Black Hills Corp (BKH) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter earnings call for Black Hills Corporation. At this time, all participants or in a listen only mode. Later we will conduct a question-and-answer session and instructions will begin at that time. If you should require assistance during the call, please press star then 0. As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Dale Jahr, Director of Investor Relations. Please go ahead, Sir.

Thank you all for joining us today. 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 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 events will be led by Mr. Mark Thies, our Executive Vice President and CFO. Mark would like to start off reviewing the press release and then we will open it up to your questions. Mark?

Thank you, Dale. Good morning everyone. We just released last night our first quarter earnings and in that we had $9.7 million of net income or 30 cents a share compared to $14.1 million or 52 cents a share in the prior year. Income from continuing operations was $10 million, again, 30 cents a share compared to 15.7 or 58 cents a share compared to the first quarter of 2003.

We had a number of things that affected our activity in the first quarter, with higher earnings from our oil and gas segment and that is largely due to the last quarter of no comparison. We acquired Mallon Resources in March of 2003 so this is -- we had 60 percent increase in our production that we would expect that percentage increase to decline some as we go forward but we do expect to continue to have strong production from our oil and gas segment.

In addition we had higher prices. The current price the current prices, market prices are very strong relative to prior year. Our marketing operations had stable earnings, really offset lower margins with higher volumes and that allowed us to have stable earnings in our marketing segment.

The biggest decline, primarily two reasons. Our generation segment had a loss of $2.1 million in the first quarter, compared to $3.4 million in the first quarter of last year primarily due to a couple of things. One we no longer have a contract or we no longer had a contract on that plant for the first quarter. We did get a new contract that began April 1 and that plant has been operating very well as we go forward in the second quarter but in the first quarter results we had no contracted earnings and really marginal opportunity for getting margins in the first quarter.

And we still had all the expenses associated with that plant, relative to interest and depreciation and transmissions. So we expect that to improve significantly in the second quarter.

The second impact is, we still continue to have significant cash balances at the end of the year. We had $172 million in cash balances and we have that increased in the second quarter even though we did pay down some debt in the first quarter.

So we continue to carry those cash really, primarily, for two things. Looking for opportunities to deploy that capital. We have one opportunity we expect to close later this year. Again our Cheyenne Light Fuel and Power acquisition and we expect to grow close that by the end of the year. And we are moving along the regulatory process with that.

In our utility business, we were down in the first quarter relative to last year primarily due to higher gas prices and lower op system sales. We did have some planned maintenance occurring in the first quarter and we expect to have some early in the second quarter as we have some scheduled maintenance for our operations but that really gets our fleet up and running for the summer season.

So we expect to see improvement as we go for from our utility.

Our communications business was flat with last year and that's really -- we view that as positive in that we have lower costs and we were able to offset our competitors' pricing campaign. As you recall from prior quarters' discussion in the late third quarter and the fourth quarter of 2003, our competitor offered a significant pricing discount to our customers. And we had to match that for certain of our customers. That had a full impact in the first quarter, we expect that impact to lessen in the second quarter and going forward in the third and fourth quarters we will be back to our full pricing so we expect improvement from our communications business as we go through the year.

We did have a slight reduction in customers on a residential basis in the first quarter but not a significant amount. We expect to continue to slowly increase our customer base as we go forward.

We did, I guess we changed our -- changed or narrowed our range on our guidance previously. We had been $2 to $2.35 for the year but based on the results of the first quarter and expected timing of deployment of our cash into earning assets in the retail businesses, primarily Cheyenne but we're also looking at other opportunities, we don't expect that to have an accretive effect in the first quarter or in 2004 -- excuse me. And so we have lowered or narrowed our range to $2 to $2.15 for the year and we continue to expect strong performance from our oil and gas business and our marketing business given the current market conditions.

There are market conditions shaping up relative to power prices in the West due to the Hydro situation out there but we have not forecast significant benefit from that in our forecast. We do expect to have normal off system sales or wholesale sales that is somewhat dependent on the price of gas as gas clears the market in the West.

