Edgar Filing: BLACK HILLS CORP /SD/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2008.
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	For the transition period from __________ to __________.

	Commission File Number 001-31303

Black Hills Corporation
Incorporated in South Dakota	IRS Identification Number 46-0458824
625 Ninth Street
Rapid City, South Dakota 57701

Registrant’s telephone number (605) 721-1700

Former name, former address, and former fiscal year if changed since last report
NONE

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Class	Outstanding at October 31, 2008

Common stock, $1.00 par value	38,450,217 shares

TABLE OF CONTENTS

		Page

	Glossary of Terms and Abbreviations	3-5

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Statements of Income –
	Three and Nine Months Ended September 30, 2008 and 2007	6

	Condensed Consolidated Balance Sheets –
	September 30, 2008, December 31, 2007 and September 30, 2007	7

	Condensed Consolidated Statements of Cash Flows –
	Nine Months Ended September 30, 2008 and 2007	8

	Notes to Condensed Consolidated Financial Statements	9-38

Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	39-70

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	71-75

Item 4.	Controls and Procedures	76

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	77

Item 1A.	Risk Factors	77-82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 6.	Exhibits	83

	Signatures	84

	Exhibit Index	85

GLOSSARY OF TERMS AND ABBREVIATIONS

The following terms and abbreviations appear in the text of this report and have the definitions described below:

AFUDC	Allowance for Funds Used During Construction
ARB	Accounting Research Bulletin
ARB 51	ARB 51 “Consolidated Financial Statements”
Aquila	Aquila, Inc.
Aquila Transaction	The July 14, 2008 acquisition of Aquila’s regulated electric utility in
	Colorado and its regulated gas utilities in Colorado, Kansas,
	Nebraska and Iowa
Bbl	Barrel
BHEP	Black Hills Exploration and Production, Inc., a direct, wholly-owned
	subsidiary of Black Hills Non-regulated Holdings
Black Hills Energy	The name used to conduct the business activities of Black Hills Utility
	Holdings, including the gas and electric utility properties acquired
	from Aquila
Black Hills Non-regulated Holdings	Black Hills Non-regulated Holdings, LLC, a direct, wholly-owned
	subsidiary of the Company that was formerly known as Black Hills
	Energy, Inc.
Black Hills Power	Black Hills Power, Inc., a direct, wholly-owned subsidiary of the
	Company
Black Hills Utility Holdings	Black Hills Utility Holdings, Inc., a direct, wholly-owned subsidiary of
	the Company formed to acquire and own the utility properties
	acquired from Aquila, all which are now doing business as
	Black Hills Energy
Btu	British thermal unit
Cheyenne Light	Cheyenne Light, Fuel & Power Company, a direct, wholly-owned
	subsidiary of the Company
Cheyenne Light Pension Plan	The Cheyenne Light, Fuel & Power Company Pension Plan
Colorado Electric	Black Hills Colorado Electric Utility Company, LP, (doing business as
	Black Hills Energy), an indirect, wholly-owned subsidiary of
	Black Hills Utility Holdings, formed to hold the Colorado electric
	utility properties acquired from Aquila
Colorado Gas	Black Hills Colorado Gas Utility Company, LP, (doing business as
	Black Hills Energy), an indirect, wholly-owned subsidiary of
	Black Hills Utility Holdings, formed to hold the Colorado gas
	utility properties acquired from Aquila
CPUC	Colorado Public Utility Commission
CT	Combustion turbine
Dth	Dekatherm. A unit of energy equal to 10 therms or one million British thermal units (MMBtu)
EITF 87-24	EITF 87-24, “Allocation of Interest to Discontinued Operations”
Enserco	Enserco Energy Inc., a direct, wholly-owned subsidiary of Black Hills
	Non-regulated Holdings
FASB	Financial Accounting Standards Board
FSP	FASB Staff Position
FSP FAS 157-1	FSP FAS 157-1, “Application of FASB Statement No. 157 to FASB
	Statement No. 13 and Other Accounting Pronouncements that
	Address Fair Value Measurement for Purposes of Lease Classification
	or Measurement under Statement 13”
FSP FAS 157-2	FSP FAS 157-2, “Effective Date of FASB Statement No. 157”

FSP FIN 39-1	FSP FIN 39-1, “Amendment of FASB Interpretation No. 39”
FERC	Federal Energy Regulatory Commission
FIN 39	FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain
	Contracts – an Interpretation of APB Opinion No. 10 and FASB
	Statement No. 105”
GAAP	Generally Accepted Accounting Principles
Hastings	Hastings Funds Management Ltd
IIF	IIF BH Investment LLC, a subsidiary of an investment entity advised by
	JPMorgan Asset Management
Indeck	Indeck Capital, Inc.
Iowa Gas	Black Hills Iowa Gas Utility Company, LLC, (doing business as
	Black Hills Energy), a direct, wholly-owned subsidiary of
	Black Hills Utility Holdings, formed to hold the Iowa gas
	utility properties acquired from Aquila
IPP	Independent Power Production
IPP Transaction	The July 11, 2008 sale of seven of our IPP plants to affiliates of
	Hastings and IIF
IUB	Iowa Utility Board
Kansas Gas	Black Hills Kansas Gas Utility Company, LLC, (doing business as
	Black Hills Energy), a direct, wholly-owned subsidiary of
	Black Hills Utility Holdings, formed to hold the Kansas gas
	utility properties acquired from Aquila
KCC	Kansas Corporation Commission
LIBOR	London Interbank Offered Rate
LOE	Lease Operating Expense
Las Vegas I	Las Vegas I gas-fired power plant
Las Vegas II	Las Vegas II gas-fired power plant
LVC	Las Vegas Cogeneration Limited Partnership, a former subsidiary of
	Black Hills Non-regulated Holdings that was sold as part of our
	IPP Transaction
Mcf	One thousand cubic feet
Mcfe	One thousand cubic feet equivalent
MDU	MDU Resources Group, Inc.
MEAN	Municipal Energy Agency of Nebraska
MMBtu	One million British thermal units
Moody’s	Moody’s Investor Services, Inc.
MW	Megawatt
MWh	Megawatt-hour
Nebraska Gas	Black Hills Nebraska Gas Utility Company, LLC, (doing business as
	Black Hills Energy), a direct, wholly-owned subsidiary of
	Black Hills Utility Holdings, formed to hold the Nebraska gas
	utility properties acquired from Aquila
Nevada Power	Nevada Power Company
NPSC	Nebraska Public Service Commission
PNM	PNM Resources, Inc.
PUCN	Public Utilities Commission of Nevada
SEC	U. S. Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards
SFAS 13	SFAS 13, “Accounting for Leases”
SFAS 71	SFAS 71, “Accounting for the Effects of Certain Types of Regulation”


