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SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27931; 70-10237)

Black Hills Corporation, et al.

Order Authorizing Financing and Certain Related Transactions, Including Investment in Exempt Wholesale Generators and Foreign Utility Holding Companies; Approving Service Company and Intrasystem Transactions; and Reserving Jurisdiction

December 28, 2004

Black Hills Corporation ("Black Hills"), a public-utility holding company exempt from registration under section 3(a)(1) of the Public Utility Holding Company Act of 1935, as amended ("Act"), by rule 2, and its sole utility subsidiary, Black Hills Power, Inc. ("Black Hills Power" or "Utility Subsidiary"), both located in Rapid City, SD, and its nonutility subsidiaries ("Nonutility Subsidiaries")¹ (collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") an application-declaration, as amended ("Application"), under sections 6(a), 7, 9(a), 10, 11, 12(b) and (c), 13(b), 32, 33 and 34 of the Act and rules 42, 43, 45, 52, 53, 54, 58 and 88 through 92 under the Act. The Commission issued a notice of the Application on November 1, 2004 (Holding Co. Act Release No. 27907).

I. Background

Black Hills, a South Dakota corporation, is an energy company with three principal subsidiaries engaged in three major lines of business: (i) Black Hills Power, a subsidiary electric-utility company engaged in the generation, transmission, distribution and sale of electricity to customers in South Dakota, Wyoming and Montana and the wholesale sale of power in the western United States;² (ii) Black Hills Energy, Inc. ("Black Hills Energy"), a direct wholly owned subsidiary engaged, through subsidiaries, in the development, ownership and operation of exempt wholesale generators, as defined in section 32 of the Act ("EWGs"), and qualifying facilities as defined in the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA") ("QFs"), the production, transportation and marketing of natural gas, oil, coal and other energy commodities, power marketing and other energy-related activities; and (iii) Black Hills FiberCom, LLC ("Black Hills FiberCom"), a subsidiary of Black Hills Energy engaged in telecommunications activities and which Applicants anticipate will become an exempt telecommunications company, as defined in section 34 of the Act ("ETC"). Black Hills Power is regulated as a public-utility company by the states of South Dakota, Wyoming and Montana, with these states regulating Black Hills Power's retail electric rates and charges and most of its securities issuances. Black Hills Power is also subject to regulation, under the Federal Power Act, by the Federal Energy Regulatory Commission ("FERC"). Black Hills Energy, directly and indirectly, owns Black Hills' interests in Nonutility Subsidiaries, all primarily engaged in energy-related or telecommunications activities. Black Hills states that it intends to register as a public-utility holding company under section 5 of the Act upon the issuance of the Commission's order in this matter. Black Hills also intends to purchase an additional electric-utility company, Cheyenne Light, Fuel & Power Company, which is currently a subsidiary of Xcel Energy, Inc., a registered holding company under the Act. The Commission issued a notice of the application-declaration in the proposed acquisition on November 19, 2004 (Holding Co. Act Release No. 27914).³

Black Hills proposes to continue developing generation projects, expanding its power marketing operations and pursuing additional, related growth opportunities. Black Hills seeks authorizations to enable it, and its Utility Subsidiary and Nonutility Subsidiaries (collectively, "Subsidiaries"), to operate and engage in financing and investment activities, intrasystem services and other related activities and transactions following its registration as a public-utility holding company under the Act. Black Hills also proposes to form Black Hills Services Company, Inc. ("Black Hills Services"), upon its registration, to provide centralized services (such as accounting, financial, human resources, information technology and legal services) to the companies in the Black Hills system ("Black Hills System"). Applicants request authority for various related affiliate transactions in connection with Black Hills' registration and the establishment of Black Hills Services.

II. Summary of Requested Authority

Applicants request the following financing authorizations, for the period beginning with the effective date of an order issued in this matter, through December 31, 2007 ("Authorization Period"), and authorizations for certain related actions, as described further in subsequent sections of this order:

For Black Hills, directly or indirectly, to retain or refinance existing outstanding financing arrangements and debt issuances in the total amount of up to $1.524 billion, consisting of approximately (a) $798 million in utility and nonutility debt arrangements; (b) up to $350 million in short-term debt and available credit lines ("Existing Short-Term Debt"); and (c) $376.2 million in guarantees and other forms of credit support ("Existing Guarantees") (collectively, "Existing Financings");
For Black Hills and its Subsidiaries, to issue and sell securities, of up to an additional $1 billion in securities outstanding at any one time ("Aggregate Additional Financing Limit") (subject to the Commission's reservation of jurisdiction over $250 million, pending completion of the record), comprised of:

For Black Hills, (i) common stock ("Common Stock," as defined below), (ii) preferred stock and preferred stock equivalent securities (collectively, "Preferred Securities," as defined below), (iii) unsecured short-term debt ("Short-Term Debt"), and (iv) unsecured long-term debt ("Long-Term Debt") (excluding the additional issuance of 2.7 million shares of common stock under various plans, described below); and
For the Subsidiaries, (a) common stock ("Subsidiary Common Stock," as defined below) (b) preferred stock and preferred stock equivalent securities ("Subsidiary Preferred Securities," as defined below), (c) unsecured and secured short-term debt ("Subsidiary Short-Term Debt") and (d) unsecured and secured long-term debt ("Subsidiary Long-Term Debt") (and subject to a sublimit of $350 million for the Utility Subsidiary);

For Black Hills and its Subsidiaries, to enter into transactions to manage interest rate risk, including anticipatory hedging transactions (together, "Interest Rate Hedging Transactions");
For Black Hills and its Subsidiaries, to issue guarantees and other credit support ("Guarantees") in an aggregate amount of up to $400 million (excluding Existing Guarantees) ("Additional Guarantee Limit");
For Black Hills and its Subsidiaries, (a) to form financing entities ("Financing Subsidiaries," as defined below) and (b) to issue and sell securities through Financing Subsidiaries, subject to the Aggregate Additional Financing Limit;
For Black Hills and its Subsidiaries, to establish two money pools and enter into certain intrasystem financing arrangements (subject to the Commission's reservation of jurisdiction over the addition of nonutility money pool participants and the use of certain instruments for short-term investment of money pools excess funds);
For Black Hills, directly or indirectly through Nonutility Subsidiaries, to engage, and make investments, in nonutility activities (such as EWGs, FUCOs, energy-related activities or subsidiaries authorized under rule 58 ("Rule 58 Subsidiaries") and other energy-related activities, assets or subsidiaries (collectively, "Permitted Nonutility Investments")):

to (i) engage in energy marketing and brokering ("Energy Marketing," as further defined below) in Canada and Mexico and elsewhere in the world outside of the United States (subject to the Commission's reservation of jurisdiction over these activities outside of the United States, Mexico and Canada), and (ii) render energy management services ("Energy Management Services," as defined below) and consulting services ("Consulting Services," as defined below) anywhere in the world outside of the United States (collectively "Non-U.S. Energy-Related Subsidiaries");
to invest in energy-related assets ("Energy-Related Assets," as further defined below) in an amount of up to $300 million ("Energy-Related Assets Financing Limit");
to invest in an aggregate amount of up to $1.4 billion in EWGs and FUCOs (including its existing EWG investments) ("Aggregate EWG/FUCO Financing Limit"); and
to engage, and invest an amount of up to $100 million (on a revolving fund basis), in (i) preliminary development activities ("Development Activities," as defined below) and (ii) administrative and management activities ("Administrative Activities," as defined below) related to EWGs, FUCOs, Rule 58 Subsidiaries, Energy-Related Assets and Non-U.S. Energy-Related Subsidiaries;

For Black Hills and its Subsidiaries, to alter the capital stock of all wholly owned Subsidiaries (subject to the Commission's reservation of jurisdiction over partially owned Subsidiaries, pending completion of the record);
For Nonutility Subsidiaries, to pay dividends out of capital and unearned surplus (including revaluation reserve);
For Black Hills, directly or through Nonutility Subsidiaries, to acquire the securities of one or more corporations, trusts, partnerships, limited liability companies or other entities organized exclusively for the purpose of acquiring, holding and/or financing or facilitating the acquisition or disposition of Permitted Nonutility Investments ("Intermediate Subsidiaries");
For Black Hills and its Nonutility Subsidiaries, to undertake internal reorganizations of subsidiaries and businesses;
For Black Hills, for the Commission to find, concerning the formation of a service company, that Black Hills Services will be so organized and so conducted as to meet the requirements of section 13(b) of the Act and that the filing of a Form U-13-1 is unnecessary; to be permitted an interim transition period after registration (no later than 12 months following the date of the Commission's order in this matter), to implement fully the service company, provided that Black Hills establishes the service company and it begins operations within 60 days of Black Hills' registration, as further described below; and to be exempted, among other things, from various at-cost rules applicable to transactions among Black Hills System companies; and
For Black Hills, to retain all of its existing investments in (a) EWGs and QFs, (b) energy-related exploration, production, transportation and marketing of energy commodities, power marketing and other activities; (c) telecommunications activities and (d) related businesses.

