CONDITION AND RESULTS OF OPERATIONS



We are a diversified energy company operating principally in the United States
with two major business groups - Utilities and Non-regulated Energy. We report
our business groups in the following segments:



Business Group             Financial Segment

Utilities Group            Electric Utilities
                           Gas Utilities

Non-regulated Energy Group Oil and Gas
Power Generation Coal Mining
Energy Marketing

Our Utilities Group consists of our electric and gas utility segments. Our Electric Utilities generate, transmit and distribute electricity to approximately 202,100 customers in South Dakota, Wyoming, Colorado and Montana. In addition, Cheyenne Light, which is also reported within the Electric Utilities segment, provides natural gas to approximately 33,300 customers in Wyoming. Our Gas Utilities segment serves approximately 524,000 natural gas customers in Colorado, Nebraska, Iowa and Kansas. Our Non-regulated Energy Group engages in the production of coal, natural gas and crude oil primarily in the Rocky Mountain region; the production of electric power through ownership of a portfolio of generating plants and the sale of electric power and capacity primarily under long-term contracts; and the marketing of natural gas, crude oil and related services.

See Forward-Looking Information in the Liquidity and Capital Resources portion of this Item 2, beginning on Page 65.

Significant Events

Wygen III Power Plant Project

In March 2008, we received final regulatory approval for construction of Wygen
III. Construction began immediately and the 110 MW coal-fired base load electric generating facility is expected to be completed by June, 2010. The expected cost of construction is approximately $255 million, which includes estimates for AFUDC. A 2004 Purchase Power Agreement between Black Hills Power and MDU included an option to purchase an ownership interest in Wygen III. MDU exercised this option, and under an agreement entered into in April 2009, we will retain an undivided ownership of 75% of the facility with MDU owning the remaining 25%. MDU reimbursed us for 25% of the costs incurred to date on the ongoing construction of the facility. We received $30.2 million, which was used to pay down a portion of the Acquisition Facility. We will retain responsibility for operations of the facility with a life-of-plant site lease and agreements with MDU for operations and coal supply.

Partial Sale of Wygen I to MEAN

During August 2008, we entered into a definitive agreement to sell a 23.5% ownership interest in the Wygen I plant to MEAN. The sale was completed in January, 2009 for a price of $51.0 million, which was based on the then current replacement cost for the coal-fired plant. We realized an after-tax gain of $16.9 million on the sale, and our property, plant and equipment was reduced by $26.2 million. We retain responsibility for operations of the plant, and at closing entered into a site lease, and agreements with MEAN for coal supply and operations. In addition, we renegotiated a 10-year power purchase contract requiring MEAN to purchase 20 MW of power annually from Wygen I.

Extension of Long-Term Power Sales Agreement with MEAN

In March 2009, our 10-year power sales contract with MEAN that originally expired in 2013 was re-negotiated and extended until 2023. Under the new contract, MEAN will purchase 20 MW of unit-contingent capacity from the Neil Simpson II and the Wygen III plants with capacity purchase decreasing to 15 MW in 2018, 12 MW in 2020 and 10 MW in 2022. The unit-contingent capacity from Wygen III and Neil Simpson II plants are as follows:

20 MW - 10 MW contingent on Wygen III and 10 MW contingent on Neil Simpson II 15 MW - 10 MW contingent on Wygen III and 5 MW contingent on Neil Simpson II 12 MW - 6 MW contingent on Wygen III and 6 MW contingent on Neil Simpson II 10 MW - 5 MW contingent on Wygen III and 5 MW contingent on Neil Simpson II

Colorado Electric Resource Plan

In August 2008, Black Hills Energy filed a long-term Electric Resource Plan with CPUC proposing to build five natural gas-fired power generation facilities totaling 350 MW to support the customers of Colorado Electric. In the first quarter of 2009, Colorado Electric received approval from the CPUC to build two of the five power generation facilities representing approximately 150 MW. The power generation facilities are part of a plan to replace the purchased power agreement currently with Xcel Energy which expires on December 31, 2011. The initial decision of the CPUC waives the competitive bidding process for the two turbines; the remaining three turbines will be completed through a competitive bid process.

Executive Summary

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008.

Income from continuing operations for the three month period ended March 31, 2009 was $25.6 million, or $0.66 per share, compared to $11.8 million, or $0.31 per share, reported for the same period in 2008. For the three month period ended March 31, 2009, net income available for common stock was $26.4 million or $0.68 per share, compared to $16.8 million, or $0.44 per share, for the same period in 2008.

