# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, DC 20549Form 10-K

||X| |  | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ------------------------------------------------------------------------------------

| |  | For the
fiscal year ended December 31, 2004
| |  | -------------------------------------------

||_| |  | 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 1-7978
| |  | -----------------------------

# BLACK HILLS POWER, INC.

Incorporated in South Dakota        
              IRS Identification Number 46-0111677

625 Ninth Street
Rapid City, South Dakota 57701

Registrants telephone
number, including area code
(605) 721-1700

Securities registered
pursuant to Section 12(b) of the Act: None

Securities registered
pursuant to Section 12(g) of the Act: 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 |X|     NO |_|

Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.

This
paragraph is not applicable to the Registrant. |X|

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES |_|     NO |X|

State the aggregate market value of
the voting stock held by non-affiliates of the Registrant.

| | All outstanding shares are held by the Registrants parent company, Black Hills
Corporation. Accordingly, the aggregate market value of the voting common stock of the
Registrant held by non-affiliates is $0.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Indicate the number of shares
outstanding of each of the Registrants classes of common stock, as of the latest
practicable date.

| |  |  |  |  | Class |  | Outstanding
at February 28, 2005
| |  |  |  |  | ----- |  | --------------------------------

| |  |  |  |  | Common stock,
$1.00 par value            
               
          23,416,396 shares
| |  |  |  |  | -------------------------------------------------------------------------------------

# Reduced Disclosure

The Registrant meets the conditions
set forth in General Instruction I (1) (a) and (b) of Form 10-K and is therefore filing
this Form 10-K with the reduced disclosure format.

---

# TABLE OF CONTENTS

|              |  | Page
|------------- |  | ----
|ITEMS 1. & 2. |  |     
|              |  |     
|              |  |     
|              |  |     
|              |  |     
|ITEM 3.       |  |     
|ITEM 5.       |  |     
|ITEM 7.       |  |     
|ITEM 8.       |  |     
|ITEM 9.       |  |     
|ITEM 9A.      |  |     
|ITEM 9B.      |  |     
|ITEM 15.      |  |     
|              |  |     
|              |  |     

2

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# PART I

# ITEMS 1 AND 2.     
BUSINESS AND PROPERTIES

# General

We are an electric utility serving
customers in South Dakota, Wyoming and Montana. We are incorporated in South Dakota and
began providing electric utility service in 1941. We are a wholly-owned subsidiary of
Black Hills Corporation, a registered public utility holding company under the Public
Utility Holding Company Act of 1935 (PUHCA).

Unless the context otherwise
requires, references in this Form 10-K to Black Hills Power, we,
us and our refer to Black Hills Power, Inc.

We engage in the generation,
transmission and distribution of electricity. We have a solid foundation of revenues,
earnings and cash flow that support our capital expenditures, dividends, and overall
performance and growth.

Distribution and
Transmission

Our distribution and transmission
businesses serve approximately 62,000 electric customers, with an electric transmission
system of 447 miles of high voltage lines and 263 miles of lower voltage lines. In
addition, we jointly own 43 miles of high voltage lines with Basin Electric Cooperative.
Our service territory covers a 9,300 square mile area of western South Dakota, eastern
Wyoming and southeastern Montana with a strong and stable economic base. Approximately 90
percent of our retail electric revenues are generated in South Dakota.

The following are characteristics of
our distribution and transmission businesses:

| |  |  | We
have a diverse customer and revenue base. Our revenue mix for the year ended December 31,
2004 was comprised of 28 percent commercial, 22 percent residential, 14 percent contract
wholesale, 23 percent wholesale off-system, 12 percent industrial and 1 percent municipal
sales and other revenue. Approximately 73 percent of our large commercial and industrial
customers are provided service under long-term contracts. We have historically optimized
the utilization of our power supply resources by selling wholesale power to other
utilities and to power marketers in the spot market and through short-term sales
contracts.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
are subject to regulation by the South Dakota Public Utilities Commission (SDPUC) and the
Wyoming Public Service Commission (WPSC). The retail rate freeze granted to us by the
SDPUC, which had been in effect for 10 years, expired on January 1, 2005. Our current
rates in South Dakota and Wyoming remain in place following the expiration of the rate
freeze.  The rate freeze preserved our low-cost rate structure for our retail customers at levels below
the national average while allowing us to retain the benefits from cost savings and from
wholesale off-system sales, which were not covered by the rate freeze. Our
rates do not include a fuel or a purchased power adjustment, so we continue to have the
flexibility in allocating our generating capacity to wholesale off-system sales. While we
are not obligated to do so, we are permitted to petition the SDPUC and WPSC for a rate
increase at any time, or the SDPUC and WPSC may require that we do so. We do not expect to
request a rate increase during 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 23
percent of our electric revenues for the year ended December 31, 2004 consisted of
off-system and short-term contract wholesale sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

3

---

| |  |  | Black
Hills Power and Basin Electric Power Cooperative completed the construction of an
AC-DC-AC transmission tie in the fourth quarter of 2003. We own 35% and Basin Electric
owns 65% of the transmission tie. The transmission tie provides an interconnection
between the Western and Eastern transmission grids, enabling access to both the WECC
region in the West, and the Mid-Continent Area Power Pool, or MAPP region in
the East. The system is located in the WECC region. The total transfer capacity of the
tie is 400 megawatts200 megawatts from West to East and 200 megawatts from East to
West. This transmission tie allows us to buy and sell energy in the Eastern
interconnection without having to isolate and physically reconnect load or generation
between the two electrical transmission grids. The transmission tie is bidirectional and
thus accommodates scheduling transactions in both directions simultaneously. This
transfer capability provides additional opportunity to sell our excess generation or to
make economic purchases to serve our native load and our contract obligations, and to
take advantage of the power price differentials between the two electric grids.
Additionally, the system is capable of directly interconnecting up to 80 megawatts of
generation or load to the Eastern transmission grid. Transmission constraints within the
MAPP transmission system may limit the amount of capacity that may be directly
interconnected to the Eastern system at any given time.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
have firm point-to-point transmission access to deliver up to 17 megawatts of power on
PacifiCorps transmission system to wholesale customers in the Western region from
2004 through 2006 and 50 megawatts from 2007 through 2023.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
have firm network transmission access to deliver power on PacifiCorps system to
Sheridan, Wyoming to serve our power sales contract with Montana-Dakota Utilities Company
(MDU) through 2006, with the right to renew pursuant to the terms of PacifiCorps
transmission tariff.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Power
Sales Agreements. We sell a portion of our current load under long-term
contracts. Our key contracts include:

| |  |  | an
agreement with MDU, expiring at the end of 2006, for the sale of up to 55 megawatts of
capacity and energy to serve the Sheridan, Wyoming electric service territory. We
recently entered into a new power purchase agreement with MDU for the supply of up to 74
megawatts of capacity and energy for Sheridan, Wyoming starting in 2007 and going through
2017, which is pending regulatory approval by the WPSC; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | an
agreement with the City of Gillette, Wyoming, expiring in 2012, to provide the citys
first 23 megawatts of capacity and energy.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

These consumers are integrated into
our control area and are treated as firm native load. We also provide 20 megawatts of unit
contingent energy and capacity to the Municipal Energy Agency of Nebraska (MEAN) under a
contract that expires in 2013.

Regulated
Power Plants and Purchased Power. Our electric load is primarily served by
generating facilities in South Dakota and Wyoming, which provide 435 megawatts of
generating capacity, with the balance supplied under purchased power and capacity
contracts. Approximately 50 percent of our capacity is coal-fired, 39 percent is oil- or
gas-fired, and 11 percent is supplied under the following purchased power contracts with
PacifiCorp:

| |  |  | a
power purchase agreement expiring in 2023, involving the purchase by us of 50 megawatts
of baseload power; and
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | a
reserve capacity integration agreement expiring in 2012, which makes available to us 100
megawatts of reserve capacity in connection with the utilization of the Ben French CT
units.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Since 1995, we have been a net
producer of energy. We reached our peak system load of 392 megawatts in August 2001. None
of our generation is restricted by hours of operation, thereby providing us the ability to
generate power to meet demand whenever necessary and feasible.

4

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# Rate Regulation

Rate Regulation

The rate freeze granted by the SDPUC,
which had been in effect since 1995, expired on January 1, 2005. During this ten-year
term, we were prohibited, subject to certain limited exceptions, from filing for any
increase in its rates or invoking any fuel and purchased power adjustment tariff which
would take effect during the freeze period. While the rate freeze has expired, we cannot
raise rates without initiating a proceeding before the SDPUC and the WPSC and receiving
approval from these commissions. As such, our current rates remain in effect.

Unless and until we file for and
receive a rate increase, we are undertaking the risks of:

| |  |  | machinery
failure;
| | - |  | ------------------

| |  |  | load
loss caused by either an economic downturn or changes in regulation;
| | - |  | -------------------------------------------------------------------------

| |  |  | costs
of fuel commodities;
| | - |  | --------------------------

| |  |  | increased
costs under power purchase contracts over which it has no control;
| | - |  | ----------------------------------------------------------------------------

| |  |  | government
interferences; and
| | - |  | -----------------------------

| |  |  | acts
of nature and other unexpected events that could cause material losses of income or
increases in costs of doing business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

Under our current structure, we will
continue to retain earnings realized from more efficient operations, sales from load
growth, and off-system sales of power and energy.

Beginning in the mid-1990s, we
initiated an effort to enter into new contracts with our largest commercial and industrial
customers. Most of the new contracts contain meet or release provisions that
grant us a five-year right to continue to serve a customer at market rates in the event of
deregulation. Additionally, through our General Service Large Optional Combined Account
Billing Tariff, we have allowed general service customers to aggregate their loads. This
tariff also provides us with a five-year right to continue to serve those customers in the
event of deregulation. Our meet or release contracts currently total more than
110megawatts of large commercial and industrial load. These
contracts provide us with greater assurance of a firm local market for our power resources
in the event deregulation occurs. These industrial and large commercial customers,
together with our wholesale power sale agreements with the City of Gillette, Wyoming and
MDU, equal approximately 50 percent of our firm load.

Regulatory Accounting

As it pertains to the accounting for
our utility operations, we follow SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation, and our financial statements reflect the effects of the
different ratemaking principles followed by the various jurisdictions in which we operate.
As a result of our regulatory activity, a 50-year depreciable life for the Neil Simpson II
plant is used for financial reporting purposes. If we were not following SFAS 71, a 35- to
40-year life would probably be more appropriate, which would increase depreciation expense
by approximately $0.6  $1.1 million per year. If rate recovery of generation-related
costs becomes unlikely or uncertain, due to competition or regulatory action, these
accounting standards may no longer apply to our generation operations. In the event we
determine that we no longer meet the criteria for following SFAS 71, the accounting impact
to us could be an extraordinary non-cash charge to operations of an amount that could be
material. Criteria that may give rise to the discontinuance of SFAS 71 include increasing
competition that could restrict our ability to establish prices to recover specific costs
and a significant change in the manner in which rates are set by regulators from
cost-based regulation to another form of regulation. We periodically review these criteria
to ensure that the continuing application of SFAS 71 is appropriate.