III. General Financing Parameters and Use of Proceeds

Black Hills proposes that the following general terms be applicable to the external financing transactions.

A. Effective Cost of Money

Applicants propose that the effective cost of capital on the proposed Preferred Securities, Short-Term Debt and Long-Term Debt and Black Hills' Subsidiaries' preferred securities, short-term debt and long-term debt will not exceed competitive market rates available at the time of the issuance of securities, having the same or reasonably similar terms and conditions issued by companies of reasonably comparable credit quality; provided that in no event will the effective cost of capital exceed, (1) on any series of Preferred Securities, Long-Term Debt or Subsidiary Preferred Securities or Subsidiary Long-Term Debt, 500 basis points over a U.S. Treasury security having a remaining term equal to the term of the series; and (2) on Short-Term Debt, or Subsidiary Short-Term Debt, 300 basis points over the London Interbank Offered Rate ("LIBOR") for maturities of less than one year.

B. Maturity of Debt and Final Redemption of Preferred Securities

Applicants state that the maturity of the proposed long-term indebtedness will not exceed 50 years. In addition, they state that all preferred securities are to be redeemed no later than 50 years after their issuance.

C. Issuance Expenses

Applicants state that the underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of a security that is the subject of this Application (not including any original issue discount) will not exceed 5% of the principal or total amount of the security being issued.

D. Common Equity Ratio and Investment Grade Condition

The consolidated common equity of Black Hills was 47.5% of total consolidated capitalization (all common stock equity (comprised of common stock, additional paid-in capital, retained earnings and/or treasury stock), minority interests, preferred stock, preferred securities, equity-linked securities and long-term and short-term debt and current maturities), as of September 30, 2004. Black Hills and its Utility Subsidiary commit that they will each maintain a common equity ratio (as reflected in the most recent Form 10-K or 10-Q (filed with the Commission as required by the Securities Exchange Act of 1934, as amended ("34 Act"), and as adjusted to reflect subsequent events that affect capitalization) of at least 30% of capitalization.

Applicants represent that, apart from securities issued for the purpose of funding money pool operations, no guarantees or other securities, other than common stock, may be issued in reliance upon the authorization to be granted by the Commission in this matter, unless (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer, that are rated, are rated investment grade; and (iii) all outstanding securities of Black Hills, that will be registered, that are rated, are rated investment grade ("Investment Grade Condition"). For purposes of this Investment Grade Condition, a security will be deemed to be rated "investment grade," if it is rated investment grade by at least one nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the 34 Act. The Investment Grade Condition ratings test will not apply to any issuance of common stock. Applicants request that the Commission reserve jurisdiction over the issuance of any of such securities that are rated below investment grade. Applicants further request that the Commission reserve jurisdiction over the issuance of any guarantee or other securities at any time that the conditions set forth in clauses (i) through (iii) above are not satisfied.

E. Use of Proceeds

Applicants state that proceeds from the sale of securities in external financing transactions will be used for general corporate purposes, including, in part, capital expenditures of the Black Hills System, working capital requirements of the Black Hills System, the acquisition, retirement or redemption under rule 42 of the securities previously issued by Black Hills or its Subsidiaries and other purposes, including direct or indirect investment in authorized assets and securities (i.e., energy-related assets and companies, EWGs, FUCOs and ETCs).

IV. Retention and Refinancing of Existing Financing

Applicants request authorizations, during the Authorization Period, for Black Hills, directly or indirectly, to retain and refinance existing outstanding financing arrangements and debt issuances in the total amount of up to $1.524 billion, consisting of, approximately, (a) $798 million in Utility and Nonutility debt arrangements; (b) up to $350 million in Existing Short-Term Debt; and (c) $376.2 million in Existing Guarantees. With respect to its Existing Short-Term Debt, Black Hills requests that the Commission include in its approval the retention and refinancing of Black Hills' existing revolving credit facilities (up to $350 million in borrowing ability at any one time on a short-term basis), although Black Hills may not draw down the full amount of its facilities at the time of a Commission order and, thus, not have actually incurred "short-term debt."⁴

V. Proposed Additional Financing and Other Related Authority

Applicants request authority to issue and sell additional equity and debt securities in an amount of up to $1 billion (the Aggregate Additional Financing Limit) (subject to the Commission's reservation of jurisdiction over a $250 million, pending completion of the record) and Additional Guarantees in an amount of up to $400 million, among other things, in addition to the refinancing of its Existing Financings (described above), during the Authorization Period. Specifically, Black Hills requests authorization to issue, directly and indirectly, (a) common stock (other than 2.7 million shares for employee benefits plans or stock purchase and dividend reinvestment plans, discussed below), (b) preferred stock and preferred securities, (c) long-term debt and (d) short-term debt, in an aggregate amount of up to $1 billion (the Aggregate Additional Financing Limit), and guarantees and other credit support in an aggregate amount of up to $400 million (the Additional Guarantee Limit). Applicants also seek financing authority (a) for certain energy-related investments, in an aggregate amount of up to $300 million (the Energy-Related Assets Financing Limit), and (b) for investments in EWGs and FUCOs, in an aggregate amount of up to $1.4 billion (including existing EWG investments) (the Aggregate EWG/FUCO Financing Limit), during the Authorization Period and other related authority, described further below.

A. Common Stock

Black Hills requests authority to issue and sell its common stock, denominated as "common stock," and including (unless the context indicates otherwise) outstanding options, warrants and other stock purchase rights exercisable for Black Hills' common stock (but not Black Hills' Preferred Stock that is convertible into its common stock, prior to conversion) ("Common Stock"), subject to the Aggregate Additional Financing Limit, during the Authorization Period.

In addition, Black Hills requests authority to issue up to 2.7 million additional shares of Common Stock through various plans, in accordance with the terms of the programs.⁵ Black Hills proposes in this regard, from time to time, to issue new shares and/or acquire in open market transactions, or by some other method, up to 400,000 additional shares of Black Hills Common Stock, during the Authorization Period. Black Hills also proposes to issue new shares and/or acquire in open market transactions, or by some other method, up to 2.3 million additional shares of Black Hills Common Stock under the employee stock-based plans (excluding shares that may be issued through the exercise of outstanding options and issuance of shares for outstanding restricted stock units and performance shares), from time to time, during the Authorization Period.⁶

B. Preferred Securities

Black Hills requests authority to issue additional shares of its authorized Preferred Stock, defined below, or other types of preferred securities of Black Hills Corporation (including trust-preferred securities, monthly income preferred securities and equity-linked securities) (together, "Preferred Securities"), directly or indirectly through one or more financing entities ("Financing Subsidiaries," as defined below), organized by Black Hills, subject to the Aggregate Additional Financing Limit. Preferred Stock is defined as stock of Black Hills Corporation denominated as "preferred stock" and having preference rights with respect to payment of dividends and other benefits, which may include, in certain circumstances, the right of conversion into Common Stock.⁷

C. Debt Securities

1. Long-Term Debt

Black Hills requests authority to issue and sell unsecured long-term debt securities, comprised of notes and debentures and other forms of unsecured indebtedness having maturities of one year or longer ("Long-Term Debt"), up to the Aggregate Additional Financing Limit (which excludes renewals of Existing Financings).⁸

2. Short-Term Debt

Black Hills seeks authority to issue unsecured short-term debt securities, comprised of commercial paper, promissory notes and other forms of indebtedness having maturities of less than one year ("Short-Term Debt"), up to the Aggregate Additional Financing Limit (which excludes renewals of Existing Financings).⁹

D. Subsidiary Financings

Applicants also request that Black Hills' Subsidiaries be authorized to issue and sell Subsidiary Common Stock and Subsidiary Preferred Securities, Subsidiary Long-Term Debt and Subsidiary Short-Term Debt, subject to the Aggregate Additional Financing Limit and the parameters described in section III, above, during the Authorization Period. Black Hills' Utility Subsidiary and its Nonutility Subsidiaries request this financing authority to the extent that Subsidiaries may require financing that is outside rule 52 exempt financing.¹⁰ The Utility Subsidiary specifically requests authority to issue unsecured and secured short-term debt securities, including commercial paper and credit lines, subject to the Aggregate Additional Financing Limit and the parameters described in section III, above, during the Authorization Period. Black Hills and Black Hills Power state, in addition, that Black Hills Power's borrowings (whether through external or internal financings, including the Utility Money Pool) will not exceed a sublimit of $350 million.

