up to 20 percent of their eligible compensation on a pre-tax basis.  The Company provides a matching contribution of 100 percent of the employee’s tax-deferred contribution up to a maximum 3 percent of the employee’s eligible compensation.  Matching contributions vest at 20 percent per year and are fully vested when the participant has 5 years of service with the Company.  The Company’s matching contributions totaled approximately $0.5 million for 2005 and $0.4 million for 2004 and 2003, respectively.      (9)   RELATED-PARTY TRANSACTIONS     Receivables and Payables   The Company has accounts receivable balances related to transactions with other Black Hills Corporation subsidiaries.  The balances were $2.0 million and $0.9 million as of December 31, 2005 and 2004, respectively.  The Company also has accounts payable balances related to transactions with other Black Hills Corporation subsidiaries.  The balances were $1.6 million and $0.3 million as of December 31, 2005 and 2004, respectively.   Notes Payable - Affiliate   The Company has borrowings from its Parent, which are due on demand.  Outstanding advances were $1.8 million at December 31, 2005 and $25.1 million at December 31, 2004.  Advances under this note bear interest at 0.70 percent above the daily LIBOR rate (5.09 percent at December 31, 2005).  Interest paid was $0.8 million and $0.1 million for the years ended December 31, 2005 and 2004, respectively.   In August 2005, the Company entered into a Utility Money Pool Agreement with the Parent; and Cheyenne Light, Fuel & Power, an electric and gas utility subsidiary of the Parent.       38         Under the agreement, the Company may borrow from the Parent.  The Agreement restricts the Company from loaning funds to the Parent or to any of the Parent’s non-utility subsidiaries; the Agreement does not restrict the Company from making dividends to the Parent.  Borrowings under the Agreement bear interest at the daily cost of external funds as defined under the Agreement, or if there are no external funds outstanding on that date, then the rate will be the daily one-month LIBOR rate plus 100 basis points.     Other Balances and Transactions   The Company purchases coal from Wyodak Resources Development Corp., an indirect subsidiary of the Parent.  The amount purchased during the years ended December 31, 2005, 2004 and 2003 was $10.1 million, $9.6 million and $10.3 million, respectively.   In addition to the above transactions, in order to fuel its combustion turbine, the Company purchased natural gas from Enserco Energy, an indirect subsidiary of the Parent.  The amount purchased during the years ended December 31, 2005, 2004 and 2003 was approximately $6.4 million, $2.7 million and $6.1 million, respectively.  These amounts are included in “Fuel and purchased power” on the Statements of Income.   The Company also received revenues of approximately $2.2 million for the year ended December 31, 2005 and $1.1 million for the years ended December 31, 2004 and 2003, respectively, from Black Hills Wyoming, Inc., an indirect subsidiary of Black Hills Corporation, for the transmission of electricity.      (10)   COMMITMENTS AND CONTINGENCIES     Power Purchase and Transmission Services Agreements – Pacific Power    In 1983, the Company entered into a 40 year power purchase agreement with PacifiCorp providing for the purchase by the Company of 75 megawatts of electric capacity and energy from PacifiCorp’s system.  An amended agreement signed in October 1997 reduces the contract capacity by 25 megawatts (5 megawatts per year starting in 2000).  The price paid for the capacity and energy is based on the operating costs of one of PacifiCorp’s coal-fired electric generating plants.  Costs incurred under this agreement were $10.1 million in 2005, $10.0 million in 2004 and $10.8 million in 2003.   In addition, the Company has a firm network transmission agreement for 36 megawatts of capacity with PacifiCorp that expires on December 31, 2006.  Annual costs are approximately $0.9 million per year.  The Company uses this agreement to serve the Sheridan, Wyoming electric service territory under our contract with Montana-Dakota Utilities Company.   The Company also has a firm point-to-point transmission service agreement with PacifiCorp that expires on December 31, 2023.  The agreement provides that the following amounts of capacity and energy be transmitted:  32 megawatts in 2001, 27 megawatts in 2002, 22 megawatts in 2003, 17 megawatts in 2004-2006 and 50 megawatts in 2007-2023.  Costs incurred under this agreement were $0.4 million in 2005, $0.4 million in 2004 and $0.5 million in 2003.       39         Long-Term Power Sales Agreements      •   The Company has a ten-year power sales contract with the Municipal Energy Agency of Nebraska (MEAN) for 20 megawatts of contingent capacity from the Neil Simpson Unit #2 plant.  The contract expires in February 2013.               •   The Company has a contract with Montana-Dakota Utilities Company, expiring January 1, 2007, for the sale of up to 55 megawatts of energy and capacity to service the Sheridan, Wyoming electric service territory.  