Included in the results are the earnings from the utilities acquired from Aquila on July 14, 2008 and impacts from the following notable items:

• $16.9 million after-tax gain from sale of a 23.5% interest in the Wygen I generation facility on January 22, 2009;

• $9.6 million after-tax non-cash gain, resulting from an unrealized net mark-to-market gain for certain interest rate swaps entered into in 2007;

• Non-cash ceiling test impairment of oil and gas assets totaling $27.8 million after-tax, driven by lower natural gas and crude oil prices at the end of the quarter; and

• Lower effective tax rate for the quarter relating to a $3.8 million benefit associated with an improvement of a previously recorded tax position.

The Utilities Group includes the 2009 results of the electric and gas utilities acquired from Aquila on July 14, 2008. Earnings reflect the impact of increased retail margins from an approved rate case for transmission rates and the impact of AFUDC related to the Wygen III construction partially offset by lower margins from off-system sales and higher interest expense.

Earnings from the Oil and Gas segment decreased for the quarter due to a decrease in operating revenues due to lower prices and a ceiling test impairment, partially offset by a 4% increase in production compared to the first quarter 2008. Average oil prices received, net of hedges, decreased 37% and average gas prices received, net of hedges, decreased 34%.

Increased earnings from the Power Generation segment were impacted by a $16.9 million after-tax gain on the sale of a 23.5% ownership interest in the Wygen I power generation facility to MEAN, partially offset by increased interest expense. In addition, for the three months ended March 31, 2008, results included $5.4 million of allocated indirect corporate costs and intersegment net interest expense not classified to discontinued operations for the IPP Transaction.

Lower earnings from the Coal Mining segment resulted from increased depreciation and coal taxes, partially offset by revenue increases from higher average sale prices and lower diesel fuel costs.

Increased earnings from the Energy Marketing segment reflect higher realized crude oil margins received and lower unrealized mark-to-market losses partially offset by lower realized natural gas margins. Realized natural gas margins were impacted by changes in market conditions as lower geographic and calendar spreads compared to 2008 contributed to the earnings decline. As part of our efforts to preserve our liquidity, we have intentionally limited the usage of Enserco's uncommitted credit facility. This has had a negative impact on marketing results.

Income from discontinued operations was $0.8 million, or $0.02 per share, for the three month period ended March 31, 2009, compared to $5.1 million, or $0.13 per share, for the same period in 2008. The Income from discontinued operations in 2009 relates to working capital adjustments and the related impact on the gain on sale from the IPP Transaction.

Consolidated Results



Revenues and Income (Loss) from Continuing Operations provided by each business
group were as follows (in thousands):



                       Three Months Ended
                            March 31,
                         2009       2008
Revenues

Utilities             $  393,397  $ 99,302
Non-regulated Energy     44,546     53,548
                      $  437,943  $ 152,850

Income (loss) from
continuing operations

Utilities             $  26,582   $ 10,167
Non-regulated Energy     (6,493)    3,583
Corporate                5,536      (1,934)
                      $  25,625   $ 11,816

Income from continuing operations increased $13.8 million for the three months ended March 31, 2009 due primarily to the following:

• $17.3 million income from the Gas Utilities segment;

• An $18.0 million increase in Power Generation earnings;

• A $0.7 million increase in Energy Marketing earnings; and

• A $7.5 million increase in corporate income.

The increases in earnings were partially offset by:

• A $0.9 million decrease in Electric Utilities earnings;

• A $28.3 million decrease in Oil and Gas earnings; and

• A $0.8 million decrease in Coal Mining earnings.

See the following discussion under the captions "Utilities Group" and "Non-regulated Energy Group" for more detail on our results of operations by business segment.

The following business group and segment information does not include intercompany eliminations or results of discontinued operations. Amounts are presented on a pre-tax basis unless otherwise indicated.

Utilities Group

In July 2008, we acquired from Aquila regulated electric utility assets in Colorado and four gas utilities assets operating in Colorado, Nebraska, Iowa and Kansas. Operations from the acquired utilities have been included in the Utilities Group results from the July 14, 2008 acquisition date.

With the completion of the acquisition, we are reporting two segments within the Utilities Group: Electric Utilities and Gas Utilities. The Electric Utilities segment includes the electric operations of Black Hills Power, Colorado Electric and the electric and natural gas operations of Cheyenne Light. The Gas Utilities segment includes the regulated natural gas utility operations of Black Hills Energy in Colorado, Nebraska, Iowa and Kansas.