E. Financing Risk Management Devices

Black Hills, directly or indirectly through its Subsidiaries, requests authority to enter into interest rate hedging transactions with respect to outstanding indebtedness utilizing various financial instruments (collectively, "Interest Rate Hedges"), subject to certain limitations and restrictions, in order to reduce or manage interest rate costs.

Applicants state that Interest Rate Hedges (other than exchange-traded interest rate futures or options contracts)¹¹ will only be entered into with counterparties whose senior debt ratings, or the senior debt ratings of any credit support providers who have guaranteed the obligations of such counterparties, as published by Standard and Poor's Ratings ("Standard and Poor's"), are equal to or greater than BBB, or an equivalent rating from Moody's Investor Service ("Moody's"), Fitch Investor Service ("Fitch") or Duff and Phelps ("Approved Counterparties"). Applicants also state that fees, commissions and other amounts payable to an Approved Counterparty or exchange or other party (excluding, however, the swap or option payments) in connection with an Interest Rate Hedge, will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.

Applicants also request authority to enter into interest rate hedging transactions for anticipated debt offerings ("Anticipatory Hedges"). Black Hills states that Anticipatory Hedges would be utilized to fix and/or limit the interest rate risk associated with any new issuance.¹² Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades"), through brokers by the opening of futures and/or options positions traded on the Chicago Board of Trade, the opening of over-the-counter positions with one or more Approved Counterparties ("Off-Exchange Trades") or a combination of On-Exchange Trades and Off-Exchange Trades.

Black Hills states that Applicants will not engage in speculative transactions. Applicants state that they will comply with Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivatives Instruments and Hedging Activities" or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board ("FASB"). The Interest Rate Hedges and Anticipatory Hedges will qualify for hedge accounting treatment under the FASB standards in effect and as determined at the date Interest Rate Hedges or Anticipatory Hedges are entered into.

F. Additional Guarantees ($400 Million)

Applicants request authority to guarantee performance, and provide other forms of credit support, of Subsidiaries ("Guarantees") in an aggregate principal amount not to exceed $400 million outstanding at any one time, the Additional Guarantee Limit, during the Authorization Period. Applicants also request authority to charge each Subsidiary a guarantee fee that is comparable to those fees charged by third parties. Black Hills further requests that any Guarantees outstanding at the end of the Authorization Period be permitted to continue until expiration or termination in accordance with their terms.¹³

G. Financing Subsidiaries

Applicants request authority to acquire, directly or indirectly, the equity securities of one or more corporations, trusts, partnerships, limited liability companies, or other entities, created specifically for the purpose of facilitating the financing of authorized and exempt activities (including authorized and exempt acquisitions) ("Financing Subsidiaries"), through the issuance of Subsidiary Common Stock or Subsidiary Preferred Securities, or Subsidiary Long-Term Debt, and to transfer of the proceeds to the Black Hills System company involved.¹⁴ Applicants also request authority to issue Guarantees for the Financing Subsidiaries, subject to the Additional Guarantee Limit. Applicants further request authority to enter into support, servicing or expense agreements ("Expense Agreements") for obligations of Financing Subsidiaries.¹⁵ Applicants request authority for Financing Subsidiaries to pledge revenues or other assets or grant security interests solely to accommodate the intrasystem mirror structure of the financings; provided that the security pledged will not consist of the assets (other than an income stream in support of the financing) or stock of any Black Hills Utility Subsidiary or nonutility entity dedicated to serving a Utility Subsidiary.¹⁶

Black Hills and its Subsidiaries also request authority to issue and sell to any Financing Subsidiary, from time to time, in one or more series, unsecured debentures, unsecured promissory notes, or other unsecured debt instruments ("Notes").¹⁷ Applicants further request authority for the Financing Subsidiaries to apply the proceeds of any external financing by a Financing Subsidiary, plus the amount of any equity contribution made to it, from time to time, by its parent corporation and other funds that may be available, or obtained in an exempt financing transaction, to purchase Notes. Applicants state that amounts issued by Financing Subsidiaries to third parties will be subject to the Aggregate Additional Financing Limit. However, Applicants request that the underlying intrasystem mirror debt (including Notes), and parent guarantee, not be so included, so as to avoid double counting.

H. Money Pools

Black Hills and its Utility Subsidiary request authorization to establish a utility money pool ("Utility Money Pool") and Black Hills and its Nonutility Subsidiaries request authority to establish a nonutility money pool ("Nonutility Money Pool"), separate from the Utility Money Pool. Black Hills represents that it will not borrow from either of the money pools. Black Hills also asks the Commission to reserve jurisdiction over the addition of other participants to the Nonutility Money Pool in the future.¹⁸

Black Hills states that it will form and operate the Utility and Nonutility Money Pools by July 1, 2005. The Utility Subsidiary, to the extent not exempted under rule 52, requests authority to make unsecured short-term borrowings from, contribute surplus funds to, and to lend and extend credit to (and acquire promissory notes from) other participants in the Utility Money Pool, through the Utility Money Pool.¹⁹ The Utility Subsidiary also will be subject to a financing sublimit, described in section V.D. above.

Applicants propose that the Nonutility Money Pool would be operated on the same terms and conditions as the Utility Money Pool, except that Black Hills' funds made available to Money Pools will be made available to the Utility Money Pool first and only afterward to the Nonutility Money Pool. No loans would be made to, and no borrowings from, the Nonutility Money Pool by a Utility Subsidiary.

Black Hills requests authorization to contribute surplus funds and to lend and extend credit to: (1) the Utility Subsidiary through the Utility Money Pool and (2) the Nonutility Subsidiaries through the Nonutility Money Pool. Black Hills and the Utility Subsidiary may contribute funds from the issuance of short-term debt to the Utility Money Pool. Black Hills and the Nonutility Subsidiaries may contribute funds from the issuance of short-term debt to the Nonutility Money Pool.²⁰ Black Hills also requests authority, for both the Utility Money Pool and the Nonutility Money Pool, to make certain short-term investments with funds not required by the respective money pool to make loans (with the exception of funds required to satisfy the money pool's liquidity requirements).²¹ In addition, Black Hills requests the Commission to reserve jurisdiction over these investments in (a) short-term debt securities rated AAA by Standard and Poor's, Aaa by Moody's, or AAA by Fitch and (b) short-term debt securities issued or guaranteed by an entity rated AAA by Standard and Poor's, AAa or by Moody's, or AAA by Fitch, pending completion of the record.

I. Intrasystem Financing

Black Hills and the Subsidiaries request that they be permitted, when making intrasystem loans or extending intrasystem credit (in the event a loan or an extension of credit is not exempt under rules 45(b) or 52), to charge interest at the same effective rate of interest as the daily weighted average of commercial paper, revolving credit and/or other short-term borrowings of the respective lending Subsidiary, including an allocated share of commitment fees and related expenses.²²

Applicants also request authority for Black Hills, directly or indirectly through a Nonutility Subsidiary, to make loans to partially owned Subsidiaries at interest rates and maturities designed to provide a return to the lending company of not less than its effective cost of capital.²³

J. Energy-Related Activities and Other Additional Nonutility Investments

Applicants seek authorization for certain activities related to nonutility investments in EWGs, FUCOs and other energy-related investments permitted under rule 58, as well as investments in Energy-Related Assets and Non-U.S. Energy Related Subsidiaries, for the duration of the Authorization Period, i.e., Permitted Nonutility Investments, as discussed below.