# New Accounting
Pronouncements

See Note 1 of our Notes to
Consolidated Financial Statements for information on new accounting standards adopted in
2004 or pending adoption.

5

---

# Risk Factors

The following specific risk factors
and other risk factors that we discuss in our periodic reports from time to time should be
considered for a better understanding of our Company. These factors and other matters
discussed herein are important factors that could cause our actual results or outcomes to
differ materially from those discussed in the forward looking statements included
elsewhere in this document.

Our credit ratings could be
further lowered in the future. If this were to occur, our access to capital and our cost
of capital and other costs would be negatively affected.

Our issuer credit rating is
Baa2 by Moodys Investor Services, Inc., or Moodys and
BBB- by Standard & Poors. Our credit rating on our First Mortgage Bonds is
Baa1 by Moodys and BBB by Standard & Poors. Any
further reduction in our ratings by Moodys or Standard & Poors Rating
Service could adversely affect our ability to refinance or repay our existing debt and to
complete new financings.

In addition, a further downgrade in
our credit rating would increase our costs of borrowing under some of our existing debt
obligations.

A downgrade could also result in our
business counterparties requiring us to provide additional amounts of collateral under new
transactions.

Geopolitical tensions may impair
our ability to raise capital and limit our growth.

Continuing conflict in Iraq or
further tensions with the governments of Iran or North Korea could disrupt capital markets
and make it more costly or temporarily impossible for us to raise capital, thus hampering
the implementation of our stated strategy. In the past, geopolitical events, including the
uncertainty associated with the Gulf War in 1991 and the terrorist attacks of September
11, 2001, have been associated with general economic slowdowns. Geopolitical tensions or
other factors could retard economic growth and reduce demand for the power and fuel
products that we produce or market, which could adversely affect our earnings.

We may not raise retail rates
without prior approval of the South Dakota Public Utilities Commission or the Wyoming
Public Services Commission. If we seek rate relief, we could experience delays in
obtaining approvals and could have rate recovery disallowed in rate proceedings.

Our rate freeze agreement with the
SDPUC expired on January 1, 2005. Until such time as we petition the SDPUC or the
WPSC for rate relief, or either commission requires that we do so, we may not increase our
retail rates. Additionally, we may not invoke any fuel and purchased power adjustment
tariff that would take effect prior to the completion of a rate proceeding, absent
extraordinary circumstances. As part of the process for Black Hills Corporation to obtain
approval to acquire Cheyenne Light, Fuel and Power (CLF&P), a combination public
utility serving electric and gas customers in Cheyenne, Wyoming and vicinity, we agreed
with the WPSC that we would not raise retail rates for our Wyoming customers prior to
January 1, 2006. Because we are generally unable to increase our base rates without prior
approval from the SDPUC and the WPSC, our returns could be threatened by plant outages,
machinery failure, increases in purchased power costs over which our utility has no
control, acts of nature, acts of terrorism or other unexpected events that could cause
operating costs to increase and operating margins to decline. Moreover, in the event of
unexpected plant outages or machinery failures, we may be required to purchase replacement
power in wholesale power markets at prices that exceed the rates we are permitted to
charge our retail customers. Finally, our costs would be subject to the review of the
SDPUC or the WPSC, and the commissions could find certain costs not to be recoverable,
thus negatively affecting our revenues.

6

---

Because prices for our products
and services and other operating costs for our business are volatile, our revenues and
expenses may fluctuate.

The prices of energy products in the
wholesale power markets have stabilized at lower levels after the price volatility
experienced in the second half of 2000 and the first half of 2001. Power prices are
influenced by many factors outside our control, including:

| |  |  | fuel
prices;
| | - |  | ------------

| |  |  | transmission
constraints;
| | - |  | -------------------------

| |  |  | supply
and demand;
| | - |  | ------------------

| |  |  | weather;
| | - |  | --------

| |  |  | economic
conditions; and
| | - |  | ------------------------

| |  |  | the
rules, regulations and actions of the system operators in those markets.
| | - |  | ----------------------------------------------------------------------------

Moreover, unlike most other
commodities, electricity cannot be stored and therefore must be produced concurrently with
its use. As a result, wholesale power markets are subject to significant price
fluctuations over relatively short periods of time and can be unpredictable.

Construction, expansion,
refurbishment and operation of power generating and transmission facilities involve
significant risks which could lead to lost revenues or increased expenses.

The construction, expansion,
refurbishment and operation of power generating and transmission and resource recovery
facilities involve many risks, including:

| |  |  | the
inability to obtain required governmental permits and approvals;
| | - |  | --------------------------------------------------------------------

| |  |  | the
unavailability of equipment;
| | - |  | --------------------------------

| |  |  | supply
interruptions;
| | - |  | ---------------------

| |  |  | work
stoppages;
| | - |  | ---------------

| |  |  | labor
disputes;
| | - |  | ---------------

| |  |  | social
unrest;
| | - |  | --------------

| |  |  | weather
interferences;
| | - |  | ----------------------

| |  |  | unforeseen
engineering, environmental and geological problems; and
| | - |  | ------------------------------------------------------------------

| |  |  | unanticipated
cost overruns.
| | - |  | ----------------------------

7

---

The ongoing operation of our
facilities involves all of the risks described above, in addition to risks relating to the
breakdown or failure of equipment or processes and performance below expected levels of
output or efficiency. New plants may employ recently developed and technologically complex
equipment, especially in the case of newer environmental emission control technology. Any
of these risks could cause us to operate below expected capacity levels, which in turn
could result in lost revenues, increased expenses, higher maintenance costs and penalties.
While we maintain insurance, obtain warranties from vendors and obligate contractors to
meet certain performance levels, the proceeds of such insurance and our rights under
warranties or performance guarantees may not be adequate to cover lost revenues, increased
expenses or liquidated damage payments.

Our business is subject to
substantial governmental regulation and permitting requirements as well as on-site
environmental liabilities. We may be adversely affected by any future inability to comply
with existing or future regulations or requirements or the potentially high cost of
complying with such requirements.

Our business is subject to extensive
energy, environmental and other laws and regulations of federal, state and local
authorities. We generally are required to obtain and comply with a wide variety of
licenses, permits and other approvals in order to operate our facilities. In the course of
complying with these requirements, we may incur significant additional costs. If we fail
to comply with these requirements, we could be subject to civil or criminal liability and
the imposition of liens or fines. In addition, existing regulations may be revised or
reinterpreted, new laws and regulations may be adopted or become applicable to us or our
facilities, and future changes in laws and regulation may have a detrimental effect on our
business.

We strive at all times to be in
compliance with all applicable environmental laws and regulations. However, steps to bring
our facilities into compliance, if necessary, could be expensive, and thus could adversely
affect our results of operation and financial condition. Furthermore, with the continuing
trends toward stricter standards, greater regulation, more extensive permitting
requirements and an increase in the assets we operate, we expect our environmental
expenditures to be substantial in the future.

Ongoing changes in the United
States utility industry, such as state and federal regulatory changes, a potential
increase in the number of our competitors or the imposition of price limitations to
address market volatility, could adversely affect our profitability.

The United States electric utility
industry is currently experiencing increasing competitive pressures as a result of:

| |  |  | consumer
demands;
| | - |  | -----------------

| |  |  | technological
advances;
| | - |  | -----------------------

| |  |  | deregulation;
| | - |  | -------------

| |  |  | greater
availability of natural gas-fired power generation; and
| | - |  | ---------------------------------------------------------------

| |  |  | other
factors.
| | - |  | --------------

FERC has implemented and continues to
propose regulatory changes to increase access to the nationwide transmission grid by
utility and non-utility purchasers and sellers of electricity. In addition, a number of
states have implemented or are considering or currently implementing methods to introduce
and promote retail competition. Industry deregulation in some states has led to the
disaggregation of some vertically integrated utilities into separate generation,
transmission and distribution businesses, and deregulation initiatives in a number of
states may encourage further disaggregation. As a result, significant additional
competitors could become active in the generation, transmission and distribution segments
of our industry.

8

---

In addition, the independent system
operators who oversee most of the wholesale power markets have in the past imposed, and
may in the future continue to impose, price limitations and other mechanisms to address
some of the volatility in these markets. These types of price limitations and other
mechanisms may adversely affect the profitability of selling energy into the wholesale
power markets. Given the extreme volatility and lack of meaningful long-term price history
in some of these markets and the imposition of price limitations by independent system
operators, we may not be able to operate profitably in all wholesale power markets.

# Safe Harbor for
Forward Looking Information

This Annual Report on Form 10-K
includes forward-looking statements as defined by the Securities and Exchange
Commission, or SEC. We make these forward-looking statements in reliance on the safe
harbor protections provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical facts, included in this Form 10-K that
address activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements. These forward-looking statements
are based on assumptions which we believe are reasonable based on current expectations and
projections about future events and industry conditions and trends affecting our business.
However, whether actual results and developments will conform to our expectations and
predictions is subject to a number of risks and uncertainties that, among other things,
could cause actual results to differ materially from those contained in the
forward-looking statements, including the risk factors described in Item 1 of this Form
10-K and the following:

| |  |  | Our
ability to access the debt and equity markets, which will depend on general market
conditions and the credit ratings for our debt obligations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | General
economic and political conditions, including tax rates or policies and inflation rates;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | The
creditworthiness of counterparties and defaults on amounts due from counterparties;
| | - |  | ---------------------------------------------------------------------------------------

| |  |  | The
amount of collateral required to be posted from time to time in our transactions;
| | - |  | -------------------------------------------------------------------------------------

| |  |  | Changes
in or compliance with laws and regulations, particularly those relating to taxation,
safety and protection of the environment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
timing and extent of changes in energy-related and commodity prices, interest rates,
energy and commodity supply or volume, the cost of transportation of commodities, and
demand for our services, all of which can affect our earnings, liquidity position and the
underlying value of our assets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Weather
and other natural phenomena;
| | - |  | ------------------------------------

| |  |  | Industry
and market changes, including the impact of consolidations and changes in competition;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | The
effect of accounting policies issued periodically by accounting standard-setting bodies;
| | - |  | --------------------------------------------------------------------------------------------

| |  |  | The
cost and effects on our business, including insurance, resulting from terrorist actions
or responses to such actions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------

| |  |  | Capital
market conditions which may affect our ability to raise capital on favorable terms;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | Price
risk due to marketable securities held as investments in benefit plans; and
| | - |  | ---------------------------------------------------------------------------------

| |  |  | Other
factors discussed from time to time in our filings with the SEC.
| | - |  | ----------------------------------------------------------------------

New factors that could cause actual results
to differ materially from those described in forward-looking statements emerge from time
to time, and it is not possible for us to predict all such factors, or the extent to which
any such factor or combination of factors may cause actual results to differ from those
contained in any forward-looking statement. We assume no obligation to update publicly any
such forward-looking statements, whether as a result of new information, future events, or
otherwise.

