# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 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, 2003

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 29, 2004
| | --------------------------------------------------------------------------

| | 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.

1

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# TABLE OF CONTENTS

|              |  | Page
|------------- |  | ----
|ITEMS 1. & 2. |  |     
|              |  |     
|              |  |     
|              |  |     
|ITEM 3.       |  |     
|ITEM 5.       |  |     
|ITEM 7.       |  |     
|              |  |     
|              |  |     
|ITEM 8.       |  |     
|ITEM 9.       |  |     
|ITEM 9A.      |  |     
|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. In 2000, we became a wholly owned
subsidiary of Black Hills Corporation through a plan of exchange between us
and Black Hills Corporation.

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 61,000 electric customers, with an electric transmission
system of 447 miles of high voltage lines and 513 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. Over 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,
2003 was comprised of 30 percent commercial, 23 percent residential, 16 percent contract
wholesale, 18 percent wholesale off-system, 12 percent industrial and 1 percent municipal
sales and other revenue. Approximately 74 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | In
1999, the South Dakota Public Utilities Commission extended our previous retail rate
freeze until January 1, 2005. The rate freeze preserves 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 are not
covered by the rate freeze. This provides us with flexibility in allocating our
generating capacity to maximize returns in changing market environments.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 18
percent of our electric revenues for the year ended December 31, 2003 consisted of
off-system and short-term contract wholesale sales.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

3

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| |  |  | Black Hills Power and Basin Electric Power Cooperative completed the construction of a jointly
owned AC-DC-AC transmission tie (the transmission tie) 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, of which we own 35 percent. This interconnection allows us to
buy and sell energy in both markets 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, contract
obligations, and to take advantage of the power price differentials between the two
electric grids. Additionally, our system is capable of directly interconnecting up to 80
megawatts of generation or load to either the Eastern or Western transmission grids. The
available transmission capacity of the MAPP transmission system determines how much
capacity may be directly interconnected to the Eastern system.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  |  | We
have firm network transmission access to deliver 36 megawatts of power on PacifiCorps
system to Sheridan, Wyoming to serve our contract with Montana-Dakota Utilities Company
through 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Power Sales Agreements

We sell approximately 47 percent of
our utilitys current load under long-term contracts. Our key contracts include a
contract with Montana-Dakota Utilities Company, expiring in 2007, for the sale of up to 55
megawatts of energy and capacity to service the Sheridan, Wyoming electric service
territory, and 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. In May 2001, we began selling
30 megawatts of firm capacity and energy to Public Service Company of Colorado (PSCO) for
a period through 2004. For the 10-year period beginning in 2003, our utility and our power
generation segment each provide 20 megawatts of unit contingent energy and capacity to the
Municipal Energy Agency of Nebraska.

Regulated Power Plants
and Purchased Power

Our utility electric load is served
by coal-, oil- and natural gas-fired generating units providing 435 megawatts of
generating capacity all of which is located in South Dakota and Wyoming, and from the
following purchased power and capacity contracts with PacifiCorp:

| |  |  | a power sales 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 with the
ability to generate power to meet demand whenever necessary and feasible.

4

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# Rate Regulation

Existing Rate Regulation

In June 1999, the South Dakota Public
Utilities Commission approved a settlement, which extended a rate freeze in effect since
1995 until January 1, 2005.

The South Dakota settlement provides
that, absent an extraordinary event, we may not file for any increase in our rates or
invoke any fuel and purchased power adjustment tariff which would take effect during the
freeze period. The specified extraordinary events are:

| |  |  | new governmental impositions increasing
annual costs for South Dakota customers by more than $2.0 million;
| | - |  | ----------------------------------------------------------------------------------------------------------

| |  |  | simultaneous forced outages of both our Wyodak plant and Neil Simpson II plant projected to continue at
     least 60 days;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

| |  |  | forced outages occurring to either plant which continue for a period of three months and are projected
     to last at least nine months;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

| |  |  | an increase in the Consumer Price Index at a monthly rate for six months which would
result in a 10 percent or higher annual inflation rate;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the loss of a South Dakota customer or revenue from an existing South Dakota customer that
would result in a loss of revenue of $2.0 million or more during any 12-month period;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the cost of coal to our South Dakota customers increases and is projected to increase by
more than $2.0 million over the cost for the most recent calendar year; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | electric deregulation occurs as a result of either federal or state mandate, which allows
any of our customers to choose its provider of electricity at any time during the freeze
period.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the freeze period, except as
identified above, we are undertaking the risks of:

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

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

| |  |  | increased costs under power purchase
contracts over which we have 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

However, the settlement anticipates
that we will retain, during that period of time, earnings realized from more efficient
operations, sales from load growth, and off-system sales of power and energy.