The Company entered into a new power purchase agreement with MDU for the supply of up to 74 megawatts of capacity and energy for Sheridan, Wyoming from 2007 through 2016, which is subject to regulatory approval by the WPSC.  The Company also has a contract with the City of Gillette, Wyoming, expiring in 2012, to provide the city’s first 23 megawatts of capacity and energy.  The agreement renews automatically and requires a seven-year notice of termination.  Both contracts are served by the Company and are integrated into its control area and are treated as part of the Company’s firm native load.     Legal Proceedings   Forest Fire Claims   In September 2001, a fire occurred in the southwestern Black Hills, now known as the “Hell Canyon Fire.”  It is alleged that the fire occurred when a high voltage electrical span maintained by the Company broke, and electrical arcing from the severed line ignited dry grass.  The fire burned approximately 10,000 acres of land owned by the Black Hills National Forest, the Oglala Sioux Tribe, and other private landowners.  The State of South Dakota initiated litigation against the Company, in the Seventh Judicial Circuit Court, Fall River County, South Dakota, on or about January 31, 2003.  The Complaint seeks recovery of damages for alleged fire suppression and rehabilitation costs.  A claim for treble damages is asserted with respect to the claim for injury to timber.  A substantially similar suit was filed against the Company by the United States Forest Service, on June 30, 2003, in the United States District Court for the District of South Dakota, Western Division.  The State subsequently joined its claim in the federal action.  The State claims damages in the amount of approximately $0.8 million for fire suppression and rehabilitation costs.  The United States Government’s claim for fire suppression and related costs has been submitted at approximately $1.3 million.  A trial date has been set for late 2006.  The Company has denied all claims and will vigorously defend this matter, the timing or outcome of which is uncertain.   On June 29, 2002, a forest fire began near Deadwood, South Dakota, now known as the “Grizzly Gulch Fire.”  Before being contained more than eight days later, the fire consumed over 10,000 acres of public and private land, mostly consisting of rugged forested areas. The fire destroyed approximately 7 homes and 15 outbuildings. There were no reported personal injuries. In addition, the fire burned to the edge of the City of Deadwood, forcing the evacuation of the City of Deadwood, and the adjacent City of Lead, South Dakota. These communities are active in the tourist and gaming industries. Individuals were ordered to leave their homes, and businesses were closed for a short period of time. On July 16, 2002, the State of South Dakota announced the results of its investigation of the cause and origin of the fire. The State asserted that the fire was caused by tree encroachment into and contact with a transmission line owned and maintained by the Company.       40         On September 6, 2002, the State of South Dakota commenced litigation against the Company, in the Seventh Judicial Circuit Court, Pennington County, South Dakota. The Complaint seeks recovery of damages for alleged injury to timber, fire suppression and rehabilitation costs.  A claim for treble damages was asserted with respect to the claim for injury to timber.     On March 3, 2003, the United States of America filed a similar suit against the Company, in the United States District Court, District of South Dakota, Western Division.  The federal government’s Complaint likewise seeks recovery of damages for alleged injury to timber, fire suppression and rehabilitation costs.  A similar claim for treble damages is asserted with respect to the claim for injury to timber.  In April 2003, the State of South Dakota intervened in the federal action.  Accordingly, the state court litigation has been stayed, and all governmental claims will be tried in U.S. District Court.     The state and federal government claim approximately $5.3 million for suppression costs, $1.2 million for rehabilitation costs, and $0.6 million for timber loss.  Additional claims could be asserted for alleged loss of habitat and aesthetics or for assistance to private landowners.   The Company completed its own investigation of the fire cause and origin and based upon information currently available, the Company filed its Answer to the Complaints of both the State and the United States government, denying all claims, and asserting that the fire was caused by an independent intervening cause, or an act of God.  A trial date has been set for August 2006.  The Company expects to vigorously defend all claims brought by governmental or private parties.     During the period of April 2003 through June 2005, various private civil actions were filed against the Company, asserting that the Grizzly Gulch Fire caused damage to the parties’ real property.  