Black Hills Corp (BKH) 2006 Q3 法說會逐字稿

Welcome to the Black Hills Corporation quarterly earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dale Jahr. Please go ahead.

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

Thank you, Dale. Good morning, everyone, and thanks for joining us on our call today. We're here to discuss the third quarter of 2006 earnings. We had a very good quarter in the third quarter, as we got through the power plant outages, both planned and unplanned earlier in the year and everything's back up and running for our power plants, as we would expect and had very good performance out of our generation plants, both from a regulated and non-regulated perspective. They all ran at over a 98% level, which is very good for Black Hills and what we have historically had absent outages, so we're glad to be back and have a good quarter to report for you.

We had $22.3 million, or $0.66 a share in the third quarter. That compares to a loss from the prior year and that was primarily due to the impairment in 2005 of Las Vegas won a power plant that effected us by about $0.99 a share. So when you take that out, we still had a very strong quarter. That included the increase from generations, our retail business increased last year, in '05 we had an unplanned outage at one of our utility plants in the third quarter. We had an increase in our energy marketing results. They continue to have a strong year with the volatile markets in energy marketing. Our increase in coal earnings is really due to the power plants being all back up online and running. We do expect that to increase in the future, as we add coal fire generation and I'll talk about that a little bit later in the call.

Our reduction in corporate costs were primarily the result of, and reduction or an impairment in expensing of costs in 2005. So we expect to be at normal levels there. We had really strong operating performances, as I mentioned, at our generation utility and coal mine sites. In the third quarter we did experience in our oil and gas operations a decline in natural gas prices, and that has impacted us both this year and in our forward expectations. Gas production was down slightly in the third quarter last year in 2005, we peaked in the third quarter as we brought on oil and gas production, primarily gas production from new wells drilling.

We did experience some delays in wells, as we've been bringing them on and those delays are really into the fourth quarter. We see that turning around in the fourth quarter and expect our production to increase in the fourth quarter versus the prior year and have a targeted production of 14.2 Bcf equivalent in 2006. This is down slightly from our expectations and our long-term goal of 10%. But we do, with bringing on new wells in the fourth quarter and our expectations in the future, we do expect that to get back to a 10% level in 2007. We have affirmed our guidance for 2006 of $2.10 to 2.25 and really point towards the lower end of that range at the end of the third quarter from continuing operations, our earnings are $1.59 from continuing operations. So we need a $0.51 or better quarter to achieve that and we believe that's achievable for 2006.

With this release we also provided our expectations and guidance for 2007 and we have put out a range of $2.10 to $2.30, and have identified several factors that impact that guidance range. One, we have a rate case that is, has been filed for Black Hills Power in South Dakota for our South Dakota customers and the filed case is a 9.5% increase, or $9.5 million to be effective January 1, 2007. That case appears to be proceeding as expected and we expect that we will be through that case by the end of the year with our rates able to go into effect on January 1 of 2007. We do expect our production to increase on an oil and gas basis by approximately 10% in 2007 on a base of 14.2 Bcf, which is our expected production for 2006. We've also put out prices, which we did last year for anticipated prices, and they are really current, current prices at, for the calendar 2000- strip of $8 mmbtu for natural gas on NYMEX and we put the well head prices in there and $65 for oil.

We don't anticipate any significant outages at any of our power plants, both regulated and non-regulated. We do expect slightly lower earnings from our energy marketing operations. That's a difficult business to forecast, as it relies on market volatility to some extent. We have a very strong base of business and fee business by moving both natural gas and crude oil, primarily natural gas, but the volatility has been favorable to the results this year and we can't anticipate that specifically for next year. That is an opportunity. And finally we are on schedule and on budget for our YGEN2 power plant. That was approximately $170 million power plant that we expect to have ready for service on 1/1/2008, so we don't anticipate a significant impact in 2007 but we will have to file a rate case early in 2007 to get that included in our base rates at our Cheyenne light utility serving Cheyenne and Laramie county. I would now like to open up the conference call for any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jim Harman from Lehman Brothers. Please go ahead.

Good morning.

Good morning, Jim.

Two quick questions. One, did your earnings number include the ceiling test charge?

No, the ceilings test is a calculation, and as we describe in the paragraph there, there are -- we went into a great deal of detail on that, but we had no impairment that we were required to record or needed to record. If you use, and it was just unusual because of the way September 30, landed on a weekend, the market trades natural gas on Thursday for Saturday, Friday, Saturday delivery and then Friday for Sunday, Monday delivery. We looked at the prices on Thursday for how the market trades and it was $3.16 an MCF and 59.39 -- 55.39 per barrel and we did not have an impairment test. But if you use Friday's price, which is the last posted price, they dropped substantially to $2.79 an MCF and 55. The barrels, the oil didn't change on the price, but natural gas did and that would have indicated a $15.5 million pretax impairment.

Subsequent to that and under the rules of the SEC, if you had a price, I'll say aberration, that's probably not the word in the literature, but a significant price decline that does not continue, you're not required to record the impairment. And subsequent prices, as of yesterday, the natural gas prices had doubled to $5.88 on a well head adjusted spot price. These aren't index prices. These are spot prices. And oil had come off, but we had a significant excess over our costs, so we're not required to record impairment. We are required to disclose it because of the lower prices on that particular day, and it was literally a change from one day to another. So we felt we would at least let our shareholders know what that was, what that impact was, but we are not required as prices, product prices have recovered. Now, the reason that that's important from a test calculation basis is you have to use that price for the life of the well.

