Black Hills Corp (BKH) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the quarterly earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded today, February 8th, 2005.

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

Thank you. And welcome to Black Hills Corporation's conference call held in conjunction with the release of fourth quarter and year-end 2004 results.

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 will be led by Mr. Mark Thies, our Executive VP, and CFO.

Mark would like to start with a review of recent results before we open the call to your questions. Mark?

Thank you, Dale. Good morning, everyone. And welcome to our year-end earnings call.

In the fourth quarter of 2004 we did, again, continue our return to a normal earnings profile. We recorded $19.4 million or $0.59 a share, compared to 7.9 million or $0.24 a share last year. And from continuing operations we had 20.4 million or $0.62 a share, compared to 9.6 million or $0.29 a share. That was really driven primarily by 4 things. The increase in our oil and gas production earnings was $3.8 million or $0.12 a share. We increased our production from oil and gas 10 percent in the fourth quarter, and 16 percent overall for the year. So a very good showing for our oil and gas production.

In addition, we did increase our year-end reserves by 11 percent to 173.4 billion cubic feet equivalent. Again, a normal-- a very strong showing from our oil and gas production. We have had some operational difficulties earlier in the year and we are now returning to a normal profile or growth profile from that business. Our power generation earnings increased 2.4 million or $0.07 a share. And that compares favorably primarily because, if you recall in 2003, we had sold our contract in the third quarter.

So for the fourth quarter and the first quarter of this-- of 2004, we operated that plant as a merchant plant and we recontracted that plant in April, starting April 1, 2004. So, we expect that our earnings will be benefited even in 2005 in the first quarter because we were still merchant in the first quarter of 2004. In addition, we continued to reduce our communications losses, improving by $1.9 million, or $0.06 a share.

And we reduced corporate losses-- or corporate costs 2.4 million or $0.07 a share, that's primarily 2 reasons. We allocate more of our costs to our subsidiaries, which is included in their results, that's offset partially by increased costs related to Sarbanes-Oxley compliance and our formation of a holding company. So a very strong quarter for Black Hills.

And looking forward, we maintain our guidance of $1.85 to $2 a share. That is expected to come from-- or increases are expected to come from continued improvement and growth in our oil and gas production, some accretion from Cheyenne Light, Fuel & Power, which we acquired in January of 2005. So, that is not reflected in our year-end results. We did complete that acquisition in January. Some continued improvement in our communications business. And an increase in our power generation business, again because the Las Vegas Cogen II plant was not contracted in the first quarter.

We do expect some small declines from Black Hills Power, our electric utility, due to a planned outage at our Wyodak plant. That outage currently has moved from the spring to the fall, and we expect that outage to be in the September/October time frame. Still within the year of 2005, still maintained within our guidance. That negatively affects our electric utility as well as our coal mine as there are-- that plant is our largest coal customer so we do expect some reduction in coal from our-- from the Wyodak plant sales.

Given the increased outlook at the $1.85 to $2, the board in January did increase our dividend for the thirty-fifth consecutive year, to $1.28 on an annualized basis, which is a 3.2 percent increase from the $1.24 that we paid in 2004. And this is the thirty-fifth consecutive annual decrease-- increase, and we're proud of that record as we continue to return dollars to our shareholders.

For the year, we operationally had very good metrics in our energy businesses. Our coal production was relatively flat, despite an outage in 2004. We expect that to continue with the major outage in 2005. Oil and gas improved, as I mentioned earlier, 10 percent in the fourth quarter and 16 percent throughout the year. We do expect to continue to increase our production from our oil and gas business, primarily in our New Mexico property, Black Hills Gas Resources, we expect to continue that.

Our marketing business, gas marketing, again had very strong volumes in 2004. And we expect that increase to levelize. We do not expect to have 40 percent increases every year. We do expect to maintain what we've got in our overall businesses.