Over the last several years, we have
initiated an effort to enter into new contracts with our largest industrial customers. 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
108megawatts of large commercial and industrial load. These
contracts provide us the 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 Montana-Dakota
Utilities Company, equal approximately 47 percent of our utilitys firm load.

5

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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
2003 or pending adoption.

# 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 have recently
been lowered and 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 was recently
downgraded to Baa2 by Moodys Investor Services, Inc., or Moodys
and BB+ 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 the Middle
East or further tensions with the government of 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 growth 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. A prolonged conflict or
stalemate arising from current 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.

6

---

Our rate freeze agreement with the
South Dakota Public Utilities Commission, which prevents us, absent extraordinary
circumstances, from passing on to our South Dakota retail customers cost increases we may
incur during the rate freeze period, could decrease our operating margins.

Our rate freeze agreement with the
South Dakota Public Utilities Commission is effective until January 1, 2005. We may
not file for any increase in our rates or invoke any fuel and purchased power adjustment
tariff which would take effect during the freeze period, except in extraordinary
circumstances. Because we are generally unable to increase our rates, our historically
stable returns could be threatened by plant outages, machinery failure, increases in
purchased power costs over which we have no control, acts of nature, acts of terrorism or
other unexpected events that could cause our operating costs to increase and our 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 which exceed the rates we are permitted to charge our retail customers. After the
rate freeze agreement expires, current rates will remain in effect until a point when the
SDPUC would decide new rates are appropriate.

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 declined significantly since 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;
| | - |  | ---------------

7

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

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

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

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

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.
| | - |  | --------------

8

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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.

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.

# ITEM 3.     
     LEGAL PROCEEDINGS

Information regarding our legal
proceedings is incorporated herein by reference to the Legal Proceedings
subcaption within Item 8, Note 6, 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

|                                  | 2003 | 2002 | 2001
|--------------------------------- | ---- | ---- | ----
|
|Revenue                           |      |      | $   
|Operating expenses                |      |      |     
|                                  |      |      |     
|Operating income                  |      |      | $   
|                                  |      |      |     
|Income from continuing operations |      |      | $   
|                                  |      |      |     

The following table provides certain
electric utility operating statistics:

|                           | 2003 | 2002 | 2001
|-------------------------- | ---- | ---- | ----
|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.

9

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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, 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.

2002 Compared to 2001

Electric revenue decreased 24 percent
in 2002 compared to 2001. The decrease in electric revenue in 2002 was due to a $52.9
million decrease in wholesale off-system sales at an average price that was 63 percent
lower than the average price in 2001.

Firm kilowatt-hour sales decreased 2
percent in 2002. Residential and commercial sales increases of 5 percent and 3 percent,
respectively, in 2002 accounted for a $2.9 million increase in revenue, which was offset
by a $3.6 million decrease in industrial sales, primarily due to discontinued operations
at two of our largest and oldest customers, Homestake Gold Mine and Federal Beef
Processors. Degree days, a measure of weather trends, were 1 percent above normal in 2002
and 4 percent above 2001.

Revenue per kilowatt-hour sold was
5.3 cents in 2002 compared to 7.0 cents in 2001. The number of customers in the service
area at December 31, 2002 increased to 59,948 from 59,237 in 2001. The decrease in the
revenue per kilowatt-hour sold in 2002 is due to a 63 percent decrease in average
wholesale off-system prices.

Electric utility operating expenses
decreased $25.1 million or 19 percent in 2002. The decrease was primarily due to a $22.0
million decrease in fuel and purchased power costs and a $5.0 million decrease in
operations and maintenance expenses, offset by higher depreciation expense related to the
addition of the Lange combustion turbine in early 2002.

The decrease in fuel and purchased
power costs was primarily due to the high spot market price for gas and electricity in the
first half of 2001. The decrease in operations expense was primarily due to a $3.2 million
expense of a temporary generator lease in 2001 and a $3.1 million decrease in incentive
compensation in 2002 offset by a $1.8 million increase in pension expense in 2002.

Net interest expense increased $2.3
million due to the issuance of $75 million of first mortgage bonds in August 2002.