Electric Utilities



                                     Three Months Ended
                                          March 31,
                                        2009       2008
                                       (in thousands)

Revenue - electric                  $  122,177   $ 82,574
Revenue - gas                          15,098      17,034
Total revenue                          137,275     99,608

Fuel and purchased power - electric    64,896      40,256
Purchased gas                          10,258      11,858
Total fuel and purchased power         75,154      52,114

Gross margin - electric                57,281      42,318
Gross margin - gas                     4,840       5,176
Total gross margin                     62,121      47,494

Operating expenses                     42,875      27,628
Operating income                    $  19,246    $ 19,866

Income from continuing operations
and net income available for
common stock                        $  9,317     $ 10,167

The following tables summarize regulated sales revenues, quantities generated and purchased, sales quantities and degree days for our Electric Utilities segment. Included in 2009 reported amounts for the quarter are the operations of Colorado Electric, acquired July 14, 2008 as part of the Aquila Transaction:

Sales Revenues              Three Months Ended
                                 March 31,
                               2009       2008
                              (in thousands)
Residential:
Black Hills Power          $  14,281    $ 12,966
Cheyenne Light                7,487       9,950
Colorado Electric             16,503      -
Total Residential             38,271      22,916

Commercial:
Black Hills Power             14,643      13,484
Cheyenne Light                12,061      11,421
Colorado Electric             13,228      -
Total Commercial              39,932      24,905

Industrial:
Black Hills Power             4,750       5,296
Cheyenne Light                2,533       1,988
Colorado Electric             8,092       -
Total Industrial              15,375      7,284

Municipal:
Black Hills Power             636         625
Cheyenne Light                241         232
Colorado Electric             1,029       -
Total Municipal               1,906       857

Contract Wholesale:
Black Hills Power             6,553       6,931

Off-system Wholesale:
Black Hills Power             9,220       15,097
Cheyenne Light                1,980       1,260
Colorado Electric             4,053       -
Total Off-system Wholesale    15,253      16,357

Other:
Black Hills Power             4,375       3,233
Cheyenne Light                101         91
Colorado Electric             411         -
Total Other                   4,887       3,324

Total Sales Revenues       $  122,177   $ 82,574

Quantities Generated and Purchased   Three Months Ended
                                          March 31,
                                      2009        2008
                                          (in MWh)
Generated -
Coal-fired:
Black Hills Power                    437,551     432,882
Cheyenne Light                       191,556     188,013
Colorado Electric                    66,475      -
Total Coal                           695,582     620,895

Gas and Oil-fired:
Black Hills Power                    1,075       37,000
Cheyenne Light                       -           -
Colorado Electric                    -           -
Total Gas and Oil                    1,075       37,000

Total Generated:
Black Hills Power                    438,626     469,882
Cheyenne Light                       191,556     188,013
Colorado Electric                    66,475      -
Total Generated                      696,657     657,895

Purchased:
Black Hills Power                    432,839     384,581
Cheyenne Light                       157,987     138,631
Colorado Electric                    487,526     -
Total Purchased                      1,078,352   523,212

Total Generated and Purchased        1,775,009   1,181,107

Quantity Sold                  Three Months Ended
                                    March 31,
                                2009        2008
                                    (in MWh)
Residential:
Black Hills Power              163,476     163,034
Cheyenne Light                 71,126      75,342
Colorado Electric              142,673     -
Total Residential              377,275     238,376

Commercial:
Black Hills Power              175,256     173,459
Cheyenne Light                 145,545     145,317
Colorado Electric              149,466     -
Total Commercial               470,267     318,776

Industrial:
Black Hills Power              85,984      102,669
Cheyenne Light                 42,822      33,747
Colorado Electric              121,814     -
Total Industrial               250,620     136,416

Municipal:
Black Hills Power              8,095       8,208
Cheyenne Light                 1,025       1,020
Colorado Electric              7,420
Total Municipal                16,540      9,228

Contract Wholesale:
Black Hills Power              168,679     171,620

Off-system Wholesale:
Black Hills Power              243,786     227,741
Cheyenne Light                 70,104      64,972
Colorado Electric              105,943     -
Total Off-system Wholesale     419,833     292,713