Our utility on the firm sale, we were negatively affected by weather. Our overall weather in our service territory for the year was down, as you can see from a slight decrease in firm sales. We are able to make that up through increased off-system sales, albeit at lower margins. Those are market sales because of our position in the market, we can arbitrize the east and west market. We take advantage of that to incrementally offset some of the negatives from the weaker weather that we did experience in our service territory.

We were down 9 percent on a degree-day basis in the fourth quarter and 11 percent overall in 2004.

From a capital structure perspective, again, we -- we have a very consistent capital structure with the end of the third quarter. We don't typically have balance sheet items in our release, but our capital structure is approximately 51 percent, debt 49 percent equity. And we believe we're in a strong position to move forward as we-- as we continue to look to grow our organization.

I would now like to turn the call over for questions. I do not know if the operator is on the call. But I would like to now turn the call over for questions.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question comes from the line of Gordon Howald with Natexis.

Thank you. Great quarter and great year for you guys.

Thank you. Good morning, Gordon.

Good morning. A question on the-- on the coal business. Noticed that the average price received per ton in coal sales had actually decreased for the year, and that kind of goes against industry trends.

Could you talk a little bit about maybe the contract situation. What drove that average unit price down a little bit for the year and what the outlook could be, given, of course, the Wyodak outage as we look into 2005 and maybe more relevantly into 2006?

Most of our coal, almost all of our coal production is under long-term contracts to power plants. Our largest customer is the Wyodak plant of which we own 20 percent and PacifiCorp owns 80 percent and operates that plant.

The impact in the reduction of the coal revenues per ton primarily resulted from the resolution of a-- of a tax case with the Wyoming taxing authorities in that we returned some dollars to-- $1.7 million to Pacific through revenues, yet we recorded lower taxes. So on the top line in revenue received per ton, it was -- it was a artificially lower price per ton. We had accrued all that. It really had a very nominal impact overall to Black Hills, but when you look at a revenue per ton basis, it was lower.

So we don't expect any significant change from historical levels on the contracted price, and those are contracted very long-term. I believe it is 2022 for the Wyodak plant and life-of-plant for all of Black Hills' plants. So we would not expect -- we don't have the impact relative to the market changes in coal price as much because most of ours is under long term contract.

With respect to the outage, we do expect that to be approximately 6 weeks. So, if you really took an annualized basis to try to forecast what that impact is, we don't say specifically what that is. But, an annualized basis, 6 weeks, it's nearly 12 percent of our-- of our overall impact in which that plant will be down. We will try to -- to sell that coal to the market when it makes some sense.

But we don't expect that in our guidance, because our -- even with the market prices trying to haul our coal by train, we generally have not seen a significant benefit from that in the past. So we will expect some reduction in our coal mine and some slight reduction in our electric utility related to that maintenance outage, and that's included in our guidance.

Got you. If I could-- that's great. One more quick question.

Oil and gas production volumes were strong. You said up 16 percent in '04. 10 percent in the fourth quarter. You also made the comment, Mark, that you guys are returning to a normal profile. Could you talk a little bit about a run rate, I guess the impact of New Mexico which you highlighted? And, kind of where you see production numbers going in '05 and '06.

We have, again, historically said that we would expect to increase our production around 10 percent. And we -- and we have -- we have seen that in the past. Now we did see some -- some larger impacts in '03 and '04 because of the significant acquisition of Mallon Resources, but now that that is included in our operational results for a full year, we would expect to return to a normal 10 percent increase in production.

Got you.

And that's off of the base that we have of 12.6 Bcfe. So our expectation is to increase that by 10 percent in '05 and we would expect that to continue as that -- as that field allows us opportunities to continue to drill for some -- for a few more years to come and we continue to look for new opportunities as we move forward to continue that business.

Would there be any changes in the capital budget as you go through the year if you are experiencing success?

Well, to the extent you experience more success and -- and the economics make sense, in the current price environment they do, we would expect to increase some of our capital budget.

