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 reportable operating 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 section of this Item 2, beginning on Page 90.
Significant Events

Wygen III Power Plant Project and Partial Sale of Wygen III to MDU

We are currently constructing Wygen III, a 110 MW coal-fired base load electric generating facility located near Gillette, Wyoming. Construction is currently expected to be completed by April 1, 2010. The expected cost of construction is approximately $247 million, which includes estimates for AFUDC.

A 2004 Power Purchase Agreement between Black Hills Power and MDU included an option for MDU 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%. At closing we received proceeds of $32.8 million as MDU reimbursed us for its 25% of the total costs incurred to date on the ongoing construction of the 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. In conjunction with the sales transaction, we also modified the 2004 PPA under which Black Hills Power supplied MDU with 74 MW of capacity and energy through 2016. The PPA with MDU now provides that once online, the first 25 MW of MDU's required 74 MW will be supplied from its ownership interest in Wygen
III. During periods of reduced production at Wygen III, or during periods when Wygen III is offline, we will provide MDU with its first 25 MW from our other generation facilities or from system purchases.

Partial Sale of Wygen I to MEAN

In 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 operating agreements with MEAN for coal supply and operations. In addition, we terminated 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 between MEAN and Black Hills Power 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 amounts from Wygen III and Neil Simpson II plants are as follows:

2009-2017 20 MW - 10 MW contingent on Wygen III and 10 MW contingent on Neil Simpson II
2018-2019 15 MW - 10 MW contingent on Wygen III and 5 MW contingent on Neil Simpson II
2020-2021 12 MW - 6 MW contingent on Wygen III and 6 MW contingent on Neil Simpson II
2022-2023 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 the 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 power generation facilities representing approximately 90 MW each. The power generation facilities are part of a plan to replace the capacity and energy supplied under Colorado Electric's current PPA with PSCo, which expires on December 31, 2011. The initial decision of the CPUC waived the competitive bidding process for the two turbines; the remaining capacity and energy needs of the utility were to be acquired from other power producers through a competitive bid process. Our Power Generation segment was allowed to participate in the competitive bidding process. On September 29, 2009, our Power Generation segment was awarded the bid to provide 200 MW of power to Black Hills Energy through a 20-year PPA. The PPA is subject to approval by FERC. The 200 MW natural gas-fired electric generation facilities will be built in Colorado and are expected to be completed by December 31, 2011.

Silver Sage Wind Site

In April 2009, Cheyenne Light entered into an agreement to purchase 30 MW of renewable energy from Duke Energy's Silver Sage wind site through a 20-year PPA. Commercial operations commenced October 1, 2009. Under a separate inter-company agreement, Cheyenne Light has agreed to sell 20 MW of energy from Silver Sage to Black Hills Power.

Power Purchase Agreement with MEAN

In July 2009, Black Hills Power entered into a five-year PPA with MEAN. The contract commences the month following the onset of commercial operations at Wygen III. Under this contract, MEAN will purchase 5 MW of unit-contingent capacity from Neil Simpson II and 5 MW of unit-contingent capacity from Wygen III.

Extension of Long-Term Power Purchase Agreement

On September 29, 2009, FERC approved an extension of the PPA between Black Hills Wyoming and Cheyenne Light. The 60 MW of capacity and energy from Black Hills Wyoming's Wygen I generating facility, which was scheduled to expire in 2013, has been extended through December 31, 2022. In addition to establishing rates, terms and conditions for the sale of capacity and energy in this extension, the PPA grants Cheyenne Light an option to purchase Black Hills Wyoming's ownership in the Wygen I facility during years one to seven of the ten year term of the PPA. The purchase price related to the option is fixed at $2.55 million per MW which is the equivalent of the estimated price of new construction of the Wygen III plant. This price is reduced annually by an amount of annual depreciation.

Executive Summary

Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008.
Loss from continuing operations for the three month period ended September 30, 2009 was $3.9 million, or $0.10 per share, compared to income from continuing operations of $19.5 million, or $0.51 per share, reported for the same period in 2008. For the three month period ended September 30, 2009, net loss available for common stock was $2.2 million or $0.06 per share, compared to net income available for common stock of $164.9 million, or $4.29 per share, for the same period in 2008.