I would now like to open up the call for questions.

(OPERATOR INSTRUCTIONS)

Michael Worms, Harris Nesbitt.

Question for you. In the press release, it suggests that on the segment and wholesale energy, related to the power generation or the business, that you had lower revenues and that's understandable with regard to Las Vegas. But it also indicates that you had increased fuel costs primarily related to Las Vegas. Can you explain that because I would assume that without a contract you weren't going to run the plant and yet you've got increased fuel so can you just kind of give us a little bit more on that?

Yes we did Mike, we did run some, that plant some on days when it was opportunity to take advantage of its spots sales of that plant and in the first quarter of the prior year in 2003 that was a complete tolling arrangement so we didn't have any fuel expense. That was responsibility of our tolling party so when we run we had the revenue differences, we had contracted revenues last year and spot revenues this year. So they were lower but to get the spot revenues we did have to run the plant and incur fuel expense so we had higher fuel expense.

I understand that now and can you give us a little bit more on the timing of when you're going to redeploy the cash if there aren't any significant acquisitions to be made other than Cheyenne. Are you looking at taking down some debt?

Well, our first objective with our cash balances and the reason that we're carrying the cash balances is because we believe there may be some opportunities in our development group continuing to look at opportunities that we feel at least at this point that we should retain the cash to be able to deploy that capital into those opportunities should that not come to fruition. Or we believe that the timeframe for that capital deployment would be delayed then we would look at yes, buying down some of our debt and additionally repurchasing stock. But our main focus primarily, currently, is carry the cash and to look for continue devaluation of opportunities that we have.

Would there be implied in that would there be something that you are closer to looking at or doing than perhaps just looking?

Yes. There are a few things that we're actively looking but we're not to a point where we would have an ounce of all transactions. We do feel in the next 90 days or 180 days that we will have a lot of information or be further down the road to be able to say, to make that determination as to whether we're going to continue to retain that cash because we have a transaction that we believe will become announcable or we would look at the alternative options if we feel at that point that they are -- we don't expect those to come to fruition in a reasonable time period.

Jeff Gildersleeve of Millennium Partners.

Just a follow-up on Mike's question. Just want to make sure on the gas fuel exposure, that is, with the new contract there's no fuel exposure there, right?

Correct but that contract didn't go into place until April 1st.

That's right and back home at the utility you know, you usually benefit to varying degrees from all system sales and sort of the counter to that is you take on the fuel risk. Could you just let us know or give us a sense of what you're seeing there and what the impact of potentially higher fuel costs at the utilities were?

Well, really, the impact of higher fuel costs resulted in lower off system sales. We didn't run those plants because it wasn't economic to, based on the market price of power relative to our fuel cost so it's not as much that we have a significant higher fuel cost relative to our utility and our core retail operations business. It was a lost opportunity on ability to sell wholesale sales so we had a reduction in our wholesale sales revenues and earnings because of the higher gas prices primarily.

And then, finally, on the earnings guidance update (indiscernible) you talked about the narrowing of guidance takes any consideration possible additional delay and you list a number of things. I understand that delay in deployment of capital if there are no attractive opportunities but why would there be a delay in debt reduction or stock repurchasing?

Well it's really as I was trying to explain before -- maybe I did not do that as clearly. We are retaining the cash because would love to have opportunities to deploy that. You wouldn't necessarily embark on a significant reduction in debt or stock repurchase if you expected to have that opportunity to deploy the capital into earning assets. Because we knew that the analysis based on what the negatively arbitrage costs us up until a point of refinancing or reissuing capital in the event we had a new opportunity to deploy that capital into. So we continue to evaluate that very closely and to the point where we feel we won't be able to have or the timing of new capital would not be there, then we would look to repurchase debt and/or repurchase stock and then we would not delay. We would just implement that.

Okay and so the guidance in '04 does not include any accretion from any investments that have not already been made?