But that's -- we -- when we set forth our capital budget we put that in in a risked fashion in that we look at a risk profile of historical results and execution risk, and factor that in. To the extent they are better, it is more capital but we also see more production. To the extent they're worse, we would see less production and less capital.

Yes. Great. Thank you very much.

Thank you.

Our next question comes from the line of John Hanson with Imperium. Please go ahead with your question.

Good morning.

Good morning, John.

First question is the energy marketing business, it looks like that did pretty well there in the last quarter. Could you talk a little bit more about what led to that, and which -- what -- how that may look going forward?

Again, our energy marketing business has -- has historically continued to be profitable for us. It is a service business in delivering gas to end users, and aggregating gas from suppliers. And we've been in that business since the mid-1990s. And have consistently delivered gas.

We were able to continue to -- to deliver volumes at all -- at -- at reasonable margins. And we expect that to continue. We don't expect the significant -- a 40 to 45 percent increase. We had 40 percent for the year and 45 percent in the fourth quarter. We would expect that to levelize and continue to provide that level of marketing.

That is really dependent on market conditions, to the extent that there is some volatility in the market, if it is a flat market that becomes more difficult for us. But we did have reasonable volatility in 2004. To the extent that continues, we expect to continue to deliver that gas to our customers. It is really -- it is a service business, and we do a nice job with that.

Now, I will say we are expecting somewhat lower margins. We tend to want to be somewhat conservative because we don't know what the volatility will be going forward, so we want to have a reasonable expectation. We do have a slight reduction from our margins, narrower margins included in our guidance. To the extent that that is better, we will do better. To the extent it is worse, we won't. But we do try to take a conservative look at that.

We also do anticipate reduced revenues from our oil marketing and transportation, primarily because our pipeline will be out for a minor outage in the summer, and then is recontracted going forward beginning, I believe, in August. So, we do expect a slight decline there. But overall, our business is very consistent, and we expect that to continue.

Okay. Good. Thanks.

If I might ask on the oil and gas, to follow up on Gordon's question just a bit, talked about the volumes. How about the -- the cost aspects of the business? And the ability to execute along those lines? And is the permit backlog situation been eaten up by the success here, or what's the outlook there in terms of the ability to continue to grow that business?

We believe we'll be able to continue to grow that business, and the permit backlog was more of a problem in the first 6 months. We believe that we have worked very closely with the Hickory Apache tribe on which -- the land that we are on. We have got a number of permits in various stages of the process. So, we believe that all of that is corrected and as we go forward, we'll continue to drill. So we don't expect that to be a delay in 2005 from a permitting perspective.

We continue to work on the gathering system in the -- in the pipeline and bringing that to the sales meter. We did increase our overall reserves, and we did have a very reasonable success in our drilling, which we expect to continue as we continue to drill that property out.

But the cost of -- ?

No, we don't expect to have -- experience the same issues. We believe we've corrected those.

And on the cost aspects?

Costs are -- are -- historically we don't -- we don't specifically put that out in this press release, we'll have more information in our 10-K but our costs are reasonable to historic levels and we would expect, as we continue to increase production, that they will incrementally come down slightly.

Okay.

Just if I might, one item of old business came up in the Las Vegas papers with regard to the -- the old Enron and the power contract thing -- on the tapes from the people in the Pacific northwest are raising, that -- that seemed to involve Las Vegas Cogen plant, but that was when you guys did not own it, right? There was no carryover to you guys on that at all?

No. We don't believe so. That -- that was the plant that we had. And in fact when we originally acquired that plant, Enron was the-- the operator and the sales agent. And so they really ran -- they could bring that plant up or down.

But given the -- given the legal situation, we don't believe we have any exposure there. But I'm not going to comment legally regarding that one.

Sure. Thanks.

Thank you.

Our next question comes from the line of Michael Worms with Harris. Please go ahead with your questions.

Good morning, Mark and Dale, how are you?

Good morning, Mike. Good.

