Black Hills Corp (BKH) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Black Hills Corporation quarterly earnings conference call. All participants are in a listen-only mode at this time. Later we will conduct a question-and-answer session. Instructions will be given at that time.

If you require any assistance during the conference, you may depress the 0 and then the * on your touchtone phone. We do remind you the conference is being recorded, and replay information will be given out at the conclusion. And starting off with your hosting speaker, we have Director of Investor Relations Mr. Dale Jahr. Please go ahead, sir.

Yes, thank you. And good morning to everyone. I appreciate your interest in our company. I remind the audience that this conference call may include forward-looking statements as defined by the SEC. These statements concern our plans, expectations and objectives for future operations.

Such statements are based on what we believe are reasonable assumptions and based on current expectations of industry and economic conditions and other factors. However, risks and uncertainties could cause results to differ materially from those in forward-looking statements. I refer you to the cautionary language published in our press release and other public disclosures.

Our discussion of recent results will be led by Mr. Mark Thies, our CFO. Mark has a few opening remarks for us before we open the call to your questions. Mark.

Thank you, Dale. And I want to thank everybody on the call for your participation. We had a very solid quarter. We're up 7 percent on earnings and 5 percent earnings per share. Our business plan remains on track, and operationally we've had very strong performance in each of our business segments.

In our largest business segment, the integrated energy business segment, our power generation earnings were up very strong, reflecting the additional generation capacity we have in service. And that's a little bit misleading from our statistics, as we did place a significant amount of generation in the third quarter, in the middle of the third quarter of last year.

So, overall, we've continued to deploy capital in that business unit and we have two projects that remain to come online. One we expect to come online in our Las Vegas project this year, and in the first quarter we expect our Wygen plant to come online. So we have additional growth prospects as we continue the construction of our power plants.

Our electric utility had very solid performance. Our results on the firm sales are down slightly, just primarily due to the Home Stake mine, which closed at the end of last year and was expected. But we had very strong wholesale sales, off-system sales, reflecting our low-cost generation and our access to both the eastern and western markets.

We continue to have improvement in our communications business segment as we continue to add customers on the residential side. That is starting to slow down, reflecting our market penetration in our markets. And it is expected. But we have continued to have strong customer growth. And we added the metric on the business access lines as our customer numbers on the business lines went down slightly. We had a consolidation of small customers. But we did continue to show good growth on the access lines in the business arena within our service territory.

Our growth prospects also were advanced with the announcement and the pending acquisition of Mallon Resources, which has significant reserves in the San Juan basin, primarily in New Mexico. And we anticipate closing that transaction in the first quarter; that is, pending Mallon's shareholder approval.

From a financing perspective, we made strong advancements in the third quarter in a very difficult environment. The financing environment has been difficult, as I'm sure everyone is aware of by reading the news. And we had successfully completed three transactions.

Our utility, Black Hills Power, issued $75 million of bonds. We extended our revolving credit facility $195 million in August, in a very difficult market. And we're pleased with that accomplishment. And we added a $35 million unsecured credit on September 25th. We have a bridge financing, a $50 million bridge financing, that comes due in November. We are currently seeking extension of that, as well as other financing options. And we remain confident that we will maintain strong liquidity to continue to run our operations.

We have engaged Deloitte & Touche, our independent public accountants, to do a re-audit of our financial statements from '99 to 2001, and we expect that to be completed in the fourth quarter. And we don't expect to change our previously-reported earnings.

Our earnings guidance...we reaffirm our guidance for our earnings, 225 to 230 for the year. And we expect continued growth in the 8 to 10 percent range. The drivers of the growth, we believe, will be the additional power plants that we will get in service, our acquisitions and growth primarily in our integrated energy business unit, which continues to have good growth opportunities, and continued improvement in our communications.

I would now like to open the call up to questions from the callers.

Ladies and gentlemen, if you wish to ask a question, you may press the 1 on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by depressing the # key. One moment for the first question.

We do have a question from Bill Hyler of CIBC. Please go ahead.

Yes, good morning, Mark. How are you doing?