In addition, 2001 earnings included a
$2.0 million after-tax charge related to the formation of the Black Hills Corporation
Foundation.

10

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# 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 to trading and other transactions, 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, including 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.

11

---

# ITEM 8.     
     CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

# INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                                                | 
|------------------------------------------------------------------------------- | 
|Independent Auditors' Report                                                    | 
|Consolidated Statements of Income                                               | 
|for the three years ended December 31, 2003                                     | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                    | 
|Consolidated Statements of Cash Flows                                           | 
|for the three years ended December 31, 2003                                     | 
|Consolidated Statements of Common Stockholder's Equity and Comprehensive Income | 
|for the three years ended December 31, 2003                                     | 
|Notes to Consolidated Financial Statements                                      | 

# INDEPENDENT AUDITORS'
REPORT

To the Shareholder 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, 2003 and 2002, 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, 2003.  These financial statements are the responsibility
of the Company's management.  Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in
accordance with auditing standards generally accepted in the United States of America.
 Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes 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, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota,
March 10, 2004

12

---

# BLACK HILLS POWER, INC.
CONSOLIDATED STATEMENTS OF INCOME

|2003                                                   | 2002 | 2001
|------------------------------------------------------ | ---- | ----
|
|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 10) |      |     
|                                                       |      |     
|Net income                                             |      |     
|                                                       |      |     

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

13

---

# BLACK HILLS POWER, INC.
 CONSOLIDATED BALANCE SHEETS

|2003                                                        | 2002
|----------------------------------------------------------- | ----
|
|ASSETS                                                      |     
|Current assets:                                             |     
|Cash and cash equivalents                                   |     
|Receivables (net of allowance for doubtful accounts of $898 |     
|and $882, respectively) -                                   |     
|Customers                                                   |     
|Affiliates                                                  |     
|Other                                                       |     
|Materials, supplies and fuel                                |     
|Prepaid income taxes                                        |     
|Deferred income taxes                                       |     
|Assets of discontinued operations                           |     
|                                                            |     
|                                                            |     
|                                                            |     
|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                                |     
|Accrued liabilities                                         |     
|Deferred income taxes                                       |     
|Liabilities of discontinued operations                      |     
|                                                            |     
|                                                            |     
|                                                            |     
|Long-term debt, net of current maturities                   |     
|                                                            |     
|Deferred credits and other liabilities:                     |     
|Deferred income taxes                                       |     
|Regulatory liability                                        |     
|Other                                                       |     
|                                                            |     
|                                                            |     
|                                                            |     
|Commitments and contingencies (Notes 6 and 7)               |     
|Stockholder's equity:                                       |     
|Common stock $1 par value; 50,000,000 shares authorized;    |     
|Issued: 23,416,396 shares in 2003 and 2002                  |     
|Additional paid-in capital                                  |     
|Retained earnings                                           |     
|Accumulated other comprehensive loss                        |     
|                                                            |     
|                                                            |     
|                                                            |     
|                                                            |     
|                                                            |     

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

14

---

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

|2003                                                          | 2002 | 2001
|------------------------------------------------------------- | ---- | ----
|
|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                                |      |     
|Decrease in short-term borrowings                             |      |     
|Long-term debt - issuance                                     |      |     
|Long-term debt - repayments                                   |      |     
|                                                              |      |     
|                                                              |      |     
|                                                              |      |     
|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                                                  |      |     
|Non-cash net assets acquired through issuance of common stock |      |     
|Stock dividend distributions to Black Hills Corporation, the  |      |     
|parent company of Black Hills Power, Inc. (Note 10)           |      |     

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

15

---

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

|                             |  |  |  |        | Accumulated |  
|---------------------------- |  |  |  | ------ | ----------- | -
|
|
|
|
|Balance at December 31, 2000 |  |  |  | 23,416 |             | $
|                             |  |  |  |        |             |  
|Comprehensive Income:        |  | 
|Net income                   |  |  |  | --     |             |  
|Other comprehensive loss,    |  | 
|net of tax (see Note 8)      |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Total comprehensive income   |  |  |  | --     |             |  
|Dividends on common stock    |  |  |  | --     |             |  
|Earnout consideration on     |  | 
|acquisition                  |  |  |  | --     |             |  
|Non-cash dividend to Parent  |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Balance at December 31, 2001 |  |  |  | 23,416 |             |  
|                             |  |  |  |        |             |  
|Comprehensive Income:        |  | 
|Net income                   |  |  |  | --     |             |  
|Other comprehensive loss,    |  | 
|net of tax (see Note 8)      |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|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 8)      |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Total comprehensive income   |  |  |  | --     |             |  
|Non-cash dividend to Parent  |  |  |  | --     |             |  
|Dividends on common stock    |  |  |  | --     |             |  
|                             |  |  |  |        |             |  
|Balance at December 31, 2003 |  |  |  | 23,416 |             | $
|                             |  |  |  |        |             |  