9

---

# ITEM 3.      
LEGAL PROCEEDINGS

Information regarding our legal
proceedings is incorporated herein by reference to the Legal Proceedings
subcaption within Item 8, Note 10, Commitments and Contingencies, of our Notes
to Financial Statements in this Annual report on Form 10-K.

# PART II

# ITEM 5.     
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

All of our common stock is held by
our parent company, Black Hills Corporation. Accordingly, there is no established trading
market for our common stock.

# ITEM 7.     
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

In 2003, we made a non-cash dividend
to our parent company, Black Hills Corporation, consisting of our 100 percent ownership in
Black Hills Generation, Inc., formerly known as Black Hills Energy Capital, Inc. As a
result, we no longer have any subsidiaries and operate only in the electric utility
business.

# Results of Operations

|                                  | 2004 | 2003 | 2002
|--------------------------------- | ---- | ---- | ----
|
|Revenue                           |      |      | $   
|Operating expenses                |      |      |     
|                                  |      |      |     
|Operating income                  |      |      | $   
|                                  |      |      |     
|Income from continuing operations |      |      | $   
|                                  |      |      |     

The following table provides certain
electric utility operating statistics:

|                           | 2004 | 2003 | 2002
|-------------------------- | ---- | ---- | ----
|Firm electric sales - MWh  |      |      |     
|Wholesale off-system - MWh |      |      |     

We currently have a winter peak load of
344 megawatts established in December 1998 and a summer peak load of 392 megawatts
established in August 2001. We own 435 megawatts of electric utility generating capacity
and purchase an additional 50 megawatts under a long-term agreement.

10

---

2004 Compared to 2003

Electric revenue increased 2 percent
in 2004 compared to 2003, primarily due to a 16 percent increase in wholesale off-system
sales offset by decreased transmission revenues due to lower approved rates and higher
load share of our Open Access Transmission Tariff revenues.

Firm kilowatt-hour sales decreased 2
percent. Residential and commercial sales decreases of 3 percent and 2 percent,
respectively, in 2004 accounted for a $1.7 million decrease in revenue. These decreases
were partially offset by a 1 percent increase in industrial sales. The 16 percent increase
in wholesale off-system sales accounted for a $5.9 million increase in revenues.

Revenue per kilowatt-hour sold was
5.5 cents in 2004 compared to 5.6 cents in 2003. The number of customers in the service
area increased to 62,259 in 2004 from 61,148 in 2003. Degree days, which is a measure of
weather trends, were 11 percent below last year and 9 percent below normal.

Electric utility operating expenses
increased $10.0 million due to a $5.9 million increase in fuel and purchased power cost, a
$4.5 million increase in certain operations and maintenance costs and administrative and
general costs, including scheduled and unscheduled maintenance costs, increased group
insurance and corporate allocations and increased costs associated with the increase in
wholesale off-system sales, partially offset by decreased interest expense of $0.9
million, primarily due to retirement of debt.

The increase in fuel and purchased
power cost was due to an $11.8 million increase in purchased power costs, offset by a $5.9
million decrease in fuel costs, as prevailing gas prices made it more economical for us to
purchase power for our peaking needs and increased off-system sales, rather than generate
energy utilizing our gas turbines.

2003 Compared to 2002

Electric revenue increased 5 percent
in 2003, compared to 2002, primarily due to an 18 percent increase in wholesale off-system
sales at an average price that was 24 percent higher than the average price in 2002.

Firm kilowatt-hour sales increased 1
percent. Residential and commercial sales increases of 2 percent and 3 percent,
respectively, in 2003 accounted for a $2.1 million increase in revenue. The 18 percent
increase in wholesale off-system sales accounted for a $5.8 million increase in revenues.
These increases were off-set by a 4 percent decrease in industrial sales, primarily due to
the closing of Homestake Mine, which had been one of our largest customers.

Revenue per kilowatt-hour sold was
5.6 cents in 2003 compared to 5.3 cents in 2002. The number of customers in the service
area increased to 61,148 in 2003 from 59,948 in 2002.

Electric utility operating expenses
increased $15.9 million due to a $10.1 million increase in fuel and purchase power cost, a
$3.7 million increase in certain operations and maintenance costs and administrative and
general costs, including pension expense, a $1.5 million increase in depreciation expense
and a $2.5 million increase in interest expense due to the full year impact of $75 million
of first mortgage bonds issued in August 2002.

The increase in fuel cost is due to a
77 percent increase in average gas prices for combustion turbine generation facilities and
a 19 percent increase in average megawatt-hour purchased power costs.

11

---

ITEM 8.     
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                                | 
|------------------------------------------------------------------------------- | 
|Report of Independent Registered Public Accounting Firm                         | 
|Consolidated Statements of Income                                               | 
|for the three years ended December 31, 2004                                     | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                    | 
|Consolidated Statements of Cash Flows                                           | 
|for the three years ended December 31, 2004                                     | 
|Consolidated Statements of Common Stockholder's Equity and Comprehensive Income | 
|for the three years ended December 31, 2004                                     | 
|Notes to Consolidated Financial Statements                                      | 

12

---

REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholder of
Black Hills Power, Inc. Rapid City, South Dakota

We have audited the accompanying
consolidated balance sheets of Black Hills Power, Inc. and subsidiaries (the Company) as
of December 31, 2004 and 2003, and the related consolidated statements of income, common
stockholders equity and comprehensive income, and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting.Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial position of
Black Hills Power, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the
United States of America.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
March 10, 2005

13

---

# BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF INCOME

|2004                                                   | 2003 | 2002
|------------------------------------------------------ | ---- | ----
|
|Operating revenues                                     |      |     
|                                                       |      |     
|Operating expenses:                                    |      |     
|Fuel and purchased power                               |      |     
|Operations and maintenance                             |      |     
|Administrative and general                             |      |     
|Depreciation and amortization                          |      |     
|Taxes, other than income taxes                         |      |     
|                                                       |      |     
|                                                       |      |     
|                                                       |      |     
|Operating income                                       |      |     
|                                                       |      |     
|Other (expense) income:                                |      |     
|Interest expense                                       |      |     
|Interest income                                        |      |     
|Other expense                                          |      |     
|Other income                                           |      |     
|                                                       |      |     
|                                                       |      |     
|                                                       |      |     
|Income from continuing operations before income taxes  |      |     
|Income taxes                                           |      |     
|                                                       |      |     
|Income from continuing operations                      |      |     
|Discontinued operations, net of income taxes (Note 11) |      |     
|                                                       |      |     
|Net income                                             |      |     
|                                                       |      |     

| | The
accompanying notes to financial statements are an integral part of these financial
statements.
| | --------------------------------------------------------------------------------------------------

14

---

# BLACK HILLS POWER, INC.
CONSOLIDATED BALANCE SHEETS

|2004                                                                  | 2003
|--------------------------------------------------------------------- | ----
|
|ASSETS                                                                |     
|Current assets:                                                       |     
|Cash and cash equivalents                                             |     
|Restricted cash                                                       |     
|Receivables (net of allowance for doubtful accounts of $912 and $898, |     
|respectively) -                                                       |     
|Customers                                                             |     
|Affiliates                                                            |     
|Other                                                                 |     
|Materials, supplies and fuel                                          |     
|Prepaid income taxes                                                  |     
|Other current assets                                                  |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|Investments                                                           |     
|                                                                      |     
|Property, plant and equipment                                         |     
|Less accumulated depreciation                                         |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|Other assets:                                                         |     
|Regulatory asset                                                      |     
|Other                                                                 |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|LIABILITIES AND STOCKHOLDER'S EQUITY                                  |     
|Current liabilities:                                                  |     
|Current maturities of long-term debt                                  |     
|Accounts payable                                                      |     
|Accounts payable - affiliate                                          |     
|Note payable - affiliate                                              |     
|Accrued liabilities                                                   |     
|Deferred income taxes                                                 |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|Long-term debt, net of current maturities                             |     
|                                                                      |     
|Deferred credits and other liabilities:                               |     
|Deferred income taxes                                                 |     
|Regulatory liability                                                  |     
|Other                                                                 |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|Commitments and contingencies (Notes 8 and 10)                        |     
|Stockholder's equity:                                                 |     
|Common stock $1 par value; 50,000,000 shares authorized;              |     
|Issued: 23,416,396 shares in 2004 and 2003                            |     
|Additional paid-in capital                                            |     
|Retained earnings                                                     |     
|Accumulated other comprehensive loss                                  |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|                                                                      |     
|                                                                      |     

| | The
accompanying notes to financial statements are an integral part of these financial
statements.
| | --------------------------------------------------------------------------------------------------

15

---

# BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|2004                                                        | 2003 | 2002
|----------------------------------------------------------- | ---- | ----
|
|Operating activities:                                       |      |     
|Net income                                                  |      |     
|Adjustments to reconcile net income to net cash             |      |     
|provided by operating activities-                           |      |     
|Income from discontinued operations                         |      |     
|Depreciation and amortization                               |      |     
|Provision for valuation allowances                          |      |     
|Deferred income taxes                                       |      |     
|Change in operating assets and liabilities-                 |      |     
|Accounts receivable and other current assets                |      |     
|Accounts payable and other current liabilities              |      |     
|Other operating activities                                  |      |     
|                                                            |      |     
|                                                            |      |     
|                                                            |      |     
|Investing activities:                                       |      |     
|Property, plant and equipment additions                     |      |     
|Notes receivable from associated companies, net             |      |     
|Other investing activities                                  |      |     
|                                                            |      |     
|                                                            |      |     
|                                                            |      |     
|Financing activities:                                       |      |     
|Dividends paid on common stock                              |      |     
|Note payable to associated companies                        |      |     
|Long-term debt - issuance                                   |      |     
|Long-term debt - repayments                                 |      |     
|Other financing activities                                  |      |     
|                                                            |      |     
|                                                            |      |     
|                                                            |      |     
|Increase (decrease) in cash and cash equivalents            |      |     
|Cash and cash equivalents:                                  |      |     
|Beginning of year                                           |      |     
|                                                            |      |     
|End of year                                                 |      |     
|                                                            |      |     
|Supplemental disclosure of cash flow information:           |      |     
|Cash paid during the period for-                            |      |     
|Interest                                                    |      |     
|Income taxes                                                |      |     
|Stock dividend distribution to Black Hills Corporation, the |      |     
|parent company of Black Hills Power, Inc. (Note 11)         |      |     

| | The
accompanying notes to financial statements are an integral part of these financial
statements.
| | --------------------------------------------------------------------------------------------------