1. Certain Energy-Related Activities

Black Hills requests authority, directly or indirectly through Nonutility Subsidiaries, to (a) engage in Energy Marketing²⁴ in Canada and Mexico and elsewhere in the world outside of the United States, subject to the Commission's reservation of jurisdiction over these activities outside of the United States, Mexico and Canada, and (b) render Energy Management Services²⁵ and Consulting Services²⁶ anywhere in the world outside of the United States. To the extent that operations outside the U.S. involve additional or different risks than U.S. operations, Black Hills states that it will evaluate and seek to mitigate those risks in a manner similar to the manner in which it evaluates and addresses EWG and FUCO investments, described below. The Commission has authorized these activities in other recent instances.²⁷

2. Additional Investments in Energy-Related Assets ($300 Million)

Black Hills also requests authority, directly or indirectly through Nonutility Subsidiaries, to invest in nonutility energy assets that are incidental and related to its business as an electricity and energy commodities marketer and broker²⁸ ("Energy-Related Assets") in an amount of up to $300 million ("Energy-Related Assets Financing Limit"). We have concluded, as Black Hills requests, that Black Hills' existing investments in Energy-Related Assets should be disregarded for purposes of calculating the dollar limitation upon investment in energy-related companies under rule 58.²⁹

3. Additional Investment in EWGs and FUCOs ($1.4 Billion)

Applicants also seek financing authority in an aggregate amount of up to $1.4 billion for investments in EWGs and FUCOs (including Black Hills existing EWG investments as of September 30, 2004, of $718 million) during the Authorization Period ("Aggregate EWG/FUCO Investment Limit").³⁰ The proposed investment limit represents approximately 448% of Black Hills' "average consolidated retained earnings," as defined in rule 53(a)(1), for the four quarterly periods ending September 30, 2004.

Black Hills states that it is able to satisfy Commission requirements for its proposed Aggregate EWG/FUCO Investment Limit by meeting the statutory requirements of sections 32 and 33 of the Act, as well as standards provided by rule 53(c).³¹ In addition, Black Hills states that the proposed Aggregate EWG/FUCO Investment Limit compares favorably with other EWG/FUCO investment limits authorized by the Commission.³²

Black Hills states that there have been significant changes to the electric utility industry in recent years and, further, that one profound change has been the divestiture by many traditional vertically integrated utilities of their generation assets. Generation has developed as a viable business, which may, but need not be, associated with transmission and distribution companies. Key to Black Hills' overall business strategy is the continued growth of its generation business through additional investment in EWGs and large dollar investments are required to participate in larger, more energy-efficient operating projects, as compared to the investment capacity available under rule 53. Black Hills is of the view that the ability to bid on the full range of available opportunities in both regulated and deregulated generation markets, especially in the larger, more significant transactions, is vital to Black Hills' growth strategies, just as it is for Black Hills' competitors. In order to compete effectively, Black Hills states that it must be on an equal footing with its competitors with authority well in excess of the rule 53(a) partial safe harbor.

3.a. Rule 53 Analysis of Black Hills' Proposed EWG/FUCO Investments

EWG and FUCO investments by a registered holding company are subject to, among other things, rule 53 and sections 32 and 33 of the Act. Rule 53(c) provides standards to consider in connection with a proposal by a registered holding company that is unable to satisfy the requirements of rule 53(a) and to which rule 53(b) does not apply, to issue and sell securities to finance an investment in any EWG, or to guarantee the securities of any EWG. Rule 53(c) states, among other things, that a registered holding company must "affirmatively demonstrate" that the proposal to issue securities to finance the acquisition of an EWG or the guarantee of a security of an EWG: "(1) will not have a substantial adverse impact upon the financial integrity of the registered holding company system; and (2) will not have an adverse impact on any utility subsidiary of the registered holding company, or its customers, or on the ability of state commissions to protect such subsidiary or customers." As discussed below, Black Hills states that it satisfies each of these prongs of the rule 53(c) standard.

3.a.1. Impact of Investments in EWGs and FUCOs on Financial

>Integrity of Black Hills Holding Company System

Black Hills states that additional investments in EWGs and FUCOs, and financing for that purpose, will not have a substantial adverse impact on the financial integrity of the Black Hills System. The lack of any "substantial adverse impact" on Black Hills' financial integrity can be demonstrated in several ways, including an analysis of historic trends in Black Hills existing EWG investment, its consolidated capitalization ratios and retained earnings and the market view of Black Hills' securities.

Black Hills' Existing EWG Investment. Black Hills made its existing investments in EWGs when it was not subject to the Act and its existing investments in EWGs, as of September 30, 2004, exceed 229% of its retained earnings. Black Hills states that its EWG investments have a history of positively affecting Black Hills' operating results. From January 1, 2003, to December 31, 2003, Black Hills' EWG investments produced operating earnings of $69,129,000, and from January 1, 2004, to September 30, 2004, Black Hills' EWG investments produced earnings of $36,766,000. Black Hills also states that it has a low risk profile when considering investments in EWGs because Black Hills typically will consider investments only in EWGs that have long-term off-take agreements for the capacity and output of the facility with creditworthy counterparties or load-serving utilities with state utility commission-approved contracts.
Size of Black Hills' Proposed EWG Investment. Black Hills states that its proposed Aggregate EWG/FUCO Investment Limit would represent a reasonable commitment of capital for a company the size of Black Hills, particularly in light of the Commission's recent approval of EWG and FUCO investment authority of over 400% of consolidated retained earnings for other holding companies.³³ The Aggregate EWG/FUCO Investment Limit sought by Black Hills, as noted previously, would be equal to approximately 448% of Black Hills' year-to-date September 30, 2004, consolidated retained earnings, which falls within the range of investment authority granted by the Commission in the recent past. $1.4 billion would equal 92%, 344%, 69%, and 145%, respectively, of Black Hills' consolidated capitalization, consolidated net utility plant, total consolidated assets and market value of outstanding stock as of September 30, 2004.³⁴
Black Hills' Consolidated Capitalization Ratio. Black Hills' consolidated capitalization ratio, as of September 30, 2004, was 47.5% equity and 52.5% debt. This ratio exceeds the Commission's 30% common equity ratio requirement.
Black Hills' Credit Ratings. Black Hills has investment grade credit ratings from Moody's and Standard and Poor's, both nationally recognized rating agencies. The Black Hills Corporation Issuer rating from Moody's is Baa3 and Standard and Poor's is BBB-.
Black Hills' Retained Earnings Growth. Black Hills states that its consolidated retained earnings have grown steadily over the past three years. Black Hills Corporation's consolidated retained earnings in 2001 were $250.5 million; in 2002 were $280.6 million and in 2003 were $304.6 million.

Black Hills' consolidated retained earnings at September 30, 2004, were approximately $313 million, and Black Hills' expects that its retained earnings will continue to increase steadily during the Authorization Period as a result of a conservative payout ratio.

Other Financial Ratios. Black Hills states that its financial strength is further reflected in its current price/earnings ("P/E") ratio and market to book ratio. Black Hills' P/E ratio, as of December 6, 2004, was 21.8 compared to the average for utilities in the Standard and Poor's Electric Utility Index of 15.3. Black Hills' market to book ratio is currently 1.39, based on a pro forma book value of $21.90 per share, as of September 30, 2004, and, as of December 23, 2004, an assumed market price is $30.39 per share.
Black Hills Management Controls and Investment Review Process. Black Hills' Board of Directors has established oversight levels for its investment in capital expenditures, mergers, acquisitions, new businesses, divestitures and contracts. Black Hills states that it has a comprehensive development, review and approval process for investments, including specific review and approval by the Board of certain investments and certain delegations from the Board to specified corporate officers, which it refers to as its "Investment Review Process." The Investment Review Process requires potential investments in projects to be reviewed by the senior management team, including, among others, Black Hills' Chief Risk Officer, General Counsel and Senior Vice President of Corporate Development. Black Hills indicates that the senior management review is intended to ensure completeness of the analysis and adherence to corporate valuation standards in advance of presentation of a project to the Board of Directors.³⁵ The process requires development of a business case. A committee reviews the assumptions, analysis and strategic fit of each proposal several times. A committee (with representatives from various functional areas (i.e., legal, tax, accounting, treasury, corporate development and information systems)) provides a report to senior management indicating any open issues or areas of concern regarding the investment. When considering potential investments in FUCOs, the Investment Committee will consider additional relevant factors, including currency risk and country-specific risk (such as political risk or economic performance risk).

3.a.2. Rule 53(c)(2) - Impact of Investments in EWGs and FUCOs on Black Hills' Utility Subsidiary, Customers and on the Ability of State Commissions to Protect Them

The second prong of rule 53(c) requires that the investments "not have an adverse impact on any utility subsidiary of the registered holding company, or its customers, or on the ability of state commissions to protect such subsidiary or customers." Black Hills states that its proposed Aggregate EWG/FUCO Investment Limit will not have an adverse impact on Black Hills Power or its customers, or on the ability of the South Dakota Commission, the Wyoming Commission, or the Montana Commission to protect Black Hills Power and its customers because of the insulation of (1) Black Hills Power and its customers from potential direct adverse effects of Black Hills' investments in EWGs and FUCOs; (2) Black Hills Power's current financial health, and (3) the proven effectiveness of state commission oversight over Black Hills Power.