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

16

---

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001

# (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 (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 10, 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, 2003 and 2002, the
Company had regulatory assets of $4.3 million and $4.4 million and regulatory liabilities
of $6.3 million and $6.8 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. 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.

17

---

# Cash Equivalents

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

# Inventory

Materials, supplies and fuel are
generally stated at cost on a first-in, first-out 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,
9.1 percent and 10.2 percent during 2003, 2002 and 2001, respectively. The amount of AFUDC
was approximately $0.1 million, $0.9 million, and $0.7 million in 2003, 2002 and 2001,
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 3.1 percent in 2003 and 2002, and 3.0 percent in 2001.

# 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 2003, 2002 or 2001.

# 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.

18

---

# Reclassifications

In 2003, the Company reclassified
removal costs that are recoverable under our electric utility rates. These amounts,
previously recorded as a component of accumulated depreciation, have been reclassified
into regulatory liabilities. Amounts on the 2002 Consolidated Balance Sheet have been
reclassified to conform to this presentation. The changes in presentation had no impact on
the Companys stockholders equity or results of operations, as previously
reported.

In addition, certain 2002 and 2001
amounts in the financial statements have been reclassified to conform to the 2003
presentation. These reclassifications had no effect on the Companys common
stockholders equity or results of operations, as previously reported.

# Recently Adopted
Accounting Pronouncements

SFAS 132-R

In December 2003, the FASB issued
SFAS No. 132 (Revised), Employers Disclosure about Pensions and Other
Postretirement Benefits (SFAS 132-R). SFAS 132-R retains disclosure requirements of
the original SFAS 132 and requires additional disclosures related to assets, obligations,
cash flows, and net periodic benefit cost. SFAS 132-R is effective for fiscal years ending
after December 15, 2003, except that certain disclosures are effective for fiscal years
ending after June 15, 2004. Interim period disclosures are effective for interim periods
beginning after December 15, 2003. The adoption of the disclosure provisions of SFAS 132-R
did not have an effect on the Companys Financial Statements (see Note 7).

SFAS 143

In June 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143
provides accounting and disclosure requirements for retirement obligations associated with
long-lived assets and was effective January 1, 2003. SFAS 143 requires that the present
value of retirement costs for which the Company has a legal obligation be recorded as
liabilities with an equivalent amount added to the asset cost and depreciated over an
appropriate period. The liability is then accreted over time by applying an interest
method of allocation to the liability. Adoption did not have a material effect on the
Companys financial position, results of operations or cash flows.

SFAS 150

In May 2003, the FASB issued SFAS No.
150 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 provides accounting and disclosure
requirements for classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. Management adopted SFAS 150 effective July
1, 2003. Adoption did not have a material effect on the Companys financial position,
results of operations or cash flows.

Issue C20

On June 25, 2003, the FASB
Derivatives Implementation Group cleared Issue C20, Scope Exceptions: Interpretation
of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding
Contracts with a Price Adjustment Feature (Issue C20). Issue C20 clarifies which
contracts qualify for the normal purchase or sale exception as provided by
paragraph 10(b) of SFAS 133. The Company adopted this guidance on October 1, 2003. Under
Issue C20, the Companys long-term power sales contracts either are not considered
derivatives, or qualify for the normal purchase or sale exception as defined
by SFAS 133, therefore adoption of this guidance had no impact on the Companys
results of operations and financial position.

19

---

# Recently Issued
Accounting Pronouncements

FSP 106-1

In January 2004, the FASB issued FASB Staff
Position (FSP) No. 106-1, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP 106-1),
which permits a sponsor of a postretirement health care plan that provides a prescription
drug benefit to make a one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 until remaining
questions  notably the issue of how to account for the federal subsidy  are
resolved. The Company provides prescription drug benefits to certain eligible employees
and has elected the one-time deferral of accounting for the effects of the 2003 Medicare
Act. The Company intends to analyze the 2003 Medicare Act, along with the authoritative
guidance, when issued, to determine if its benefit plans need to be amended and how to
record the effects of the 2003 Medicare Act. Specific guidance on the accounting for the
federal subsidy provided by the 2003 Medicare Act is pending and that guidance, when
issued, could require the Company to change previously reported postretirement benefit
information. For more information on the Companys postretirement benefits, see Note
7.