Correct, well, that's correct.

Jim Harmon of Lehman Brothers.

Two quick questions. One is relating around what your balance sheet looked like at the end of the first quarter and maybe an update on your discussions with the ratings agencies and then, the second question is, have you been able to take advantage in run up in NYMEX for your MP (ph) division? And lock in some additional hedges?

We continue, we continue to look I guess I will go with the second one first if you don't mind because the run up in NYMEX we do expect and we say in our guidance update, that we do expect continued strength in our oil and gas business relative to increased production and the strong price environment. So, yes, we believe we will be able to take advantage of the higher prices and expected continued increase in production in our oil and gas business. With respect to our balance sheet at the first quarter, our 10-Q will be filed on Monday. So the but it did not change significantly from year end. We still have strong cash balances and our debt to equity is very similar to where we were at year end.

Okay I also believe you stated that you normally lock up 25 to 50 percent of your production on an ongoing basis. Have you thought about maybe going above that range?

We look at that relative also to the expected uses so we do have one plant, our Las Vegas I plant that has fuel risk (ph) so part of our hedging program includes an internal expectation that we will need to burn gas at that plant and the results in generation were down slightly due to that. It was down for a number of reasons but down due to higher gas costs. That's offset by the stronger production. We actually benefit as a Corporation in total by higher gas prices because we produce more gas then we use in our plants. So we do, we keep that in.

We look at that, Jim, with respect to your question on would we consider going higher? We want to make sure that we get a firming of our production levels and then at that point once we bring on new drilling or new compression and new pipeline, which we expect in the second quarter to come on to get additional gas out of our Mallon field, then we would look to put additional hedges on.

Paul Debbas, Value Line.

Even, just to get to the low end of your guidance you are going to need to have a really good year-to-year increase over the remaining three months. And I mean, is there anything else besides the fact that you expect better oil and gas earnings and I don't even know if contract in Las Vegas is positive year-to-year but what other factors would help you get up to $2?

Well we expect to get strong -- as we acquired Mallon and continued to drill, the oil and gas is not just the price but it's also the production. We expect to have strong production year over year as well as a strong price environment. Our marketing operations, we expect to have, given the way that the markets are shaping up, we expect good results from our marketing operations which included a big negative last year that we don't have in this year's results.

In addition, we -- there are, we are continuing to manage the communications business. We expect continued improvement in our communications business. That didn't show up in the first quarter because we had a significant portion of that prior year's price competition affecting our first quarter but we expect that to go away and we expect improvement in our communications business as well. So we do -- and then that's why we have the guidance that we have is we believe we can achieve that.

Okay and are you any closer to making a decision on whether you will need to file any sort of rate case in South Dakota once your current agreement expires at the end of the year?

No, we're really just into the evaluation of that and so we're not I mean we made progress but are we any closer to where we had anything announced? Nope. It's very similar to where we were and, again, nothing happens with our rates. When the clock ticks over into the new year, our rates stay the same. And we don't expect anything to change on that unless we unless we go in and look for that but that -- the Commission has historically not called companies in with good service records and we have a sterling record of service with very few complaints.

I would think that if you decide you do need an increase and you want to have it in place at the start of next year you would have to make a decision to file pretty quickly.

Yes we expect the second quarter, second quarter, early third quarter to have that, have that wrapped up. To where we would have a decision as to whether we're going to file or not.

Eric Beaumont, Hobbio Capital.

Couple of quick questions. Just thinking about off systems sales and VIPP (ph). You know we've seen a lot of warm weather in California and obviously the elevated commodity prices. Can you just help us think about what sensitivity drive obviously in your guidance and we've seen the forward strips go up for summer in a lot of the regions. Can you remind us again where your kind of long, where the prime markets for selling both the ops system and the IPPR and the sensitivities you have with respect to commodity levels price?

