Black Hills Corp (BKH) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the Black Hills Corporation quarterly earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Friday, May 5, 2006. I would now like to turn the conference over to our host Mr. Dale Jahr, Director of Investor Relations, please go ahead.

Good morning, and thank you for joining us. I remind the audience that this conference call may contain forward-looking statements as defined by the SEC, these statements concern our plans, expectations, and objectives for future operations. Such statements are based on what we believe are reasonable assumptions and based on current expectations of industry and economic conditions and other factors. However, risks and uncertainties could cause results to differ materially from those in forward-looking statements. I refer you to the cautionary language published in our press release and other public disclosures. Our discussion of recent results will be led be Mr. Mark Thies, our EVP and CFO. Mark, would like to start with a review of recent results before we open the call to questions. Mark?

Thank you, Dale. Good morning, everyone. We appreciate your interest in Black Hills as we report our first quarter 2006 results. We had a very strong quarter in the first quarter and a number of things happened in that quarter. We were up 20% from continuing operations as compared to last year. That's important from a perspective of continuing operations as we did have a $0.23 increase from discontinued operations as we sold our oil marketing and transportation business in Houston within the first quarter.

Our earnings from -- total earnings were 26.2 million or $0.78 a share compared to 15.7 million or $0.48 per share in the prior quarter in 2005. And income from continuing operations as I mentioned was up 20% to 18.6 million or $0.55 a share, compared to 15.3 million or $0.46 that share in 2005. A number of factors impacted this, but primarily it was the increase in energy marketing earnings, our energy marketing business unit typically has very strong fourth quarters and first quarters. We had a very strong fourth quarter in 2005 and continued that with the volatility in the market in 2006 in the first quarter having 4.9 million or $0.15 per share increase. That was including the impact of as you recall in the fourth quarter we had about a $1.2 million mark to market that was going to turn against us in 2006. And so that includes that impact, as well.

In addition, our -- both our utilities had strong first quarters despite somewhat milder weather, Black Hills power was up to 4.9 million compared to 4.3 million last year, and Cheyenne light fuel and power had a strong first quarter with 1.4 million of net income compared to 0.5 million. That does include the impact of a base rate increase that went into effect January 1, of 2006. In our nonregulated energy businesses, again, I had already mentioned the energy marketing business had a very strong quarter. Our oil and gas did increase production slightly in the first quarter. 1% on a total basis, but our earnings were up 8%, primarily due to strong prices in the first quarter. We did have higher lease operating expenses due to -- really compared to the prior quarter, we had lower expenses in the first quarter of 2005 due to bad weather. We were not able to get in the field. So the increase looks higher because we were -- it was milder weather, we were able to do a lot of work in the field, so our LOE was up, our depletion expense was also up, that's a slight increase from last year, last year's amount, which was $1.54. And that does include the impact of the acquisition of the coke properties. We did have a acquisition $51 million acquisition for 40 Bcf of gas, primarily as you recall from a prior release, primarily undeveloped properties that we expect to continue to drill up towards the end of this year and into the future.

We did add a new Vice President and General Manager, Tim Hopkins joined us, we're very excited to have him lead our oil and gas business. He recently joined us in April. He had a tremendous background in all phases of the oil and gas business. And fills the position that was vacated in December of last year. The power generation business continues to have the impacts of the outages at the Las Vegas plants, but we have made progress on those outages, our Las Vegas 1 facility is backed up and running in April. And we expect our Las Vegas 2 facility to resume operations in May. And the financial impact of that, to remind everybody, is expected to be $0.05 to $0.08 on a total basis. We did have a scheduled outage also that nominally affected our amounts at our Wygen II coal fired plant. And recall that beginning later this month, the electric utility in our coal mine will be impacted by the planned outage, planned six week outage at the Wyodak plant that's operated by PacifiCorp, that is expected to begin later this month and continue through June. And the impact is expected to be $0.06 to $0.08 a share.

In addition, in the first quarter we had higher corporate costs, corporate expense, primarily related to development expenses associated with our attempted transaction with Northwestern Corporation. And they recently came out with an announcement that they have signed a definitive agreement with an Australian firm to move forward with that transaction. We still believe that we exercise great financial care for our shareholders in our analysis of that. And believe that we were a very strong counterparty for customers, regulators, and shareholders in that transaction, but we were not successful in that process. I would now like to open up the call for questions, operator.

Certainly. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Michael Worms from Harris Nesbitt. Please go ahead.

Good morning, guys.

Good morning, Mike.

Just a couple of questions. First, can you give us a little bit more color on the $2.7 million after tax gain related to the mark to market thing? Will that reverse over time? And can you kind of also explain, you talked about an MTM issue in the fourth quarter and how that relates to the first quarter?