# (2)     
     PROPERTY, PLANT AND EQUIPMENT

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

Regulated

|                                                                | 2003 | 2002 | Lives
(in years)
|--------------------------------------------------------------- | ---- | ---- | ----------------
|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                                              |      |      | $               
|                                                                |      |      |                 

20

---

# (3)     
     LONG-TERM DEBT

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

|                                                 | 2003 | 2002
|------------------------------------------------ | ---- | ----
|
|First mortgage bonds:                            |      |     
|9.00% repaid 2003                                |      |     
|8.06% due 2010                                   |      |     
|9.49% due 2018                                   |      |     
|9.35% due 2021                                   |      |     
|8.30% due 2024                                   |      |     
|7.23% due 2032                                   |      |     
|                                                 |      |     
|                                                 |      |     
|                                                 |      |     
|Other long-term debt:                            |      |     
|Pollution control revenue bonds at 6.7% due 2010 |      |     
|Pollution control revenue bonds at 7.5% due 2024 |      |     
|Other                                            |      |     
|                                                 |      |     
|                                                 |      |     
|                                                 |      |     
|Total long-term debt                             |      |     
|Less current maturities                          |      |     
|                                                 |      |     
|Net long-term debt                               |      |     
|                                                 |      |     

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 2004 through 2008.

During 2002, the Company entered into
a $50 million treasury lock to hedge a portion of the Companys $75 million First
Mortgage Bond offering completed in August 2002. The treasury lock cash settled on August
8, 2002, the bond pricing date, and resulted in a $1.8 million loss. This treasury lock
was treated as a cash flow hedge, in accordance with SFAS 133, and accordingly the
resulting loss is carried in Accumulated other comprehensive loss on the Consolidated
Balance Sheet and amortized over the life of the related bonds as additional interest
expense.

# (4)     
     FAIR VALUE OF FINANCIAL INSTRUMENTS

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

|                          | 2003 | 2002
|------------------------- | ---- | ----
|
|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.

21

---

# 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 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 bonds.

# (5)     
     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, 2003, the
Companys investment in the Plant included $72.2 million in electric plant and $40.4
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 $5.8 million, $5.5 million and $5.9 million for the years ended December 31,
2003, 2002 and 2001, 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. As of December 31, 2003, the
Companys investment in the transmission tie was $20.3 million.

# (6)     
     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 $10.8 million in 2003, $10.9 million in 2002 (net
of a $1.3 million refund for prior years) and $13.9 million in 2001.

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 our
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 $0.5 million in 2003 and $0.7 million in each of 2002 and 2001.

22

---

# 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 Company has a contract with Montana-Dakota Utilities Company, expiring in 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 served by the Companys electric utility and 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 will be 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.

23

---

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 through
November 2003, 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 its 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 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.

# (7)     
     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 and cash equivalents. The Company uses
a September 30 measurement date for the Plan.

24

---

Obligations and Funded Status

Change in benefit obligation:

|                                                  | 2003 | 2002
|------------------------------------------------- | ---- | ----
|
|Projected benefit obligation at beginning of year |      |     
|                                                  |      |     
|Service cost                                      |      |     
|Interest cost                                     |      |     
|Actuarial loss                                    |      |     
|Discount rate change                              |      |     
|Benefits paid                                     |      |     
|Amendments                                        |      |     
|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:

|                                      | 2003 | 2002
|------------------------------------- | ---- | ----
|
|Beginning market value of plan assets |      |     
|Benefits paid                         |      |     
|Investment income (loss)              |      |     
|Employer contributions                |      |     
|                                      |      |     
|Ending market value of plan assets    |      |     
|                                      |      |     

Funding information for the Plan is
as follows:

|                             | 2003 | 2002
|---------------------------- | ---- | ----
|
|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:

|                                     | 2003 | 2002
|------------------------------------ | ---- | ----
|
|Net pension (liability) asset        |      |     
|Intangible asset                     |      |     
|Accumulated other comprehensive loss |      |     
|                                     |      |     
|Net amount recognized                |      |     
|                                     |      |     
|Accumulated benefit obligation       |      |     
|                                     |      |     

25

---

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

The provisions of SFAS No. 87
required the Company to record an accrued pension liability of $6.4 million at December
31, 2002 and is included in the line item Other in Deferred credits and other liabilities
on the accompanying Balance Sheets.