Good. Good morning, Bill.

Okay. I've got a couple of questions. One, I was pleasantly surprised to see these off-system sales stay strong. I think you mentioned they were up --

Just over 50 percent.

-- 50 percent. And, you know, my calculation is that the off-system revenues, even with the lower power price, were up year-to-year. I know the Mid-Columbia price was very weak. Were you moving more power to eastern markets or to Colorado? How were you able to sustain that kind of off-system revenue?

Well, we have been able to move some power to the eastern markets, as we have access to both grids. We can move some south to the Colorado market. And we continue to move some power into the western grid because we do have low-cost generation. So we may make a smaller margin. As you see, we had a 22 percent lower average price compared to the prior year, but we still are able to move and make a good margin, moving that to all three of those markets.

Okay. And the expansion on the transmission grid to better allow movement east, is that still on schedule for an '03 completion?

Yes. We expect that to be in the late third quarter, early fourth quarter of '03.

How much would that increase your flexibility to move megawatts east? Is there any kind of estimate?

It's a 200-megawatt tie. And we have between 30 and 40 percent.

Okay. And just a follow-up on the power. I know you don't break down the integrated energy group in the earnings releases traditionally, but do you have any color on what the independent power earnings were year-to-year?

We'll file our Q next week, Bill. We have our segment information in our Q.

Okay. Last question and I'll move on with someone else. The $395 million secured revolver, how much of that is drawn down as of today or as of the close of September 30th?

That'll be in the Q as well, consistent with where we were before.

Okay, guys, thanks a lot.

Thank you.

Our next question is from Gary Spriggs, private investor. Please go ahead.

Mark, good morning to you.

Good morning.

In relation to the acquisition of Mallon in 2003, where do you see that setting into the plans of the company as regards to income capability to the overall Black Hills operation?

We believe that there will be strong opportunities to...it will increase production as some of the reserves are proved producing, but provides us also opportunities to expand and develop that property more fully that the ongoing opportunity will be late '03 into '04 as we continue to develop that resource. It is a pending acquisition.

So assuming that we accomplish that and the Mallon shareholders approve that, we believe the opportunity to continue to increase production, as well as in our integration strategy, to be able to market that gas from our marketing concern located in Golden, would provide additional opportunity for earnings.

Thank you.

You're welcome.

Our next question is from Paul Debbas of Value Line. Please go ahead.

As a follow-up on the Mallon question, can you quantify how much of an earnings pop you would expect from that each year?

Not specifically. When we accomplish that and have all of the reserves in our reserve profile, we'll come out with further guidance.

Okay, thank you.

Our next question is from Michael Worms of GKN. Please go ahead.

Good morning, Mark and Dale.

Good morning, Mike.

Good morning.

Congratulations on a good quarter. A couple of questions for you. First, why was coal production up so strongly?

As you recall, we previously released that we signed an additional contract with PacifiCorp to supply its Dave Johnson plant for approximately a million tons a year. We began servicing that.

Okay. Then in the release, you indicated that drilling was delayed. Could you explain that a bit?

We are partners in certain drilling programs that we don't have control over. And last year we drilled sooner, and this year those partners did not drill up the properties as quickly. So overall we're still 5 percent increase in production, but in the quarter we were down.

Will this impact your expectations for total production for the year? Or is there perhaps a catch-up coming?

It may impact somewhat for the year, as we would expect our increase in productions to return to historical levels next year.

Okay. Regarding the communications operations, it was a good quarter, obviously, in reducing losses. Are you on target? I think you indicated losses in the $6 million range for the year or so. You know, where do you stand, and how does it look for the entire year?

No. Well our 10-K indicated six and a half million dollars. And we would expect to be within half a million to a million dollars of that. We are on target on the customer basis, and we continue to have strong customer growth and would expect that we are still on target to be earnings-positive in 2004.

Okay. And then, finally, can you kind of discuss a little bit if there has been any ongoing negotiation between you guys and Allegheny regarding the Las Vegas plant?