Without going into a tremendous amount of accounting detail, Mike. We do -- are required by the accounting literature to mark to market certain transactions. Actually in the first quarter, speaking of the first quarter, it's really a change in the mark to market as we had a mark to market loss in the first quarter of 2005 and a mark to market gain in the first quarter of 2006. The $2.7 million is the change in that, and we look at all of our positions and how the market moves relative to that, and we include that in our results on a quarterly basis. We also in the 10-Q and the 10-K have significant disclose, additional disclosure, and we will have that again in our 10-Q that will be filed next week. That explains the changes in that mark to market. And you can really look at, did the book overall expand in value, in future value as opposed to just what went through the mark to market gain or loss or valuation on a quarterly basis? It will give you the expectations of the forward book and the value of that forward book. Now that includes a significant amount of assumptions, assuming that there are no changes in the book, it's static, and the prices remain the same. There are a number of variables that change throughout the year that can change that, but we do report that on a quarterly basis.

What we had last year was we had a mark to market accounting gain that -- that was not really an economic from an economic perspective, we didn't expect it to have an economic impact so the accounting would reverse in 2006. And that was $2 million pretax or approximately $1.2 million after tax, and that -- that occurred in the first quarter, now, again, to the extent that the book changes from transactions that are entered into throughout the quarter, that's a -- that's a moving target at all times and we do try to disclose that, we can have some volatility in earnings, but recall Mike, that energy marketing generally does favor some volatility in the market. And we did see volatility in prices in the first quarter. And we had a very strong first quarter. Very similar to the fourth quarter of last year.

One other question, Mark. Can you talk a little bit about the production, up only 1%? And what gives you the confidence that you can meet the 10% growth expectations for the entire year?

You don't do historically a lot of drilling in the first quarter, it depends on weather in the locations that we're drilling, but the first quarter is still winter in New Mexico and Colorado, and to some extent Wyoming, as well. We generally don't have a significant amount of drilling accomplished in the first quarter. And we do have a very strong drilling budget and expectations as we go forward to continue to add production. We were up 1%, oil was down, gas was up slightly higher and oil was down, but we do believe with our current drilling program, we do have rigs available and a plan that we can execute on and, we believe we'll be able to add that production. If you look at our total target of 10% and that's an average. Just taking the straight number, we had 13.7 Bcfe of production last year, so 10% is 15 Bcfe for this year. And on an equivalent basis, all else being equal at 3.5 Bs for the first quarter that would be 14, we need to add a B plus maintain our production levels this year. And we believe we'll be able to do that with the opportunities we have identified in our core drilling areas.

Thank you.

Thank you, Mike.

Thank you, our next question comes from the line of Paul Patterson of Glenrock Associates. Please go ahead.

Hi, how you doing, can you hear me?

Yes, good morning, Paul.

Good morning. I wanted to touch base with you, just to again go over, I wasn't clear on the answer to Mike's question. Is that mark to market $2.7 million gain, is that going to reverse, or do you expect it to reverse or not, I guess?

What I suggested, Paul, was in the 10-K, and then again in the 10-Q, we left out what the value of our forward positions are as of that date. That's what was recorded in the first quarter. And then if you look at the value of the forward positions in the disclosure, you can see that will come out next week. But last year we had a -- we had a value of $5.8 million on a generally accepted accounting principal basis, and then we have some non-GAAP disclosure that had a $21 million value that is included in our 10-K, so as you -- and you can track that as you see the 10-Q that comes out next week, you'll be able to see the value of our book. If that expanded, if that shrunk, and we recorded that within the quarter. So you'll be able to determine that. I can't really speak to it until we disclose it.

Okay. So in other words, okay, we'll wait until the 10-Q comes out. Okay. I missed that. And on the LOE question, I guess, if you could just elaborate a little bit more on this. You did more work, but one would think there would be more production as a result, no? I'm just, this milder weather. How did the milder weather impact not just LOE, but also your production?

Well, the production, again, we didn't get the drilling, you generally don't schedule a lot of drilling in the winter just because it's the winter.

Right.

So we didn't do a tremendous amount of drilling, we did a lot of field work. We have an aiming plant, we did work on that. We have some additional taxes that impact the LOE number for our company and then in addition, last year we were not able to do any work, so we did not spend the dollars in the first quarter. So on a comparative basis, it increases, you would see increases in late in the first quarter and early in the second quarter last year as we were catching up. We were able to do a lot of that work, but it didn't necessarily increase production. Just increased production slightly this year.