These actions were filed in the Fourth Judicial Circuit Court, Lawrence County, South Dakota.  The Complaints seek recovery on the same theories asserted in the governmental Complaints, but most of the Complaints specify no amount for damage claims.  The Company will vigorously defend these matters as well.   Additional claims could be made for individual and business losses relating to injury to personal and real property, and lost income, all arising from the Grizzly Gulch Fire.  A trial date has been set for August 2006.   Although we cannot predict the outcome or the viability of potential claims with respect to either fire, based on the information available, management believes that any such claims, if determined adversely to the Company, will not have a material adverse effect on the Company’s financial condition or results of operations.    PPM Energy, Inc. Demand for Arbitration   On January 2, 2004, PPM Energy, Inc. delivered a Demand for Arbitration to the Company.  The demand alleges claims for breach of contract and requests a declaration of the parties’ rights and responsibilities under an Exchange Agreement executed on or about April 3, 2001. Specifically, PPM Energy asserts that the Exchange Agreement obligates the Company to accept receipt and cause corresponding delivery of electric energy, and to grant access to transmission rights allegedly covered by the Agreement. PPM Energy requests an award of damages in an amount not less than $20.0 million.  The Company filed its Response to Demand, including a counterclaim that seeks recovery of sums PPM has refused to pay pursuant to the Exchange Agreement.  The Company denies all claims.  The dispute was presented to the arbitrator in August 2005.  The Company cannot predict the outcome of the decision.     41         Ongoing Litigation    The Company is subject to various other legal proceedings, claims and litigation which arise in the ordinary course of operations.  In the opinion of management, the amount of liability, if any, with respect to these actions would not materially affect the financial position or results of operations of the Company.      (11)   DIVIDEND OF SUBSIDIARY STOCK AND DISCONTINUED OPERATIONS     During the quarter ended March 31, 2003, the Company distributed a dividend of subsidiary stock to its parent company, Black Hills Corporation (Parent).  The dividend consisted of 10,000 common shares of Black Hills Generation, Inc., formerly known as Black Hills Energy Capital, Inc., (Generation), which represents 100 percent ownership of Generation.  The Company therefore no longer operates in the independent power production business.  As a result, the Company no longer has any subsidiaries and operates only in the electric utility business.  The Company’s investment in Generation at the time of the distribution was $46.5 million, including approximately $29.0 million of cash held at Generation.    The disposition was accounted for under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144).  Accordingly, results of operations have been classified as “Discontinued operations, net of income taxes” in the accompanying Statements of Income, and prior periods have been restated.  For business segment reporting purposes, Generation’s business results were previously included in the segment “Independent Power Production.”   Revenues and net income from the discontinued operations were as follows (in thousands):          2003               Revenue   $   41,485      Income before income taxes and change in             accounting principle   $   2,833      Income tax expense       (927)     Net income from discontinued operations   $   1,906      The financial statements and notes to financial statements have been restated to reflect our continuing operations for all periods presented.  The net operating results of discontinued operations are included in the Statements of Income under the caption “Discontinued operations, net of income taxes.”       42            (12)   QUARTERLY HISTORICAL DATA (Unaudited)     The Company operates on a calendar year basis.  The following table sets forth selected unaudited historical operating results data for each quarter of 2005 and 2004.            First  Quarter   Second Quarter   Third  Quarter   Fourth  Quarter                   (in thousands)     2005:                                     Operating revenues   $   43,147   $   42,261   $   49,274   $   54,323     Operating income       9,495       8,120       5,463       12,966     Income from continuing operations and                                     net income       4,322       3,409       1,888       8,386                                           2004:                                     Operating revenues   $   41,647   $   39,809   $   47,921   $   44,368     Operating income       11,408       6,560       12,506       13,335     Income from continuing operations and                                     net income       5,037       1,816       5,860       6,496
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     None.