Well, as you may have seen yesterday, they were further downgraded by Moody's. We continue to work with them and continue to complete the construction on that project. And we have a contract with them which every indication would be that they anticipate honoring that contract. And their credit situation, according to Moody's, has deteriorated. But we believe that that is a very good location and a very efficient plant in the Las Vegas area.

Okay, thank you very much.

Thank you.

Our next question is from Frank Short, private investor. Please go ahead.

Yes. My question, Mark, would be, isn't Black Hills' debt-to-equity ratios out of line with the industry as a whole?

I don't believe so. The industry as a whole depends on how you compare to it. We have several...our debt-to-equity has increased over the last year and a half, primarily due to non-recourse project financing in our power generation segment.

And we have very strong long-term contracts, primarily towing arrangements, related to those plants so we're able to finance those plants on a non-recourse basis based on the cash and revenue streams from those contracts. So on an overall basis, we consolidate all of that debt. So, yes, we have increased our debt-to-equity, but it is non-recourse project financing.

Thank you, Mark.

Thank you. You're welcome.

We have a question from James Balessa, E.A. Davison. Please go ahead.

Good morning.

Good morning, Jim.

On the Las Vegas plant, you say that you're going to inaugurate that in the fourth quarter, yet you don't have the long-term non-recourse financing in place. Would you delay actual operation of that plant until you do?

No. We want to get that plant. I mean, we financed that on balance sheet. We have spent the capital. We want to continue to get that plant online and in service.

And who would you be selling the power to, and where would you be buying the fuel from?

It's a towing arrangement with Allegheny Energy. And at this point we would expect them to perform under their contract.

Okay. Then I'd like to see how you're thinking strategically. I saw recently that El Paso Marketing sold some gas-fired plants in Colorado. Now, those plants may have been 10 or 12 years old. And you may already have your fill in Colorado. Would that be the case, that you don't want to buy more plant and equipment down in Colorado, or you don't like to buy the older plant and equipment?

We believe that our opportunities...I don't believe that we're negative to Colorado at all. Colorado and Las Vegas are the two largest growth markets in the West, and we believe our opportunities remain there. We continue to look at expanding our existing sites in Colorado and with the new efficient machines. So, no, I don't believe that we've had our fill. We continue to look at our opportunities there that we believe make sense.

But most likely it would be expansion of existing sites rather than other facilities.

Well, we could look at other facilities as well. If it makes sense for us and we can get an economic deal that meets our internal return criteria, then we would continue to do that. It could be the acquisition of an existing site or expansion of our sites.

You started using this new accounting convention, reporting on a net basis your trading business.

Marketing.

Marketing business. And, of course, that materially changes the revenues that were posted from last year to what they are now.

Yes, but has no impact on net income.

Understood. When might you be restating those historical numbers for the new methodology?

Well, we did in this release, and we will in the third quarter Q that we expect to file next week.

And will all the historical quarters be available at that time, or will we have to wait an extended period of time to revise --

Well, every quarter that we would have in the Q, we will restate. And then when we go into our 10-K, we will also do it. We also anticipate, Jim, when we have our re-audited financial statements that Deloitte & Touche is currently working on, and we expect to complete in the fourth quarter, that that will have the prior periods restated for the accounting.

Thank you very much.

You're welcome.

And, once again, if there are additional questions, you may press the 1 on your touchtone phone at this time. We have a question from Bill Hyler of CIBC. Please go ahead.

Yeah, Mark, just a follow-up on the Las Vegas plant. I think it's been discussed in the past, kind of a [300-350] gas price environment. You know, to make the toll economic for Allegheny, you would need about a $55 power price to make that work.

In a worst-case scenario, if you were to have to operate this plant as a merchant plant, you know, my numbers suggest you can make it economic somewhere in the low 40s at that kind of gas price, which actually, you know, given the tight market down there, may actually be the real market in the near-future. Does that kind of jibe with numbers you guys have run?

Yeah, Bill. And I think the other thing you have to look at is the capacity market. We own 100 percent of that plant. And there is a need for capacity in the West that you can't just look at the spot price of power in the West, but also look at the capacity market as a number of companies are looking to have long-term contracts.