SFAS 133	SFAS 133, “Accounting for Derivative Instruments and Hedging
	Activities”
SFAS 141(R)	SFAS 141(R), “Business Combinations”
SFAS 144	SFAS 144, “Accounting for the Impairment or Disposal of Long-lived
	Assets”
SFAS 157	SFAS 157, “Fair Value Measurements”
SFAS 159	SFAS 159, “The Fair Value Option for Financial Assets and Financial
	Liabilities”
SFAS 160	SFAS 160, “Non-controlling Interest in Consolidated Financial
	Statements – an amendment of ARB 51”
SFAS 161	SFAS 161, “Disclosure about Derivative Instruments and Hedging
	Activities – an amendment of FASB Statement No. 133”
S&P	Standard & Poor’s Rating Services
Valencia	Valencia Power, LLC, a former subsidiary of Black Hills Non-regulated
	Holdings that was sold as part of our IPP Transaction
VIE	Variable Interest Entity
WPSC	Wyoming Public Service Commission
WRDC	Wyodak Resources Development Corp., a direct, wholly-owned
	subsidiary of Black Hills Non-regulated Holdings, LLC

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(in thousands, except per share amounts)

Operating revenues	$	291,892	$	130,167	$	598,015	$	421,190

Operating expenses:
Fuel and purchased power		131,300		39,127		230,643		119,544
Operations and maintenance		34,477		17,210		80,762		50,272
Administrative and general		40,993		26,272		90,273		76,590
Depreciation, depletion and amortization		30,825		19,333		70,999		53,647
Taxes, other than income taxes		11,609		7,113		31,590		24,691
Impairment of long-lived assets		—		2,721		—		2,721
		249,204		111,776		504,267		327,465

Operating income		42,688		18,391		93,748		93,725

Other income (expense):
Interest expense		(16,402)		(6,093)		(35,160)		(18,652)
Interest income		628		980		1,427		2,396
Allowance for funds used during
construction – equity		1,390		811		2,287		3,851
Other income, net		171		73		573		396
		(14,213)		(4,229)		(30,873)		(12,009)

Income from continuing operations
before equity in earnings of
unconsolidated subsidiaries, minority
interest and income taxes		28,475		14,162		62,875		81,716
Equity in earnings of unconsolidated
subsidiaries		1,359		574		3,656		2,092
Minority interest		—		(97)		(130)		(285)
Income tax expense		(10,312)		(3,510)		(21,989)		(26,025)

Income from continuing operations		19,522		11,129		44,412		57,498
Income from discontinued operations,
net of taxes		145,389		6,335		159,486		17,518

Net income	$	164,911	$	17,464	$	203,898	$	75,016

Weighted average common shares
outstanding:
Basic		38,307		37,643		38,145		36,810
Diluted		38,425		38,078		38,430		37,226

Earnings per share:
Basic–
Continuing operations	$	0.51	$	0.30	$	1.16	$	1.56
Discontinued operations		3.79		0.17		4.18		0.48
Total	$	4.30	$	0.47	$	5.34	$	2.04

Diluted–
Continuing operations	$	0.51	$	0.29	$	1.16	$	1.55
Discontinued operations		3.78		0.17		4.15		0.47
Total	$	4.29	$	0.46	$	5.31	$	2.02

Dividends paid per share of common stock	$	0.35	$	0.34	$	1.05	$	1.02

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	September 30,		December 31,		September 30,
	2008		2007*		2007*
	(in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	152,457	$	76,889	$	76,407
Restricted cash		5,514		5,443		5,394
Short-term investments		6,310		—		—
Receivables (net of allowance for doubtful accounts of $6,077;
$4,588 and $5,259, respectively)		227,862		268,462		217,900
Materials, supplies and fuel		173,734		88,580		85,155
Derivative assets		84,758		35,921		31,896
Deferred income taxes		—		4,512		—
Other assets		32,424		12,698		10,731
Assets of discontinued operations		322		573,601		565,943
		683,381		1,066,106		993,426

Investments		21,911		19,216		23,886

Property, plant and equipment		2,615,627		1,846,565		1,800,625
Less accumulated depreciation and depletion		(566,191)		(509,187)		(500,872)
		2,049,436		1,337,378		1,299,753
Other assets:
Derivative assets		1,500		2,492		2,746
Goodwill		400,959		11,482		12,076
Other		69,512		32,960		32,346
		471,971		46,934		47,168
	$	3,226,699	$	2,469,634	$	2,364,233
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	234,647	$	239,177	$	201,313
Accrued liabilities		144,768		100,986		89,952
Derivative liabilities		62,409		39,380		24,904
Deferred income taxes		592		—		—
Notes payable		627,800		37,000		67,500
Current maturities of long-term debt		2,074		130,326		130,523
Accrued income taxes		48,360		833		17,620
Liabilities of discontinued operations		124		91,233		120,000
		1,120,774		638,935		651,812

Long-term debt, net of current maturities		501,277		503,301		401,851

Deferred credits and other liabilities:
Deferred income taxes		240,654		207,735		191,451
Derivative liabilities		6,792		9,375		2,941
Other		207,841		135,266		143,539
		455,287		352,376		337,931

Minority interest in subsidiaries		132		5,167		5,075

Stockholders’ equity:
Common stock equity –
Common stock $1 par value; 100,000,000 shares authorized;
Issued 38,490,315; 37,842,221 and 37,802,087 shares,
respectively		38,490		37,842		37,802
Additional paid-in capital		580,601		560,475		558,935
Retained earnings		561,102		397,393		386,869
Treasury stock at cost – 40,059; 45,916 and 42,935
shares, respectively		(1,419)		(1,347)		(1,219)
Accumulated other comprehensive loss		(29,545)		(24,508)		(14,823)
		1,149,229		969,855		967,564

	$	3,226,699	$	2,469,634	$	2,364,233

__________________________

As adjusted (see Note 2)