Included in 2009 are a full quarter of results from the utilities acquired from Aquila on July 14, 2008 and the impact of a $5.7 million after-tax non-cash loss, resulting from an unrealized net mark-to-market loss for certain interest rate swaps entered into in 2007.

The Utilities Group includes a full quarter of results of the electric and gas utilities acquired from Aquila on July 14, 2008. Earnings at our Electric Utilities reflect the impact of lower margins from off-system sales due to lower energy prices, lower retail sales due to milder summer weather, and higher interest expense, partially offset by the impact of AFUDC related to the Wygen III construction and increased retail margins from an approved rate case for transmission rates. Increased losses at our Gas Utilities reflect a full quarter of seasonal operations compared to the same period in 2008 and increased depreciation and property tax expense.

Earnings from the Oil and Gas segment decreased for the quarter due to a decrease in operating revenues resulting from lower oil and gas prices and lower production, partially offset by lower production taxes reflecting lower oil and gas prices. Average oil prices received, net of hedges, decreased 28% and average gas prices received, net of hedges, decreased 14%.

Increased earnings from the Coal Mining segment resulted from site lease income, higher volumes sold and lower diesel fuel costs, partially offset by lower average sales prices and increased depreciation.

Decreased earnings from the Energy Marketing segment reflect decreased unrealized mark-to-market margins, partially offset by increased realized natural gas and crude oil margins that were primarily impacted by differing market conditions between years.

Earnings from the Power Generation segment were impacted by lower margins due to the net earnings impact of replacing MEAN's 20 MW PPA with operating and site lease agreements related to their purchase of a 23.5% ownership interest in Wygen I, partially offset by operating fees charged to MEAN. For the three months ended September 30, 2008, results included the sale of nitrogen oxide Reclaim Trading Credits allocated to our Ontario facility which has been decommissioned.

Income from discontinued operations was $1.7 million, or $0.04 per share, for the three month period ended September 30, 2009, compared to $145.4 million, or $3.78 per share, for the same period in 2008. The Income from discontinued operations in 2009 relates to tax adjustments related to the sale in the IPP Transaction. The income from discontinued operations in 2008 relates primarily to the IPP Transaction in which we sold seven of our IPP plants.

Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008.
Income from continuing operations for the nine month period ended September 30, 2009 was $46.4 million, or $1.20 per share, compared to $44.5 million, or $1.16 per share, reported for the same period in 2008. For the nine month period ended September 30, 2009, net income available for common stock was $48.8 million or $1.26 per share, compared to $203.9 million, or $5.31 per share, for the same period in 2008.

Included in the 2009 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 the sale of a 23.5% interest in the Wygen I generation facility on January 22, 2009;

· $24.6 million after-tax non-cash gain, resulting from an unrealized net mark-to-market gain for certain interest rate swaps entered into in 2007; and

· Non-cash impairment charge 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 first quarter of 2009.

The Utilities Group's 2009 results include a full nine months of earnings from the electric and gas utilities acquired from Aquila on July 14, 2008. Earnings at our Electric Utilities reflect the impact of increased 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 due to lower energy prices, and higher interest expense.

Earnings from the Oil and Gas segment decreased from 2008 due to a decrease in operating revenues reflecting lower oil and gas prices and lower production and a first quarter of 2009 impairment charge, partially offset by lower production taxes and LOE costs compared to 2008. Average oil prices received, net of hedges, decreased 36% and average gas prices received, net of hedges, decreased 33%.

Lower earnings from the Coal Mining segment in 2009 resulted from lower volumes on coal sales, increased depreciation and coal taxes, partially offset by revenue increases from higher average sale prices, site lease income and lower diesel fuel costs.

Lower earnings from the Energy Marketing segment in 2009 reflect unrealized mark-to-market losses, partially offset by higher realized natural gas and crude oil margins received. Realized natural gas margins and crude oil margins were primarily impacted by differing market conditions between years.

Increased earnings from the Power Generation segment in 2009 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 and partially offset by increased interest expense and lower margins due to the net earnings impact of replacing the 20 MW PPA with operating and site lease agreements related to MEAN's purchase of the 23.5% ownership interest in Wygen I. In addition, for the nine months ended September 30, 2008, results included $11.8 million of pre-tax allocated indirect corporate costs and inter-segment net interest expense not classified to discontinued operations for the IPP Transaction, as well as the sale of nitrogen oxide Reclaim Trading Credits allocated to our Ontario facility which has been decommissioned.