Well with respect to our utility we are long generation. We have 485 MW of required capacity, including a power purchaser for 15 MW and our peak is 392. We are a summer peaking utility. So normally in shoulder periods, we're able to take advantage of our low-cost generation and have wholesale sales. We did have some plant maintenance that was occurring in March and some in April that we expect going forward for future months we will have our full fleet up. And that happens generally every four or five years and when we try to take down our plants staged across all of our coal plants and some of that occurred so we weren't able to take advantage of it in the first quarter the opportunity for those wholesale sales.

But, otherwise, we are able to taking advantage of that opportunity assuming the sparks (ph) for us there in the West. We have seen stronger pricing in the West and the one plant that we do have out there, our Harbor facility, has been running to take advantage of that. All our other IPP plants, now that we have the Las Vegas II Plant contract beginning April 1st are running or under tolling arrangements so except for the Wygen plant which is a fuel coal plant we have our own coal supply. But, otherwise, they are all contracted plants over 90 percent of our generation for the IPP site is under contract. The Harbor facility has a summer contract from June to October. So we don't --a five-year summer contract from June to October, so we would expect that April and May we would have an opportunity to take advantage of markets sales but after that that plan is contracted. And we will see those earnings come into our generation segment as well.

Okay and getting back to utility real quick. With being long in summer. What markets can you reasonably access given transmission constraints just so -- if we're looking at the clearing prices for the different regions, where do you typically sell?

Well we have, again, a unique arbitrage between the Eastern and Western grid. So to the extent that we can do that and that's right here in Rapid City that we can arbitrage those grids. So the first look for our utility is it's cheaper to purchase power or generate on our own so we can do that analysis. And our production folks look at that every day. But we can arbitrage between the grids here at Rapid City. Our ability to get to the West comes through that transmission agreement that we have as part of our power purchase agreement that allows to get to mid Columbia which is a pricing point in the West and we can do that over -- we have rights over PacifiCorp's transmission system to do that.

That's a 50 MW contract.

Bill Hyler of Avery (ph) Partners.

Mark, a couple of questions. One did you mentioned in your opening remarks that the cash balance approximates the year end number? Or are we waiting for the balance sheet data on that?

The balance sheet will come out on Monday, Bill, so I didn't name the cash balance. It is still strong.

Okay that's good. Question on the off systems sales at the electric utility which was down. Was that largely a function of regional prices or was the did the on system, your distribution requirements use most of the capacity?

As you see, our firm sales were up slightly a percent and a half so that has some, some impact but not a significant impact. The larger impact is higher gas prices having plants down for some scheduled maintenance and then having to run -- we had some reduced capacity just because we had scheduled maintenance and high gas prices. So. The higher gas prices made it difficult at times to have wholesale sales in the first quarter. Again the prices in the West are impacted. They did have some Hydro in the West and the prices (indiscernible) really have expanded in the second quarter not in the first quarter.

Right, but the ability to use some of the coal assets, the coal plants off system. Was that compromised by greater on system use?

Partially but also we had some maintenance going on. It's a combination of a number of things. None of which are huge, but they -- we did have a number of different impacts. We do use our coal for our base load that's true. You're exactly right.

Okay and a question on the gas marketing which saw a big increase in volumes but looks like the margins fell there. And I guess that's largely just a function of the differentials between the Rockies and California, Canada to California which came in. Is that a big factor there?

Yes. The margins that we made really returned to normal levels and we didn't have an increase in our volumes. Again that's just a stability, our marketing business and being in a business with serving end users and aggregating supply, we've had good strong consistent movement of gas. But we are subject somewhat to the market margins and they have come down quarter over quarter.

(MULTIPLE SPEAKERS)

You're exactly right we do move Canadian Rockies gas to the West, Southwest, and some Midwest.

So normally that the trends, the operating performance does tend to trend differentials between the Rockies in the West so if we see those open up over the next -- through the summer there may be some opportunity to enhance margins?

Yes.

Gordon Howell. (ph) (inaudible).