Components of Net Periodic Pension Expense

|                                     | 2003 | 2002 | 2001
|------------------------------------ | ---- | ---- | ----
|
|Service cost                         |      |      | $   
|Interest cost                        |      |      |     
|Expected return on assets            |      |      |     
|Amortization of prior service cost   |      |      |     
|Recognized net actuarial (gain) loss |      |      |     
|                                     |      |      |     
|Net pension (income) expense         |      |      | $   
|                                     |      |      |     

Additional Information

|                                               | 2003 | 2002
|---------------------------------------------- | ---- | ----
|
|Pre-tax amount included in other comprehensive |      |     
|income (loss) arising from a change in the     |      |     
|additional minimum pension liability           |      |     
|                                               |      |     

Assumptions

|2003                                    | 2002
|--------------------------------------- | ----
|Discount rate                           |     
|Rate of increase in compensation levels |     

|2003                                          | 2002 | 2001
|--------------------------------------------- | ---- | ----
|Discount rate*                                |      |     
|Expected long-term rate of return on assets** |      |     
|Rate of increase in compensation levels       |      |     

_________________

| | * |  | The
discount rate used for net periodic pension cost was changed from 6.75 percent in 2003 to
6.0 percent for the calculation of the 2004 net periodic pension cost. This change is
expected to affect pension costs in 2004 by an increase of approximately $0.4 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** |  | The
expected rate of return on plan assets was changed from 10.0 percent in 2003 to 9.5
percent for the calculation of the 2004 net periodic pension cost. This change is
expected to increase pension costs in 2004 by approximately $0.2 million.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

---

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 10.5 percent and 11.0 percent for the 2003 and 2002 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, 2002, 12.5 percent, 10.5 percent, 10.3 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:

|                |  | 2003 |  | 2002  |     
|--------------- |  | ---- |  | ----- | ----
|Domestic equity |  |      |  | 44.8  | %   
|Foreign equity  |  |      |  | 26.6  | %   
|Fixed income    |  |      |  | 3.8   | %   
|Cash            |  |      |  | 24.8  | %(a)
|                |  |      |  |      
|Total           |  |      |  | 100.0 | %   
|                |  |      |  |      

|(a) | Allocation
includes $6.9 million cash contribution made to the plan on September 30, 2003; the
contribution is expected to be placed in noncash investments in the fiscal 2004 plan
year.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Asset Class    | Target Allocation
|-------------- | -----------------
|US Stock       |                  
|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.

Contributions

The Company made a contribution to
the Plan of $6.9 million on September 30, 2003. The Company does not anticipate that a
contribution will be made to the Plan in the 2004 fiscal year.

27

---

# 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

|                                                  | 2003 | 2002
|------------------------------------------------- | ---- | ----
|
|Change in benefit obligation:                     |      |     
|Projected benefit obligation at beginning of year |      |     
|                                                  |      |     
|Service cost                                      |      |     
|Interest cost                                     |      |     
|Actuarial 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                             |      |     
|                                                  |      |     

|                                                                  | 2003 | 2002
|----------------------------------------------------------------- | ---- | ----
|
|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 $1.6 million and $1.4 million at
December 31, 2003 and 2002, and is included in Deferred credits and other liabilities,
Other on the accompanying Balance Sheets.

Components of Net Periodic Benefit Cost

|                          | 2003 | 2002 | 2001
|------------------------- | ---- | ---- | ----
|
|Service cost              |      |      | $   
|Interest cost             |      |      |     
|Prior service cost        |      |      |     
|(Gain) loss               |      |      |     
|                          |      |      |     
|Net periodic benefit cost |      |      | $   
|                          |      |      |     

28

---

Additional Information

|                                               | 2003 | 2002
|---------------------------------------------- | ---- | ----
|
|Pre-tax amount included in other comprehensive |      |     
|income (loss) arising from a change in the     |      |     
|additional minimum pension liability           |      |     
|                                               |      |     

Assumptions

|2003                                    | 2002
|--------------------------------------- | ----
|
|Discount rate                           |     
|Rate of increase in compensation levels |     

|2003                                    | 2002 | 2001
|--------------------------------------- | ---- | ----
|Discount rate*                          |      |     
|Rate of increase in compensation levels |      |     

_________________

|* |  | The
discount rate used for net periodic benefit cost was changed from 6.75 percent in 2003 to
6.0 percent for the calculation of the 2004 net periodic benefit cost. This change will
not materially affect benefit costs in 2004.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Plan Assets

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

Contributions

The Company anticipates that
contributions to the plan for the next fiscal year will be approximately $0.1 million; the
contributions are expected to be in the form of benefit payments.