Just a quick question. Despite the fact that you had a fairly strong quarter in terms of oil and gas production, I think it kind of fell a little bit short of what you were expecting after the third quarter. Is that true?

Well, we -- it was -- it was towards the lower end of our expectations. But I do not think it fell short per se.

Okay.

We -- we continued to increase. We -- we did increase our production. That is a difficult one to get -- as an exact science as you're trying to bring a number of wells on.

So, overall I believe we did not -- we did not knock it out of the park, per se. But we-- we met the lower end of our expectations and it provides us a platform to continue to grow.

Okay. You don't foresee any of the issues that came up in 2004 that that would impede production in 2005?

No. From a perspective -- no from the permitting perspective. And the getting the pipeline of -- of wells pipeline begin -- a little bit of a pun.

But getting that backlog of wells to get drilling permits and having it in various stages, we believe we've corrected that. We continue to work very closely with the tribe. And we believe we have good relations there.

With respect to the operational aspects of -- of the -- the pressures and getting the gathering systems, bringing wells online, that's an ongoing operational matter that we always deal with. We don't -- we expect that we will be able to continue to manage that. And we don't expect it to negatively impact us but that is an ongoing operational issue in any oil and gas company.

On the utility company, when -- now that the -- I -- I guess that the -- the maintenance schedule has been changed. But, are you going to look to hedge yourself at all here, just in case things happen?

We will continue to monitor that as we -- as we proceed. The -- the difference now in the spring versus the fall, we'll have to look at those metrics. And we don't control the schedule of when that plant is going to go down for major maintenance, that's the operator, which is PacifiCorp.

But what happened to us -- what you're referring to, is what happened to us in the spring of last year when the hydros had less -- had less production and gas came on the margin and we were -- we were replacing some of the-- some of the generation needs with gas, which is a higher cost. We will continue to monitor that as we get closer to it. And if it makes sense, we may -- we may look at -- at purchasing some replacement power, if that makes sense.

But I -- we -- we just have to monitor that as we move forward throughout the year.

Moving to the communications side of it, what -- what are you looking at for 2005? In terms of -- ?

We expect to continue to improve that business. What we've said in the past was that we would -- we would like to have our losses. We -- we -- we've got a third out in this year. We would expect to continue that improvement as we move forward.

That's really a maturing business, and in 2004 we did have the residual effects or -- a good portion of the effects of the communications price war we had with 1 of our competitors. And we would expect that not to continue. If it does, then we'll have to work through that as it occurs. If it doesn't, we would expect to show continued improvement from communications.

Okay. And then finally, you had some tax items in the quarter, in the year that benefited earnings.

Can you just talk a little bit about that? I think there was something on the power side, there was some tax item that you mentioned on the corporate side and then there were some accruals on the communication side?

Well, in reverse order.

Okay.

I believe it was property taxes on the communications side, and that's just a normal accrual-- you accrue an expectation for property taxes, we do that for both our utility and our communications business. And our accruals were slightly higher. So within the year, we got the appropriate amount, in a particular quarter we may have a change. That was not significant.

From the other tax side, we had $1.2 million in the -- in the generation. We really began filing as a -- as a -- on a unitary basis, all of our companies in various states. So it was a state tax benefit that we had accrued higher levels, and our actual -- when we trued up our return, which we're always going to do that in the fourth quarter, we file our state returns in the fourth quarter, generally October/November, and we always true that up.

So that's an ongoing estimate that we will true up. It happened to benefit us this year. In the future it could be -- it could go either way. We try to do as reasonable a basis as we can in preparing our estimates, but that is an ongoing tax that we pay for state tax purposes.

Okay.

It -- it happened to benefit us in the fourth quarter.

Thank you very much.

Thank you, Mike.

Our next question comes from the line of Michael Weinstein with Zimmer Lucas. Please go ahead.

Hi, good morning.

Good morning, Mike.