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

BLACK HILLS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine Months Ended
	September 30,
	2008		2007*
	(in thousands)
Operating activities:
Net income	$	203,898	$	75,016
Income from discontinued operations, net of taxes		(159,486)		(17,518)
Income from continuing operations		44,412		57,498
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation, depletion and amortization		70,999		53,647
Net change in derivative assets and liabilities		(26,853)		(10,300)
Deferred income taxes		76,546		10,008
(Undistributed) distributed earnings in associated companies		(1,988)		177
Allowance for funds used during construction – equity		(2,287)		(3,851)
Change in operating assets and liabilities:
Materials, supplies and fuel		(47,382)		24,960
Accounts receivable and other current assets		111,595		23,374
Accounts payable and other current liabilities		(118,369)		9,038
Other operating activities		(44,772)		11,704
Net cash provided by operating activities of continuing operations		61,901		176,255
Net cash provided by operating activities of discontinued operations		18,184		29,476
Net cash provided by operating activities		80,085		205,731

Investing activities:
Property, plant and equipment additions		(219,350)		(143,316)
Proceeds from sale of business operations		835,316		—
Payment for acquisition of net assets, net of cash acquired		(937,606)		—
Increase in short-term investments		(6,525)		—
Other investing activities		(698)		(3,304)
Net cash used in investing activities of continuing operations		(328,863)		(146,620)
Net cash used in investing activities of discontinued operations		(28,966)		(13,693)
Net cash used in investing activities		(357,829)		(160,313)

Financing activities:
Dividends paid		(40,189)		(37,068)
Common stock issued		2,611		149,860
Increase (decrease) in short-term borrowings, net		590,800		(78,000)
Long-term debt – repayments		(130,276)		(26,286)
Other financing activities		(72)		(585)
Net cash provided by financing activities of continuing operations		422,874		7,921
Net cash used in financing activities of discontinued operations		(73,928)		(9,643)
Net cash provided by (used in) financing activities		348,946		(1,722)

Increase in cash and cash equivalents		71,202		43,696

Cash and cash equivalents:
Beginning of period		81,255^(a)		37,530^(c)
End of period	$	152,457	$	81,226^(b)

Supplemental disclosure of cash flow information:
Non-cash investing and financing activities-
Property, plant and equipment acquired with accrued liabilities	$	25,549	$	56,274
Cash paid during the period for-
Interest (net of amounts capitalized)	$	29,748	$	30,160
Income taxes paid (net of amounts refunded)	$	2,984	$	7,627

_________________________

*	As adjusted (see Note 2)

(a)	Includes approximately $4.4 million of cash included in the assets of discontinued operations.

(b)	Includes approximately $4.8 million of cash included in the assets of discontinued operations.

(c)	Includes approximately $5.0 million of cash included in the assets of discontinued operations.

The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated financial statements.

BLACK HILLS CORPORATION

Notes to Condensed Consolidated Financial Statements

(unaudited)

(Reference is made to Notes to Consolidated Financial Statements

included in the Company’s 2007 Annual Report on Form 10-K)

(1)	MANAGEMENT’S STATEMENT

The condensed consolidated financial statements included herein have been prepared by Black Hills Corporation (the Company) without audit, pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the footnotes adequately disclose the information presented. These financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company’s 2007 Annual Report on Form 10-K filed with the SEC.

Accounting methods historically employed require certain estimates as of interim dates. The information furnished in the accompanying financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the September 30, 2008, December 31, 2007 and September 30, 2007 financial information and are of a normal recurring nature. Some of the Company’s operations are highly seasonal and revenues from, and certain expenses for, such operations may fluctuate significantly among quarterly periods. Demand for electricity and natural gas is sensitive to seasonal cooling, heating and industrial load requirements, as well as changes in market price. In particular, the normal peak usage season for our gas utilities is November through March and significant earnings variances can be expected between the Gas Utilities segment’s peak and off-peak seasons. The results of operations for the nine months ended September 30, 2008, are not necessarily indicative of the results to be expected for the full year. All earnings per share amounts discussed refer to diluted earnings per share unless otherwise noted.

The Company completed its sale of IPP assets on July 11, 2008. For all periods presented, amounts associated with the IPP plants divested in the IPP Transaction have been reclassified as discontinued operations. See Note 16 for additional information.

The Company completed the Aquila Transaction on July 14, 2008. Effective as of that date, the assets and liabilities, results of operations, and cash flows of the acquired utilities are included in our Condensed Consolidated Financial Statements. See Note 15 for additional information.

As a result of these transactions, the asset and earnings profile of our company have changed significantly. As of June 30, 2008, regulated utilities properties comprised approximately 38 percent of our consolidated assets and generated approximately 45 percent of our revenues for the quarter ending June 30, 2008. As of September 30, 2008, regulated utility properties comprised approximately 66 percent of our consolidated assets and generated approximately 76 percent of our revenues for the quarter ending September 30, 2008. In order to more appropriately reflect the manner in which we are managing our newly acquired businesses, we have changed our business reporting segments relating to our utility businesses. See Note 11 for additional information.

(2)	RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

SFAS 157

During September 2006, the FASB issued SFAS 157. This Statement defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 does not expand the application of fair value accounting to any new circumstances, but applies the framework to other accounting pronouncements that require or permit fair value measurement. The Company applies fair value measurements to certain assets and liabilities, primarily commodity derivatives within our Energy Marketing and Oil and Gas business segments, interest rate swap instruments, and other miscellaneous derivatives.

SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. As of January 1, 2008, the Company adopted the provisions of SFAS 157 for all assets and liabilities measured at fair value except for non-financial assets and liabilities measured at fair value on a non-recurring basis, as permitted by FSP FAS 157-2. As a result of the Company’s adoption of SFAS 157, the Company discontinued its use of a “liquidity reserve” in valuing the total forward positions within its energy marketing portfolio. This impact was accounted for prospectively as a change in accounting estimate and resulted in a $1.2 million after-tax benefit being recorded within our unrealized marketing margins. Unrealized margins are presented as a component of Operating revenues on the accompanying Condensed Consolidated Statements of Income. SFAS 157 also requires new disclosures regarding the level of pricing observability associated with instruments carried at fair value. This additional disclosure is provided in Note 13.

SFAS 159

SFAS 159 establishes a fair value option under which entities can elect to report certain financial assets and liabilities at fair value, with changes in fair value recognized in earnings. SFAS 159 was adopted on January 1, 2008 and did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

FSP FAS 157-1

In February 2008, the FASB issued FSP FAS 157-1, which excludes SFAS 13 and other accounting pronouncements that address fair value for purposes of lease classification and measurement under SFAS 13 from SFAS 157 except when applying SFAS 157 to assets acquired and liabilities assumed in a business combination. The Company applied the provisions of FSP FAS 157-1 from the date of initial adoption of SFAS 157 on January 1, 2008. Accordingly, the provisions of SFAS 157 will not be applied to lease transactions under SFAS 13 except when applying SFAS 157 to business combinations recorded by the Company.