Unidentified Speaker This is actually Angela. (MULTIPLE SPEAKERS) Actually my question has been answered on utilities but whether or not your rate case -- what is the ROE including wholesale sales? Can you tell us that or is that something we can figure out?

Well we haven't been in for a rate case in nearly 10 years. And we don't have --our wholesale sales are generally our wholesale off systems sales are generally excluded. We take the fuel risk and the operating risk for that yet we're able to retain the margins of the benefit of that. That's been part of our rate structure for the last 10 years. And we don't -- the normal -- when you look at normal market ROEs for utilities they are in the 10 to 12 percent range.

So is there a way to figure out what it is for you including wholesale or how would I...?

We don't really because you can look at the 10 K for Black Hills power which we do file. They file separate financial statements and a separate 10 K because of our public debt so if you'd would like to do that that is public.

Mike Werner with Kennedy Capital.

I have a question on the tolling arrangements that started April 1st. Would that -- if you -- I don't know -- how would you do this or not but if you had that running say for the first quarter would the loss have been -- would there not have been a loss or how would that affect -- I guess -- or if you want to look at it going forward for the second quarter I mean, how is that going to affect that particular segment?

Well, we expect that because we say the reason we have the loss was largely due to the limited dispatch and we still have the costs of depreciation and transmission of all the requirements that we had to have in place for that contract to be instated. So yes, guess we would expect improvement. We don't go through plant by plant impacts to our quarter but we would expect you know -- we would expect not to have continuing losses out of that segment going forward.

Okay. Did you ever go through how much in terms of -- once you closed the Cheyenne utility would you you -- how much would you expect to have in terms of accretion from that particular acquisition?

What we said is it's $80 to $90 million for an acquisition, total assets and a typical utility rate structure is 55 percent debt, 45 percent equity. So we would expect taking the asset base and usually -- and I want to state this from a regulatory perspective as our regulatory guys might get me. You do not necessarily get 100 percent of your asset base in rate base so if you took some discounted percentage for an assumption purpose, 90 percent that's -- I don't know that that is typical in all areas. But you take 90 percent of your assets the capital structure on it and then you'll get a 10 to 12 percent ROE type of return that will give you an expectation for what the impact would be as we -- for a full year basis as we close. They are... They don't have generation that is a pass-through for them. They are a T&D, transmission and distribution company so they do get their earnings on their customer base, relative to that. But they don't have power risk as they have a power purchase agreement all requirements with Public Service Company of Colorado that runs through 2007 and that's a pass-through approved by the commission. So the variability of that we would expect to be reasonably small.

So if I went through that math, I would be able to come up with a number that should be roughly (MULTIPLE SPEAKERS)

Generally speaking as (MULTIPLE SPEAKERS).

In line with giving your diluted share base what you should expect?

Yes.

And then the -- remind me that the stock offering last year that increased -- last year that increased your share base? What was that for?

At the time we had increased our leverage percentage. We were about 64 percent debt because we had deployed a lot of capital in contracted power plants and the ratings agencies came out in said those are all on credit and we needed to improve our capital structure So we did issue -- issue 4.6 million shares or $118 million net in April of last year and then followed that up with a $250 million bond offering on senior unsecured notes at the holding company. And that really paid off a significant amount of short-term debt that we had. We carried short-term debt through the construction period in March or I'm sorry -- in January of last year in 2003 we brought online the Las Vegas II plants and in February we brought online the Wygen plant, 90 MW coal plant. So we had two significant construction projects become completed and we had funded those largely through short-term debt. And we got our debt, our capitalization to match what we should for those assets and that's why we raised the equity as well as the debt last year. The reason we are carrying the cash balances we are is in the late third quarter of 2003, we bought out or sold our contract on the Las Vegas plant for $114 million and then we also some eastern hydroelectric assets for $186 million.

Okay, now, I understand. And you mentioned -- you mentioned that because of the lower Hydro conditions that you see some stronger spreads starting here in the second quarter. Is that kind of what you reiterated what you pointed out earlier?