Okay. So and I guess that's sort of a timing issue. Would that mean that there's going to be less work that's done throughout the year now, as a result because you were able to -- compared to last year's because--?

Yes, we're ahead on a relative basis compared to last year. But the timing of the work depends on what happens in the field, what needs to be done, and what we're doing with our different rigs. So, I can't say that it would necessarily just be on a straight basis less as we continue to try to grow production at our targeted rate, we're going to continue to do a lot of work in the field, but the production growth would be expected to offset that LOE balance on a per Mcf basis.

Okay. And just back to the trading and marketing, how sustainable do you, how much of this is sort of abnormal because of the volatility in the marketplace versus what -- how much sort of abnormal versus normal if you follow me, in terms of--?

It's probably one of the most difficult businesses that we have to forecast because you can't forecast market volatility and what the customer needs are. Typically and historically the fourth quarter and the first quarter are our strongest quarters in our energy marketing. Second and third quarters are not as strong quarters, still profitable, but not as strong a quarters. We saw that in the fourth quarter last year, it was an extremely strong quarter, we had a lot of volatility in the market, so it really is driven on do you have a lot of market volatility. We had a lot of market volatility and it's bidirectional. Was the volatility up or down, we had a lot of volatility up in the fourth quarter, in the natural gas prices and we had a lot of volatility down in the first quarter. And we were able to capture earnings from that. I don't know that I would anticipate second and third quarter having a similar characteristic. If there was volatility and we were able to take advantage of it, yes, we could have different results, but we wouldn't expect that type of volatility in those quarters. Historically we have not seen that. And in the fourth quarter of '06, I have no idea how to predict at this point, it really is what happens in that quarter.

Okay, and then just finally, guidance, has that changed at all?

No.

Thanks a lot.

Our next question comes from the line of Eric Beaumont from Copia Capital, please go ahead.

Good morning, guys.

Good morning, Eric.

Probably a few more questions along the same lines. First off, the production number for the quarter, did that include any production from the acquisition?

The coke acquisition?

Yes.

Very, very minimal. It was a March acquisition. So, if anything it would be very minimal.

Okay. Then you mentioned all the work you did that went into the LOE and how part of that was taxes, one thing to mention was the Aiming plant. I thought by the end of last year you were going to have the new Aiming plant on which was going to lower tax base because of having it off the reservation. Is that still the plan?

Yes, yes, yes.

Okay. So is that just kind of a little behind schedule or rolling into this year as opposed to the end of last year?

No, it's been moved. It was really getting that plan operational.

Okay.

So just some startup costs relative to making that plat operational.

Okay. And second, obviously a lot of moving parts between the acquisition, the outages for the Vegas plants and things, obviously gas coming down, still production guidance is up 10%, is that inclusive of the acquisition? Is there an expectation that it will be up more? And kind of, your original guidance obviously had a higher gas number than we're at now. If you can just kind of walk me through, kind of where some of the offsets, obviously we had a big pickup in marketing that gives you a little head start, but if you could let me understand, kind of if you you have expectations of contribution changes from the segments.

Well, we don't -- we typically just give annual guidance now. Historically as I mentioned and I'll come back to your production question, but as I just mentioned earlier in a question, you know, the marketing business from a seasonality perspective is typically a third quarter -- or a third quarter and a first quarter strength.

Yes.

Much weaker in the second and third quarter. Typically our utilities, our electric utilities very strong in the third quarter, summer peaker, and then fourth and first quarter are strong, but the second quarter is typically our historically our weakest quarter. That will be somewhat exacerbated this year as there's a major plant outage in the second quarter at the Wyodak plant that we've previously discussed.

Yes.

In addition, with respect to the generation business, that's a largely tolled assets, so that's a fairly steady level. But we do get additional earnings or incremental earnings when the plants run so that can have an incremental impact in the summer and occasionally the winter.

Yes.

But typically it's more of the summer. But most of our economics come out of the tolling arrangement, so that's just a fairly stable earnings stream from our generation business. The coal mine, the coal mine goes generally as the power plants go as we're selling, but that's usually fairly steady. Again we have a significant outage that will impact the coal mine, as well as that plant is our largest coal customer. We do have some seasonality to it, some of it's a little bit offset. But the second quarter is historically our weakest, and third quarter is strong from the utility side and then fourth quarter and first quarters, continued some strength on utility and marketing, energy marketing, and with respect to oil and gas, as we continue to grow production, a lot of their sensitivity is to price. Prices generally are stronger in the winter, fourth quarter and first quarter and weaker in the summer. Now, as you look forward on the strip, there's a lot of strength in summer pricing, as well as you go forward long-term.