FSP FAS 157-2

In February 2008, the FASB issued FSP FAS 157-2, which permits a one-year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted FSP FAS 157-2 effective January 1, 2008. Accordingly, the provisions of SFAS 157 will not be applied to non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. Management is currently evaluating the impact, if any, that the deferred provisions of SFAS 157 will have on the Company’s consolidated financial statements.

FSP FIN 39-1

FSP FIN 39-1 amends certain paragraphs of FIN 39 to permit a reporting entity to offset fair value amounts recognized for the right to reclaim or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007. The Company adopted FSP FIN 39-1 effective January 1, 2008. This standard changed our method of netting certain balance sheet amounts. The Company applied FSP FIN 39-1 as a change in accounting principle through retrospective application. Each Condensed Consolidated Balance Sheet herein reflects the offsetting of net derivative positions with fair value amounts for cash collateral with the same counterparty when management believes a legal right of offset exists. Accordingly, December 31, 2007 and September 30, 2007 amounts have been reclassified to conform to this presentation as follows (in thousands):

December 31, 2007							As Reported
	As Reported				Discontinued		for the
Balance Sheet	for the		FSP FIN 39-1		Operations		September
Line Description	2007 10-K		Reclassification		Reclassification		2008 10-Q

Current assets:
Receivables	$	291,189	$	(1,945)	$	(20,782)	$	268,462
Derivative assets	$	37,208	$	(1,287)	$	—	$	35,921

Current liabilities:
Accounts payable	$	242,813	$	(3,232)	$	(404)	$	239,177

September 30, 2007	As Reported						As Reported
	for the				Discontinued		for the
Balance Sheet	September		FSP FIN 39-1		Operations		September
Line Description	2007 10-Q		Reclassification		Reclassification		2008 10-Q

Current assets:
Receivables	$	238,662	$	(2,511)	$	(18,251)	$	217,900
Derivative assets	$	29,385	$	2,511	$	—	$	31,896

Non-current assets:
Derivative assets	$	3,420	$	(674)	$	—	$	2,746

Non-current liabilities:
Derivative liabilities	$	3,615	$	(674)	$	—	$	2,941

The affect on the Cash Flow Statement for 2007 due to the reclassification is as follows (in thousands):

	As Reported						As Reported
Cash Flow Statement	for the				Discontinued		for the
Operating Activities	September		FSP FIN 39-1		Operations		September
Line Description	2007 10-Q		Reclassification		Reclassification		2008 10-Q

Accounts receivable and
other current assets	$	21,099	$	2,511	$	(236)	$	23,374

Net change in derivative
assets and liabilities	$	(4,911)	$	(5,389)	$	—	$	(10,300)

Accounts payable and
other current liabilities	$	4,662	$	2,878	$	1,498	$	9,038

As of December 31, 2007 and September 30, 2007, the Company offset fair value cash collateral receivables and payables against net derivative positions in the amounts of $(1.3) million and $2.5 million, respectively.

(3)	RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

SFAS 141(R)

In December 2007, the FASB issued SFAS 141(R). SFAS 141(R) requires an acquiring entity to recognize the assets acquired, the liabilities assumed and any non-controlling interests in the acquiree at the acquisition date to be measured at their fair values as of the acquisition date, with limited exceptions specified in the statement. This replaces the cost allocation process in SFAS 141, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. Acquisition-related costs will be expensed in the periods in which the costs are incurred or services are rendered. Costs to issue debt or equity securities shall be accounted for under other applicable GAAP. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008. We expect SFAS 141(R) will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of any acquisitions we consummate after the effective date. If income tax liabilities are settled for an amount other than as previously recorded prior to the adoption of SFAS 141(R), the reversal of any remaining liability will affect goodwill. If such liabilities reverse subsequent to the adoption of SFAS 141(R), such reversals will affect expense including income tax expense in the period of reversal. The Company is assessing the full impact SFAS 141(R) would have on future consolidated financial statements.

SFAS 160

In December 2007, the FASB issued SFAS 160. SFAS 160 amends ARB 51 and requires:

• ownership interests in subsidiaries held by parties other than the parent be clearly identified on the consolidated statement of financial position within equity, but separate from the parent’s equity;

• consolidated net income attributable to the parent and to the non-controlling interest be clearly identified on the face of the consolidated statement of income;

• changes in a parent’s ownership interest while the parent retains a controlling financial interest be accounted for consistently as equity transactions;

• when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value; and

• sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners.

SFAS 160 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Management does not expect the adoption of SFAS 160 to have a significant effect on the Company’s consolidated financial statements.

SFAS 161

In March 2008, the FASB issued SFAS 161, which requires enhanced disclosures about how derivative and hedging activities affect an entity’s financial position, financial performance and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact of adoption of SFAS 161.

(4)	MATERIALS, SUPPLIES AND FUEL

The amounts of materials, supplies and fuel included on the accompanying Condensed Consolidated Balance Sheets, by major classification, are provided as follows (in thousands):

	September 30,		December 31,		September 30,
Major Classification	2008		2007		2007

Materials and supplies	$	32,565	$	27,649	$	28,092
Fuel – Electric Utilities		11,497		5,025		7,401
Gas Supply – Gas Utilities		74,407		—		—
Gas and oil held by Energy
Marketing*		55,265		55,906		49,662

Total materials, supplies and fuel	$	173,734	$	88,580	$	85,155

___________________________

* As of September 30, 2008, December 31, 2007 and September 30, 2007, market adjustments related to natural gas held by Energy Marketing and recorded in inventory were $(15.1) million, $(9.8) million and $(6.5) million, respectively (see Note 12 for further discussion of Energy Marketing trading activities).

The increase in gas is due to additions of natural gas storage inventory for the gas utilities acquired in July 2008.

The inventory held by Energy Marketing primarily consists of gas held in storage. Such gas is being held in inventory to capture the price differential between the time at which it was purchased and a sales date in the future.

(5)	NOTES PAYABLE AND LONG-TERM DEBT

Wygen I

During June 2008, the Company repaid the $128.3 million Wygen I project debt. Borrowings on the revolving credit facility were used to fund the repayment.

We had previously been the lessee of the Wygen I Plant under a synthetic lease arrangement and under GAAP we consolidated the plant, the related project debt and all its operating and financial activities into our financial statements. In conjunction with the repayment of the project debt, the synthetic lease structure was terminated and the Company assumed direct ownership of the plant. Since the plant and its financial activities were previously consolidated into our financial statements, the transaction had minimal impact on our consolidated financial statements.