Yes. That's what the current conditions are out in the West. And they are also weather-related too they're having very hot weather unusually hot weather for this time of the year in the West and, typically, a number of utilities were no different. They do a lot of the maintenance on their plants in the April May time frame in advance of the summer season so there's a number of -- there's factors. The Hydro is down somewhat. There's more weather it's hotter and companies have their plants down for scheduled maintenance and that's causing some pressure on pricing in the West. To the extent we're able to take advantage of that, we will.

That's great and, lastly, on the marketing -- on the marketing operations, again, could you remind me of the big negative that you mentioned was last year? Versus this year?

We had a $3 million fine with the CFTC, Commodities Futures Training Commission.

James Bellessa of D.A. Davidson.

Your press release indicates that you had higher interest expense. I went back and looked that in the first quarter last year you had about $14 million of it dollars of interest expense so your press release had suggested it's higher than that. My question is, why is it higher given the run rate of interest expense last -- in the second half of last year? Was $11 to $12 million a quarter.

Well recall we did have interest expense for some period in the -- last year did include interest related to the plants that we had in service for the hydroelectric plants. And we did issue the bonds, $250 million of bonds in the first quarter, or in the second quarter in May of 2003 whereas we didn't have that. We had much lower interest rate short-term debt in the first quarter of 2003.

I can see that you've issued this debt and that there would be interest expense for it, but ever since the second --

Paid down short-term debt Jim.

You paid down short-term debt. Okay.

Your production figures that you cited today, impressive 60 percent increase in production. However, when you reported last year at this time, you indicated a production figure that's different than it is in the press release today. What caused the change?

That was as you recall from I believe it was the third quarter of January -- I forget which release we had -- the January release, we did identify -- we -- the numbers the production numbers we have in this release are accurate and our annual numbers for last year are accurate that we had in our 10-K and annual report. The first quarter release operations of last year had some numbers that were in error. We looked at that and said it did not affect the financial performance at all as our earnings numbers were accurate in both cases that we decided not to change. But we did see that in the first quarter and we would expect a slight change in the second quarter merely on the production numbers. Our earnings and our our results are the same. But, recall, last year in the fourth quarter we did have that change that we identified and that was all during the time in which we were acquiring the Mallon acquisition. And we had some data that in error got included in our release from a production number basis that we have corrected.

(MULTIPLE SPEAKERS)

Would you be able to provide the historical quarterly production figures that are correct now?

Yes it will be -- this quarter it is historical and it is correct and next quarter will be the only other one. After that, it is correct.

But you can't provide the second quarter figure? Now?

If you take the difference between the annual number and the -- now that you have first quarter the only other quarter second quarter, you can back into it.

Mike Weinstein from Simcare Lucas.

I just wanted to ask a question about the telecom business. I may have missed this if you've already spoken about this in the Q&A. I may have missed it. Just wondered if you could go over that again? Is the the price war is over now? Am I to understand that correctly?

It occurred through the end of last year and we had six months. What we did in response was offered six months at a discounted price that required 12 to 18 month contracts so we're still in that period. It occurred -- started in late third quarter and then in through the fourth quarter so the first quarter got the full impact of our discounted pricing. Second quarter will have some impact and then beyond that we're back to our regular pricing so they haven't -- we haven't seen at least to this point any additional activity there. But we still feel the effects of it in our results.

I see. So, the second half of the year though that (MULTIPLE SPEAKERS)

Yes. Absent any changes we would expect to be back to normal pricing for our customers.

So it's safe to say this year should be better then last year whereas last year was kind of flat as the year before.

That's correct. And our guidance out there for this year is $3 to $4 million loss and we are 5 and -- 5.7 I believe -- we're just under 6 million.

We do expect some improvement. Thank you.

All right.

John Hatson of Emporium.

I think most of my questions have been answered but let me just go to a couple of clarifying items here. One is on your guidance. Can you give us an indication as to what your oil and gas prices that you're using inside of those?