In reference to your comment on the production, we did indicate that we would have historically production out of the coke acquisition was approximately 0.7 Bcf, which would be about 5% in production. Our targeted growth rate is really a long-term growth rate in production. So we have to replace our decline curve and continue to grow. What that acquisition provides us is an opportunity to continue to drill as it was largely undeveloped acreage. And we'll have an ability to meet our long-term goals on our production, with that property, with our properties in the San Juan basin in New Mexico. We are also drilling in the Powder River Basin for oil and some in the DJ, Denver Joueles basin in Nebraska. So it's really a long-term goal. I don't necessarily look at it as an acquisition just to make our production targets, we want to get there, acquisitions do add to production, but also through the drill bit. And this was a great acquisition to demonstrate that as it's largely underdeveloped and we'll be able to add to production through the drill bit.

No, I understand, Mark, you in the past couple of years have done a tremendous job of adding production through the drill bit and I guess the only question is obviously, we kind of expected or saw the potential for the oil falloff. I guess I'm just trying to get at were there any problems either permitting or otherwise that made you think that the production, granted it's a long-term goal, but you still have your expectations of 10% pick up a year.

No, I don't think there were -- we historically had some pro rating problems in the San Juan basin when we first started. We're into normal, normal permitting time frames. They're not quick time frames and we have a pipeline of permits and we continue to drill up our properties. I don't think we're experiencing, we do expect weather delays in the winter, and that's just a very normal, normal occurrence, but no, I don't think there's, we don't see any operational delays, again from rig availability, we do expect to have the availability of drilling a rig and completion rigs to achieve our plan.

So nothing abnormal, just standard operational variability that you'll see in any given year?

Yes.

Thanks guys.

Thank you, Eric.

Our next question comes from the line of Gordon Howald from Natexis.

Thank you, hey guys.

Good morning, Gordon.

Good morning, regarding Northwestern, I think the investors were pretty happy with the discipline that management showed there so kudos to you guys on that despite the fact that you didn't win it. Regarding the coke acquisition, I apologize if you talked about this earlier and some people hit on this on questions already. I know you'd bought a partial interest in this and it was at a pretty attractive price. We came out with $1.29 per M, are you guys interested in purchasing the remaining interest in that? Is that something you're pursuing, or is possible, maybe just a little color on that.

Well, any -- we obviously like the properties that we acquired and since we didn't own 100% interest, if the other party would be interested in selling those properties at a reasonably attractive price to us, sure we would be interested, we were interested enough to acquire the properties that we did. So, that's a -- that's a two-way discussion and a negotiation that we don't necessarily control.

Right. Okay.

But yes, we would be -- we do like those properties.

Got you. Power generation. Impacted by the outages, Las Vegas 2, I think you cited $0.05 in the press release, and mention that the remaining outage should be completed pretty soon. If you do $0.05 in the first quarter and it's $0.05 to $0.08 can we expect $0.02 to $0.03 of negative impact from that in the second quarter, is that a good way of looking at it?

We've disclosed what the total was and we did have an impact. I didn't specifically say the impact to generation, we did have a one-week outage, planned outage at our Wygen I plant, as well in the first quarter, but generally what we -- we're saying that it's $0.05 to $0.08, so whatever amount you assume was in the first quarter, the difference your math is correct. You know that is our -- our expectation is $0.05 to $0.08 in total.

Got you. Thank you very much, appreciate it.

Thank you, Gordon.

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

Good morning.

Good morning, Jim.

The 10-Q, what day are you going to file that?

I believe Wednesday.

And the -- in the press release it talks about your average realized prices going up 30% for natural gas and 38% for oil. Do you have an absolute amount per Mcf? And a barrel on that?

I don't think we disclosed it. We'll probably have some some disclosure on the 10-Q on those values, but we did not does close it in the press release.

Right. You don't care to disclose it until you put out the 10-Q?

No, I prefer to do it in public disclosure, Jim.

Isn't this public?

Yes, it can be, it will be out next week. You'll have the prices.

Okay. Now also, when you reported last year, you reported revenues that were twice or more than they are now, and of course, that's because of the reclassification of the sale of the oil transportation and marketing asset. But it makes very difficult following your company if the historical record isn't put into place. Now we have the first quarter into place of the reclassification. What would prevent you from just easily giving out to the investment community the reclassification for the rest of the year?

Well, actually in the 10-K,Jim, we disclosed what the impact was on the revenues on an annual basis. So in 2005, it was 778 million, 2004, 636 million, 2003, 653 million. So that number is disclosed on the 10-K on an annual basis, we don't go back and go every quarter, but you can look at it and say here's -- when we have the 10-Q we'll have the first quarter amounts, you could look at the difference and say, okay, does it look like it's one year, or do you want to go on production, prices did change. But you could get a general feel. We did put out the annual numbers last year to try to provide some assistance to the investors because we knew it was a big number.