Acquisition Credit Facility

On July 14, 2008, in conjunction with the closing of the Aquila Transaction, the Company borrowed $383 million under its $1 billion acquisition credit facility dated May 7, 2007. The LIBOR-based borrowing is bearing interest at 3.74 percent as of September 30, 2008. The loan matures in February 2009.

Black Hills Colorado

In conjunction with the sale of IPP assets, the $67.5 million project financing debt for our Black Hills Colorado facilities was paid off.

(6)	GUARANTEES

During the nine months ended September 30, 2008, the Company had the following changes to its guarantees:

• Extinguished the $111.0 million guarantee to Wygen Funding, Limited Partnership on June 20, 2008 when the Wygen I project debt was repaid and the Company assumed direct ownership of the plant;

• Extinguished the $30.0 million guarantee in favor of The Bank of Nova Scotia in July 2008 when the Black Hills Colorado project debt was repaid in conjunction with the IPP Transaction;

• Extinguished the $12.0 million guarantee in favor of Public Service Company of New Mexico for obligations and damages, if any, due by Valencia under a power purchase agreement in conjunction with the IPP Transaction in July 2008;

• Extinguished the $5.0 million guarantee in favor of Nevada Power Company for payments due by Las Vegas II under the Western Systems Power Pool Confirmation Agreement in conjunction with the IPP Transaction in July 2008;

• Issued a guarantee for up to $0.4 million to The Industrial Company for payment obligations arising from a construction contract with Black Hills Non-regulated Holdings. It is a continuing guarantee which terminates upon 45 days written notice to the counterpart;

• Extended the expiration of a guarantee for up to $7.0 million related to the obligations of Enserco under an agency agreement whereby Enserco provides services to structure up to $100.0 million of certain transactions involving the buying, selling, transportation and storage of natural gas on behalf of another energy company to July 31, 2009; and

• Issued the following guarantees for payment obligations arising from commodity-related physical and financial transactions by Black Hills Utility Holdings, Inc. These commodity transactions secure natural gas supply for our gas utilities. Each guarantee is a continuing guarantee that may be terminated upon 30 days written notice to the counterparty.

§ Up to $25.0 million to BP Energy Company and/or BP Canada Energy Marketing Corp.

§ Up to $25.0 million to Public Service Company of Colorado.

§ Up to $10.0 million to Northern Natural Gas Company.

(7)	EARNINGS PER SHARE

Basic earnings per share from continuing operations is computed by dividing income from continuing operations by the weighted-average number of common shares outstanding during the period. Diluted earnings per share from continuing operations gives effect to all dilutive common shares potentially outstanding during a period. A reconciliation of “Income from continuing operations” and basic and diluted share amounts is as follows (in thousands):

Period ended September 30, 2008	Three Months			Nine Months
			Average			Average
	Income		Shares	Income		Shares

Income from continuing operations	$	19,522		$	44,412

Basic earnings		19,522	38,307		44,412	38,145
Dilutive effect of:
Stock options		—	42		—	62
Estimated contingent shares issuable
for prior acquisition		—	—		—	132
Others		—	76		—	91
Diluted earnings	$	19,522	38,425	$	44,412	38,430

Period ended September 30, 2007	Three Months			Nine Months
			Average			Average
	Income		Shares	Income		Shares

Income from continuing operations	$	11,129		$	57,498

Basic earnings		11,129	37,643		57,498	36,810
Dilutive effect of:
Stock options		—	111		—	108
Estimated contingent shares issuable
for prior acquisition		—	159		—	159
Others		—	165		—	149
Diluted earnings	$	11,129	38,078	$	57,498	37,226

Basic average shares include the weighted-average effect of the issuance of 451,465 common shares on March 21, 2008 and 4,170,891 common shares on February 27, 2007 (see Notes 9 and 14 for discussion of the March 21, 2008 share issuances).

(8)	OTHER COMPREHENSIVE INCOME

The following table presents the components of the Company’s other comprehensive income

(in thousands):

	Three Months Ended
	September 30,
	2008		2007

Net income	$	164,911	$	17,464
Other comprehensive income (loss),
net of tax:
Fair value adjustment on derivatives
designated as cash flow hedges
(net of tax of $(14,030) and $3,558,
respectively)		25,824		(6,749)
Reclassification adjustments on cash
flow hedges settled and included in
net income (net of tax of $(1,539)
and $1,296, respectively)		2,761		(2,406)
Unrealized loss on available for sale
securities (net of tax of $17)		(32)		—

Total comprehensive income	$	193,464	$	8,309

	Nine Months Ended
	September 30,
	2008		2007

Net income	$	203,898	$	75,016
Other comprehensive income (loss),
net of tax:
Fair value adjustment on derivatives
designated as cash flow hedges
(net of tax of $6,449 and $3,419,
respectively)		(11,951)		(6,521)
Reclassification adjustments on cash
flow hedges settled and included in
net income (net of tax of $(3,952)
and $4,012, respectively)		7,071		(7,787)
Unrealized loss on available for sale
securities (net of tax of $58)		(157)		—

Total comprehensive income	$	198,861	$	60,708

Other comprehensive loss from fair value adjustments on derivatives designated as cash flow hedges in the three and nine months ended September 30, 2008 is primarily attributable to fluctuating oil and gas prices affecting the fair value of natural gas and crude oil swaps held in the Oil and Gas segment and a decrease in interest rates affecting the fair value of interest rate swaps on variable rate debt.

Balances by classification included within Accumulated other comprehensive loss on the accompanying Condensed Consolidated Balance Sheets are as follows (in thousands):

	Derivatives						Unrealized
	Designated as		Employee		Amount from		Loss on
	Cash Flow		Benefit		Equity-method		Available-for-
	Hedges		Plans		Investees		Sale Securities		Total

As of September 30, 2008	$	(23,168)	$	(6,115)	$	(122)	$	(140)	$	(29,545)

As of December 31, 2007	$	(18,178)	$	(6,115)	$	(215)	$	—	$	(24,508)

As of September 30, 2007	$	(6,248)	$	(8,404)	$	(171)	$	—	$	(14,823)

(9)	COMMON STOCK

Other than the following transactions, the Company had no other material changes in its common stock, as reported in Note 9 of the Notes to Consolidated Financial Statements in the Company’s 2007 Annual Report on Form 10-K.

