Black Hills Corp (BKH) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing and and welcome to the Black Hills conference call. At this time, all participant are in a listen-only mode. Later on, we will conduct a question and answer session. If you require any assistance, please press 0 and star and an operator will assist you offline. As a reminder this call is being recorded. I would now like to turn the conference over you to your host, the Director of Investor Relations, Mr. Dale Jahr. Please go ahead sir.

Thank you and welcome our conference call held in conjunction with the release of first quarter 2003 earnings. I remind the audience that this conference call may include forward-looking statement as defined by the SEC. These statements concern our plans, expectations and objectives for future operations. Such statements are based on with a 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 statement. 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 Executive Vice President and CFO. Mark has a few opening remarks before we open up the call to your questions. Mark?

Thank you, Dale. Good morning, everybody. Black Hills announced our first quarter results. We had very good results, earnings from continuing operations were 62 cents a share in the quarter compared to 55 cents a share in the same period in the prior year. We had good results, operational results from all of our businesses. Our power generation capacity increased 62%. That was primarily due to bringing on two construction projects that we had throughout last year, the Las Vegas plant came on at 224 megawatt plant in January and our Wygen plant came on in mid-February, that's a coal plant. Both of those plants are under long term contracts.

In addition, our marketing volumes increased quarter over quarter substantially 41% and %32 and more importantly, increased over the prior year's average, 9% for gas marketing and 1% for the oil marketing. Our coal production increased 14% primarily due to a long-term contract we put in place last year to service one of Pacific Corp's plants as well as the beginning of the Wygen plant for half the quarter, which is our coal plant that sits atop our mine. Our oil and gas production was up 14% and we expect that to increase considerably as we go forward because we did close in March the Mallon acquisition. We announced we had a reserve study done, an internal study which shows we had 86 BCF of gas as of December 3st. Previously, we disclosed 2003 numbers so we are excited about that opportunity.

In addition, in April, we did have a stock offering, a very successful stock offering in which we issued 4.6 million shares and netted the company proximately 118 million dollars. Our communications business continue to add customers and reduce its loss. On the retail side as well as the electric utility, continued to have strong operation result with all system sales. The overall results were down in our electric utility, primarily due to last year's issuance in August of $75 million of first mortgage bonds and certain hire operating costs. The cost of gas were much hire than previous quarters. I would now like to open up the discussion for questions.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch tone phone. You will hear a tone indicating you have been placed in queue. You may remove your self at any time by pressing pound key. If you are using a speaker phone, we ask that you pick up your handset before you pressing the number. One moment for our first question. It comes from the line of Michael Woerns of GKN. Please go ahead.

Just a couple of questions. First, on the 86 billion cubic feet of gas reserves, is that total for the company, or is that just the Mallon resources part of it.

That's just the Mallon Resource part of it.

Can you tell me what the total reserve would be for the company.

In our release, if we have 146.1 BCFE. That's in our table.

Then you add the 86 to it?

No, that includes the 86. So we had previously, otherwise , if you would take that out we would have had 60.

You had a small loss in the coal mining business. Can you elaborate a little bit more on that and is that a trend that will continue?

We did not have a loss in the coal mine business. We had a decrease in earnings. That was somewhat by -- we had higher tons, lower average price and then we had a slightly operating cost. Some of that is, you know, reflective of the pension expense that we disclosed last year. And moving more dirt with respect to, you know, as our mine -- we are moving towards opening a new pit across the interstate so we had some slightly higher cost as we transitioned our coal mine.

Okay. And then with regard to the off system sales at the utility company, obviously, the megawatt sold increased and the price was substantially higher but you say most of that was offset by increased fuel and purchase power cost. Can you kind of elaborate a little bit more on that, particularly on the purchase power side?

Some of that was due to the higher prices of gas and it's also difficult in the first quarter, being the quarter that gas usage for home heating load was at it highest point. The prices to get gas to have our -- you know, to have our gas fired equipment increased substantially relative to other quarters.

But you would not expect this trend to continue as we go through the summer period, particularly with the weak hydro conditions out there, most system sales should be additive to earnings?

Yes, depending again upon the price of gas, if that continues. Right now, the forward trip looks high, not nearly as high as what we saw on a cash basis in the first quarter but it still looks high. Generation pricing or power pricing is a combination of what the gas price is and the hydro conditions. Hydro is proximately 80 to 85% of normal at this point in the west.

And finally, can you just remind us what you are targeting for communications in terms of losses for the year?

We are looking at 3 1/2 million to 4 million, which is really halving last year's loss.

Thank you very much.

Thank you.

Thank you, Mr. Woern. And the next question is from the line of Scott Haerld of Credit Suisse First Boston.

It's actually James. Hi.

Good morning, James.

I was wondering if you could provide a little more breakout on the integrated energy segment from a revenue or income perspective than what was just provided in the release.

Well, in the release, we generally have it to this level of detail in the Q which will be filed the 14th or 15th of may into next week, middle of next week. We have the segment. Each of those segments is laid out with revenue and income and statistics on the segment.

So wait for the Q for that?

Yes.