So, you know, those are reasonable if you run that plant. It's a very efficient plant. And, you know, at a $3 gas price, I think your numbers, just doing the heat rate and some expected costs, yes, I believe those are reasonable.

Yeah. I mean, ideally, I know your strategy is to do the tolls that give you your return criteria, very low risk. But it doesn't seem to be, in my mind...I don't think it would be a disaster if you were to lose that toll, just based on the location of the plant and the supply-demand parameters in that area. But, okay, I just wanted to throw those numbers by you just to see if they were close. Thanks a lot.

Thank you.

Our next question is from Peter Hart of Talent Capital. Please go ahead.

Good morning. Hi.

Good morning.

A couple of questions. You mentioned the debt-to-cap including or not including non-recourse debt. I was wondering if you had the quarter-ending debt-to-cap both ways.

Well, no, we included...it's all consolidated on our balance sheet, and it is included in our balance sheet, which we will come out with in our filing of our 10-Q next week.

Okay. Did you have it through the second quarter?

Not right at my fingertips. It was 63 percent, roughly.

Okay.

But you could look at the second quarter Q and that would give you the specifics.

Okay. And then a couple of questions on communications; a nice improvement quarter-over-quarter. First you said you thought it might go earnings-positive in '04. What are your expectations for '03?

That we would continue to improve and trend towards earnings-positive as we continue to add customers.

Is it fair to just guess that you might cut the '02 loss in half? Is that reasonable?

Yeah, I think that that would be our expectation is we'd continue to show improvement to get the profitability in '04.

Okay. And part of the quarterly results in communications included this $600,000 after-tax collection of previously-reserved amounts. What is that due to? And what was previously reserved?

Well, with the communications business, you have inter-carrier billings to different carriers. Until you have collection on those, you can't record those as earnings. So we reserved...we call it reserve the amounts. I don't know if that's technically the correct accounting terminology, but we did not record income, though the revenue was due to us. We worked with those parties and were able to have collections of those amounts that were due under inter-carrier billings.

And then will this continue? Will you kind of collect these going forward?

Yes. And we would expect that as we have the billings, we will record those as we collect. But until we collect them, we don't record them as earnings.

Okay.

And we would expect that to continue in our service to other carriers.

And I guess I'm trying to figure out, you know, how does it help you...does it help you going out through the '03-'04 time frame? Is it that kind of --

It diminishes. As we continue to capture more of the market, we become more of the dominant carrier in our market, so it will diminish.

Okay. And then, just on the revenue side, do you break out revenues by lit and dark fiber, or were there dark fiber sales?

We don't have dark fiber. We're a local carrier, you know, to the customer, as opposed to a wholesale carrier with the dark fiber. Our fiber...we do have a fiber network and a fiber backbone to service our retail customers, but we don't have the long-haul dark fiber, or long-haul fiber at all.

Okay, thanks. And then just on customer growth, you noted that you grew customers by more than 50 percent year-over-year, but only 6 percent quarter-to-quarter. What's a better indication of customer growth? What would you use going out into '03-'04?

Well, we would expect customer growth to slow down; still have increase in customers, but we'd expect the overall numbers, as you can see the trend, to slow down, as we have captured more and more of the market. You know, our footprint is primarily Rapid City and the Northern Hills, and our expectations are that we continue to get more and more of that market. So our increases...we expect to show continued increases in customers, but that will slow.

Okay. And then, maybe on the bigger picture, you reaffirmed guidance today of two and a quarter to 230 and stating that you could continue to grow 8 to 10 percent, suggesting next year 243 to 253. First, is that kind of a good range to think about for '03? And could you kind of go through what you need to do to get there? I know you've got the plant coming online. The Las Vegas [tolling] is probably counted in there, and continuing improvements across all segments.

We have expectations of...we have two plants coming online. We have the Las Vegas plant, expected to be online in the fourth quarter, and we have the coal plant expected to be online in the first quarter, a 90-megawatt coal plant that has a long-term contract.

Yes.