Issuance of Unregistered Securities

On March 21, 2008, the Company issued 451,465 common shares as additional consideration associated with the “Acquisition Earn-out Litigation” previously disclosed in Note 18 of the Company’s 2007 Annual Report on Form 10-K. No additional consideration was received in exchange for the earn-out shares (see Note 14).

Equity Compensation Plans

• The Company granted 32,371 target performance shares to certain officers and business unit leaders of the Company for the January 1, 2008 through December 31, 2010 performance period. Actual shares are not issued until the end of the Performance Plan period (December 31, 2010). Performance shares are awarded based on the Company’s total shareholder return over the designated performance period as measured against a selected peer group and can range from 0 to 175 percent of target. In addition, the Company’s stock price must also increase during the performance period. The final value of the performance shares will vary according to the number of shares of common stock that are ultimately granted based upon the actual level of attainment of the performance criteria. The performance awards are paid 50 percent in the form of cash and 50 percent in the form of common stock. The grant date fair value was $46.00 per share.

• The Company issued 32,568 shares of common stock under the 2007 short-term incentive compensation plan during the nine months ended September 30, 2008. Pre-tax compensation cost related to the award was approximately $1.2 million, which was accrued for in 2007.

• The Company granted 80,684 restricted common shares during the nine months ended September 30, 2008. The pre-tax compensation cost related to the awards of restricted stock and restricted stock units of approximately $3.0 million will be recognized over the three-year vesting period.

• 90,214 stock options were exercised during the nine months ended September 30, 2008, at a weighted-average exercise price of $25.12 per share providing $2.3 million of proceeds to the Company.

• Total compensation expense recognized for all equity compensation plans for the three months ended September 30, 2008 and 2007 was $0.3 million and $1.4 million, respectively, and for the nine months ended September 30, 2008 and 2007 was $1.0 million and $4.4 million, respectively.

• As of September 30, 2008, total unrecognized compensation expense related to non-vested stock awards was $4.6 million and is expected to be recognized over a weighted-average period of 2.1 years.

(10)	EMPLOYEE BENEFIT PLANS

On July 14, 2008, as disclosed in Note 15, the Company completed the Aquila Transaction adding an additional defined benefit pension plan, a non-pension defined benefit post-retirement healthcare plan, and a 401K retirement savings plan to cover the employees of the utilities acquired. Benefits under these plans are determined based on each employee’s compensation, years of service, and/or age at retirement.

Amounts recognized in the Condensed Consolidated Balance Sheet upon the acquisition are (in thousands):

			Non-Pension
			Defined Benefit
	Defined Benefit		Postretirement
	Pension Plan		Plan

Unfunded postretirement benefit obligation – Black Hills Energy	$	16,105	$	16,948

Defined Benefit Pension Plan

The Company has three non-contributory defined benefit pension plans (Plans). One Plan covers employees of the Company and the following subsidiaries who meet certain eligibility requirements: Black Hills Service Company, Black Hills Power, WRDC and BHEP. The second Plan covers employees of the Company’s subsidiary, Cheyenne Light, who meet certain eligibility requirements. The third plan covers employees of the Black Hills Energy utilities.

The components of net periodic benefit cost for the three Plans are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007

Service cost	$	1,547	$	687	$	3,055	$	2,061
Interest cost		3,165		1,129		5,625		3,387
Expected return on plan assets		(3,644)		(1,374)		(6,790)		(4,122)
Prior service cost		41		38		123		114
Net loss		—		127		—		381

Net periodic benefit cost	$	1,109	$	607	$	2,013	$	1,821

The Company made a $0.5 million contribution to the Cheyenne Light Pension Plan in the first quarter of 2008; no additional contributions are anticipated to be made to the Plans during the 2008 fiscal year. Total contributions to the Plans for 2009 are expected to be approximately $14.5 million.

Supplemental Non-qualified Defined Benefit Plans

The Company has various supplemental retirement plans for key executives of the Company (Supplemental Plans). The Supplemental Plans are non-qualified defined benefit plans.

The components of net periodic benefit cost for the Supplemental Plans are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007

Service cost	$	112	$	103	$	336	$	309
Interest cost		311		289		933		867
Prior service cost		3		3		9		9
Net loss		142		178		426		534

Net periodic benefit cost	$	568	$	573	$	1,704	$	1,719

The Company anticipates that it will make contributions to the Supplemental Plans for the 2008 fiscal year of approximately $0.8 million. The contributions are expected to be made in the form of benefit payments.

Non-pension Defined Benefit Postretirement Healthcare Plans

Employees who are participants in the Company’s Postretirement Healthcare Plans (Healthcare Plans) and who meet certain eligibility requirements are entitled to postretirement healthcare benefits.

The components of net periodic benefit cost for the Healthcare Plans are as follows (in thousands):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007

Service cost	$	226	$	135	$	476	$	405
Interest cost		503		207		937		621
Expected return on Plan assets		(43)		—		(43)		—
Net transition obligation		15		15		45		45
Net gain		(20)		(4)		(60)		(12)

Net periodic benefit cost	$	681	$	353	$	1,355	$	1,059

The Company anticipates that it will make contributions to the Healthcare Plans for the 2008 fiscal year of approximately $0.3 million. The contributions are expected to be made in the form of benefits payments.

It has been determined that the Company’s post-65 retiree prescription drug plans are actuarially equivalent and qualify for the Medicare Part D subsidy. The decrease in net periodic postretirement benefit cost due to the subsidy was approximately $0.2 million for each of the three and nine month periods ended September 30, 2008 and 2007.

(11)	SUMMARY OF INFORMATION RELATING TO SEGMENTS OF THE COMPANY’S
	BUSINESS

The Company’s reportable segments are those that are based on the Company’s method of internal reporting, which generally segregates the strategic business groups due to differences in products, services and regulation. As of September 30, 2008, substantially all of the Company’s operations and assets are located within the United States.

Prior to the third quarter of 2008, we managed our business in six reporting segments within two business groups: Utilities and Non-regulated Energy. Utilities consisted of two reporting segments, including the Electric Utility segment (Black Hills Power) and the combination Electric and Gas Utility segment (Cheyenne Light). Non-regulated Energy consisted of four reporting segments, including our Coal Mining, Energy Marketing, Power Generation, and Oil and Gas segments.