We look at what the forward market price is at the time we give that to you, really, have to look at the strip and that's what we use. We think the NYMEX strip then take a basis differential or historic basis differential back to our wells and those wells are all over so it's not one consistent difference. But we do look at the forward NYMEX strip for the reminder of the year and that's how we base our expectations.

And your level of hedging -- oh, we already did that. Let me come back to the second area. The power market situation. We understand that the Hydro situation even in the last week or two has deteriorated even further. Is it fair to say that you benefit from that kind of thing? You're not exposed any way on the minus side of that, are you?

We always have operational exposure that if our plants for some reason did not run and we had to purchase power there is a potential there. But our plants have historically very very strong rate mid 90 percent running for our coal plant which is just absolutely terrific. So there is a possibility but we don't look at that. We look at it as more of an opportunity and especially in the months where we are not peaking. In the summer July August, September, depending on our weather in our own service territory does have some impact on our ability to take advantage of that but we do we have historically been able to take advantage of that.

So in general that Hydro situation is a plus, is a plus for you?

Yes I would say that. That's accurate.

I'm not quite -- I know you've talked a lot about being able to sell both to the East and West. I understand that Manitoba, the Hydro situation is also quite dry. Would you be able to reach back into markets that that might affect as well?

No, I think that's too far. We can get into Man and maybe possibly if it got real out of line main but we don't we can't get further east than that. So our business is largely if there is our arbitrage opportunity is if there's cheaper power it's bidirectional. So if there's cheaper power in the East we can buy in the East and sell to the West and vice versa. So if it is cheaper in the West and prices are stronger in the East we can do that but we can't get too far East. It's really got to be Man (ph) or Maine.

Yes I think so that Hydro from Manitoba just does flow down to (indiscernible) so there may be some advantage there but let me come back to -- you mentioned that the first part of the year you've had some outages on your plants and you kind of got those behind you.

Just to clarify it was really scheduled maintenance. (MULTIPLE SPEAKERS)

THEY were outages but they were scheduled maintenance outages.

Sorry used the wrong word there but on the plant maintenance do you have any other major plant maintenance coming up here for the part of the year?

No again, we will have some early in the second quarter. We did some in March and we will do some in April and May but we would expect by the middle of May that we would effectively not to say that it is all done at this point today but we expect by the middle of May to be done with all of our maintenance in advance of the summer season.

(OPERATOR INSTRUCTIONS)

Steve Percoco (ph) of Lark Research.

Could you talk a little bit more about Mallon Resources and your other oil and gas production operations? What type of production increase do you expect for the year, what's the drilling activity like, what do you expect with regard to reserve replacement, do you to plan to purchase more oil and gas assets?

Well I'll answer the last one first. In this environment it is very difficult because price is so high, we found that is difficult. We do continue to look for those opportunities but, given the current pricing environment and the forward expectation of pricing in the current strip, we don't believe that that's a short-term opportunity. Long term, we expect to continue to look for those opportunities. With respect to our production and our drilling we did increase our production, significantly, in the first quarter. Because we didn't have a comparative quarter appeared we would expect historically -- we've been in the 10 to 15 percent increase in reserves and production on an annual basis. Now we have enhanced our drilling program because of Mallon and the opportunities there so as we continue to drill those properties up and get additional production from there we would expect our production to increase and, really, we don't forecast a specific mile we will just demonstrate those increases on a quarterly basis with our releases. But we do expect increased production over and above last year the last year's production including Mallon as well.

Aright but the 10 to 15 percent range still is where you think you'll be?

We think we could be somewhat stronger depending on our ability to get all those properties drilled up and a lot of that is you're just starting your drilling program now due to weather and it's the ability to get those drilled up and hooked into the system for production so we try to report that, conservatively, in that 10 to 15 percent because a lot of it is timing of drilling and getting those wells hooked on and then it really affects even going forward next year's production.