# 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.

29

---

Obligation and Funded Status

|                                                                   | 2003 | 2002
|------------------------------------------------------------------ | ---- | ----
|
|Change in benefit obligation:                                      |      |     
|Accumulated postretirement benefit obligation at beginning of year |      |     
|                                                                   |      |     
|Service cost                                                       |      |     
|Interest cost                                                      |      |     
|Plan participant's contributions                                   |      |     
|Amendments                                                         |      |     
|Benefits paid and actual expenses                                  |      |     
|Net transfer in/out                                                |      |     
|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:

|                                   |  | 2003 |   | 2002   |  
|---------------------------------- |  | ---- | - | ------ | -
|
|Accrued postretirement (liability) |  |      | $ | (4,421 | )
|                                   |  |      |   |       

Components of Net Periodic Benefit Cost

|                                      | 2003 | 2002 | 2001
|------------------------------------- | ---- | ---- | ----
|
|Service cost                          |      |      | $   
|Interest cost                         |      |      |     
|Amortization of transition obligation |      |      |     
|Amortization of prior service cost    |      |      |     
|Loss                                  |      |      |     
|                                      |      |      |     
|Net periodic benefit cost             |      |      | $   
|                                      |      |      |     

30

---

Assumptions

Weighted-average assumptions used to determine
benefit obligations at September 30

|              | 2003 | 2002
|------------- | ---- | ----
|Discount rate |      |     

Weighted-average assumptions used to determine net
periodic benefit cost for plan year

|               | 2003 | 2002 | 2001
|-------------- | ---- | ---- | ----
|Discount rate* |      |      |     

_________________

*The discount rate used for net
periodic benefit cost was changed from 6.75 percent in 2003 to 6.0 percent for the
calculation of the 2004 net periodic benefit cost. This change is expected to affect
benefit costs in 2004 by an increase of approximately $0.1 million.

The healthcare 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. The health care
trend rate assumption for 2003 fiscal year disclosure and 2004 fiscal year expense 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.

A 1 percent increase in the
healthcare cost trend assumption would increase the service and interest cost $0.1 million
or 21 percent and the accumulated periodic postretirement benefit obligation $1.1 million
or 14 percent. A 1 percent decrease would reduce the service and interest cost by $0.1
million or 16 percent and the accumulated periodic postretirement benefit obligation $0.9
million or 11 percent.

Plan Assets

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

Contributions

The Company anticipates that
contributions to the plan for the next fiscal year will be approximately $0.5 million in
the form of benefits and administrative costs paid.

# 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 $0.4 million
for 2003,$0.4 million for 2002 and $0.6 million for 2001.

31

---

# (8)     
     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):

|                                                                       | 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                                                |     
|                                                                        |     

|                                                                       | 2001
|---------------------------------------------------------------------- | ----
|
|Net change in fair value of derivatives designated as cash flow hedges |     
|associated with discontinued operations                                |     
|                                                                       |     

# (9)     
     INCOME TAXES

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

|         | 2003 | 2002 | 2001
|-------- | ---- | ---- | ----
|Current  |      |      | $   
|Deferred |      |      |     
|         |      |      |     
|         |      |      | $   
|         |      |      |     

32

---

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

|2003                                                         | 2002
|------------------------------------------------------------ | ----
|Deferred tax assets, current:                                |     
|Valuation reserve                                            |     
|Employee benefits                                            |     
|Items of other comprehensive income                          |     
|Other                                                        |     
|                                                             |     
|                                                             |     
|                                                             |     
|Deferred tax liabilities, current:                           |     
|Employee benefits                                            |     
|                                                             |     
|                                                             |     
|                                                             |     
|Net deferred tax (liability) asset, 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                                         |     
|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, 2002, to December 31,
2003, to deferred income tax expense:

|                                                                   | 2003
|------------------------------------------------------------------ | ----
|
|Increase in deferred income tax liability from the preceding table |     
|Deferred taxes associated with ITC                                 |     
|Deferred taxes associated with other comprehensive loss            |     
|Other                                                              |     
|                                                                   |     
|Deferred income tax expense for the period                         |     
|                                                                   |     