Hey, about the EMP business, just a couple of questions there. In terms of -- I think originally the beginning of last year we were talking about maybe ending the year with about 15 Bcfe production levels, and I'm just wondering if-- right now we're saying that there is going to be a 10 percent increase annually off a 12.6 base. Does that mean that we've pretty much given up on any kind of makeup there for the boss -- I guess the 2.5 to 3 that you expected to get in '05, it is just not going to happen? At any kind of accelerated rate?

Maybe, in other words, that a accelerated rate of development of production is not going to be pushed into '05 at all? We're just going to see a slow 10 percent. [ Inaudible ]

We are going to expect a normal -- return to normal production increases. We did have some expectation earlier. We ran into a number of operational difficulties. So as we look to guide, we continue to drill aggressively in that field and work on the operational issues. We had -- we had 2 different types of issues.

We had the permitting issue which slowed drilling, and then the operational issues. And so our expectation is we're not going to try to make that up this year. If we have good success, and improve, that's a great thing. But that's not in our expectations. We expect to return to a normal improvement of a 10 percent increase in production and continue to increase our reserves, as we have in the past.

Is that 10 percent--?

We're not -- we're not looking for a-- we're not forecasting or expecting a significant catch-up, no.

Right. Does that 10 percent increase include the effects of the decline rates in the various basins that you're in?

Yes. It is net. It's net improvement in production.

Okay. And what average price are you assuming in your guidance for '05, price received for gas?

It -- it is reasonably goes to where the -- the current strip is. We set that guidance out previously and the strip may have moved some but we're not -- not enough to change our guidance. So it's reasonably close to where the market prices are.

Market price for '05. As if you were--

Yes. 'for '05.

As if you were on hedge for '05?

Well, we incorporate-- for the known hedges we incorporate those into our forecasting.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Eric Beaumont with Copia Capital. Please go ahead.

Good morning, Dale, good morning Mark.

Good morning, Eric.

Congratulations on a good quarter.

Thank you.

A couple of questions, first on the power gen segment, obviously a good year, picking up from the Vegas Cogen, I'm just wondering what happens in first quarter '04, and going forward? Can you give us some expectation of what type of run rate we should expect out of that segment?

Well, when you look at power generation it is largely all contracted. Now , in the first quarter of '04 we didn't have that -- the Las Vegas plant contracted. And in the fourth quarter-- our comparison -- this year's fourth quarter, if you -- if you remove the unusual -- the tax adjustment, I don't know that we would expect the continuation of the tax adjustment in the fourth quarter. But that's -- that's a more reasonable comparison.

It may be off somewhat because our plants are generally tolling arrangements or fuel sourced through our own coal. We do have one coal plant in that business. Otherwise, they are generally capacity payments. That -- that may have some slight impact, to the extent we run more hours or not, and that's more of a seasonal impact.

But I think if you -- if you remove the -- the tax adjustment from the fourth quarter, it's more closely aligned to a reasonable expectation as we go forward.

Okay. Great.

And going onto the EMP, realizing that you won't direct pricing, but what -- what percent of expected output do you have hedged going into '05?

We have historically said that we would be between 25 and 50 percent hedged and that's in part because we have some internal needs that we internally hedge. So we're -- we're within that range, we're around the middle of that range from a expectation -- or a current hedge as we go forward.

Okay. And -- and I guess just lastly, has it been -- I can't recall if it changed in the first quarter, or if it has been the whole year, the -- the moving of costs down from corporate to each of the subs.

Can -- can you kind of walk us through, just so we can calibrate our expectations, should we just use the corporate number from this year, and assume that kind of goes forward? Or was that for a full year, the cost-to-metric analysis, or will there be a little bit more pickup because that was not for all 4 quarters?

If you -- if you look at the annual -- the annual corporate costs for the year, I think that's -- that's more reasonable, it's approximately $3.5 million in corporate. From a -- from a total perspective. An improvement of just over $4 million from last year. But that -- the '03 amounts are included in our expect -- in our results in '04, they're just -- they're just allocated to the subsidiaries. So you see in certain of the subsidiaries there's mention also of increased corporate costs. They are all included.