Total Quantity Sold            1,703,214   1,167,129

Losses and Company Use:
Black Hills Power              26,190      7,733
Cheyenne Light                 18,921      6,245
Colorado Electric              26,684      -
Total Losses and Company Use   71,795      13,978

Total Energy                   1,775,009   1,181,107

Degree Days                Three Months Ended
                                March 31,
                          2009            2008

                            Variance        Variance
                              from            from
Heating Degree Days: Actual  Normal  Actual  Normal
Actual -
Black Hills Power    3,254  (1)%     3,361  2%
Cheyenne Light       2,824  (10)%    3,236  3%
Colorado Electric    2,370  (10)%    -      -

                    Electric Utilities Power Plant Availability

                           Three Months Ended March 31,
                            2009                   2008

Coal-fired plants  97.3%                  94.1%
Other plants       99.2%                  94.9%

Cheyenne Light Natural Gas Distribution



Included in the Electric Utilities is Cheyenne Light's natural gas distribution
system. The following table summarizes certain operating information of these
natural gas distribution operations:



                                 Three Months Ended
                                      March 31,
                                  2009        2008

Sales Revenues (in thousands):
Residential                    $ 9,012     $ 10,009
Commercial                       4,429       5,028
Industrial                       1,434       1,788
Other                            223         209
Total Sales Revenues           $ 15,098    $ 17,034

Sales Margins (in thousands):
Residential                    $ 1,171     $ 1,278
Commercial                       3,277       3,509
Industrial                       169         180
Other                            223         209
Total Sales Margins            $ 4,840     $ 5,176

Volumes Sold (Dth):
Residential                      1,015,246   1,208,093
Commercial                       584,423     686,272
Industrial                       247,325     261,955
Total Volumes Sold               1,846,994   2,156,320

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008. Income from continuing operations for the Electric Utilities decreased $0.9 million from the prior period primarily due to the following:

• A $1.0 million decrease in margins from off-system sales reflecting the lower margins available in the industry's current low energy price environment; and

• A $3.3 million increase in interest expense due to additional debt associated with the acquisition of Colorado Electric.

Partially offsetting the increases were the following:

• Increased gross margins of $1.6 million primarily due to transmission rate increases effective January 1, 2009 at Black Hills Power; and

• Increased AFUDC of $1.5 million due to construction of the Wygen III plant in 2009.

Gas Utilities



Operating results for the Gas Utilities are as follows:



                                Three Months Ended
                                    March 31,
                                       2009
                                  (in thousands)

Revenue:
Natural gas - regulated        $   248,981
Other - non-regulated services     7,356
Total sales                        256,337

Cost of sales:
Natural gas - regulated            181,215
Other - non-regulated services     4,570
Total cost of sales                185,785

Gross margin                       70,552

Operating expenses                 41,177
Operating income               $   29,375

Income from continuing
operations and net income
available for common stock     $   17,265

The following tables summarize regulated Gas Utilities' sales revenues, sales margins and volumes for the three months ended March 31, 2009:

                        Sales Revenues   Sales Margins  Volumes Sold
                        (in thousands)  (in thousands)      (Dth)

Residential:
Colorado               $  27,410        $  5,115           2,351,614
Nebraska                  59,282           15,135          5,699,778
Iowa                      54,545           15,565          5,465,557
Kansas                    30,705           9,056           2,946,898
Total Residential         171,942          44,871          16,463,847

Commercial:
Colorado                  5,832            967             509,478
Nebraska                  21,959           4,744           2,335,660
Iowa                      25,487           5,122           2,822,937
Kansas                    10,416           2,219           1,120,927
Total Commercial          63,694           13,052          6,789,002

Industrial:
Colorado                  130              35              12,257
Nebraska                  1,513            142             202,481
Iowa                      617              66              82,132
Kansas                    1,260            214             189,254
Total Industrial          3,520            457             486,124

Transportation:
Colorado                  176              176             234,974
Nebraska                  3,952            3,952           7,583,683
Iowa                      1,100            1,100           4,067,274
Kansas                    1,606            1,606           3,492,627
Total Transportation      6,834            6,834           15,378,558

Other:
Colorado                  29               29              -
Nebraska                  648              648             890
Iowa                      426              426             36,173
Kansas                    1,888            1,449           59,582
Total Other               2,991            2,552           96,645

Total Regulated           248,981          67,766          39,214,176

Non-regulated Services    7,356            2,786           -

Total                  $  256,337       $  70,552          39,214,176

Degree Days                     2009
                               Variance From
Heating Degree Days:   Actual     Normal

Colorado               2,524      (12)%
Nebraska               2,979      (6)%
Iowa                   3,439      (1)%
Kansas                 2,202      (14)%
Combined Gas Utilities
Heating Degree Day     3,013      (6)%

Results from the Gas Utilities for the three month period ended March 31, 2009 reflect the operations from the gas utilities acquired from Aquila on July 14, 2008.