CONTROLS AND PROCEDURES     Evaluation of disclosure controls and procedures   Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)) as of December 31, 2005.  Based on their evaluation, they have concluded that our disclosure controls and procedures are adequate and effective including consideration of the Statement of Cash Flow restatement disclosed in Note 1, to ensure that material information relating to us that is required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the required time periods.   Internal control over financial reporting   During our fourth fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
OTHER INFORMATION     None.       43         PART IV   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM      To the Stockholder of   Black Hills Power, Inc. Rapid City, South Dakota   We have audited the financial statements of Black Hills Power, Inc. (the Company) as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, and have issued our report thereon dated March 16, 2006 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to restatement of the statement of cash flows for the year ended December 31, 2003 as discussed in Note 1); such financial statements and report are included in your 2005 Annual Report on Form 10-K and are included elsewhere in this Form 10-K.  Our audits also included the financial statement schedule of the Company listed in Item 15.  The financial statement schedule is the responsibility of the Company’s management.  Our responsibility is to express an opinion based on our audits.  In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.   DELOITTE & TOUCHE LLP      Minneapolis, Minnesota   March 16, 2006     44
EXHIBITS, FINANCIAL STATEMENT SCHEDULES        (a)   1.   Financial Statements               Financial statements required by Item 15 are listed in the index included in Item 8 of Part II.            2.   Schedules               Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2005, 2004 and 2003.               All other schedules have been omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements incorporated by reference in the Form 10-K.       BLACK HILLS POWER, INC. SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003   Additions          Balance at   Charged to costs       Balance at     Description   beginning of year   and expenses   Deductions   end of year                           (In thousands)      Allowance for                                     doubtful accounts:                                     2005   $   912   $   41   $   (123)   $   830     2004       898       190       (176)       912     2003       882       201       (185)       898                    45                  3.   Exhibits               Exhibit Number     Description                               2*   Plan of Exchange Between Black Hills Corporation and Black Hills Holding Corporation (filed as an exhibit to the Black Hills Holding Corporation’s Registration Statement on Form S-4 (No. 333-52664)).             3.1*   Restated Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant’s Form 8-K dated June 7, 1994 (No. 1-7978)).             3.2*   Articles of Amendment to the Articles of Incorporation of the Registrant, as filed with the Secretary of State of the State of South Dakota on December 22, 2000 (filed as an exhibit to the Registrant’s Form 10-K for 2000).             3.3*   Bylaws of the Registrant (filed as an exhibit to the Registrant’s Registration Statement on Form S-8 dated July 13, 1999).             4.1*   Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as an exhibit to Black Hills Holding Corporation’s Registration Statement on Form S-4 (No. 333-52664)).  First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and JPMorgan Chase Bank, as Trustee (filed as Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2002).             10.1*   Restated and Amended Coal Supply Agreement for NS II dated February 12, 1993 (filed as Exhibit 10(c) to the Registrant’s Form 10-K for 1992).             10.2*   Second Restated and Amended Power Sales Agreement dated September 29, 1997, between PacifiCorp and Black Hills Power, Inc. (filed as Exhibit 10(e) to the Registrant’s Form 10-K for 1997).             10.3*   Reserve Capacity Integration Agreement dated May 5, 1987, between Pacific Power & Light Company and Black Hills Power, Inc. (filed as Exhibit 10(u) to the Registrant’s Form 10-K for 1987).             10.4*   Rate Freeze Extension (filed as Exhibit 10(t) to the Registrant’s Form 10-K for 1999).             31.1   Certification pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             31.2   Certification pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.             32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.             32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.        *   Previously filed as part of the filing indicated and incorporated by reference herein.                     (b)   See (a) 3. Exhibits above.       (c)   See (a) 2. Schedules above.     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.   The Registrant is not required to send an Annual Report or Proxy to its sole security holder and parent company, Black Hills Corporation.      46         SIGNATURES   Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.            BLACK HILLS POWER, INC.                             By    /S/ DAVID R. EMERY                                 David R. Emery, Chairman, President         and Chief Executive Officer               Dated:    March 27, 2006                          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.        /S/ DAVID R. EMERY    Director and   March 27, 2006     David R. Emery, Chairman, President and   Principal Executive Officer         Chief Executive Officer                           /S/ MARK T. THIES    Principal Financial and   March 27, 2006     Mark T. Thies, Executive Vice President and   Accounting Officer         Chief Financial Officer                           /S/ DAVID C. EBERTZ    Director   March 27, 2006     David C. Ebertz                           /S/ JACK W. EUGSTER    Director   March 27, 2006     Jack W. Eugster                           /S/ JOHN R. HOWARD    Director   March 27, 2006     John R. Howard                           /S/ KAY S. JORGENSEN    Director   March 27, 2006     Kay S. Jorgensen                           /S/ RICHARD KORPAN    Director   March 27, 2006     Richard Korpan                           /S/ STEPHEN D. NEWLIN    Director   March 27, 2006     Stephen D. Newlin                           /S/ WILLIAM G. VAN DYKE    Director   March 27, 2006     William G. Van Dyke                           /S/ JOHN B. VERING    Director   March 27, 2006     John B. Vering                           /S/ THOMAS J. ZELLER    Director   March 27, 2006     Thomas J. Zeller             47         INDEX TO EXHIBITS        Exhibit Number     Description               2*   Plan of Exchange Between Black Hills Corporation and Black Hills Holding Corporation (filed as an exhibit to the Black Hills Holding Corporation’s Registration Statement on Form S-4 (No. 333-52664)).     3.1*   Restated Articles of Incorporation of the Registrant (filed as an exhibit to the Registrant’s Form 8-K dated June 7, 1994 (No. 1-7978)).     3.2*   Articles of Amendment to the Articles of Incorporation of the Registrant, as filed with the Secretary of State of the State of South Dakota on December 22, 2000 (filed as an exhibit to the Registrant’s Form 10-K for 2000).     3.3*   Bylaws of the Registrant (filed as an exhibit to the Registrant’s Registration Statement on Form S-8 dated July 13, 1999).     4.1*   Restated and Amended Indenture of Mortgage and Deed of Trust of Black Hills Corporation (now called Black Hills Power, Inc.) dated as of September 1, 1999 (filed as an exhibit to the Registrant’s Registration Statement on Form S-4 (No. 333-52664)).  First Supplemental Indenture, dated as of August 13, 2002, between Black Hills Power, Inc. and JPMorgan Chase Bank, as Trustee (filed as Exhibit 10.1 to the Registrant’s Form 10-Q for the quarter ended September 30, 2002).     10.1*   Restated and Amended Coal Supply Agreement for NS II dated February 12, 1993 (filed as Exhibit 10(c) to the Registrant’s Form 10-K for 1992).     10.2*   Second Restated and Amended Power Sales Agreement dated September 29, 1997, between PacifiCorp and Black Hills Power, Inc. (filed as Exhibit 10(e) to the Registrant’s Form 10-K for 1997).     10.3*   Reserve Capacity Integration Agreement dated May 5, 1987, between Pacific Power & Light Company and Black Hills Power, Inc. (filed as Exhibit 10(u) to the Registrant’s Form 10-K for 1987).     10.4*   Rate Freeze Extension (filed as Exhibit 10(t) to the Registrant’s Form 10-K for 1999).     31.1   Certification pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     31.2   Certification pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.     32.1   Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.     32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   __________________________    *   Previously filed as part of the filing indicated and incorporated by reference herein.       48             EX-31 2 exhibit31-1bhp10k2005.htm DAVE EMERY           Exhibit 31.1 CERTIFICATION   I, David R. Emery, certify that:      1.   I have reviewed this annual report on Form 10-K of Black Hills Power, Inc.;        2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:        a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;     b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and     c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and        5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent functions):        a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and     b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.     Date:  March 27, 2006      /s/ David R. Emery        Chairman, President and   Chief Executive Officer               EX-31 3 exhibit31-2bhp10k2005.htm MARK THIES         Exhibit 31.2 CERTIFICATION   I, Mark T. Thies, certify that:      1.   I have reviewed this annual report on Form 10-K of Black Hills Power, Inc.;        2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;        3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;        4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:        a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;     b)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and     c)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and        5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of  registrant’s board of directors (or persons performing the equivalent functions):        a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and     b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.     Date:  March 27, 2006      /s/ Mark T. Thies        Executive Vice President and   Chief Financial Officer                 EX-32 4 exhibit32-1bhp10k2005.htm DAVE EMERY         Exhibit 32.1   CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the Annual Report of Black Hills Power, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Emery, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:      (1)   The Report fully complies with the requirements of Section 13 (a) or   15 (d) of the Securities Exchange Act of 1934; and      (2)   The information contained in the Report fairly presents, in all material   respects, the financial condition and results of operations of the Company.        Date:   March 27, 2006        /s/ David R. Emery   David R. Emery Chairman, President and Chief Executive Officer               EX-32 5 exhibit32-2bhp10k2005.htm MARK THIES         Exhibit 32.2   CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002   In connection with the Annual Report of Black Hills Power, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark T. Thies, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:      (1)   The Report fully complies with the requirements of Section 13 (a) or   15 (d) of the Securities Exchange Act of 1934; and      (2)   The information contained in the Report fairly presents, in all material   respects, the financial condition and results of operations of the Company.   Date:  March 27, 2006        /s/ Mark T. Thies   Mark T. Thies Executive Vice President and Chief Financial Officer               -----END PRIVACY-ENHANCED MESSAGE-----