The -- the only increase that we-- really impacted '04 was the compliance with the Sarbanes-Oxley Act in which every company, every public company has that. That's -- that's an ongoing expectation, as well as we are now a registered holding company within the Public Utility Holding Company Act. That will be ongoing as we move forward.

But other than that, I think it's a reasonable -- a reasonable expectation to -- to match those costs. We are working very diligently on cost containment, and -- and identifying efficiencies so we can improve that. But as a baseline, I would use 2004.

Thank you. Great.

And just one last thing, do you -- obviously we'll have to wait for the K for this, but do you have any information on-- one, cash on hand; secondly as far as any refinancing that may be in the works for this year for additional interest savings?

We continue to look at that. We accomplished a lot of that in 2004, because of the -- the cash we had from the 2003 asset sale and contract sale. So we were able to reduce our debt in 2004 by over $100 million. Our capital structure is reasonable. As I mentioned, 51 percent debt, very consistent with third quarter. We really don't speak to overall capital or balance sheet items in this release.

But we -- we continue to look at opportunities to reduce interest expense through refinancings, but our expectation is more-- we look for opportunities to deploy capital to grow our business. So that's our first and foremost look. If -- if we find that those aren't forthcoming and we have excess cash, we will look to reduce our debt when it makes sense.

Thanks, guys.

Thank you.

Our next question comes from the line of James Bellessa with DA Davidson and Company. Please go ahead.

Good morning.

Good morning, Jim.

On the oil and natural gas business, the volume that you had of 3.4 to 3.5 million Mcf equivalents in the most recent quarter. Is that a good base or could we see quarterly numbers that are lower than that in 2005?

Generally I would say that's a good base. The one thing you do run into is, you don't get as much drilling and operational activity done in the winter, so the first quarter, we -- we would expect that that's a reasonable base. But overall from the production, our expectation is that 12.6 million Mcf equivalent, our expectation is to grow that at 10 percent. Most of that growth does occur, as you continue your drilling.

And we are -- we are hooking up wells that we have drilled, that we continue to hook up. So it's an ongoing process. So, I would say that's a good base. But, the timing of which we have our improvement, I -- I can't tell you, Jim. You know, we do expect for the year that we will increase our production by approximately 10 percent.

Mark, if I just add 50,000 Mcf equivalents per quarter, I get to a 13.5 percent volume increase. And so, I'm just trying to picture this in my mind. It seems like it's so easy to get 10 percent volume increase off of this new base that you've set.

Well, but, Jim you have to realize your existing wells are declining. That's a net growth. Our existing wells are declining. And, again, I'm not an engineer, so I'm going to-- I'll use this in a simplistic expectation. If we produced 12.6 million Mcf equivalent sales, and our average life is approximately 10 years, and it was a linear decline, we're going to decline by 1.26 million Mcf from our existing wells over the year. And we expect to increase our production by 10 percent net of that decline or over and above that decline.

So I don't think that's -- that's a -- you're -- you're using that as a -- or your example is a increase without any decline curves. Those are-- those are declining assets in oil and gas. And we expect to grow that net of our-- net of our decline curve. And I -- I use that as a simplistic view. Every well is different. So I can't tell you the exact decline of our -- of our -- each property.

If your oil and gas reserves went up about 11 percent, think that therefore the volume would go up about 11 percent in the next year. Is that fair?

That's -- well, that's -- I mean, we're saying 10 percent. We're close.

Can you characterize Cheyenne Light, Fuel & Power? What the revenue base is there? What the expense base is? What the earnings potential is?

Again, we -- we did -- we did complete that acquisition in January. And we expect that the earnings in 2005, we are precluded from seeking any rate increase. That's just part of our -- what the Wyoming public service commission agreement was in allowing that transaction to move forward. So our first opportunity in which to look at rates or file a rate case would be effective 1/1/06. So we would expect as we continue to work to integrate that operation and get a rate case, a potential rate case filed, '05 would not meet a normal utility return. I believe that -- that is within our expectations.