(a) (Insulation from Risk. All of Black Hills' investments in EWGs and FUCOs are, and will remain, segregated from Black Hills Power and any future Utility Subsidiary of Black Hills by, among other things, being held in separate corporate entities within the Black Hills System. In addition, Black Hills commits that no Black Hills Utility Subsidiary will provide financing for, extend credit to, or sell or pledge its assets directly or indirectly to any EWG in which Black Hills owns any interest; the indebtedness of any Black Hills EWG project will not otherwise be recourse to any Black Hills Utility Subsidiary; and there will be no contractual relationship between any Black Hills EWG and any Black Hills Utility Subsidiary other than as permitted by law. Black Hills acknowledges that rules 46(a) and 42 limit Black Hills' ability to make equity distributions from capital surplus without Commission approval.

Moreover, to the extent that EWG and FUCO investments may have an indirect effect on Black Hills (for example, on Black Hills' cost of capital), Black Hills states that the state commissions have broad discretion to set the cost of capital for any utility subject to their jurisdiction, with a variety of means available to them, and are able to exclude costs caused by EWGs and FUCOs and prevent those costs from being passed on to utility customers. Black Hills commits that it will not seek recovery in retail rates of any Black Hills Utility Subsidiary for any failed investment in, or inadequate returns from, an EWG or FUCO investment.

Black Hills also states that no Utility Subsidiary will increase staffing levels to support the operations of any EWG or FUCO. Development of new EWG or FUCO projects will be conducted through Black Hills Energy or one or more of its Subsidiaries.³⁶

(b) (Financial Health of Black Hills Power. Black Hills states that its Utility Subsidiary, Black Hills Power, has stable earnings and cash flows and sound investment grade ratings from the major nationally recognized rating agencies. At September 30, 2004, Black Hills Power's common equity ratio was 45%. In addition, Black Hills has committed that it will, and it will cause its Utility Subsidiary to, adhere to the Commission's 30% common equity ratio requirement. See section III.D., above.

Black Hills also states that its current and proposed investments in EWGs and FUCOs will not have any negative impact on Black Hills Power's ability to fund operations and growth. It states that current projections indicate that Black Hills Power will continue to fund operations and construction expenditures primarily from internal sources of cash and credit facilities. Moreover, Black Hills states that Black Hills Power can access capital markets as needed, although its ability to issue debt and preferred equity securities in the future depends upon market factors at the time such securities are issued.

(c) (Utility Subsidiary Credit Ratings. Black Hills Power's Issuer ratings are: Baa2 (Moody's) and BBB- (Standard and Poor's). Its senior secured debt ratings are: Baa1 (Moody's) and BBB (Standard and Poor's). Black Hills Power's pollution control revenue bond ratings are: Baa2 (Moody's) and No Rating (Standard and Poor's).

(d) (Adequacy of State Commission Oversight. Three state commissions have jurisdiction over the operations of the Black Hills Power -- the South Dakota Commission, the Wyoming Commission and the Montana Commission. Black Hills believes that these state commissions are able to protect utility customers of their states. The Commission solicited the views of each of the state commissions regarding their ability to protect the ratepayers of their states from the proposed transactions and none of the state commissions opposed the proposal.

4. Investment in Development Activities and Administrative Activities

Black Hills and its Subsidiaries also request authority to invest, using a "revolving fund" concept described below, an amount of up to $100 million, in (i) Development Activities³⁷ and (ii) Administrative Activities³⁸ related to EWGs, FUCOs, Rule 58 Subsidiaries, Energy-Related Assets and Non-U.S. Energy-Related Subsidiaries. Development Activities will be designed to result in nonutility investments, eventually, such as EWGs, FUCOs, Rule 58 Subsidiaries, Energy-Related Assets or Non-U.S. Energy-Related Subsidiaries.

Black Hills proposes a "revolving fund," which would provide that, to the extent that funds are expended for Development Activities (or Administrative Activities, as the case may be) and result in an EWG, FUCO, or a Rule 58 Subsidiary, or other authorized investment, the amount will cease to be allocable to the Development Activities financing limit of $100 million, but will then be allocable to the particular, applicable investment limit related to the investment. For example, Development Activities expenditures that result in an EWG would count against the Aggregate EWG/FUCO Financing Limit (described in section V.J.3., above) and expenditures resulting in a Rule 58 Subsidiary would count against the limitation on investment in rule 58, or expenditures resulting in an Energy-Related Asset would count against the Energy-Related Assets Financing Limit (described in section V.J.2., above), or any other applicable limitation.³⁹

J. Changes in Capital Stock of Subsidiaries

Applicants request authority to change the terms of any wholly owned Subsidiary's authorized capital stock capitalization or other equity interests by an amount deemed appropriate by Black Hills or another intermediate parent company, as needed to accommodate transactions and future issuances. Applicants propose that a wholly owned Subsidiary be able to change the par value, or change between par value and no-par stock, without additional Commission approval.⁴⁰

Black Hills also states that the Utility Subsidiary would only take this action upon receipt of necessary approvals from interested state commissions. Black Hills also requests that the Commission reserve jurisdiction over these transactions by partially owned Subsidiaries, pending completion of the record.

K. Nonutilities' Payment of Dividends Out of Capital and Unearned Surplus

Black Hills Energy and Black Hills FiberCom also request that they be permitted, directly or indirectly through their Nonutility Subsidiaries, to pay dividends, from time to time, out of capital and unearned surplus (including revaluation reserve), to the extent permitted under applicable state corporate law, during the Authorization Period.

Applicants state that Black Hills and its Nonutility Subsidiaries will not declare or pay any dividend out of capital or unearned surplus unless it: (1) has received excess cash as a result of the sale of some or all of its assets; (2) has engaged in a restructuring or reorganization and/or (3) is returning capital to an associate company.

L. Intermediate Subsidiaries

Black Hills requests authority to acquire, directly or indirectly through Nonutility Subsidiaries, the securities of one or more corporations, trusts, partnerships, limited liability companies or other entities to be created and organized exclusively for the purpose of acquiring, holding and/or financing or facilitating the acquisition or disposition of investments ("Intermediate Subsidiaries").⁴¹ Black Hills states that, to the extent that it provides funds to an Intermediate Subsidiary for investment in an EWG, FUCO or a Rule 58 Subsidiary or other investment, the amount will be included in Black Hills' Aggregate EWG/FUCO Financing Limit or other applicable financing limit, as the case may be. Black Hills states that the transactions will not involve the sale, transfer, or other disposition of any utility assets of any Utility Subsidiary to any other person. The transactions will also not involve any change in the corporate ownership of, or involve any restructuring of, the Utility Subsidiaries.

M. Internal Corporate Reorganizations

Applicants request authority to undertake internal reorganizations of Nonutility Subsidiaries and businesses. Internal reorganizations may be accomplished through a contribution, sale, distribution, assignment or other transfer from one entity, and the acquisition by another entity, of the securities, assets or interests in an entity.

To effect a consolidation or other reorganization, Black Hills or a Nonutility Subsidiary may wish to either contribute the equity securities of one Nonutility Subsidiary to another Nonutility Subsidiary (including a newly formed Intermediate Subsidiary) or sell (or cause a Nonutility Subsidiary to sell) the equity securities or all or part of the assets of one Nonutility Subsidiary to another one. These transactions may also take the form of a Nonutility Subsidiary selling or transferring the equity securities of a subsidiary or all or part of that subsidiary's assets as a dividend to an Intermediate Subsidiary or to another Nonutility Subsidiary, and the acquisition, directly or indirectly, of the equity securities or assets of that subsidiary, either by purchase or by receipt of a dividend. The purchasing Nonutility Subsidiary in any transaction structured as an intrasystem sale of equity securities or assets may execute and deliver its promissory note evidencing all or a portion of the consideration given. Black Hills also requests that it be permitted, following direct or indirect acquisition of securities of Nonutility Subsidiaries, to transfer securities or assets of Nonutility Subsidiaries to other Subsidiaries using any tof these methods or to liquidate or merge Nonutility Subsidiaries.