In the third quarter of 2008, we changed the reporting segments within our Utilities Group to reflect the significant change to our utility business resulting from the Aquila Transaction (see Note 15). Effective for the period ending September 30, 2008, the Utilities Group includes two reporting segments: Electric Utilities and Gas Utilities. We manage our electric and gas utility businesses predominantly by state; however, because our electric utilities and our gas utilities have similar economic characteristics, we aggregate our electric (and combination) utility businesses in the Electric Utilities reporting segment and our gas utility businesses in the Gas Utilities reporting segment. Electric Utilities includes the operating results of the regulated electric utility operations of Black Hills Power and Colorado Electric, and the regulated electric and natural gas utility operations of Cheyenne Light. The natural gas operations within our combination utility, Cheyenne Light, provide stable gross margins and overall financial results. Periodic variances are therefore rarely expected to significantly impact the operating results discussions for the Electric Utilities segment. Presentation of prior periods has been adjusted to reflect the combination of Black Hills Power and Cheyenne Light within the Electric Utilities segment. Gas Utilities consists of the operating results of the regulated natural gas utility operations of Colorado Gas, Iowa Gas, Kansas Gas, and Nebraska Gas.

On July 11, 2008, the Company sold entities that owned seven of its IPP assets with a total capacity of 974 megawatts. The financial information related to these plants was previously reported in the Power Generation segment and has been reclassified to discontinued operations. The Company’s remaining IPP assets will continue to be reported in the Power Generation segment.

The Company now conducts its operations through the following six reporting segments:

Utilities Group –

• Electric Utilities, which supply electric utility service to areas in South Dakota, Wyoming, Montana and Colorado and natural gas utility service to Cheyenne, Wyoming and vicinity; and

• Gas Utilities, which supply natural gas utility service in Colorado, Iowa, Nebraska and Kansas.

Non-regulated Energy Group –

• Oil and Gas, which produces, explores and operates oil and natural gas interests located in the Rocky Mountain region and other states;

• Power Generation, which produces and sells power and capacity to wholesale customers. Subsequent to the July 11, 2008 sale of seven IPP plants, the remaining segment assets include power plant assets located in Wyoming, California and Idaho;

• Coal Mining, which engages in the mining and sale of coal from its mine near Gillette, Wyoming; and

• Energy Marketing, which markets natural gas, crude oil and related services primarily in the western and central regions of the United States and Canada.

Segment information follows the same accounting policies as described in Note 20 of the Notes to Consolidated Financial Statements in the Company’s 2007 Annual Report on Form 10-K. In accordance with the provisions of SFAS 71, intercompany fuel sales to the regulated utilities are not eliminated.

Segment information included in the accompanying Condensed Consolidated Statements of Income is as follows (in thousands):

	External		Inter-segment		Income (Loss) from
	Operating		Operating		Continuing
	Revenues		Revenues		Operations
Three Month Period Ended
September 30, 2008

Utilities:
Electric Utilities	$	136,644	$	334	$	10,765
Gas Utilities		83,937		—		(1,854)
Non-regulated Energy:
Oil and Gas		25,438		—		1,517
Power Generation		11,704		—		3,197
Coal Mining		8,103		7,928		1,092
Energy Marketing		19,196				6,902
Corporate		—				(2,061)
Inter-segment eliminations		—		(1,392)		(36)

Total	$	285,022	$	6,870	$	19,522

	External		Inter-segment		Income (Loss) from
	Operating		Operating		Continuing
	Revenues		Revenues		Operations
Three Month Period Ended
September 30, 2007

Utilities:
Electric Utilities	$	72,275	$	645	$	7,189
Non-regulated Energy:
Oil and Gas		24,291		—		1,979
Power Generation		10,048		—		(900)
Coal Mining		6,818		3,628		1,358
Energy Marketing		13,873		—		2,290
Corporate		—		—		(787)
Inter-segment eliminations		—		(1,411)		—

Total	$	127,305	$	2,862	$	11,129

	External		Inter-segment		Income (Loss) from
	Operating		Operating		Continuing
	Revenues		Revenues		Operations
Nine Month Period Ended
September 30, 2008

Utilities:
Electric Utilities	$	329,512	$	1,004	$	30,485
Gas Utilities		83,937		—		(1,854)
Non-regulated Energy:
Oil and Gas		85,770		—		11,266
Power Generation		29,079		—		1,698
Coal Mining		23,979		17,946		3,217
Energy Marketing		30,465				7,565
Corporate		—				(7,889)
Inter-segment eliminations		—		(3,677)		(76)

Total	$	582,742	$	15,273	$	44,412

	External		Inter-segment		Income (Loss) from
	Operating		Operating		Continuing
	Revenues		Revenues		Operations
Nine Month Period Ended
September 30, 2007

Utilities:
Electric Utilities	$	222,033	$	1,641	$	22,884
Non-regulated Energy:
Oil and Gas		75,948		—		9,945
Power Generation		30,123		—		(1,850)
Coal Mining		19,458		10,734		4,353
Energy Marketing		65,220		—		23,886
Corporate		—		—		(1,720)
Inter-segment eliminations		—		(3,967)		—

Total	$	412,782	$	8,408	$	57,498

During 2008, the Company's assets increased approximately $0.8 billion. The assets increased as a result of the Aquila Transaction (see Note 15), the ongoing construction of the Wygen III power plant within the Electric Utilities segment, and other additions of maintenance and deployment capital (see Capital Requirements on page 67) offset by the IPP Transactions (see Note 16).

(12)	RISK MANAGEMENT ACTIVITIES

The Company actively manages its exposure to certain market risks as described in Note 2 of the Notes to Consolidated Financial Statements in the Company’s 2007 Annual Report on Form

10-K. Details of derivative and hedging activities included in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Income are as follows:

Trading Activities

Natural Gas and Crude Oil Marketing

The contract or notional amounts and terms of the Company’s natural gas and crude oil marketing activities and derivative commodity instruments are as follows:

	Outstanding at			Outstanding at			Outstanding at
	September 30, 2008			December 31, 2007			September 30, 2007
			Latest			Latest			Latest
	Notional		Expiration	Notional		Expiration	Notional		Expiration
	Amounts		(months)	Amounts		(months)	Amounts		(months)
(in thousands of MMBtus)
Natural gas basis
swaps purchased		184,099	37		125,577	36		150,499	27
Natural gas basis
swaps sold		180,322	37		128,892	36		158,349	27
Natural gas fixed for float
swaps purchased		73,872	24		42,326	24		51,958	25
Natural gas fixed for float
swaps sold		84,786	24		59,253	24		70,379	25
Natural gas physical
purchases		146,273	18		90,583	15		95,028	18
Natural gas physical sales		182,512	24		98,888	27		93,008	30
Natural gas options
purchased		3,958	6		3,472	10		31,973	6
Natural gas options sold		3,958	6		3,472	10		31,539	6