Now when we look at it, you look at a 10, 11 percent return on a 45 percent equity to 55 percent debt basis, would give you our expected return going forward. Again, we would have to go through a rate process with the Wyoming public service commission, and we are -- we are actively -- actively looking at that and developing that.

But that would not have a -- a expected significant impact in '05. We do expect it to be modestly accretive for '05. But we expect a full utility return in '06.

Do you -- do you have $100 million in revenues on an annualized basis there? Is that about the figure, or is it something different?

Historically it has been approximately 90 to 100, I believe, on a revenue basis.

Thank you very much.

Thank you, Jim.

Our next question comes from the line of Jim Harmon with Lehman Brothers. Please go ahead.

Good morning, guys, good quarter.

Good morning, Jim. Thank you.

I've got 4 questions and the first one is in 3 simple parts. I was hoping to get a run rate for the interest expense, how much working capital came back to you in the fourth quarter and what your exit rate on production was in the fourth quarter.

I'm sorry, our -- our what on production?

The exit rate. What was it production. Volume? --that you were producing let's say as of December 31st?

Oh, that particular -- I mean, we -- we really look at -- we really look at it on a quarterly basis, because again you've got decline curves offsetting by new wells coming on. So, I think the question earlier regarding do you use that fourth quarter as a good base, I think that's -- we don't look at it-- the year-end production because it also -- we also have a decline curve. So I would use the fourth quarter as the basis for that.

With respect to a run rate on interest, we did -- the only major change in the fourth quarter relative to interest was, we effected the call on October on our $45 million utility bonds, 8.3 percent bonds that we-- we started to call, or we -- we began the call in September but actually closed that in October.

So we would expect that that's a reasonable expectation for interest expense going forward, and I forget your third one, Jim, I'm sorry.

How much working capital came back to you during the quarter?

I believe your -- we did not have a significant change. Most of that is expected in the first quarter, and I believe you are referring to the -- if I'm--

-- gas storage--

-- correctly, the inventory.

Yes.

The natural gas inventory, we-- most of that is expected to come back in the first quarter.

So we did have some -- a slight amount, but the expectation is most of that will be in the first quarter, and that will really come out-- will come out with our K and show you what our balances are. But we still carry a significant amount of gas in storage that we expect over the next -- first quarter and into April, because we sold that forward through March and that March settles in April, we would expect from January through April we would get that capital back.

Okay. What is driving the growth and volumes for the marketing business? Your customer base--

Opportunities within the business. And, again, our -- our business has been very consistent. And we're -- we -- we have consistently provided the service to our customers, so when they need gas, we're one of the first calls. And that just continued through this year, as you -- marketing over the past several years has been very volatile in people entrance in that market and exiting that market. We have been consistent in providing good service.

So we are getting calls to continue to do that. So to the extent that our customers need gas for their operations, they call us. And that's -- that's really what we've seen there, is opportunities to deliver gas at normal margins. And we will do that. But we don't expect that to grow again at a rate that it grew in 2004. We expect that to levelize.

Okay.

And the last 2 questions, probably related to some extent, is your philosophy on gas hedging has always been 25 to 50 percent. And I guess over the last few years that has worked out pretty well for you, as gas prices continued to rise.

But it looks like they've kind of leveled off, maybe to 6 to 6.50 and I was wondering, a) have you maybe thought about approaching more-- putting a little bit more hedging on your production? And, b) have you had a chance to talk to the rating agencies, or can you give us some update as to how those discussions have been going?

With respect to hedging or just overall?

I guess both, because I guess they've been kind of critical about whether or not you should put more hedges on and all the times where you might have put hedges on you would have left money on the table.