We also have expectations to increase the oil-and-gas production with the pending acquisition of Mallon Resources. We do expect to have growth, just natural growth, in our other business lines. And we expect the improvement in communications to continue.

The factors that also impact it are just the economy in our territory as well as in the markets we serve, and weather also impacts pricing for power and oil and natural gas. That could impact that.

Okay. And how about on the cost side? I mean, have you stated, say, what pension accounting might do to year-over-year earnings?

We have not stated that we're in the process of getting the evaluations of our plan. You know, we wouldn't expect it to be more than, say, 10 cents a share on the negative for the year. But we do expect to have some impact because the market has been down.

Okay. And I guess, lastly, when you made the comments on guidance for this year and for next, you say that the company recognizes that sustained growth requires capital deployment to continue. Does the 8 to 10 percent, say, going into '03, does that contemplate any additional acquisitions? And, if so, are you contemplating the need to issue equity in '03?

We do have capital deployment. As you look in the 10-K, we put out there what our expectations of capital deployment will be to continue to grow our business. And we look at financing that capital deployment from a variety of sources, which include just strong operational cash flows from our businesses, the access to both the debt and equity markets. And we evaluate that at the time we deploy the capital.

What is your projected free cash for '03? Do you have free cash?

We don't have projections forward-looking on the free cash flow. We have historically very strong cash flows in our what I would call maintenance capital requirements, including the dividend approximately about $80 million. We have approximately $180 million, I believe, in annual cash flow.

Okay. Well, that's great. Thanks, Mike. And thanks, Dale.

Thank you.

Our next question is from Jim Harmon, Lehman Brothers. Please go ahead.

Hi. Good morning, guys. Could you repeat that last series of answers you just gave? I'm kidding. [Laughter.] Sorry about that.

Good morning, Jim.

How are you?

Good.

Given the meltdown in the merchant space, have you guys seen any new customers come to your system for search of a reliable supplier?

We have had discussions in the market as to opportunities to provide power. But, again, nearly 90 percent of our power generation is contracted. We do see, you know, opportunities in the off-system sale market, obviously, from our electric utility, as that increased strongly. But most of our...you know, approximately 90 percent of our power generation segment is under long-term contract.

Okay, great. Thank you.

Thank you.

We do have a follow-up question from Gary Spriggs, private investor. Please go ahead.

Mark, in relation to Mallon, once the absorption takes place, how are you treating or will be treating Mallon's debt to Aquila?

The debt to Aquila we acquired. That was in our release that we released, I want to say, early October. So they no longer have external debt. We hold that debt.

You hold it completely.

Yes.

Okay, thank you.

We also have a follow-up question from James Balessa, [E.A. Davison]. Please go ahead.

Follow-up question on Las Vegas. When do you think, in the fourth quarter, this would be available to start producing revenues and earnings for you?

We would expect late in the fourth quarter. Probably more of the earnings impact will be next year, in '03.

So it'd be unlikely to get a month of revenues and earnings?

I would expect it would be late fourth quarter, yes; mid to late fourth quarter.

Okay, thank you very much.

You're welcome.

We have a follow-up question from Paul Debbas of Value Line. Please go ahead.

I have a couple of questions. Who is the contract with for the Wygen plant?

There are two contracts for the Wygen plant. One is Cheyenne, a subsidiary of Public Service Company of Colorado, to service Cheyenne, Wyoming. And the other is a municipal in Nebraska, totaling 80 megawatts.

Okay. And is there any change in your dividend policy?

No. We have increased our dividends for 32 consecutive years. And the board declares...we did declare a dividend in the third quarter, obviously. And we would expect that to continue, as it has historically.

Thank you.

And we have no further questions in queue at this time.

Thank you very much. I appreciate everyone's time. And have a great day.

Ladies and gentlemen, this conference will be available for replay starting today at 11:45 a.m. Mountain Time until November 14th midnight. You may dial the AT&T Executive Playback service by dialing 1-800-475-6701 with the access code 658729. And that does conclude your conference. Thank you for using AT&T Executive Teleconference. We will now disconnect. Have a good day.