Income from discontinued operations was $2.4 million, or $0.06 per share, for the nine month period ended September 30, 2009, compared to $159.5 million, or $4.15 per share, for the same period in 2008. The Income from discontinued operations in 2009 relates to working capital and tax adjustments and the related impact of the gain on sale from the IPP Transaction.

Consolidated Results

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.

Revenues and Income (loss) from continuing operations provided by each business
group were as follows (in thousands):

                          Three Months Ended           Nine Months Ended
                             September 30,               September 30,
                          2009          2008          2009          2008
Revenues

Utilities               $ 191,634     $ 220,581     $ 796,973     $ 413,449
Non-regulated Energy       34,165        71,311       124,117       184,566
                        $ 225,799     $ 291,892     $ 921,090     $ 598,015

Income (loss) from
continuing operations

Utilities               $   7,053     $   8,911     $  38,618     $  28,631
Non-regulated Energy       (1,796 )      12,672        (5,470 )      23,800
Corporate                  (9,110 )      (2,061 )      13,205        (7,889 )
                        $  (3,853 )   $  19,522     $  46,353     $  44,542

Income from continuing operations decreased $23.4 million for the three months ended September 30, 2009 reflecting the following:

Utilities

· A $0.2 million decrease in Electric Utilities earnings

· A $1.6 million decrease in the Gas Utilities segment

Non-regulated Energy

· A $1.7 million decrease in Oil and Gas earnings

· A $1.2 million increase in Coal Mining earnings

· An $11.3 million decrease in Energy Marketing earnings

· A $2.6 million decrease in Power Generation earnings

Corporate

· A $7.0 million decrease in corporate earnings

Income from continuing operations increased $1.8 million for the nine months ended September 30, 2009 reflecting the following:

Utilities

· A $6.1 million decrease in Electric Utilities earnings

· A $16.1 million increase in the Gas Utilities segment

Non-regulated Energy

· A $37.0 million decrease in Oil and Gas earnings

· A $0.6 million decrease in Coal Mining earnings

· An $8.7 million decrease in Energy Marketing earnings

· A $16.7 million increase in Power Generation earnings

Corporate

· A $21.1 million increase in corporate 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.

Utilities Group

We acquired from Aquila a regulated electric utility in Colorado and four regulated gas utilities 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           Nine Months Ended
                                           September 30,               September 30,
                                        2009          2008          2009          2008
                                                        (in thousands)

Revenue - electric                    $ 126,025     $ 131,193     $ 361,198     $ 295,946
Revenue - gas                             3,141         5,785        24,062        34,570
Total revenue                           129,166       136,978       385,260       330,516

Fuel and purchased power - electric      66,994        74,162       190,831       152,364
Purchased gas                               912         3,596        13,873        24,051
Total fuel and purchased power           67,906        77,758       204,704       176,415

Gross margin - electric                  59,031        57,031       170,367       143,582
Gross margin - gas                        2,229         2,189        10,189        10,519
Total gross margin                       61,260        59,220       180,556       154,101

Operating expenses                       42,493        38,561       128,703        95,654
Operating income                      $  18,767     $  20,659     $  51,853     $  58,447

Income from continuing operations
and net income available for
common stock                          $  10,537     $  10,765     $  24,395     $  30,485

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 periods are the operations of Colorado Electric, acquired July 14, 2008 as part of the Aquila Transaction:

Sales Revenues                 Three Months Ended           Nine Months Ended
                                  September 30,               September 30,
                               2009          2008          2009          2008
                                               (in thousands)

Residential:
Black Hills Power            $  11,132     $  13,189     $  35,804     $  35,784
Cheyenne Light                   6,512         6,967        21,093        23,800
Colorado Electric               18,586        17,182        50,274        17,182
Total Residential               36,230        37,338       107,171        76,766

Commercial:
Black Hills Power               15,694        16,581        44,888        43,804
Cheyenne Light                  13,424        13,669        38,050        38,018
Colorado Electric               15,088        15,322        42,259        15,322
Total Commercial                44,206        45,572       125,197        97,144

Industrial:
Black Hills Power                4,714         5,500        14,494        16,338
Cheyenne Light                   2,888         2,620         8,179         7,038
Colorado Electric                8,021         8,153        23,074         8,153
Total Industrial                15,623        16,273        45,747        31,529