	Outstanding at			Outstanding at			Outstanding at
	September 30, 2008			December 31, 2007			September 30, 2007
			Latest			Latest			Latest
	Notional		Expiration	Notional		Expiration	Notional		Expiration
	Amounts		(months)	Amounts		(months)	Amounts		(months)

(in thousands of Bbls)
Crude oil physical
purchases		5,994	15		4,991	12		1,619	7
Crude oil physical sales		4,690	15		3,800	12		1,370	5
Crude oil swaps/options
purchased		465	24		495	12		465	12
Crude oil swaps/options
sold		525	24		495	12		465	12

(Dollars, in thousands)
Canadian dollars
purchased	$	25,000	1	$	28,000	2	$	29,000	1
Canadian dollars
sold	$	3,000	1	$	—	—	$	—	—

Derivatives and certain natural gas and crude oil marketing activities were marked to fair value on September 30, 2008, December 31, 2007 and September 30, 2007, and the related gains and/or losses recognized in earnings. The amounts included in the accompanying Condensed Consolidated Balance Sheets and Statements of Income are as follows (in thousands):

									Cash
									Collateral
									Included in
	Current		Non-current		Current		Non-current		Derivative
	Derivative		Derivative		Derivative		Derivative		Assets/		Unrealized
	Assets		Assets		Liabilities		Liabilities		Liabilities		(Loss) Gain

September 30,
2008	$	66,807	$	(1,140)	$	22,292	$	(227)	$	1,789	$	45,391

December 31,
2007	$	30,999	$	1,901	$	16,908	$	2,482	$	1,287	$	14,797

September 30,
2007	$	24,694	$	522	$	12,154	$	619	$	(2,511)	$	9,932

FSP FIN 39-1 permits a reporting entity to offset fair value amounts recognized for the right to reclaim or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under a master netting arrangement. Each Condensed Consolidated Balance Sheet herein reflects the offsetting of net derivative positions with fair value amounts for cash collateral with the same counterparty when management believes a legal right of offset exists. Accordingly, December 31, 2007 and September 30, 2007 amounts have been reclassified to conform to this presentation.

In addition, certain volumes of natural gas inventory have been designated as the underlying hedged item in a “fair value” hedge transaction. These volumes include market adjustments based on published industry quotations. Market adjustments are recorded in inventory on the Condensed Consolidated Balance Sheets and the related unrealized gain/loss on the Condensed Consolidated Statements of Income, effectively offsetting the earnings impact of the unrealized gain/loss recognized on the associated derivative asset or liability described above. As of September 30, 2008, December 31, 2007 and September 30, 2007, the market adjustments recorded in inventory were $(15.1) million, $(9.8) million and $(6.5) million, respectively.

Activities Other Than Trading

Oil and Gas Exploration and Production

On September 30, 2008, December 31, 2007 and September 30, 2007, the Company had the following derivatives and related balances (in thousands):

											Pre-tax
		Maximum			Non-				Non-		Accumulated
		Terms	Current		current		Current		current		Other		Pre-tax
		in	Derivative		Derivative		Derivative		Derivative		Comprehensive		Income
	Notional*	Years	Assets		Assets		Liabilities		Liabilities		Income (Loss)		(Loss)
September 30,
2008

Crude oil
swaps/options	465,000	0.25	$	1,309	$	909	$	3,955	$	1,268	$	(4,308)	$	1,303
Natural gas
swaps	9,231,000	1.08		7,391		1,632		236		165		8,622		—
			$	8,700	$	2,541	$	4,191	$	1,433	$	4,314	$	1,303
December 31,
2007

Crude oil
swaps/options	495,000	1.00	$	352	$	—	$	3,506	$	1,794	$	(5,300)	$	352
Natural gas
swaps	11,406,000	1.59		4,332		591		507		825		3,587		4
			$	4,684	$	591	$	4,013	$	2,619	$	(1,713)	$	356
September 30,
2007

Crude oil
swaps/options	465,000	1.00	$	490	$	—	$	1,995	$	688	$	(2,683)	$	490
Natural gas
swaps	11,180,500	1.60		6,712		872		494		1,035		6,403		(348)
			$	7,202	$	872	$	2,489	$	1,723	$	3,720	$	142

________________________

*crude in Bbls, gas in MMBtus

Based on September 30, 2008 market prices, a $1.9 million gain would be realized and reported in pre-tax earnings during the next twelve months related to hedges of production. Estimated and actual realized gains will likely change during the next twelve months as market prices change.

Regulated Gas Utilities

The contract or notional amounts and terms of the Company’s natural gas derivative commodity instruments are as follows:

	Outstanding at
	September 30, 2008
		Latest
	Notional	Expiration
	Amounts	(months)
(in thousands of MMBtus)
Natural gas futures purchases	2,730	6
Natural gas futures sales	—	—
Natural gas options purchased	8,760	6
Natural gas options sold	1,800	6

On September 30, 2008, the Company had the following derivatives and related balances (in thousands):

Cash

Collateral

Non-

Included in

Current

current

Current

current

Derivative

Regulatory

Assets/

Assets

Liabilities

Assets

Liabilities

September 30, 2008

9,424

—

5,241

—

17,991

12,751

________________________

*gas in MMBtus

Our Gas Utilities segment purchases and distributes natural gas in four states. All of our gas utilities have Purchased Gas Adjustment (PGA) provisions that allow them to pass the cost of gas to the consumer. To the extent that gas costs are under-recovered or over-recovered, they are recorded as a regulatory asset or liability, respectively. These adjustments are subject to periodic prudence reviews by the respective state utility commissions. In addition, as allowed or required by state utility commissions, we have entered into certain exchange traded natural gas futures and option transactions to reduce our customers’ underlying exposure to fluctuations in gas prices. These transactions are considered derivative transactions under SFAS 133 and are marked-to-market and recorded as derivative assets or liabilities on the accompanying Condensed Consolidated Balance Sheet.

Financing Activities

On September 30, 2008, December 31, 2007 and September 30, 2007, the Company’s interest rate swaps and related balances were as follows (in thousands):

Weighted

Pre-tax

Average

Non-

Accumulated

Current

Fixed

Maximum

Current

current

Current

current

Other

Notional

Interest

Terms in

Derivative

Comprehensive

Amount

Rate

Years

Assets

Liabilities

(Loss)/Income

September 30,

2008