They're -- from a -- from a rating agency perspective, they're-- they're looking at the surety of the cash flows, that's -- that's their expectation, over a longer period. Our hedging has historically been 1 to 2 years. When the rating agencies look at it, they look at it on a 5-year basis forward. So, I don't know that-- -- excuse me. I don't know that we will ever meet their specific hedging requirements.

And a lot of that comes from the growth expectations in our production. We only hedge, as a matter of course, existing production. We do not hedge expected production or production adds. We look at our existing and we are ongoing looking at that at all times and incrementally adding over time.

So I don't know that from a rating agency perspective we're going to meet their -- their needs. We do look at where the prices are, and continue to monitor that. And it's -- as you said, it's somewhat levelized currently but we -- we continue to look at that from a cash flow perspective and earnings perspective and manage it the way we always have.

I think the rating agencies' primary -- primary issue, at least with -- with Standard & Poor, who has come out with the release is, execution on oil and gas. They want -- they want to see that execution. We believe we'll be able to do that. And we believe that, as we do that, they will get more comfortable with our expectations.

But, we need to execute and demonstrate that, that we will meet those production numbers. We had difficulties in the early part of '04, and we believe we've corrected those. But, they want to see that, which is reasonable.

Okay. Well, thank you very much and, again, great quarter.

Thank you, Jim.

Our next question is a follow-up question from John Hanson with Imperium. Please go ahead.

Yes, just a couple of quick ones here. On CapEx, did you disclose a CapEx number for 2004?

No, we didn't. I mean, it's -- it's very consistent absent the-- we really didn't have any significant CapEx in the fourth quarter. So, what we had through the end of September, and I just do not recall off the top of what my head what that was.

We had previously said that we expected development capital in the fourth quarter to be approximately $75 million, and that really related to Cheyenne, which closed in the first quarter of this year.

Okay. Good.

And just one other thing, anything about a cash balance at the end of the year? Or at least a range or something like that?

Again, very consistent absent what we -- we did pay off the $45 million. We effected the call of the utility bonds. So our cash balance would be -- we're at historical levels, not last year because last year we again, at the end of 2004-- or end of 2003 we had significant cash balances. But, we -- we reduced debt by over $100 million in the year, so we've returned to a normal cash level.

Okay. Good. Thank you.

Thank you.

Our next question again is a follow-up question from Michael Weinstein with Zimmer Lucas. Please go ahead.

Hey, one question about oil and gas production, sorry to go back to that.

The fourth quarter, the production is 34625, right?

Yes.

Now if I multiply that times 4, is that the base that I should be using?

No. Well, let me --

Isn't that what you said? Should I use a 13.85 base or a 12.6 base?

We-- no. We look at 12-- 12,594,600.

Right.

Which is our annual production.

Right. That's the annual production. So, 10 percent above that would be about--?

13,854.

Would be the fourth quarter times 4.

But again you have a decline. The fourth quarter--

Okay. So you have a decline rate offsetting increase in drilling.

Right.

Okay. So --

So, we expect our-- of the 12,594.6, we expect 10 percent increase on that for the year.

Okay.

But that means that growth -- there will be no growth in '05, that the production rate is pretty much going to stay the same as the fourth quarter of '04.

On a net basis--

On a net basis.

-- [inaudible] decline. You have a -- you have a decline curve in your existing wells.

Okay. What happens in '06?

We -- again, we -- we continue to expect as we continue to drill our opportunities, 10 percent growth.

10 percent net growth.

So something is going to happen in '06 in terms of production, that did not happen in '05? There's going to be like a 20 percent growth in wells that will be offset by another 10 percent of decline?

I don't know that I -- we expect on a net basis to cover our decline plus 10 percent growth, through our drilling.

Again you're going to drill -- as you go through the year, you are going to drill more wells that in the fourth quarter of '05, you will be -- you will have a level that's greater than where we are today, because of the drilling program. Offset by the -- the normal overall decline.

Okay. All right. Well, thank you very much.

Thank you.

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