16

---

# BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY 
AND COMPREHENSIVE INCOME

|                             |  |  |  |        | Accumulated |  
|---------------------------- |  |  |  | ------ | ----------- | -
|
|
|
|
|Balance at December 31, 2001 |  |  |  | 23,416 |             | $
|                             |  |  |  |        |             |  
|Comprehensive Income:        |  | 
|Net income                   |  |  |  | --     |             |  
|Other comprehensive loss,    |  | 
|net of tax (see Note 7)      |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Total comprehensive income   |  |  |  | --     |             |  
|Dividends on common stock    |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Balance at December 31, 2002 |  |  |  | 23,416 |             |  
|                             |  |  |  |        |             |  
|Comprehensive Income:        |  | 
|Net income                   |  |  |  | --     |             |  
|Other comprehensive income,  |  | 
|net of tax (see Note 7)      |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Total comprehensive income   |  |  |  | --     |             |  
|Non-cash dividend to Parent  |  |  |  | --     |             |  
|Dividends on common stock    |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Balance at December 31, 2003 |  |  |  | 23,416 |             |  
|                             |  |  |  |        |             |  
|Comprehensive Income:        |  | 
|Net income                   |  |  |  | --     |             |  
|Other comprehensive income,  |  | 
|net of tax (see Note 7)      |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Total comprehensive income   |  |  |  | --     |             |  
|Dividends on common stock    |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Balance at December 31, 2004 |  |  |  | 23,416 |             | $
|                             |  |  |  |        |             |  

| | The
accompanying notes to financial statements are an integral part of these financial
statements.
| | --------------------------------------------------------------------------------------------------

17

---

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002

# (1)     
BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

# Business Description

Black Hills Power, Inc. (the Company)
is an electric utility serving customers in South Dakota, Wyoming and Montana. The Company
is a wholly owned subsidiary of the publicly traded Black Hills Corporation, a registered
public utility holding company, (the Parent).

# Principles of
Consolidation

The consolidated financial statements
include the accounts of Black Hills Power, Inc. and its wholly-owned subsidiaries. As
discussed in Note 11, the Company has distributed the stock held in its subsidiaries in
the form of non-cash dividends to the Parent. These distributions represented 100 percent
ownership of the subsidiaries. Activity at the subsidiaries was recorded up to the date of
distribution and has been reclassified into Discontinued operations in the
accompanying consolidated financial statements.

# Use of Estimates

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. The most significant estimates relate to
allowance for uncollectible accounts receivable, long-lived asset values and useful lives,
employee benefits plans and contingencies. Actual results could differ from those
estimates.

# Regulatory Accounting

The Companys regulated electric
operations are subject to regulation by various state and federal agencies. The accounting
policies followed are generally subject to the Uniform System of Accounts of the Federal
Energy Regulatory Commission (FERC).

The Companys electric
operations follow the provisions of the Financial Accounting Standards Board (FASB) of
Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation (SFAS 71), and its financial statements
reflect the effects of the different ratemaking principles followed by the various
jurisdictions regulating its electric operations. As a result of the Companys 1995
rate case settlement, a 50-year depreciable life for Neil Simpson II is used for financial
reporting purposes. If the Company were not following SFAS 71, a 35 to 40 year life would
be more appropriate, which would increase depreciation expense by approximately $0.6
 $1.1 million per year. If rate recovery of generation-related costs becomes
unlikely or uncertain, due to competition or regulatory action, these accounting standards
may no longer apply to the Companys regulated generation operations. In the event
the Company determines that it no longer meets the criteria for following SFAS 71, the
accounting impact to the Company would be an extraordinary non-cash charge to operations
of an amount that could be material. Criteria that give rise to the discontinuance of SFAS
71 include increasing competition that could restrict the Companys ability to
establish prices to recover specific costs and a significant change in the manner in which
rates are set by regulators from cost-based regulation to another form of regulation. The
Company periodically reviews these criteria to ensure the continuing application of SFAS
71 is appropriate.

At December 31, 2004 and 2003, the
Company had regulatory assets of $7.2 million and $4.6 million and regulatory liabilities
of $6.0 million and $6.3 million, respectively. Regulatory assets are primarily recorded
for the probable future revenue to recover future income taxes related to the deferred tax
liability for the equity component of allowance for funds used during construction of
utility assets and for unamortized losses on reacquired debt. Regulatory liabilities
include the probable future decrease in rate revenues related to a decrease in deferred
tax liabilities for prior reductions in statutory federal income tax rates and also the
cost of removal for utility plant, recovered through the Companys electric utility
rates.

18

---

# Cash Equivalents

The Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.

# Materials, Supplies and
Fuel

Materials, supplies and fuel used for
construction, operation and maintenance purposes are generally stated at cost on a
weighted-average basis.

# Deferred Financing Costs

Deferred financing costs are
amortized using the effective interest method over the term of the related debt.

# Property, Plant and
Equipment

Additions to property, plant and
equipment are recorded at cost when placed in service. Included in the cost of regulated
construction projects is an allowance for funds used during construction (AFUDC) which
represents the approximate composite cost of borrowed funds and a return on capital used
to finance the project. The AFUDC was computed at an annual composite rate of 9.8 percent
during 2004 and 2003, and 9.1 percent during 2002, respectively. The amount of AFUDC was
approximately $0.2 million, $0.1 million, and $0.9 million in 2004, 2003 and 2002,
respectively. The cost of regulated electric property, plant and equipment retired, or
otherwise disposed of in the ordinary course of business, less salvage, is charged to
accumulated depreciation. Repairs and maintenance of property are charged to operations as
incurred.

Depreciation provisions for regulated
electric property, plant and equipment is computed on a straight-line basis using an
annual composite rate of 3.0 percent in 2004 and 3.1 percent in 2003 and 2002.

# Impairment of Long-Lived
Assets

The Company periodically evaluates
whether events and circumstances have occurred which may affect the estimated useful life
or the recoverability of the remaining balance of its long-lived assets. If such events or
circumstances were to indicate that the carrying amount of these assets was not
recoverable, the Company would estimate the future cash flows expected to result from the
use of the assets and their eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) was less than the carrying amount of the
long-lived assets, the Company would recognize an impairment loss. No impairment loss was
recorded during 2004, 2003 or 2002.

# Income Taxes

The Company uses the liability method
in accounting for income taxes. Under the liability method, deferred income taxes are
recognized, at currently enacted income tax rates, to reflect the tax effect of temporary
differences between the financial and tax basis of assets and liabilities. Such temporary
differences are the result of provisions in the income tax law that either require or
permit certain items to be reported on the income tax return in a different period than
they are reported in the financial statements. The Company classifies deferred tax assets
and liabilities into current and non-current amounts based on the classification of the
related assets and liabilities.

The Company files a federal income
tax return with other affiliates. For financial statement purposes, federal income taxes
are allocated to the individual companies based on amounts calculated on a separate return
basis.

# Revenue Recognition

Revenue is recognized when there is
persuasive evidence of an arrangement with a fixed or determinable price, delivery has
occurred or services have been rendered, and collectibility is reasonably assured.

19

---

# Reclassifications

Certain 2003 and 2002 amounts in the
financial statements have been reclassified to conform to the 2004 presentation. These
reclassifications had no effect on the Companys common stockholders equity or
results of operations, as previously reported.

# Recently Adopted
Accounting Pronouncements

FSP 106-2

In May 2004, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) No. 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP 106-2), which provides guidance on the accounting for
the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(2003 Medicare Act) for employers that sponsor postretirement healthcare plans that
provide prescription drug benefits. If the Plan is deemed actuarially equivalent to the
prescription drug benefit under the 2003 Medicare Act, the sponsor of the Plan could be
eligible for a federal subsidy. FSP 106-2 supersedes FSP 106-1 that was issued in January
2004 under the same title. FSP 106-2 is effective for the first interim period beginning
after June 15, 2004. The Company provides prescription drug benefits to certain eligible
employees. The actuarial measurement of the accumulated postretirement benefit obligation
and net periodic postretirement benefit cost does not include the effects of the 2003
Medicare Act as it is believed the Plan is not actuarially equivalent (see Note 8).

# (2)     
PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at
December 31, consisted of the following (in thousands):

|                                                                |  |  | Lives
|--------------------------------------------------------------- |  |  | -----
|
|Electric plant:                                                 |  |  |      
|Production                                                      |  |  | $    
|Transmission*                                                   |  |  |      
|Distribution*                                                   |  |  |      
|General                                                         |  |  |      
|                                                                |  |  |      
|Total electric plant                                            |  |  |      
|Less accumulated depreciation and amortization                  |  |  |      
|                                                                |  |  |      
|Electric plant net of accumulated depreciation and amortization |  |  |      
|Construction work in progress                                   |  |  |      
|                                                                |  |  |      
|Net electric plant                                              |  |  | $    
|                                                                |  |  |      

_________________

|* |  | As part of the Common Use Transmission Open-Access Transmission Tariff FERC filing that
was originally made in 2003, the majority of 69KV lines and substation costs were
reclassified from Transmission to Distribution assets.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

# (3)     
JOINTLY OWNED FACILITIES

The Company owns a 20 percent
interest and PacifiCorp owns an 80 percent interest in the Wyodak Plant (Plant), a 362
megawatt coal-fired electric generating station located in Campbell County, Wyoming.
PacifiCorp is the operator of the Plant. The Company receives 20 percent of the
Plants capacity and is committed to pay 20 percent of its additions, replacements
and operating and maintenance expenses. As of December 31, 2004, the Companys
investment in the Plant included $73.4 million in electric plant and $34.5 million in
accumulated depreciation, and is included in the corresponding captions in the
accompanying Consolidated Balance Sheets. The Companys share of direct expenses of
the Plant was $6.0 million, $5.8 million and $5.5 million for the years ended December 31,
2004, 2003 and 2002, respectively, and is included in the corresponding categories of
operating expenses in the accompanying Statements of Income.