Municipal:
Black Hills Power                  778           802         2,074         2,069
Cheyenne Light                     230           240           701           711
Colorado Electric                1,179         1,197         3,351         1,197
Total Municipal                  2,187         2,239         6,126         3,977

Contract Wholesale:
Black Hills Power                6,488         6,862        18,672        20,063

Off-system Wholesale:
Black Hills Power                9,625        13,213        24,610        47,548
Cheyenne Light                   1,863         1,497         5,795         4,368
Colorado Electric                2,697         4,352         9,724         4,352
Total Off-system Wholesale      14,185        19,062        40,129        56,268

Other:
Black Hills Power                4,655         3,211        13,838         9,362
Cheyenne Light                     253            98           466           299
Colorado Electric                2,198           538         3,852           538
Total Other                      7,106         3,847        18,156        10,199

Total Sales Revenues         $ 126,025     $ 131,193     $ 361,198     $ 295,946

Quantities Generated and Purchased             Three Months Ended               Nine Months Ended
                                                  September 30,                   September 30,
                                              2009            2008            2009            2008
                                                                    (in MWh)
Generated -
Coal-fired:
Black Hills Power                              465,068         450,884       1,251,276       1,268,514
Cheyenne Light                                 200,489         196,937         577,217         586,635
Colorado Electric                               63,760          79,793         187,091          79,793
Total Coal                                     729,317         727,614       2,015,584       1,934,942

Gas and Oil-fired:
Black Hills Power                               28,251          11,856          35,076          53,687
Cheyenne Light                                       -               -               -               -
Colorado Electric                                2,297             525           2,496             525
Total Gas and Oil                               30,548          12,381          37,572          54,212

Total Generated:
Black Hills Power                              493,319         462,740       1,286,352       1,322,201
Cheyenne Light                                 200,489         196,937         577,217         586,635
Colorado Electric                               66,057          80,318         189,587          80,318
Total Generated                                759,865         739,995       2,053,156       1,989,154

Purchased:
Black Hills Power                              420,332         404,148       1,304,362       1,256,835
Cheyenne Light                                 151,992         140,843         464,265         404,390
Colorado Electric                              514,980         473,019       1,495,825         473,019
Total Purchased                              1,087,304       1,018,010       3,264,452       2,134,244

Total Generated and Purchased:
Black Hills Power                              913,651         866,888       2,590,714       2,579,036
Cheyenne Light                                 352,481         337,780       1,041,482         991,025
Colorado Electric                              581,037         553,337       1,685,412         553,337
Total Generated and
Purchased                                    1,847,169       1,758,005       5,317,608       4,123,398

Quantity Sold                      Three Months Ended               Nine Months Ended
                                      September 30,                   September 30,
                                  2009            2008            2009            2008
                                                        (in MWh)
Residential:
Black Hills Power                  113,266         120,888         395,865         398,028
Cheyenne Light                      59,384          60,986         189,610         193,653
Colorado Electric                  166,993         140,945         444,223         140,945
Total Residential                  339,643         322,819       1,029,698         732,626

Commercial:
Black Hills Power                  207,939         195,661         553,150         531,433
Cheyenne Light                     152,376         153,615         439,476         440,382
Colorado Electric                  187,959         168,422         507,123         168,422
Total Commercial                   548,274         517,698       1,499,749       1,140,237

Industrial:
Black Hills Power                   80,222         107,380         260,190         319,077
Cheyenne Light                      45,447          38,798         131,694         108,569
Colorado Electric                  121,789         110,492         342,206         110,492
Total Industrial                   247,458         256,670         734,090         538,138

Municipal:
Black Hills Power                    9,894          10,228          25,556          26,073
Cheyenne Light                         742             809           2,449           2,571
Colorado Electric                   11,705          10,713          29,696          10,713
Total Municipal                     22,341          21,750          57,701          39,357

Contract Wholesale:
Black Hills Power                  161,796         165,872         473,723         494,457

Off-system Wholesale:
Black Hills Power                  309,770         241,546         784,173         753,057
Cheyenne Light                      72,771          63,202         216,822         184,151
Colorado Electric                   71,886          79,685         272,694          79,685
Total Off-system Wholesale         454,427         384,433       1,273,689       1,016,893

Total Quantity Sold:
. . .