It's a big number, and by quarter it's a big number and it's still confusing if you don't give out the detail. And I would encourage you to do so. Thank you very much.

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

Hi, guys. My questions have all been answered, but thank you very much.

Thank you.

I'll talk to you later.

Thanks.

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

Morning.

Good morning, Jim.

I was hoping that maybe you can give us a little color around the coke acquisition and maybe what your development program is going to be? At a minimum if we could get maybe how many prospects you've identified to drill, how many you expect to drill on an annual basis, and maybe some down spacing initiatives you might issue?

Well, as we just recently acquired that, we will look at integrating that into our overall plan, that will probably come later this year and then really the drilling will probably begin later this year, and then it's really more of a future opportunity to get up to full speed on that. We don't generally identify the down spacing or the number of prospects that we drill in any of our properties. We look at it on a capital deployed basis and we will adjust. We had $72 million in capital expected to be spent in our 10-K and we will look to update the capital expenditures, which will give you some sense of the significance of that drilling program, but we have not historically gone into specifics on prospects or details in any of them, not just coke, otherwise we would really have to look at saying should we do all of our prospects and all of our areas and we've historically not done that. As that becomes a more significant portion of our business, we can look at expanded disclosure, though, Jim.

Can I just ask what acreage the properties are currently drilling on? I can ask, but can you tell me?

I'm sorry?

I said I can ask--.

What we did disclose was the number of acres, the net acres we had and the amount undeveloped. The relationship to reserves, that was in the release when we actually announced the acquisition, but the acres we're drilling on, again that goes back to the same question, we haven't disclosed that, and we can look at that in the future, but we have not done that historically.

Thank you.

Thank you, Jim.

Our next question comes from the line of Gregory Macosko from Lord Abbett. Please go ahead.

Yes, thank you.

Good morning.

Good morning. Would you speak just a little bit about the Wygen II construction and the Wygen III permitting process? Can you give us, for me particularly, some update on that, please?

A little background on Wygen II, recall we acquired Cheyenne Light, Fuel, and Power in January of '05. And Cheyenne had no generation, now we had subcontracted to them through Public Service Company or Colorado. The Public Service Company of Colorado has an all requirements contract with Cheyenne through the end of 2007. We prepared as a company between our two utilities an integrated resource plan to identify opportunities and needs to construct electric generation, coal fire electric generation, primarily on our coal mine. And we identified a need to build that and a need for the customers, went to the commission, and got the necessary permits and began construction in September of last year. We expect to be completed by the end of '07, early '08 and with the milder weather, it appears that we're making good progress as a matter of an update through today. But that's still, a good year and a half or more away before we would have completion. But right now we're on track and we can update quarterly as we go with construction, and I'd expect to get some questions on that.

It's a 90 megawatt coal fire facility, we use our on coal, approximately 0.5 million tons a year, it burns. Went up to full operational. It's the third plant of this design, updated for the latest control technology and emission technology, and we're very excited about that. In that integrated resource plan is identified a need in the future for possibly Black Hills power to have an additional coal plant, which we're calling, Wygen III, again a similar 90 megawatt facility. And the main permit required there, these are air-cooled technology, which we actually pioneered in the United States in the '70s from Germany, but the major permit is an air permit. So we have begun that process that usually takes approximately a year to potentially 18 months. But we're in that process, and we would expect by the end of '06 or early '07 that we would have did a determination on that to look to begin construction on another plant at our coal mine. But that wouldn't go into service. It's approximately a two-year construction period.

And the intent for that Wygen II in terms of where that power at this point is intended to go?

That's -- we have some need in our own utility. We also have , an opportunity for others to participate or to contract. But we believe we've been approached by a number of parties that have an interest in it, and again, we're just in the permitting stage, the air permit stage, not construction, when we would -- should we get to the point where we begin construction, we would expect to have at least 80% of that plant contracted, whether to ourself as the utility asset or to other parties.

And is there any requirement that a portion of that be used by the utility.

No, there's no requirement, it's an identified need in our integrated resource plan in our utility, we have some plants that are getting older. And as you look forward, you try to plan for some of those, so we believe with growth in our service, and territory, and we've had good customer growth over the last couple years in our Black Hills power service territory with growth in that service territory, plus some additional plants, we have identified a need, we have not specifically said the amount of that need or the megawatts of that need. But that would be a portion of it.

Okay. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] We have no further questions, please continue.

We appreciate your interest in Black Hills. And have a great day. Thank you.

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