The Company also owns a 35 percent
interest and Basin Electric Power Cooperative owns a 65 percent interest in the Converter
Station Site and South Rapid City Interconnection (the transmission tie), an AC-DC-AC
transmission tie placed into service in the fourth quarter of 2003. The transmission tie
provides an interconnection between the Western and Eastern transmission grids, which
provides us with access to both the Western Electricity Coordinating Council (WECC) region
and the Mid-Continent Area Power Pool, or MAPP region. The total transfer
capacity of the tie is 400 megawatts  200 megawatts West to East and 200 megawatts
from East to West. The Company is committed to pay 35 percent of the additions,
replacements and operating and maintenance expenses. For the twelve months ended December
31, 2004, the Companys share of direct expenses was $0.1 million. As of December 31,
2004, the Companys investment in the transmission tie was $19.7 million.

# (4)     
LONG-TERM DEBT

Long-term debt outstanding at
December 31, is as follows:

|                                                     | 2004 | 2003
|---------------------------------------------------- | ---- | ----
|
|First mortgage bonds:                                |      |     
|8.06% due 2010                                       |      |     
|9.49% due 2018                                       |      |     
|9.35% due 2021                                       |      |     
|8.30% repaid 2004                                    |      |     
|7.23% due 2032                                       |      |     
|                                                     |      |     
|                                                     |      |     
|                                                     |      |     
|Other long-term debt:                                |      |     
|Pollution control revenue bonds at 6.7% due 2010(a)  |      |     
|Pollution control revenue bonds at 4.8% due 2014(b)  |      |     
|Pollution control revenue bonds at 7.5% due 2024     |      |     
|Pollution control revenue bonds at 5.35% due 2024(b) |      |     
|Other(c)                                             |      |     
|                                                     |      |     
|                                                     |      |     
|                                                     |      |     
|Total long-term debt                                 |      |     
|Less current maturities                              |      |     
|                                                     |      |     
|Net long-term debt                                   |      |     
|                                                     |      |     

_________________

|(a) |  | In September 2004, the Company called $5.9 million of pollution control revenue
               bonds without converting into another form of debt.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | In the fourth quarter of 2004, the Company called and refinanced $18.7 million
               of pollution control revenue bonds.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(c) |  | At
December 31, 2004, the Company had $3.1 million of cash restricted to maintain liquidity for our
$2.9 million Series 94A bond issue. The Company anticipates it will continue to maintain this                level of restricted cash as
liquidity for the bond issue until a replacement liquidity facility is implemented.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

---

Substantially all of the
Companys property is subject to the lien of the indenture securing its first
mortgage bonds. First mortgage bonds of the Company may be issued in amounts limited by
property, earnings and other provisions of the mortgage indentures.

Scheduled maturities are
approximately $2.0 million a year for the years 2005 through 2009.

# (5)     
FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of the
Companys financial instruments at December 31, are as follows (in thousands):

|                          | 2004 | 2003
|------------------------- | ---- | ----
|
|Cash and cash equivalents |      |     
|Long-term debt            |      |     

The following methods and assumptions
were used to estimate the fair value of each class of the Companys financial
instruments.

# Cash and Cash
Equivalents and Restricted Cash

The carrying amount approximates fair
value due to the short maturity of these instruments.

# Long-Term Debt

The fair value of the Companys
long-term debt is estimated based on quoted market rates for debt instruments having
similar maturities and similar debt ratings. The Companys outstanding first mortgage
bonds are either currently not callable or are subject to make-whole provisions which
would eliminate any economic benefits for the Company to call and refinance the first
mortgage bonds.

# (6)     
INCOME TAXES

Income tax expense from continuing
operations for the years ended December 31 was (in thousands):

|         | 2004 | 2003 | 2002
|-------- | ---- | ---- | ----
|Current  |      |      | $   
|Deferred |      |      |     
|         |      |      |     
|         |      |      | $   
|         |      |      |     

22

---

The temporary differences which gave
rise to the net deferred tax liability were as follows (in thousands):

|2004                                                         | 2003
|------------------------------------------------------------ | ----
|Deferred tax assets, current:                                |     
|Valuation reserve                                            |     
|Employee benefits                                            |     
|Other                                                        |     
|                                                             |     
|                                                             |     
|                                                             |     
|Deferred tax liabilities, current:                           |     
|Prepaid expenses                                             |     
|Employee benefits                                            |     
|                                                             |     
|                                                             |     
|                                                             |     
|Net deferred tax liability, current                          |     
|                                                             |     
|Deferred tax assets, non-current:                            |     
|Regulatory asset                                             |     
|ITC                                                          |     
|Items of other comprehensive income                          |     
|Other                                                        |     
|                                                             |     
|                                                             |     
|                                                             |     
|Deferred tax liabilities, non-current:                       |     
|Accelerated depreciation and other plant related differences |     
|AFUDC                                                        |     
|Regulatory liability                                         |     
|Items of other comprehensive income                          |     
|Other                                                        |     
|                                                             |     
|                                                             |     
|                                                             |     
|Net deferred tax liability, non-current                      |     
|                                                             |     
|Net deferred tax liability                                   |     
|                                                             |     

The following table reconciles the
change in the net deferred income tax liability from December 31, 2003, to December 31,
2004, to deferred income tax expense (in thousands):

|                                                                                            | 2004
|------------------------------------------------------------------------------------------- | ----
|Increase in deferred income tax liability from the preceding table                          |     
|Deferred taxes associated with ITC                                                          |     
|Deferred taxes associated with other comprehensive loss                                     |     
|Deferred taxes associated with 2003 federal income tax return true-up, primarily related to |     
|depreciation                                                                                |     
|                                                                                            |     
|Deferred income tax expense for the period                                                  |     
|                                                                                            |     

23

---

The effective tax rate differs from
the federal statutory rate for the years ended December 31, as follows:

|                                                           | 2004 | 2003 | 2002
|---------------------------------------------------------- | ---- | ---- | ----
|Federal statutory rate                                     |      |      |     
|Amortization of excess deferred and investment tax credits |      |      |     
|Research and development credit                            |      |      |     
|Other                                                      |      |      |     
|                                                           |      |      |     
|                                                           |      |      |     
|                                                           |      |      |     

# (7)     
OTHER COMPREHENSIVE INCOME (LOSS)

The following tables display the
related tax effects allocated to each component of Other Comprehensive Income (Loss) for
the years ended December 31, (in thousands):

|                                                                     | 2004
|-------------------------------------------------------------------- | ----
|
|
|Minimum pension liability adjustment                                 |     
|Amortization of cash flow hedges settled and deferred in accumulated |     
|other comprehensive loss and reclassified into interest expense      |     
|                                                                     |     
|Other comprehensive income                                           |     
|                                                                     |     

|                                                                       | 2003
|---------------------------------------------------------------------- | ----
|
|
|Minimum pension liability adjustment                                   |     
|Net change in fair value of derivatives designated as cash flow hedges |     
|associated with discontinued operations                                |     
|Amortization of cash flow hedges settled and deferred in accumulated   |     
|other comprehensive loss and reclassified into interest expense        |     
|                                                                       |     
|Other comprehensive income                                             |     
|                                                                       |     

|                                                                        | 2002
|----------------------------------------------------------------------- | ----
|
|
|Net change in fair value of derivatives designated as cash flow hedges, |     
|including some of which have been classified into discontinued          |     
|operations                                                              |     
|Minimum pension liability adjustment                                    |     
|                                                                        |     
|Other comprehensive loss                                                |     
|                                                                        |     

24

---

# (8)     
EMPLOYEE BENEFIT PLANS

# Defined Benefit Pension
Plan

The Company has a noncontributory
defined benefit pension plan (Plan) covering the employees of the Company. The benefits
are based on years of service and compensation levels during the highest five consecutive
years of the last ten years of service. The Companys funding policy is in accordance
with the federal governments funding requirements. The Plans assets are held
in trust and consist primarily of equity securities. The Company uses a September 30
measurement date for the Plan.

Obligations and Funded
Status

Change in benefit obligation:

|                                                  | 2004 | 2003
|------------------------------------------------- | ---- | ----
|
|Projected benefit obligation at beginning of year |      |     
|                                                  |      |     
|Service cost                                      |      |     
|Interest cost                                     |      |     
|Actuarial (gain) loss                             |      |     
|Discount rate change                              |      |     
|Benefits paid                                     |      |     
|Taxable wage rate and cost of living rate change  |      |     
|                                                  |      |     
|Net increase                                      |      |     
|                                                  |      |     
|Projected benefit obligation at end of  year      |      |     
|                                                  |      |     

A reconciliation of the fair value of
Plan assets (as of the September 30 measurement date) is as follows:

|                                      | 2004 | 2003
|------------------------------------- | ---- | ----
|
|Beginning market value of plan assets |      |     
|Benefits paid                         |      |     
|Investment income                     |      |     
|Employer contributions                |      |     
|                                      |      |     
|Ending market value of plan assets    |      |     
|                                      |      |     

25

---

Funding information for the Plan is
as follows:

|                             | 2004 | 2003
|---------------------------- | ---- | ----
|
|Fair value of plan assets    |      |     
|Projected benefit obligation |      |     
|                             |      |     
|Funded status                |      |     
|Unrecognized:                |      |     
|Net loss                     |      |     
|Prior service cost           |      |     
|                             |      |     
|Net amount recognized        |      |     
|                             |      |     

Amounts recognized in statement of
financial position consist of:

|                               | 2004 | 2003
|------------------------------ | ---- | ----
|
|Net pension asset              |      |     
|                               |      |     
|Accumulated benefit obligation |      |     
|                               |      |     

The provisions of SFAS No. 87
Employers Accounting for Pensions (SFAS 87) required the Company to
record a net pension asset of $9.5 million and $10.9 million at December 31, 2004 and
2003, respectively and is included in the line item Other in Other assets on the
accompanying Balance Sheets.