The Gas Utilities were acquired on July 14, 2008 and, consequently, information for the quarter ended March 31, 2008 is not available. Our Gas Utilities are highly seasonal and sales volumes depend largely on weather and seasonal heating and industrial loads. Approximately 74% of our Gas Utilities' revenues are expected in the fourth and first quarters. Therefore, revenues for and certain expenses of, these operations fluctuate significantly among quarters.

Depending on the state, the winter heating season begins around November 1 and ends around March 31. Margins for the Gas Utilities for the quarter ended March 31, 2009 increased 27% over the quarter ended December 31, 2008. This increase was driven by a 33% increase in residential, commercial and industrial volumes.

Regulatory Matters - Utilities Group



The following summarizes our recent rate case activity:



                              Type of    Date      Date      Amount    Amount
        In millions           Service  Requested Effective Requested  Approved
        Nebraska Gas (1)        Gas     11/2006   9/2007   $   16.3   $   9.2
        Iowa Gas (2)            Gas     6/2008    Pending  $   13.6    Pending
        Colorado Gas (3)        Gas     6/2008    4/2009   $   2.8     $  1.4

(1) In November 2006, Nebraska Gas filed for a $16.3 million rate increase. Interim rates were implemented in February 2007 and, in July 2007, the NPSC granted a $9.2 million increase in annual revenues based on an equity return of 10.4% on a capital structure of 51% equity and 49% debt. Nebraska Gas appealed the decision, and the district court affirmed the NPSC order in February 2008. Because Nebraska Gas collected interim rates subject to refund, it was required to refund to customers the difference between the higher interim rates and the final rates plus interest (approximately $5.6 million). The NPA appealed one aspect of our refund plan worth approximately $0.8 million. On April 15, 2009, the District Court affirmed the NPSC refund plan order, and thereby rejected NPA's appeal.

(2) Iowa Gas and the OCA reached a settlement agreement that resolved all issues in the rate case. This agreement was filed with the IUB in March 2009 and is subject to their approval. The settlement agreement provides for no refund of interim rates collected, a final rate increase of $10.4 million plus actual rate case expenses, and the implementation of a three-year pilot program for recovery of carrying charges on integrity capital expenditures up to $6.0 million per year. It is anticipated that the IUB will issue an order by July 2, 2009.

(3) In June 2008, Colorado Gas filed for a $2.8 million rate increase. The increase was based on a proposed equity return of 11.5% on a capital structure of 50% equity and 50% debt. Interim rates were not available for collection in Colorado. On September 19, 2008, Colorado Gas filed the second phase of its rate request. On January 29, 2009, a settlement agreement was filed with the CPUC and a settlement was approved with new rates effective on April 1, 2009. The new rates included an increase in annual revenues of $1.4 million, which was based on a 10.25% return on equity with a capital structure of 49.52% debt and 50.48% equity.

(4) On February 10, 2009, the FERC approved a revision to the method used to determine the revenue component of Black Hills Power's open access transmission tariff, and increased the utility's annual transmission revenue requirement by approximately $3.8 million. The revenue requirement is based on an equity return of 10.8%, and a capital structure consisting of 57% equity and 43% debt. The new rates had an effective date of January 1, 2009.

Non-regulated Energy Group

An analysis of results from our Non-regulated Energy Group's operating segments follows:

Oil and Gas

                               Three Months Ended
                                    March 31,
                                  2009       2008
                                 (in thousands)

Revenue                       $  16,511    $ 26,122
Operating expenses*              62,262      20,489
Operating income              $  (45,751)  $ 5,633

Income (loss) from continuing
operations and net income
available for common stock    $  (25,720)  $ 2,551


__________________________

*2009 operating expenses include a $43.3 million pre-tax ceiling test impairment charge.

The following tables provide certain operating statistics for our Oil and Gas segment:

Three Months Ended March 31,
2009 2008 Fuel production:
Bbls of oil sold 99,370 99,975 Mcf of natural gas sold 2,688,890 2,563,190 Mcf equivalent sales 3,285,110 3,163,040

. . .