Okay. On energy marketing and trading, I understand you move physical volumes from the Canadian Rockies to parts of the West and Southwest and the like. But you do other types of energy marketing and trading too and does that explain your -- the increase in your activity level? I mean, what exactly is that?

Well there are two components to our energy market. Our gas marketing, really, is exactly what you described. We move gas from the Rockies and Canada to the West, Southwest, and some to the Midwest. That is where we're seeing the additional volumes albeit at somewhat lower margins or more normal margins in the first quarter. We also have an oil marketing business that has midstream assets pipeline. We have two pipelines that came on last year in the -- to move oil from the port to the refineries or distribution points in Texas, East Texas so, really, it was an addition to this year as we have those pipelines the full ownership of those but that would be a very consistent and stable part of our business as those are contracted assets.

So the ebbs and flows in volume and margins are driven by activity in the underlying fiscal volumes, mostly, are you saying or... ?

Well it's really the opportunities to -- from our existing customers or new customers from a perspective of ability of their needs to use gas. We don't -- we're not -- our business is not generally focused on just wholesale between marketers it is end users. So the ability to add customers because of our consistent track record of delivery of gas has enabled us to pick up some additional customers as well as with an improving economy some of our existing customers are needing more gas. So it's a combination of new customers and increased requirements of existing and they are primarily industrial and LDCs distribution companies utilities.

So assuming that you hold those customers, you would expect your volumes to continue to have favorable comparisons? Going forward? I mean, what's the outlook?

We -- generally, we have a very very strong first quarter and in the winter season is obviously a strong gas usage period so what we have said historically is we expect to grow, reasonably grow, our volumes. I think first quarter was a strong period because, again, it is a winter season so there is more usage, customer usage in that period. Whereas the second quarter the volumes you may not see necessarily the increased volumes, it is seasonal. Fourth quarter and first quarter are stronger just because the customers have higher needs.

Okay, but -- (MULTIPLE SPEAKERS)

But overall on an annualized basis yes, we would expect to retain our existing customers and increase -- continue to add some new customers.

Is there anything that you can say as well about your policies with respect to risk exposures?

We are very conservative. Our VAR or value risk, we don't take significant positions. It's $2 million on a 99 percent competence level for three days. We really look to, again, have primarily transactions that are back-to-back or matched transactions and we will do that either on a -- with an actual physical (ph) or if we have a physical purchase or sale, a financial contract until we're able to replace that with a physical. But we do take some transportation or storage or other opportunities where we may have to take a position and hedge out a portion of that position with actual transactions. And we may have some open opportunity but that's really not --

We don't risk a significant amount there. We have very strong risk management practices. Our senior VP of risk sits on the trading floor in our office and we've really focus on that. So I wouldn't -- we -- we're not completely risk adverse yet. You have some risk to be able to take transactions but we manage that very tightly.

Okay and then, finally, you may have covered this before maybe even in prior calls. But can you give us a sense of the profitability comparison on the new Las Vegas II contract vs. the older contract that you have with Allegheny?

We don't go out and have specific guidance on a particular plan. We did put in a contract that began April 1st and I guess the comparison or the differentials you'll see some of that in results as we report results in the second quarter and going forward. The contract was at market prices for a long-term contract that is a tolling arrangement with Nevada Power so we took -- we paid and we received $140 million for our contract with Allegheny so we again took an impairment of $117 million of our assets. So we do have some reduced depreciation or costs associated with that plant. And it's a market rate. So we don't specifically give guidance on the contract results, you'll see those results at the second quarter.

You have no further questions at this time. Please continue.

I would like to thank everybody for their participation of our first quarter earnings call and have a nice day. Thank you.

Ladies and gentlemen, this conference is available for replay from 12 noon Pacific time today until midnight on May 14. You may reach this call by dialing 1-800-475-6701, using the access code of 729309. That number again is 1-800-475-6701 with the access code of 729309. That does conclude your conference for this morning. Thank you very much for using AT&T Executive. You may now disconnect.