Components of Net
Periodic Pension Expense

|                                   | 2004 | 2003 | 2002
|---------------------------------- | ---- | ---- | ----
|
|Service cost                       |      |      | $   
|Interest cost                      |      |      |     
|Expected return on assets          |      |      |     
|Amortization of prior service cost |      |      |     
|Recognized net actuarial loss      |      |      |     
|                                   |      |      |     
|Net pension (income) expense       |      |      | $   
|                                   |      |      |     

Additional Information

|                                               | 2004 | 2003
|---------------------------------------------- | ---- | ----
|
|Pre-tax amount included in other comprehensive |      |     
|income (loss) arising from a change in the     |      |     
|additional minimum pension liability           |      |     
|                                               |      |     

26

---

Assumptions

|                                               | 2004 | 2003
|---------------------------------------------- | ---- | ----
|Weighted-average assumptions used to determine |      |     
|benefit obligations:                           |      |     
|Discount rate                                  |      |     
|Rate of increase in compensation levels        |      |     

|                                                   | 2004 | 2003 | 2002
|-------------------------------------------------- | ---- | ---- | ----
|Weighted-average assumptions used to determine net |      |      |     
|periodic benefit cost for plan year:               |      |     
|Discount rate                                      |      |      |     
|Expected long-term rate of return on assets*       |      |      |     
|Rate of increase in compensation levels            |      |      |     

_________________

|* |  | The expected rate of return on plan assets was changed from 9.5 percent in 2004 to 9.0
percent for the calculation of the 2005 net periodic pension cost. This change is expected
to increase pension costs in 2005 by approximately $0.2 million.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Plans expected long-term
rate of return on assets assumption is based upon the weighted average expected long-term
rate of returns for each individual asset class. The asset class weighting is determined
using the target allocation for each asset class in the Plan portfolio. The expected
long-term rate of return for each asset class is determined primarily from long-term
historical returns for the asset class, with adjustments if it is anticipated that
long-term future returns will not achieve historical results.

The expected long-term rate of return
for equity investments was 10.0 percent and 10.5 percent for the 2004 and 2003 plan years,
respectively. For determining the expected long-term rate of return for equity assets, the
Company reviewed annual 20-, 30-, 40-, and 50-year returns on the S&P 500 Index, which
were, at December 31, 2004, 13.2 percent, 13.7 percent, 10.4 percent and 10.9 percent
respectively. Fund management fees were estimated to be 0.18 percent for S&P 500 Index
assets and 0.45 percent for other assets. The expected long-term rate of return on fixed
income investments was 6.0 percent; the return was based upon historical returns on
intermediate-term treasury bonds of 6.3 percent from 1950 to 2002. The expected long-term
rate of return on cash investments was estimated to be 4.0 percent; expected cash returns
were estimated to be 2.0 percent below long-term returns on intermediate-term treasury
bonds.

Plan Assets

Percentage of fair value of Plan
assets at September 30:

|                | 2004 | 2003
|--------------- | ---- | ----
|Domestic equity |      |     
|Foreign equity  |      |     
|Fixed income    |      |     
|Cash            |      |     
|                |      |     
|Total           |      |     
|                |      |     

_________________

(a)    
          Allocation includes $6.9 million cash contribution made to the plan on September
          30, 2003.

27

---

The Plans investment policy
includes a target asset allocation as follows:

|Asset Class    | Target Allocation
|-------------- | -----------------
|US Stocks      |                  
|Foreign Stocks |                  
|Fixed Income   |                  
|Cash           |                  

The Plans investment policy includes
the investment objective that the achieved long-term rate of return meet or exceed the
assumed actuarial rate. The policy strategy seeks to prudently invest in a diversified
portfolio of predominately equity-based assets. The policy provides that the Plan will
maintain a passive core US Stock portfolio based on the S&P 500 Index. Complementing
this core will be investments in US and foreign equities through actively managed mutual
funds.

The policy contains certain
prohibitions on transactions in separately managed portfolios in which the Plan may
invest, including prohibitions on short sales and the use of options or futures contracts.
With regards to pooled funds, the policy requires the evaluation of the appropriateness of
such funds for managing Plan assets if a fund engages in such transactions. The Plan has
historically not invested in funds engaging in such transactions.

Cash Flows

The Company does not anticipate any
employer contributions to the Plan in 2005.

Estimated Future Benefit
Payments

The following benefit payments, which
reflect future service, are expected to be paid (in thousands):

|          | 
|--------- | 
|2005      | 
|2006      | 
|2007      | 
|2008      | 
|2009      | 
|2010-2014 | 

28

---

# Supplemental
Nonqualified Defined Benefit Retirement Plans

The Company has various supplemental
retirement plans for outside directors and key executives of the Company. The plans are
nonqualified defined benefit plans. The Company uses a September 30 measurement date for
the Plans.

Obligations and Funded
Status

|                                                  | 2004 | 2003
|------------------------------------------------- | ---- | ----
|
|Change in benefit obligation:                     |      |     
|Projected benefit obligation at beginning of year |      |     
|                                                  |      |     
|Service cost                                      |      |     
|Interest cost                                     |      |     
|Actuarial (gains) losses                          |      |     
|Benefits paid                                     |      |     
|                                                  |      |     
|Net increase                                      |      |     
|                                                  |      |     
|Projected benefit obligation at end of year       |      |     
|                                                  |      |     
|Fair value of plan assets at end of year          |      |     
|Funded status                                     |      |     
|Unrecognized net loss                             |      |     
|Unrecognized prior service cost                   |      |     
|Contributions                                     |      |     
|                                                  |      |     
|Net amount recognized                             |      |     
|                                                  |      |     

|                                                                  | 2004 | 2003
|----------------------------------------------------------------- | ---- | ----
|
|Amounts recognized in statement of financial position consist of: |      |     
|Net pension liability                                             |      |     
|Intangible asset                                                  |      |     
|Contributions                                                     |      |     
|Accumulated other comprehensive loss                              |      |     
|                                                                  |      |     
|Net amount recognized                                             |      |     
|                                                                  |      |     
|Accumulated benefit obligation                                    |      |     
|                                                                  |      |     

The provisions of SFAS 87 required
the Company to record an accrued pension liability of $1.7 million and $1.6 million at
December 31, 2004 and 2003, and is included in Deferred credits and other liabilities,
Other on the accompanying Balance Sheets.

Components of Net
Periodic Benefit Cost

|                                   | 2004 | 2003 | 2002
|---------------------------------- | ---- | ---- | ----
|
|Service cost                       |      |      | $   
|Interest cost                      |      |      |     
|Amortization of prior service cost |      |      |     
|Recognized net actuarial loss      |      |      |     
|                                   |      |      |     
|Net periodic benefit cost          |      |      | $   
|                                   |      |      |     

29

---

Additional Information

|                                               | 2004 | 2003
|---------------------------------------------- | ---- | ----
|
|Pre-tax amount included in other comprehensive |      |     
|income (loss) arising from a change in the     |      |     
|additional minimum pension liability           |      |     
|                                               |      |     

Assumptions

|                                               | 2004 | 2003
|---------------------------------------------- | ---- | ----
|Weighted-average assumptions used to determine |      |     
|benefit obligations at September 30            |      |     
|Discount rate                                  |      |     
|Rate of increase in compensation levels        |      |     

|                                                   | 2004 | 2003 | 2002
|-------------------------------------------------- | ---- | ---- | ----
|Weighted-average assumptions used to determine net |      |      |     
|periodic benefit cost for plan year                |      |     
|Discount rate                                      |      |      |     
|Rate of increase in compensation levels            |      |      |     

Plan Assets

The plan has no assets. The Company
funds on a cash basis as benefits are paid.

Estimated Cash Flows

The estimated employer contribution is
expected to be $0.1 million in 2005.

The following benefit payments, which
reflect expected future service, are expected to be paid (in thousands):

|         
|---------
|2005     
|2006     
|2007     
|2008     
|2009     
|2010-2014

# Non-pension Defined
Benefit Postretirement Plan

Employees who are participants in the
Companys Postretirement Healthcare Plan and who retire from the Company on or after
attaining age 55 after completing at least five years of service to the Company are
entitled to postretirement healthcare benefits. These benefits are subject to premiums,
deductibles, co-payment provisions and other limitations. The Company may amend or change
the Plan periodically. The Company is not pre-funding its retiree medical plan. The
Company uses a September 30 measurement date for the Plan.

These financial statements and this
Note do not reflect the effects of the 2003 Medicare Act on the postretirement benefit
plan.

30

---

Obligation and Funded
Status

|                                                                   | 2004 | 2003
|------------------------------------------------------------------ | ---- | ----
|
|Change in benefit obligation:                                      |      |     
|Accumulated postretirement benefit obligation at beginning of year |      |     
|                                                                   |      |     
|Service cost                                                       |      |     
|Interest cost                                                      |      |     
|Plan participants' contributions                                   |      |     
|Benefits paid and actual expenses                                  |      |     
|Actuarial (gains) losses                                           |      |     
|                                                                   |      |     
|Net increase                                                       |      |     
|                                                                   |      |     
|Accumulated postretirement benefit obligation at end of year       |      |     
|                                                                   |      |     
|Fair value of plan assets at end of year                           |      |     
|Funded status                                                      |      |     
|Unrecognized net loss                                              |      |     
|Unrecognized prior service cost                                    |      |     
|Unrecognized transition obligation                                 |      |     
|Contributions                                                      |      |     
|                                                                   |      |     
|Net amount recognized                                              |      |     
|                                                                   |      |     

Amounts recognized in statement of
financial position consist of:

|                                 | 2004 | 2003
|-------------------------------- | ---- | ----
|
|Accrued postretirement liability |      |     
|                                 |      |     

Components of Net
Periodic Benefit Cost

|                                      | 2004 | 2003 | 2002
|------------------------------------- | ---- | ---- | ----
|
|Service cost                          |      |      | $   
|Interest cost                         |      |      |     
|Amortization of transition obligation |      |      |     
|Amortization of prior service cost    |      |      |     
|Recognized net actuarial loss         |      |      |     
|                                      |      |      |     
|Net periodic benefit cost             |      |      | $   
|                                      |      |      |     

31

---

Assumptions

|                                               | 2004 | 2003
|---------------------------------------------- | ---- | ----
|Weighted-average assumptions used to determine |      |     
|benefit obligations at September 30            |      |     
|                                               |      |     
|Discount rate                                  |      |     

|                                                   | 2004 | 2003 | 2002
|-------------------------------------------------- | ---- | ---- | ----
|Weighted-average assumptions used to determine net |      |      |     
|periodic benefit cost for plan year                |      |     
|                                                   |      |      |     
|Discount rate                                      |      |      |     

The healthcare trend rate assumption
for the 2003 fiscal year disclosure and 2004 fiscal year expense and disclosure is 12
percent for fiscal 2004 grading down 1 percent per year until a 5 percent ultimate trend
rate is reached in fiscal year 2011. The health care cost trend rate assumption for the
2003 fiscal year expense was 11 percent for fiscal 2003 grading down 1 percent per year
until a 5 percent ultimate trend rate is reached in fiscal year 2009.

A 1 percent increase in the
healthcare cost trend assumption would increase the service and interest cost $0.2 million
or 23 percent and the accumulated periodic postretirement benefit obligation $1.5 million
or 19 percent. A 1 percent decrease would reduce the service and interest cost by $0.1
million or 17 percent and the accumulated periodic postretirement benefit obligation $1.2
million or 15 percent.

Plan Assets

The plan has no assets. The Company
funds on a cash basis as benefits are paid.