33

---

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

|                                                           | 2003 | 2002 | 2001
|---------------------------------------------------------- | ---- | ---- | ----
|Federal statutory rate                                     |      |      |     
|Amortization of excess deferred and investment tax credits |      |      |     
|Research and development credit                            |      |      |     
|Other                                                      |      |      |     
|                                                           |      |      |     
|                                                           |      |      |     
|                                                           |      |      |     

# (10)     
     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. The assets and liabilities of Generation are
shown in the accompanying Balance Sheets under the captions Assets from discontinued
operations and Liabilities from discontinued operations.

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

|                                               | 2003 | 2002 | 2001
|---------------------------------------------- | ---- | ---- | ----
|
|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 |      |      | $   
|                                               |      |      |     

34

---

Assets and liabilities of
discontinued operations included on the accompanying Balance Sheet are as follows (in
thousands):

|                                                 | December 31
2002
|------------------------------------------------ | ----------------
|Current assets                                   |                 
|Property, plant and equipment                    |                 
|Goodwill                                         |                 
|Intangible assets, net                           |                 
|Other non-current assets                         |                 
|Notes payable                                    |                 
|Due to affiliate                                 |                 
|Current derivative liability                     |                 
|Other current liabilities                        |                 
|Non-current derivative liability                 |                 
|Long-term debt, net of current maturities        |                 
|Other non-current liabilities                    |                 
|                                                 |                 
|Net assets of discontinued operations (including |                 
|accumulated other comprehensive loss of $9,440)  |                 
|                                                 |                 

During the quarter ended March 31,
2001, we distributed a non-cash dividend to our parent company. The dividend included
50,000 common shares of Wyodak Resources Development Corporation (Wyodak), which
represents 100 percent ownership of Wyodak. We therefore no longer operate in the coal
production segment, oil and natural gas production segment, energy marketing segment or
communications as we had indirectly owned the companies operating in these segments
through our ownership of Wyodak. Our investment in Wyodak at the time of the distribution
was $89.6 million.

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

|                           | 2001*
|-------------------------- | -----
|
|Revenue                    |      
|                           |      
|Income before income taxes |      
|Income tax expense         |      
|                           |      
|Net income                 |      
|                           |      

_________________

*Includes only one month of
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.

35

---

# (11)     
     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 2003 and 2002.

|                                  | First
Quarter | Second Quarter | Third
Quarter | Fourth
Quarter
|--------------------------------- | ------------- | -------------- | ------------- | --------------
|
|2003:                             |               |                |               |               
|Operating revenues                |               |                | $             | 43,762        
|Operating income                  |               |                |               | 13,652        
|Income from continuing operations |               |                |               | 6,699         
|Net income                        |               |                |               | 8,605         
|2002:                             |               |               
|Operating revenues                |               |                | $             | 37,192        
|Operating income                  |               |                |               | 14,327        
|Income from continuing operations |               |                |               | 7,823         
|Net income                        |               |                |               | 11,984        

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

None.

# 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, 2003. 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.

# Changes in 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.

36

---

# PART IV

# INDEPENDENT
AUDITORS REPORT

To the Shareholder 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, 2003 and 2002
and for each of the three years in the period ended December 31, 2003, and have issued our report thereon
dated March 10, 2004, which report expresses an unqualified opinion. Such financial statements and report
are included elsewhere in this 2003 Annual Report on Form 10-K. Our audits also included the financial
statement schedule of Black Hills Power, Inc., 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, 2004

# ITEM 15.      
     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(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, 2003, 2002
and 2001.
| | -----------------------------------------------------------------------------------------------------

| | 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 ACCOUNTSYEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

|Additions                       
|--------------------------------
|
|
|Allowance for
doubtful accounts:
|2003                            
|2002                            
|2001                            

37

---

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)    
          Reports on Form 8-K

The Registrant has not filed any reports on Form 8-K during the last quarter of the period
covered by this report.

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

(d)    
          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.

38

---

# 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 25, 2004

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/ JOHN R. HOWARD                          |  | 
|John R. Howard                              |  | 
|/S/ EVERETT E. HOYT                         |  | 
|Everett E. Hoyt, Chief Operating Officer    |  | 
|/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                            |  | 

39

---

# 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.

40