Additionally, any information on revenues associated with loss system sales? Or to we have to wait for the Q for that?

Historically, we have not segregated the off-system sales revenues. We tried to provide some guidance and price and production but not specifically laid out what the wholesale sales or the off-system sales revenues are. We do total revenues with respect to the utility segment.

Okay. I guess I'll wait for the Q then. That's all I have.

Thank you.

Thank you. Ladies and gentlemen, if there are additional questions or comments, please press the 1 on your touch tone phone. The next question comes from the line of Alan Fletcher who is a private investor. Please go ahead.

Good morning. I'm a long-time private investor. I was wondering what can you tell us about possible delusion in connection with that stock issue?

Well, what we have said is that we have reaffirmed our long-term guidance of earnings per share of 8 to 10% growth, but due to the diluted initial dilutive effect our offering of 4.6 million shares, we expect 2003 earnings from continued operations to approximate last year's results.

Thank you.

Thank you Mr. Fletcher. The next question comes from the lines of James Valessi of DA Davidson and company.

Good morning and congratulations on a solid quarter.

Thank you.

I was asking about energy marketing. I'm guesstimating but you have not said that the revenues there were in the order of 180 million dollars. When you reported a year ago originally, they were 203 million dollars. When you did the restatement for a new accounting method, they became more like 6 million dollars and, now, all of a sudden, they are back to -- we don't know, somewhere between 100 to 150 million dollars. This causes great confusion because you changed the method of accounting three times. That's not your choice but the accounting rule making body's rules. Is it possible to give us a historical pattern under your new accounting method so that we don't have to fight with the numbers for the remainder of the year?

Well, according, you know, to the pronouncement -- and you are exactly right. The accounting bodies have changed the guidance several times and we merely follow the guidance that's out there as to what we are required to disclose and how we are required to report earnings. We will do it on a quarterly basis comparative and when we do our annual, you know, our 10k, all of our filings will be on a comparative basis but with respect to, you know, giving out, you know, forward information under new guidance, we really need to do that on a quarterly basis, Jim, as -- because the guidance -- we follow what's in place at the time.

Is it precluded that you could give out the historical quarterly numbers for the last year? Right now, we have these three methods and they just don't make any sense.

What we will do is we will look and talk to the accountants and if we are able to give out that type of information, we will certainly look into that. And then we'll do that if we are able to.

Thank you very much.

You're welcome.

Thank you. Our next question is from the line of Tom Kramer of Remark Associates.

Hello, Mark.

Good morning, Tom.

Mark, do you have a debt repayment plan, say, for the next five years? What I'm really interested in is what your debt equity ratio might look like, say, by 2008 and will that entail additional equity offerings.

Well, a lot of that, you know, that's a difficult question to look at. We do have what our repayment schedules are. That's listed in the 10 K. As to how the debt matures.

Right.

Over the next five years. But the capitalization of the company, going forward and the capital we would deploy, how we finance that would depend on opportunities that come up. We have no significant construction projects going on at this point. As I mentioned, we completed all of our construction of generation. We have on going maintenance capital, but the determination of what our capital structure would look like in five years, I believe we'll continue to have a prudent capital structure as we have in the past.

Can I assume that all of the 118 million dollars will be used for debt repayment?

Yes, and that's what we say. We had a May facility, 50 million dollars that was coming due in May that we paid off. And the remaining 68 million dollars paid off the short-term credit facility which leaves us with 124 million dollars of availability under that facility.

What will the debt equity ratio look like after that payment, Mark?

Proximately 50% -- 57% debt and 43% equity.

Thank you very much.

Thank you.

Thank you, Mr. Kramer. And our next question is from the line of Paul Devine of Value Line. Go ahead, sir.

Hi, this is Paul Devine. How are things going with your tolling agreement with Allegheny. Are they meeting all their obligations?

Yes, they are current and they have provided, as we disclosed in our 10k. A 15 million dollars letter of credit supporting their performance under that power purchase contract.

Have they tried to renegotiate the deal at all?

You know, we are in discussion. They have been public about trying to look at their whole western book and ability to exit that from their company's perspective. And included in that could be something with our contract but we have not affirmed anything with them and it's been preliminary. We believe we have a good contract in a good location and we will work very hard to protect the value to Black Hills.

Okay. And when will you revisit your current regulatory agreement in South Dakota?

January 1, 2005 is when that current rate freeze expires. You know, we don't have to go back in. Once that expires, we will be under our existing rate structure and, you know, we continue to look at that and that continues to work well for the state and Black Hills in our opinion.

And finally, what other financing plans are refinancing plans do you have for the remainder of this year?

Well, we have a effective shelf which we want effective in the first quarter. We utilized that shelf to raise equity and we do have availability of debt under that shelf.

There would be no definitive plan to issue anything off the shelf then?

We could.

Okay. Thank you.

You're welcome. Thank you, Mr. Devine. The next question is from Neil Stein of Lebanon and Company.

My questions were answered. Thanks.

Thanks, Neil.

Ladies and gentlemen, if there are any additional questions or comment, please press the 1. At this time, we'll take a question from the line of Scott Pearl of Credit Suisse First Boston.