Estimated Cash Flows

The estimated employer contribution is
expected to be $0.2 million in 2005.

Estimated Future Benefit
Payments

The following benefit payments, which
reflect expected future service, are expected to be paid (in thousands):

|         
|---------
|2005     
|2006     
|2007     
|2008     
|2009     
|2010-2014

# Defined Contribution Plan

The Company also sponsors a 401(k)
savings plan for eligible employees. Participants elect to invest up to 20 percent of
their eligible compensation on a pre-tax basis. The Company provides a matching
contribution of 100 percent of the employees tax-deferred contribution up to a
maximum 3 percent of the employees eligible compensation. Matching contributions
vest at 20 percent per year and are fully vested when the participant has 5 years of
service with the Company. The Companys matching contributions totaled approximately
$0.4 million for 2004, 2003 and2002, respectively.

32

---

# (9)     
RELATED-PARTY TRANSACTIONS

Receivables and Payables

The Company has accounts receivable
balances related to transactions with other Black Hills Corporation subsidiaries. The
balances were $0.9 million as of December 31, 2004 and 2003, respectively. The Company
also has accounts payable balances related to transactions with other Black Hills
Corporation subsidiaries. The balances were $0.3 million and $7.9 million as of December
31, 2004 and 2003, respectively.

The Company also has a line of credit
with its Parent, Black Hills Corporation (the Parent), which is due on demand. Outstanding
advances were $25.1 million at December 31, 2004. Interest expense paid on the note was
$0.1 million for the year ended December 31, 2004. This note bears interest at 1.25
percent above the one-month average LIBOR rate (3.65 percent at December 31, 2004) and is
payable monthly.

Other Balance and
Transactions

The Company purchases coal from
Wyodak Resources Development Corp., an indirect subsidiary of the Parent. The amount
purchased during the years ended December 31, 2004, 2003 and 2002 was $9.6 million, $10.3
million and $10.5 million, respectively.

In addition to the above
transactions, in order to fuel its combustion turbine, the Company purchased natural gas
from Enserco Energy, an indirect subsidiary of the Parent. The amount purchased during the
years ended December 31, 2004, 2003 and 2002 was approximately $2.7 million, $6.1 million
and $5.8 million, respectively. These amounts are included in Fuel and purchased
power on the Consolidated Statements of Income.

The Company also received revenues of
approximately $1.0 million for the years ended December 31, 2004 and 2003, respectively,
from Black Hills Wyoming, Inc., an indirect subsidiary of Black Hills Corporation, for the
transmission of electricity.

# (10)     
COMMITMENTS AND CONTINGENCIES

# Power Purchase and
Transmission Services Agreement  PacifiCorp

In 1983, the Company entered into a
40 year power purchase agreement with PacifiCorp providing for the purchase by the Company
of 75 megawatts of electric capacity and energy from PacifiCorps system. An amended
agreement signed in October 1997 reduces the contract capacity by 25 megawatts (5
megawatts per year starting in 2000). The price paid for the capacity and energy is based
on the operating costs of one of PacifiCorps coal-fired electric generating plants.
Costs incurred under this agreement were $10.0 million in 2004, $10.8 million in 2003 and
$10.9 million in 2002 (net of a $1.3 million refund for prior years).

In addition, the Company has a firm
network transmission agreement for 36 MWs of capacity with PacifiCorp that expires on
December 31, 2006. Annual costs are approximately $0.9 million per year. The Company uses
this agreement to serve the Sheridan, Wyoming electric service territory under the
contract with Montana-Dakota Utilities Company.

The Company also has a firm
point-to-point transmission service agreement with PacifiCorp that expires on December 31,
2023. The agreement provides that the following amounts of capacity and energy be
transmitted: 32 megawatts in 2001, 27 megawatts in 2002, 22 megawatts in 2003, 17
megawatts in 2004-2006 and 50 megawatts in 2007-2023. Costs incurred under this agreement
were $0.4 million in 2004, $0.5 million in 2003 and $0.7 million in 2002.

33

---

# Long-Term Power Sales
Agreements

| |  |  | The Company has a ten-year
power sales contract with the Municipal Energy Agency of Nebraska (MEAN) for 20 megawatts of
contingent capacity from the Neil Simpson Unit #2 plant. The contract commenced in February 2003.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Company has a contract with
Montana-Dakota Utilities Company, expiring January 1, 2007, for the sale of up to 55 megawatts of
energy and capacity to service the Sheridan, Wyoming electric service territory. The Company also
has a contract with the City of Gillette, Wyoming, expiring in 2012, to provide the citys
first 23 megawatts of capacity and energy. Both contracts are integrated into our control area
and are treated as firm native load.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Legal Proceedings

# Forest Fire Claims

In September 2001, a fire occurred in
the southwestern Black Hills, now known as the Hell Canyon Fire. It is alleged
that the fire occurred when a high voltage electrical span maintained by the Company,
broke, and electrical arcing from the severed line ignited dry grass. The fire burned
approximately 10,000 acres of land owned by the Black Hills National Forest, the Oglala
Sioux Tribe, and other private landowners. The State of South Dakota initiated litigation
against the Company, in the Seventh Judicial Circuit Court, Fall River County, South
Dakota, on or about January 31, 2003. The Complaint seeks recovery of damages for alleged
fire suppression and rehabilitation costs. A claim for treble damages is asserted with
respect to the claim for injury to timber. A substantially similar suit was filed against
the Company by the United States Forest Service, on June 30, 2003, in the United States
District Court for the District of South Dakota, Western Division. The State subsequently
joined its claim in the federal action. The State claims damages in the amount of
approximately $0.8 million for fire suppression and rehabilitation costs. The United
States Governments claim for fire suppression and related costs has been submitted
at approximately $1.3 million. The Company continues to investigate the cause and origin
of the fire, and the damage claims. A trial date has been set for early 2005. The Company
has denied all claims and will vigorously defend this matter, the timing or outcome of
which is uncertain.

On June 29, 2002, a forest fire began
near Deadwood, South Dakota, now known as the Grizzly Gulch Fire. Before being
contained more than eight days later, the fire consumed over 10,000 acres of public and
private land, mostly consisting of rugged forested areas. The fire destroyed approximately
7 homes, and 15 outbuildings. There were no reported personal injuries. In addition, the
fire burned to the edge of the City of Deadwood, forcing the evacuation of the City of
Deadwood, and the adjacent City of Lead, South Dakota. These communities are active in the
tourist and gaming industries. Individuals were ordered to leave their homes, and
businesses were closed for a short period of time. On July 16, 2002, the State of South
Dakota announced the results of its investigation of the cause and origin of the fire. The
State asserted that the fire was caused by tree encroachment into and contact with a
transmission line owned and maintained by the Company.

On September 6, 2002, the State of
South Dakota commenced litigation against the Company, in the Seventh Judicial Circuit
Court, Pennington County, South Dakota. The Complaint seeks recovery of damages for
alleged injury to timber, fire suppression and rehabilitation costs. A claim for treble
damages was asserted with respect to the claim for injury to timber.

On March 3, 2003, the United States
of America filed a similar suit against the Company, in the United States District Court,
District of South Dakota, Western Division. The federal governments Complaint
likewise seeks recovery of damages for alleged injury to timber, fire suppression and
rehabilitation costs. A similar claim for treble damages is asserted with respect to the
claim for injury to timber. In April 2003, the State of South Dakota intervened in the
federal action. Accordingly, the state court litigation has been stayed, and all
governmental claims will be tried in U.S. District Court.

The state and federal government
claim approximately $5.3 million for suppression costs, $1.2 million for rehabilitation
costs, and $0.6 million for timber loss. Additional claims could be asserted for alleged
loss of habitat and aesthetics or for assistance to private landowners.

34

---

The Company is completing its own
investigation of the fire cause and origin. The Companys investigation is
continuing, but based upon information currently available, the Company filed its Answer
to the Complaints of both the State and the United States government, denying all claims,
and asserting that the fire was caused by an independent intervening cause, or an act of
God. The Company expects to vigorously defend all claims brought by governmental or
private parties.

During the period of April 2003
through September 2004, various private civil actions were filed against the Company,
asserting that the Grizzly Gulch Fire caused damage to the parties real property.
These actions were filed in the Fourth Judicial Circuit Court, Lawrence County, South
Dakota. The Complaints seek recovery on the same theories asserted in the governmental
Complaints, but most of the Complaints specify no amount for damage claims. The Company
will vigorously defend these matters as well.

Additional claims could be made for
individual and business losses relating to injury to personal and real property, and lost
income.

Although we cannot predict the
outcome or the viability of potential claims with respect to either fire, based on the
information available, management believes that any such claims, if determined adversely
to the Company, will not have a material adverse effect on the Companys financial
condition or results of operations.

# PPM Energy, Inc. Demand
for Arbitration

On January 2, 2004, PPM Energy, Inc.
delivered a Demand for Arbitration to the Company. The demand alleges claims for breach of
contract and requests a declaration of the parties rights and responsibilities under
an Exchange Agreement executed on or about April 3, 2001. Specifically, PPM Energy asserts
that the Exchange Agreement obligates the Company to accept receipt and cause
corresponding delivery of electric energy, and to grant access to transmission rights
allegedly covered by the Agreement. PPM Energy requests an award of damages in an amount
not less than $20.0 million. The Company filed its Response to Demand, including a
counterclaim that seeks recovery of sums PPM has refused to pay pursuant to the Exchange
Agreement. The Company denies all claims and will vigorously defend this matter, the
timing and outcome of which is uncertain.

# Ongoing Litigation

The Company is subject to various
other legal proceedings, claims and litigation which arise in the ordinary course of
operations. In the opinion of management, the amount of liability, if any, with respect to
these actions would not materially affect the financial position or results of operations
of the Company.

# (11)     
NON-CASH DIVIDEND AND DISCONTINUED OPERATIONS

During the quarter ended March 31,
2003, the Company distributed a non-cash dividend to its parent company, Black Hills
Corporation (Parent). The dividend consisted of 10,000 common shares of Black Hills
Generation, Inc., formerly known as Black Hills Energy Capital, Inc., (Generation), which
represents 100 percent ownership of Generation. The Company therefore no longer operates
in the independent power production business. As a result, the Company no longer has any
subsidiaries and operates only in the electric utility business. The Companys
investment in Generation at the time of the distribution was $46.5 million.

The disposition was accounted for
under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144). Accordingly, results of operations have been
classified as Discontinued operations, net of income taxes in the accompanying
Statements of Income, and prior periods have been restated. For business segment reporting
purposes, Generations business results were previously included in the segment
Independent Power Production.