N. Proposed Service Company and Certain Intrasystem Transactions

The companies will engage in a variety of affiliate transactions for the provision of goods, services and construction. Certain of these intrasystem transactions are described below. The transactions will be carried out in accordance with the requirements of rules 87, 90 and 91 under section 13(b) of the Act, unless otherwise authorized by the Commission by order or rule. With respect to the requested exemptions to the at-cost requirement, described below, for an interim period following Black Hills registration, Black Hills commits that within 12 months of its receipt of an order in connection with this Application, all transactions subject to the requested interim exemptions will be priced at cost in accordance with the requirements of section 13(b) of the Act and rules 90 and 91.

1. Black Hills Services

Following the registration, Black Hills Services will provide to Black Hills Subsidiaries various corporate, administrative, management and support services, including services relating to electric and gas plant operations.⁴² Black Hills requests the Commission to find under rule 88(b) that Black Hills Services "is so organized and conducted, or to be so conducted, as to meet the requirements of section 13(b) of the Act with respect to reasonable assurance of efficient and economical performance of services or construction or sale of goods for the benefit of associate companies, at cost fairly and equitably allocated among them (or as permitted by [rule] 90)."

Black Hills Services proposes to enter into a Services Agreement with its Utility Subsidiary and one with its Nonutility Subsidiaries. The proposed Services Agreements are structured to comply with the requirements of section 13 of the Act and related rules. Charges for services provided by Black Hills Services to system utilities will be at cost, in compliance with rules 90 and 91 under the Act. Except for certain exceptions discussed below, services to associate nonutilities will be at cost.

Black Hills states that no change in the organization of Black Hills Services, the type and character of the companies that will receive services, the factors for allocating costs to associate companies, or the broad categories of services to be rendered shall be made unless and until Black Hills Services has first given the Commission written notice of the proposed change not less than 60 days prior to the proposed effective date of the change. If, upon the receipt of any such notice, the Commission shall notify Black Hills Services within the 60-day period that a question exists whether the proposed change is consistent with the provisions of section 13 of the Act and related rules or orders, the proposed change shall not become effective unless and until Black Hills Services shall have filed an appropriate declaration regarding the proposed change and the Commission shall have permitted the declaration to become effective.

Black Hills anticipates that Black Hills Services will be formed and partially operational within 60 days after Black Hills' receipt of an order in connection with this Application.⁴³ However, to allow time for the development of all required systems, Applicant requests authority to delay the full implementation of all services and systems that are relevant under the Act for an interim period of not longer than 12 months following receipt of an order in connection with this Application. No later than October 1, 2005, Black Hills will file a post-effective amendment in this filing describing the required accounting systems and cost allocation methodologies and requesting a supplemental order of the Commission. Black Hills will file as exhibits to the amendment the documents necessary to demonstrate compliance with the Act.

2. Other Affiliate Transactions

The Utility Subsidiary may provide services incidental to its utility businesses, such as infrastructure services and storm outage emergency repairs, to another Black Hills utility subsidiary company, in the future, and other associate companies in accordance with rules 87, 90 and 91. In accordance with these rules also, a utility may provide certain goods, through a leasing arrangement or otherwise, to one or more associate companies, and may use certain assets for the benefit of one or more associate companies.

Black Hills Services and the Nonutility Subsidiaries will provide certain construction, goods or services at fair market value, under certain circumstances, to certain associate nonutility companies. Black Hills requests an exemption under section 13(b) of the Act from the at-cost standards of rules 90 and 91 with respect to transactions involving:

a FUCO or an EWG that derives no part of its income, directly or indirectly, from the generation, transmission, or distribution of electric energy for sale within the United States;
an EWG that sells electricity at market-based rates which have been approved by the FERC or other appropriate state public utility commission, provided that the purchaser of the EWG's electricity is not an affiliated public-utility or an affiliate that resells such power to an affiliated public utility;
a QF under PURPA that sells electricity exclusively at rates negotiated at arm's length to one or more industrial or commercial customers purchasing such electricity for their own use and not for resale, or to an electric utility company other than an affiliated electric utility at the purchaser's "avoided cost" determined under PURPA;
an EWG or a QF that sells electricity at rates based upon its costs of service, as approved by the FERC or any state public-utility commission having jurisdiction, provided that the purchaser of the electricity is not an affiliated public-utility; or
an energy-related company under rule 58 or any other nonutility subsidiary that (a) is partially owned, provided that the ultimate purchaser of goods or services is not a public-utility subsidiary, (b) is engaged solely in the business of developing owning, operating and/or providing services or goods to nonutility companies described in (1) through (4) above, or (c) does not derive, directly or indirectly, any part of its income from sources within the U.S. and is not a public-utility company operating within the U.S.

In addition, under section 13(b) of the Act, the Commission will grant Black Hills approval to retain an existing affiliate arrangement in which Wyodak Resources Development Corporation ("Wyodak Resources") sells delivered coal produced at its Wyodak coal mine to Black Hills Power under a cost-based pricing formula methodology. Black Hills Power uses the coal procured from Wyodak Resources to fuel its coal-fired generating facilities, some of which are mine-mouth plants located at the Wyodak mine site.

VI. Retention

Black Hills is engaged in nonutility businesses through Subsidiaries and investments in business ventures, including: (1) EWGs and QFs, (2) energy-related businesses involving exploration and production, transmission and distribution and cogeneration, among other things; and (3) telecommunication activities. These various nonutility interests are described, and the legal bases for their retention are explained, in Appendix A to this order.

VII. Conclusion

We have examined the Application under the applicable standards of the Act and have concluded that the proposed transactions are consistent with those standards. We have reached those conclusions on the basis of the complete record before us.

Except as described above, no state regulatory commission and no federal regulatory commission, other than this Commission, has jurisdiction over any of the proposed transactions. Black Hills expects to pay or incur approximately $250,000 in aggregate fees, commissions, and expenses, directly or indirectly, in connection with the proposed transactions.

Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act and no hearing has been requested of, or ordered by, the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.

IT IS ORDERED that, except as to those matters over which jurisdiction is reserved, the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 and provided that Applicants file reports on a quarterly basis, for the periods ended March 31, June 30, September 30 and December 31 of each year (such reports to be submitted within 60 days after the end of each calendar quarter and 90 days after the end of the last calendar quarter, commencing with the first calendar quarter following the date of the Commission's order in this proceeding (unless otherwise stated below)) including:⁴⁴

The sales of any Common Stock or Preferred Securities and the purchase price per share and the market price per share at the date of the agreement of sale;
The total number of share of Common Stock issued or issuable under options granted during the quarter under employee benefit plans and dividend reinvestment plans (including any later adopted employee benefit plans or dividend reinvestment plans);
If Common Stock has been transferred to a seller of securities of a company being acquired, the number of shares so issued, the value per share and whether the shares are restricted in the hands of the acquirer;
If a guarantee is issued during the quarter, the name of the guarantor, the name of the beneficiary of the guarantee and the amount, terms and purpose of the guarantee;
The amount and terms of any Black Hills indebtedness issued during the quarter;
The amount and terms of any Short-Term Debt issued by any Utility Subsidiary during the quarter;
The amount and terms of any financings consummated by any Nonutility Subsidiary not exempt under rule 52;
The notional amount and principal terms of any Hedge Instruments or Anticipatory Hedges entered into during the quarter and the identity of the counterparties;
The name, parent company and amount invested in any Intermediate Subsidiary or Financing Subsidiary during the quarter and the amount and terms of any securities issued by those Subsidiaries during the quarter;
A list of U-6B-2 forms filed with the Commission during the quarter, including the name of the filing entity and the date of filing;
Consolidated balance sheets as of the end of the quarter and separate balance sheets as of the end of the quarter for each company that has engaged in jurisdictional financing transactions during the quarter;
A table showing, as of the end of the quarter, the dollar and percentage components of the capital structure of Black Hills on a consolidated basis and of the Utility Subsidiary;
A retained earnings analysis of Black Hills on a consolidated basis and of the Utility Subsidiary detailing gross earnings, goodwill amortization, dividends paid out of each capital account and the resulting capital account balances at the end of the quarter;
Future registration statements filed under the 33 Act for securities subject to the Application will be filed or incorporated by reference as exhibits to the next certificate filed under rule 24; and
Black Hills' rule 53 undertakings addressing:

a computation in accordance with rule 53(a) setting forth Black Hills' "aggregate investment" in all EWGs and FUCOs, its "consolidated retained earnings," and a calculation of the amount remaining under the Aggregate EWG/FUCO Limit as then in effect;
a breakdown showing Black Hills' aggregate investment in each individual EWG/FUCO project under the Aggregate EWG/FUCO Limit;
consolidated capitalization ratio of Black Hills as of the end of that quarter, with consolidated debt to include all Short-Term Debt and non-recourse debt of all EWGs and FUCOs;
the market-to-book ratio of Common Stock;
identification of any new EWG/FUCO project under the Aggregate EWG/FUCO Limit in which Black Hills has invested or committed to invest during the preceding quarter;
analysis of the growth in consolidated retained earnings which segregates total earnings growth of EWGs and FUCOs from that attributable to other Subsidiaries of Black Hills; and
a statement of revenues and net income for each EWG and FUCO for the twelve months ending as of the end of that quarter.