My question has been answered as well.

Thank you.

Thank you. Our next question is from the line of Gary Spiggs who is a private investor. Please go ahead, sir.

Good morning.

Good morning, Gary.

In relation to the Mallon acquisition and properties, where do you stand regarding future expansion of that, or is any of that going to be done yet this year?

Yes, we expect to drill up that property. We expect to spend 20 to 25 million dollars this year in part -- as part of our capital budget listed in the 10k to drill those properties to, you know -- not all of the reserves were, you know, producing and we expect to spend capital to get additional reserves and that will occur throughout the year to continue to grow our production and reserves with respect to that acquisition. We just closed that acquisition and, now, we are beginning to work on those properties.

Have they expanded the new pump apparatus for the current wells?

One of the things you look at when you are doing -- you know, going through that is evaluate all the equipment. If there are workovers we can do to improve the production of the 15 wells, we do that in our overall analysis and if that makes sense, we expect to do that as we would continue to grow our reserve there - in production.

Thank you.

Thank you.

Thank you, Mr. Spriggs. And our next question is the a follow up from the line of Paul Devine.

Do you have a specific annual production growth target?

We said historically that our growth from our historical oil and gas -- I assume you are referring to oil and gas, Paul?

Yes.

That would be in the 10 to 15% but we said we expect increased production 50% with respect to the Mallon acquisition.

Okay. And what hedging have you done so far?

We have historically done hedging in the 25 to 50% range and we are in that range currently.

Thank you.

Thank you. And our next question is a follow-up from the lines of James Valessi of DA Davidson and company.

I'm asking about Mallon. The reserves increased 1.4 fold with the acquisition. Yet, you are only saying that production this year will be up 50%. I think you have been explaining that they were not very well run operations and had to be brought into better efficiencies. For next year, though, what kind of increases might you get out of your production?

Well, two things, Jim. I wasn't saying that they were not very well run. I was saying, as normal course, we go through, and most oil and gas companies go through and look at their wells that are producing and if there is a way to do a workover and improve production, they will do that as part of their normal planning but we have not provided guidance. We would expect, as we continue to deploy capital and drill up properties that we could provide guidance later in the year. I'm not prepared at this point to, you know, as we see successes in the drilling program and get a better idea of the production profile of those wells that we would drill, you know, then we would provide guidance. At this point, I would not be able to do that.

Do you have any tips as to what we should add to earnings for next year, maybe leaning to the direction of ramping up that production? I think you indicated previously you didn't think it was going to be additive this year.

Well, again, the only tips I would provide is we expect our long term growth rate to be 8 to 10%. We would expect to be in that until we change our guidance.

And 8 to 10% in the natural -- I'm talking about the natural gas.

No, I was saying overall to earnings. We don't provide specific guidance to the individual segments, and we would look at, to the most extent, but we would -- it would depend on the production rates and the forward price curbs that we would see at the time. At this point, I would not provide that guidance until we got closer to next year.

Thank you very much.

Thank you.

Thank you, Mr. Vellassi. The next question comes from Dan Daley of Rapid City Journal.

I just wanted to ask you about Black Hills Fibercom, when do you expect the communication business to become profitable?

2004.

You're going to do that by adding more customers in that amount of time?

We would expect, you know, a number of things to add additional customers to increase our efficiencies as we built out our capital, we can increase our efficiencies, operating efficiencies and we did just publish, as you would know, being local, we did publish a directory that we would expect to be additive as we move forward as well.

Okay. Thank you.

Thank you.

Thank you. And our next question is from the line of Jim Harmon of Lehman Brothers. Please go ahead.

Good morning, Mark. Good morning, Dale.

Good morning.

Can you remind us what our capital expenditure and cash flow assumptions are?

Our capital expenditures for '03 are proximately 270 million dollars and '04, 312 million dollars. That's in the 10k. That includes 150 million dollars in '03 of development capital or growth capital that is yet to be defined and we would look for opportunities that meet our economic criteria and do those if they are available or not if they are not available and in '04 that number is 200 million. Our cash flows from operations have been historically in the 180 to 200 million dollar range and we expect that to continue for '03 and then grow as our earnings grow in '04.

But as far as the total maintenance capital number excluded from discretionary.

Maintenance capital, if you look at the businesses, we do have one project in the utility going on the A C/D.C. tie that will increase the utility expenditures this year. But the continuing -- then return to a continuing level of maintenance capital in the 20 to 25 million dollars range. Our communications are 8 to 5 million dollars as we just have customer capital and some minor maintenance. So, overall, our maintenance capital is proximately 70 to 80 million dollars and then you have the dividend if you consider that a requirement, a capital requirement or a capital expenditure. So it's around 100 to 110 million dollars.

Thank you.

Thank you.

Thank you. And ladies and gentlemen, if there are any additional questions or comments, please press the 1 at this time. Thank you, ladies and gentlemen. And at this time, sir, I will turn the conference back over to you. There are no further questions.

Thank you very much, everybody, for your interest, and have a great day. Thank you.

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