35

---

Revenues and net income from the
discontinued operations are as follows:

|                                               | 2003 | 2002
|---------------------------------------------- | ---- | ----
|
|Revenue                                        |      |     
|                                               |      |     
|Income (loss) before income taxes and change   |      |     
|in accounting principle                        |      |     
|Income tax (expense) benefit                   |      |     
|Change in accounting principle, net of tax     |      |     
|                                               |      |     
|Net income (loss) from discontinued operations |      |     
|                                               |      |     

The financial statements and notes to
financial statements have been restated to reflect our continuing operations for all
periods presented. The net operating results of discontinued operations are included in
the Statements of Income under the caption Discontinued operations, net of income
taxes.

# (12)     
SUBSEQUENT EVENTS

The Company has entered into an
agreement with Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc., to
provide wholesale power for the City of Sheridan, Wyoming. Under the agreement, the
Company will provide all requirements up to 74 megawatts of power to Montana-Dakota from
January 1, 2007 through January 1, 2017. Power requirements above 74 megawatts are
negotiable under terms specified in the agreement. The contract is pending approval by the
Wyoming Public Service Commission. An existing contract provides up to 55 megawatts and
expires January 1, 2007.

# (13)     
QUARTERLY HISTORICAL DATA (Unaudited)

The Company operates on a calendar
year basis. The following table sets forth selected unaudited historical operating results
data for each quarter of 2004 and 2003.

|                                      | First | Second | Third | Fourth
|------------------------------------- | ----- | ------ | ----- | ------
|
|
|2004:                                 |       |        |       |       
|Operating revenues                    |       |        | $     | 41,647
|Operating income                      |       |        |       | 11,408
|Income from continuing operations and |       |       
|net income                            |       |        |       | 5,037 
|2003:                                 |       |       
|Operating revenues                    |       |        | $     | 43,762
|Operating income                      |       |        |       | 13,652
|Income from continuing operations     |       |        |       | 6,699 
|Net income                            |       |        |       | 8,605 

# ITEM 9.     
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

36

---

# ITEM 9A.     
CONTROLS AND PROCEDURES

# Evaluation of disclosure
controls and procedures

Our Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(Exchange Act)) as of December 31, 2004. Based on their evaluation, they have concluded
that our disclosure controls and procedures are adequate and effective to ensure that
material information relating to us that is required to be disclosed in our reports filed
under the Exchange Act is recorded, processed, summarized and reported within the required
time periods.

# Internal control over
financial reporting

During our fourth fiscal quarter,
there have been no changes in our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect our internal control
over financial reporting.

# ITEM 9B.     
OTHER INFORMATION

None.

# PART IV

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholder of
Black Hills Power, Inc. Rapid City, South Dakota

We have audited the consolidated
financial statements of Black Hills Power, Inc. and subsidiaries (the Company) as of
December 31, 2004 and 2003, and for each of the three years in the period ended December
31, 2004, and have issued our report thereon dated March 10, 2005; such financial
statements and report are included in the 2004 Annual Report on Form 10-K and are
incorporated herein by reference. Our audits also included the financial statement
schedule of the Company listed in Item 15(a)(2). This financial statement schedule is the
responsibility of the Companys management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
March 10, 2005

37

---

# ITEM 15.     
EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)    
          1.          Financial Statements

| | Financial statements required by Item 15 are listed in the index included in Item 8 of Part II.
| | -----------------------------------------------------------------------------------------------

2.         Schedules

| | Schedule II  Valuation and Qualifying Accounts for the years ended December 31, 2004, 2003
and 2002.
| | -----------------------------------------------------------------------------------------------------

| | All other schedules have been omitted because of the absence of the conditions under which they are required
or because the required information is 
        included elsewhere in the financial statements incorporated by reference
in the Form 10-K.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

BLACK HILLS POWER, INC.
SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS 
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002

|     |  | Additions |   |    
|---- |  | --------- | - | ---
|
|
|
|
|
|2004 |  |           | $ | 898
|2003 |  |           |   | 882
|2002 |  |           |   | 868

38

---

3.     Exhibits

|ExhibitNumber |  | Description
|------------- |  | -----------

|2* |  | Plan of Exchange Between Black Hills Corporation
and Black Hills Holding Corporation (filed as an exhibit to the Black Hills Holding Corporations Registration Statement on
Form S-4 (No. 333-52664)).
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1* |  | Restated Articles of Incorporation of the Registrant
(filed as an exhibit to the Registrant's Form 8-K dated June 7, 1994 (No. 1-7978)).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|3.2* |  | Articles of Amendment to the Articles of
Incorporation of the Registrant, as filed with the Secretary of State of the State of South Dakota on December 22, 2000 (filed as an exhibit
to the Registrant's Form 10-K for 2000).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3* |  | Bylaws of the Registrant (filed as an exhibit to the
Registrant's Registration Statement on Form S-8 dated July 13, 1999).
|---- |  | --------------------------------------------------------------------------------------------------------------------------

|4.1* |  | Restated and Amended Indenture of Mortgage and Deed
of Trust of Black Hills Corporation (now called Black Hills Power, Inc.)dated as of September 1, 1999 (filed as an exhibit to the
Black Hills Holding Corporation's Registration Statement on Form S-4 (No. 333-52664)).  First Supplemental Indenture, dated as of
August 13, 2002, between Black Hills Power, Inc. and JPMorgan Chase Bank, as Trustee (filed as Exhibit 10.1 to the Registrant's
Form 10-Q for the quarter ended September 30, 2002).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1* |  | Restated and Amended Coal Supply Agreement for NS II
dated February 12, 1993 (filed as Exhibit 10(c) to the Registrant's Form 10-K for 1992).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.2* |  | Second Restated and Amended Power Sales Agreement
dated September 29, 1997, between PacifiCorp and Black Hills Power, Inc. (filed as Exhibit 10(e) to the Registrant's Form 10-K for
1997).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3* |  | Reserve Capacity Integration Agreement dated May 5,
1987, between Pacific Power & Light Company and Black Hills Power, Inc. (filed as Exhibit 10(u) to the Registrant's Form 10-K
for 1987).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4* |  | Rate Freeze Extension (filed as Exhibit 10(t) to the
Registrant's Form 10-K for 1999).
|----- |  | --------------------------------------------------------------------------------------

|31.1 |  | Certification pursuant to Rule 13a - 14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|31.2 |  | Certification pursuant to Rule 13a - 14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------

_________________

* Previously filed as part of the
filing indicated and incorporated by reference herein.

(b)    
          See (a) 3. Exhibits above.

(c)    
          See (a) 2. Schedules above.

SUPPLEMENTAL INFORMATION TO BE
FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

The Registrant is not required to
send an Annual Report or Proxy to its sole security holder and parent company, Black Hills
Corporation.

39

---

# SIGNATURES

Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

| | BLACK
HILLS POWER, INC.
| | -----------------------

| | By:/s/ DAVID R. EMERY
David R. Emery, President
and Chief Executive Officer
| | ---------------------------------------------------------------------------

Dated: March 30, 2005

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

|                                            |  | 
|------------------------------------------- |  | 
|
|
|
|/S/ DAVID R. EMERY                          |  | 
|David R. Emery, President and               |  | 
|Chief Executive Officer                     |  | 
|/S/ MARK T. THIES                           |  | 
|Mark T. Thies, Executive Vice President and |  | 
|Chief Financial Officer                     |  | 
|/S/ DANIEL P. LANDGUTH                      |  | 
|Daniel P. Landguth, Chairman                |  | 
|/S/ BRUCE B. BRUNDAGE                       |  | 
|Bruce B. Brundage                           |  | 
|/S/ DAVID C. EBERTZ                         |  | 
|David C. Ebertz                             |  | 
|/S/ JACK W. EUGSTER                         |  | 
|Jack W. Eugster                             |  | 
|/S/ JOHN R. HOWARD                          |  | 
|John R. Howard                              |  | 
|/S/ KAY S. JORGENSEN                        |  | 
|Kay S. Jorgensen                            |  | 
|/S/ RICHARD KORPAN                          |  | 
|Richard Korpan                              |  | 
|/S/ STEPHEN D. NEWLIN                       |  | 
|Stephen D. Newlin                           |  | 
|/S/ THOMAS J. ZELLER                        |  | 
|Thomas J. Zeller                            |  | 

40

---

# INDEX TO EXHIBITS

|ExhibitNumber |  | Description
|------------- |  | -----------

|2* |  | Plan of Exchange Between Black Hills Corporation
and Black Hills Holding Corporation (filed as an exhibit to the Black Hills Holding Corporations Registration Statement on
Form S-4 (No. 333-52664)).
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1* |  | Restated Articles of Incorporation of the Registrant
(filed as an exhibit to the Registrant's Form 8-K dated June 7, 1994 (No. 1-7978)).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|3.2* |  | Articles of Amendment to the Articles of
Incorporation of the Registrant, as filed with the Secretary of State of the State of South Dakota on December 22, 2000 (filed as an exhibit
to the Registrant's Form 10-K for 2000).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.3* |  | Bylaws of the Registrant (filed as an exhibit to the
Registrant's Registration Statement on Form S-8 dated July 13, 1999).
|---- |  | --------------------------------------------------------------------------------------------------------------------------

|4.1* |  | Restated and Amended Indenture of Mortgage and Deed
of Trust of Black Hills Corporation (now called Black Hills Power, Inc.)dated as of September 1, 1999 (filed as an exhibit to the
Black Hills Holding Corporation's Registration Statement on Form S-4 (No. 333-52664)).  First Supplemental Indenture, dated as of
August 13, 2002, between Black Hills Power, Inc. and JPMorgan Chase Bank, as Trustee (filed as Exhibit 10.1 to the Registrant's
Form 10-Q for the quarter ended September 30, 2002).
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1* |  | Restated and Amended Coal Supply Agreement for NS II
dated February 12, 1993 (filed as Exhibit 10(c) to the Registrant's Form 10-K for 1992).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.2* |  | Second Restated and Amended Power Sales Agreement
dated September 29, 1997, between PacifiCorp and Black Hills Power, Inc. (filed as Exhibit 10(e) to the Registrant's Form 10-K for
1997).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3* |  | Reserve Capacity Integration Agreement dated May 5,
1987, between Pacific Power & Light Company and Black Hills Power, Inc. (filed as Exhibit 10(u) to the Registrant's Form 10-K
for 1987).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4* |  | Rate Freeze Extension (filed as Exhibit 10(t) to the
Registrant's Form 10-K for 1999).
|----- |  | --------------------------------------------------------------------------------------

|31.1 |  | Certification pursuant to Rule 13a - 14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|31.2 |  | Certification pursuant to Rule 13a - 14(a) of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------

_________________

* Previously filed as part of the
filing indicated and incorporated by reference herein.

41