IT IS FURTHER ORDERED that jurisdiction is reserved over (1) an additional $250 million in authority under the Aggregate Additional Financing Limit; (2) Energy Marketing outside the United States, Mexico and Canada; (3) issuance of any securities that fail to meet the Investment Grade Condition; (4) (a) addition of participants to the Nonutility Money Pool and (b) the use of short-term debt securities rated AAA by Standard and Poor's, Aaa by Moody's, or AAA by Fitch, or short-term debt securities issued or guaranteed by an entity rated AAA by Standard and Poor's, AAa by Moody's, or AAA by Fitch, as short-term investments for excess money pool funds, (5) changes in capital stock of partially owned Subsidiaries, (6) the retention of entities for which EWG or QF or ETC status is not yet determined, all pending completion of the record.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Endnotes

² Black Hills Power has approximately 60,000 retail customers in eleven counties throughout a 9,300 square-mile service territory in portions of western South Dakota, eastern Wyoming and southern Montana. It also sells bundled capacity and energy service to Gillette, Wyoming and wholesale capacity and energy to other wholesale customers; owns generating facilities in its South Dakota service area, in Wyoming's Powder River Basin (just west of Black Hills Power's service territory) and a small transmission system (consisting of 230 kV and smaller transmission facilities in southwest South Dakota and northeast Wyoming, with a 69 kV distribution extension into southeast Montana, totalling 2,195 miles of transmission facilities).

⁵ Black Hills maintains a dividend reinvestment plan ("DRP") for shareholders and various employee stock-based plans (an employee stock purchase plan (the "ESPP"), a Short-Term Incentive Plan, a 1996 Stock Option Plan, a 1999 Stock Option Plan and a 2001 Omnibus Incentive Compensation Plan). The DRP enables shareholders to reinvest dividends and make optional cash investments to purchase additional shares of common stock. The ESPP sells Black Hills common stock to employees at 90% of the stock's market price on the offering date. At September 30, 2004, 125,395 shares have been reserved and are available for issuance under the ESPP. Under the Short-Term Incentive Plan, certain key employees are awarded short-term incentive bonuses, a portion or all of which may be paid in common stock. The 1996 and 1999 Stock Option Plans permit Black Hills to grant stock options to its employees. The 2001 Omnibus Incentive Compensation Plan permits it to issue restricted stock, restricted stock units, performance shares, performance units, stock appreciation rights, stock options and other awards, as determined by the Compensation Committee of the Board of Directors.

⁶ Black Hills proposes that its common stock financings be effected by underwriting agreements customary in the industry and public distributions effected by private negotiation with underwriters, dealers or agents, as described below, or through competitive bidding among underwriters. In addition, Applicants propose that sales may be made through private placements or other non-public offerings to one or more persons. Black Hills states that all common stock sales would be at rates or prices and under conditions negotiated or based upon, or otherwise determined by, competitive capital markets. Black Hills may also buy back shares of its stock or options during the Authorization Period in accordance with rule 42.

⁷ Preferred Securities may be issued in one or more series with rights, preferences and priorities, as may be determined by Black Hills' Board of Directors. Dividends or distributions on Preferred Securities will be made periodically, but may be made subject to terms, which allow the issuer to defer dividend payments for specified periods. Preferred Securities may be convertible or exchangeable into shares of Black Hills common stock or indebtedness. Preferred Securities may be sold directly through underwriters or dealers in connection with an acquisition in a manner similar to that described for common stock.

⁸ Any long-term debt may: (a) be convertible into any other securities of Black Hills; (b) will have maturities ranging from one to 50 years; (c) be subject to optional and/or mandatory redemption, in whole or in part, at par or at various premiums above the principal amount; (d) be entitled to mandatory or optional sinking fund provisions; (e) provide for reset of the coupon as required by a remarketing arrangement; (f) be subject to tender or the obligation of the issuer to repurchase at the election of the holder or upon the occurrence of a specified event; (g) be called from existing investors by a third party; and (h) be entitled to the benefit of positive or negative financial or other covenant. Maturity dates, interest rates, redemption and sinking fund provisions, tender or repurchase and conversion features, if any, with respect to the long-term securities of a particular series, as well as any associated placement, underwriting or selling agent fees, commissions and discounts, if any, will be established by negotiation or competitive bidding. Borrowings from the banks and other financial institutions may be unsecured and pari passu with debt securities issued under the Black Hills Indenture and the short-term credit facilities. Specific terms of any borrowings will be determined by Black Hills at the time of issuance and will comply in all regards with the parameters of the financing authorization described in section III, above.

⁹ Commercial paper may be sold in established domestic and European commercial markets. Commercial paper would be sold to dealers at the discount rate or the coupon rate per annum prevailing at the date of issuance for commercial paper of comparable quality and maturities sold to commercial paper dealers generally. It is expected that the dealers acquiring commercial paper from Black Hills will offer the paper at a discount to corporate, institutional and, with respect to European commercial paper, individual investors. Institutional investors are expected to include commercial banks, insurance companies, pension funds, investment trusts, foundations, colleges and universities, and finance companies.

¹² Anticipatory Hedges may be implemented through: (a) a forward sale of exchange-traded Interest Rate Hedges ("Forward Sale"); (b) the purchase of put options on Interest Rate Hedges ("Put Options Purchase"); (c) a Put Options Purchase in combination with the sale of call options Interest Rate Hedges ("Zero Cost Collar"); (d) transactions involving the purchase or sale, including short sales, of Interest Rate Hedges; or (e) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including, but not limited to, appropriate structured notes, caps or collars.

¹⁸ Black Hills states that initial participants in the Nonutility Money Pool will be BHFC Publishing, Inc.; Black Hills Cabresto Pipeline, LLC; Black Hills Colorado, LLC; Black Hills Energy, Pipeline, LLC; Black Hills Energy Resources, Inc.; Black Hills Energy Terminal, LLC; Black Hills Energy, Inc.; Black Hills Exploration and Production, Inc.; Black Hills Fiber Systems, Inc.; Black Hills FiberCom, LLC; Fountain Valley II, LLC; Black Hills Fountain Valley, LLC; Black Hills Gas Holdings Corp.; Black Hills Gas Resources, Inc.; Black Hills Generation, Inc.; Black Hills Idaho Operations, LLC; Black Hills Ivanpah GP, LLC; Black Hills Ivanpah, LLC; Black Hills Kilgore Energy Pipeline, LLC; Black Hills Kilgore Pipeline Company, LP; Black Hills Kilgore Pipeline, Inc.; Black Hills Millennium Pipeline, Inc.; Black Hills Millennium Terminal, Inc.; Black Hills Montana Publishing, LLC; Black Hills Nevada Operations, LLC; Black Hills Nevada, LLC; Black Hills Ontario, LLC; Black Hills Operating Company, LLC; Black Hills Pepperell Power Associates, Inc.; Black Hills Southwest, LLC; Black Hills Wyoming, LLC; Desert Arc I, LLC; Desert Arc II, LLC; EIF Investors, Inc.; Enserco Energy Inc.; Fountain Valley Power, LLC; Harbor Cogeneration Company, LLC; Las Vegas Cogeneration II, LLC; Las Vegas Cogeneration Limited Partnership; Millennium Pipeline Company, LP; Millennium Terminal Company, LP; Sunco, Ltd.; West Cascade Energy, LLC; and Wyodak Resources Development Corporation.

¹⁹ Under the proposed Utility Money Pool terms, short-term funds would be available from: (1) surplus funds in the treasuries of Utility Money Pool participants other than Black Hills, (2) surplus funds in the treasury of Black Hills, and (3) proceeds from bank borrowings by Utility Money Pool participants or the sale of commercial paper by Black Hills or the Utility Subsidiary for loan to the Utility Money Pool. Funds would be made available as Black Hills Services may determine would result in a lower cost of borrowing, consistent with the individual borrowing needs and financial standing of pool participants.

