Fitch Affirms Ratings of Black Hills Corp. and Black Hills Power, Inc.

Black Hills Corp.

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--Senior Unsecured at 'BBB'.

Black Hills Power, Inc.

--Long term IDR at 'BBB';

--Short term IDR at 'F2';

--First mortgage bonds at 'A-'.

The long-term Rating Outlook for both issuers is Stable.

The rating affirmation of BKH reflects the financial and operating stability and predictability afforded by its portfolio of regulated utilities, including three integrated electric companies and four natural gas local distribution companies spanning seven states in the Upper Midwest and Intermountain Regions. Regulated operations account for approximately two-thirds of consolidated EBITDA and cash flows. Nonregulated activities include coal mining and merchant power generation, both of which are contracted with the regulated utilities as well as upstream energy production and energy marketing and trading operations. Financial management policies have been conservative and BKH has typically operated with low levels of leverage. Fitch expects debt-to-debt plus equity to remain at approximately the current 50% level. Similarly, consolidated EBITDA to Interest is expected to remain in the 4.0 times (x) range.

The Stable Outlook reflects Fitch's expectations that over the near to intermediate term BKH should benefit from the commercialization of a couple of large capex investments: 75% ownership of the 100MW Wygen III coal-fired plant, which is expected to be online by June 2010, and two gas-fired turbines totaling 152MW of capacity in 2011. These rate base assets, representing investments of $191 million and approximately $250 million, respectively, will bolster the overall contribution from regulated activities. Fitch expects weaker performance from the commodity-sensitive upstream energy production and energy marketing and trading operations, reflecting low energy prices, particularly natural gas.

Reported financial results continue to reflect a number of significant corporate events, financial writedowns, and accounting entries. Following the transformational July 11, 2008 sale of the bulk of its Independent Power Production unit for $840 million, BKH purchased five Aquila-regulated utilities for $940 million on July 14, 2008. BKH recorded a net gain of $140 million on the sale of its merchant generation fleet. In fourth quarter-2008 (4Q'08), BKH recorded a pre-tax $92 million ceiling test impairment charge due to low energy prices and reclassified and marked-to-market several interest rate swaps that no longer qualified as hedges, resulting in a pre-tax $94 million charge. In 1Q'09 and 2Q'09, BKH recorded partial reversals of the mark-to-market adjustment on the swaps and recorded gains of $15 million and $32 million, respectively, and recorded an after-tax $17 million gain on the sale of an interest in its Wygen I power plant in 1Q'09. While significant to reported financial results, these items are not material in Fitch's analysis and rating assignments.

BKH's regulated utilities operate in generally constructive regulatory environments and have modest commodity exposure. The service areas have, to date, been economically resilient to the national recession and these utilities have been generally less affected by reduced electric load, reduced industrial demand, and customer receivable losses.

South Dakota-based BHP is the largest individual utility, but only represents approximately 25% of BKH's consolidated results. BHP has experienced some modest weakening in credit metrics in 2008 and 2009 reflecting reduced off-system sales as well as the impact of the final year of a three-year base rate freeze which ends Dec. 31, 2009 and the financing of its capex investments in Wygen III. Fitch expects a new rate filing along with the Wygen III plant coming on-line sometime in 2010. Consequently, EBITDA to Interest, currently 5.0x on June 30, 2009 should strengthen modestly in 2010 and 2011.

BKH is the parent holding company for a collection of gas and electric utilities in South Dakota, Wyoming, Colorado, Kansas, Nebraska, Iowa, and Montana serving 760,000 customers. Unregulated businesses include oil and gas exploration and production, power generation, coal mining, and energy marketing and trading.

BHP is a vertically integrated electric utility serving 70,000 customers principally in South Dakota and portions of Montana and Wyoming.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

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Peter Molica, 212-908-0288 
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