²⁰ Applicants state that Black Hills Services will operate the Money Pools on an at-cost basis and separate records will be maintained for each pool. Surplus funds of the Utility Money Pool and the Nonutility Money Pool may be combined in common short-term investments, but separate records will be maintained and interest will be allocated separately, on a daily basis, to each money pool in the proportion that the amount of each money pool's surplus funds bears to the total amount of surplus funds available for investment from both money pools.

²¹ Applicants state that these short-term investments would include: (1) interest-bearing accounts with banks; (2) obligations issued or guaranteed by the U.S. government and/or its agencies and instrumentalities, including obligations under repurchase agreements; (3) obligations issued or guaranteed by any state or political subdivision, provided that the obligations are rated not less than "A" by a nationally recognized rating agency; (4) commercial paper rated not less than "A-1" or "P-1" or their equivalent by a nationally recognized rating agency; (5) money market funds; (6) bank certificates of deposit; (7) Eurodollar funds; and (8) other investments permitted under section 9(c) of the Act and rule 40.

²³ Similar authority has been granted to other registered holding companies. See Emera, Inc., Holding Co. Act Release No. 27445 (October 1, 2001); Progress Energy, Inc., Holding Co. Act Release No. 27297 (December 12, 2000); Entergy Corporation, Holding Co. Act Release No. 27039 (June 22, 1999). Black Hills states that, generally, loans to, and purchases of capital stock from, Subsidiaries will be exempt under rule 52 and capital contributions and open account advances without interest will be exempt under rule 45(b). Loans by Black Hills or a Nonutility Subsidiary to a Nonutility Subsidiary will have interest rates and maturity dates that are designed to parallel the lending company's effective cost of capital, in accordance with rule 52(b).

²⁵ Black Hills defines Energy Management Services to include the marketing, sale, installation, operation and maintenance of various products and services related to energy management and demand-side management, including energy and efficiency audits; meter data management, facility design and process control and enhancements; construction, installation, testing, sales and maintenance of (and training client personnel to operate) energy conservation equipment; design implementation, monitoring and evaluation of energy conservation programs; development and review of architectural, structural and engineering drawings for energy efficiencies, design and specification of energy consuming equipment and general advice on programs; the design, construction, installation, testing, sales, operation and maintenance of new and retrofit heating, ventilating, and air conditioning, electrical and power systems, alarm, security, access control and warning systems, motors, pumps, lighting, water, water-purification and plumbing systems, building automation and temperature controls, installation and maintenance of refrigeration systems, building infrastructure wiring supporting voice, video, data and controls networks, environmental monitoring and control, ventilation system calibration and maintenance, piping and fire protection systems, and design, sale, engineering, installation, operation and maintenance of emergency or distributed power generation systems, and related structures, in connection with energy-related needs; and the provision of services and products designed to prevent, control, or mitigate adverse effects of power disturbances on a customer's electrical systems. Black Hills states that, in the event it proposes to acquire an Energy Management Services business that owns distribution power generation systems that would constitute "utility assets" under the Act, Black Hills will, as necessary, seek any required approvals from the Commission.

²⁶ Applicants define Consulting Services to include technical and consulting services involving technology assessments, power factor correction and harmonics mitigation analysis, meter reading and repair, rate schedule design and analysis, environmental services, engineering services, billing services (including consolidation or centralized billing, bill desegregation tools and bill inserts), risk management services, communications systems, information systems/data processing, system planning, strategic planning, finance, general management consulting including training activities, feasibility studies, and other similar related services.

²⁸ Black Hills defines Energy-Related Assets to include oil and natural gas production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated facilities that will be incidental to and assist Black Hills' Nonutility Subsidiaries in connection with their marketing, brokering and trading activities. American Electric Power Company, Inc., et al., Holding Co. Act Release Nos. 27842 (April 30, 2004) and 26933 (November 2, 1998). Black Hills further defines Energy-Related Assets to exclude additional investments in EWGs or FUCOs. Black Hills also states that Energy-Related Assets will not include the acquisition and ownership of any assets that would cause any subsidiary to be or become an "electric-utility company" or "gas-utility company," as defined in sections 2(a)(3) and 2(a)(4) of the Act.

²⁹ Rule 58(a)(1)(ii) provides that investments by a registered holding company in energy-related companies, as defined in rule 58(b)(1), may not exceed 15% of the consolidated capitalization of the registered holding company. The Commission has reached this conclusion in previous similar matters involving exempt holding companies (which are not subject to the same restrictions on nonutility activities as registered holding companies are) that were to become registered. See CP&L Energy, Inc., Holding Co. Act Release No. 27874 (November 27, 2000); Exelon Corporation, Holding Co. Act Release No. 27256 (October 19, 2000).

³² More recently the Commission has authorized EWG and FUCO investment in amounts greater than 400% of consolidated retained earnings. See, e.g., Dominion Resources, Inc., Holding Co. Act Release No. 27630 (December 30, 2002) (authority to invest up to 475% of consolidated retained earnings); E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002) (authority to invest up to 619% of consolidated retained earnings); Emera, Inc., Holding Co. Act Release No. 27445 (October 1, 2001) (authority to invest up to 1000% of consolidated retained earnings). Initially addressing similar facts, in a series of earlier cases, the Commission authorized aggregate investments in EWGs and FUCOs of up to 100% of consolidated retained earnings (sometimes referred to as the "100% orders"). See, e.g., The Southern Company, Holding Co. Act Release No. 26501 (April 1, 1996).

³⁷ Development Activities will include due diligence and design review; market studies; preliminary engineering; site inspection; preparation of bid proposals, including, in connection with these activities, posting of bid bonds; application for required permits and/or regulatory approvals; acquisition of site options and options on other necessary rights; negotiation and execution of contractual commitments with owners of existing facilities, equipment vendors, construction firms, power purchasers, thermal "hosts," fuel suppliers and other project contractors; negotiation of financing commitments with lenders and other third-party investors; and such other preliminary activities as may be required in connection with the purchase, acquisition, financing or construction of facilities or the acquisition of securities of, or interests in, new businesses. See Scottish Power plc, et al., Holding Co. Act Release No. 27831 (April 1, 2004).

⁴¹ Black Hills states that there are various legal and business reasons for using Intermediate Subsidiaries. Limited purpose subsidiaries are often necessary or desirable to facilitate financing the acquisition and ownership of a FUCO, an EWG or other enterprise. The laws of some foreign countries may require that a bidder in a privatization program be organized in that country. Using one or more Intermediate Subsidiaries may allow Black Hills to secure more favorable U.S. and foreign tax treatment and achieve tax efficient corporate structures, minimizing state or federal taxes. Intermediate Subsidiaries may also isolate business risks and facilitate adjustments to ownership interests or raising debt or equity capital in domestic or foreign markets.

⁴² These operations may include, e.g., management of bulk power and natural gas supply, fuels procurement, coordination of electric and natural gas distribution systems, maintenance, construction and engineering work; customer bills and related matters; materials management; facilities; real estate; rights of way; human resources; finance; accounting; internal auditing; information systems; corporate planning and research; public affairs; corporate communications; legal; environmental matters; and executive services. Black Hills Services will have total equity capital of not more than $10,000.

⁴³ Black Hills states that the transition period is necessary to accommodate the complexities of the formation of the services company. Black Hills states that, first, appropriate personnel from Black Hills and its Subsidiaries will be transferred to Black Hills Services' employ, subject to requirements associated with the transfer employees' benefit, health and pension plans, contracts, licenses and permits to Black Hills Services, and subject to approvals and consents from regulators, counterparties and vendors.

⁴⁴ Black Hills will integrate its 34 Act and Securities Act of 1933 ("33 Act") reports with reports filed under the Act to eliminate duplication of Commission filings. To effect such integration, the portion of the 1933 Act and 1934 Act reports containing or reflecting disclosures of transactions authorized in this proceeding will be incorporated by reference in its rule 24 certificates of notification. The certificates will also contain all information required by rule 24 (including the certification that each transaction being reported on had been carried out in accordance with the terms and conditions of and for the purposes represented in this Application). A copy of relevant document (e.g., underwriting agreements, indentures, bank agreements) for the relevant quarter will be filed with, or incorporated by reference from, 33 Act or 34 Act filings in rule 24 reports.

http://www.sec.gov/divisions/investment/opur/filing/35-27931.htm