Okay.

So we have, at a $2.79 price for natural gas and 55.39 for crude oil, for the life of well, which our average reserve life's about 15 years. We have some wells that are very long, up to 40 years of life. But you have to use that price constant and then discount your cash flows at a 10% discount rate. And that's just required by the SEC in the test. So, no, we don't have an impairment. It's not included, it is solely a disclosure, but that test is a very challenging test because it uses a very short-term cash price for the life of a long-term asset. And we do not -- we had a disclosure, but not an adjustment to be recorded in the financials.

Okay. Thank you. Then I guess a follow-up question would be could we go into a little bit more detail as to what happened in the Denver Jewelsburg basin and maybe what caused the delays in the gas wells coming onstream and maybe what the adjusted drilling program is.

Well, I'm not sure about the adjusted drilling program, but I'll walk through and then maybe ask Jim for a clarification on what you're thinking there. I'll try to answer it, but if I don't specifically, please let me know.

Okay.

On the -- just to give you a sense of production, we have about 30,000 a day gas production, or 30 million cubic feet a day. Just in a normal gas production gets us 10.5 or more Bcf a year, and if we have wells that are 1 million a day, that's a 3% impact. We don't have a tremendous amount of significant wells individually. We have a lot of wells, but we had, we had a well that unexpectedly went off line in the Denver Jewelsburg basin that was a strong producer for us and that can impact us. That, coupled with some delays in bringing wells online in the San Juan basin, and they are -- I want to characterize them appropriately. They are regulatory delays. The wells have been drilled. They have been set. They are hooked up and waiting on delivery, but in New Mexico, it's the only state that we do business in that when we're going to bring those wells online to first sales, we need to get approval of the New Mexico Oil and Gas Commission, whereas other areas in which we operate, once we're ready to bring the wells online, we just hook them up and send a notice that we're bringing, we're bringing the production to sales. In New Mexico, that's not the case and they have had some delays, significant delays in receiving those approvals.

So the wells are drilled, they're tested, they're hooked up to the pipeline and we're just waiting for an approval to start the sales. Once we get that, we'll get that. And we have in the fourth quarter, we have got those wells online and we expect our production to be up in the fourth quarter.

From a focusing our drilling efforts, we are really looking at, as we always do, where can we get the best results for our capital dollars, and we've done that. So if we have certain wells that may not have achieved, we're always -- the expected results, we're always individually, well by well, analyzing our results and going to areas where we find better success. And we've done that. We continue to do that, and we always do that from a perspective of how we want to focus. And we expect to spend $88 million next year in our drilling to achieve our results. So that's where we're at with the oil and gas. Does that answer your questions, Jim? I want to make sure I got all of them.

It does. I guess the follow-up question would be do we have any sense of timing when you would be given the approval to bring the wells to your production?

We've had some that have come on in the fourth quarter and some that haven't. So it's a matter of it's in the hands of the New Mexico Oil and Gas Commission, and I can't -- we can continue to have daily conversations with them, but until we receive the approvals -- we do expect in the fourth quarter and earlier to the middle of the fourth quarter, we would expect to go forward with some of that, but I can't give you a sense of the timing. We're already in November today and we have brought some wells on in the fourth quarter, but we do have some still waiting. We do expect to achieve our 14.2 Bcf equivalent in '06 for production.

Okay, thank you.

Thank you.

Your next question comes from the line of John Hanson from Pacific, please go ahead.

Good morning, Mark.

Good morning, John. How are you?

All right. Jim asked most my questions, but let me just clarify one item, or two items with regard to that. In the, your guidance for next year, you've got a price, the prices, which indicate an $8 price, a $6.10 price and a $6.58 price. I'm just trying to understand those three different prices for gas.

To get--

One of them -- well, go ahead, please.

Well, go ahead. Finish your question. I'm sorry, John.

Is that -- is the 6.58 the average of the 8 and the 6.10 on the volume weighted basis?

No, no. We wanted to be specific. The reason we give the $8 is that's a NYMEX price. A calendar strip for NYMEX that people always see, okay, what are gas prices, everything that's posted out there is really a NYMEX price. So for our shareholders, I want to say this is the NYMEX price. We get paid based on well head prices, where we bring the price back to wherever our wells are, and that's what the $6.10 average well head price is for the basis between where we're located and NYMEX.

The $6.58 price is, we have certain hedges in and we'll disclose that. We disclose that every quarter in our quarterly filings, that we have certain hedges that are in place for forward production, and that in this case historically those prices have been lower because gas prices ran up last year. In 2007 our hedges are above the posted prices, so we'll actually have a higher price, hedge price received in our forecast. And we just wanted to lay out those differences so people can follow if prices change what that potential impact on our production is. And these are full year calendar strips. So as time passes, that can change. But these are the full year strips. And currently, as of this morning, the natural gas calendar strip on NYMEX, giving you the NYMEX prices was $8.17. And the crude oil price was $64.98. So they are really current market prices, but that can move around on a daily basis. We wanted to layout what our expectations were and what assumptions we used.

Okay. All right, good. Thanks. Just to follow-up on one thing Jim said, the wells with the regulatory problems, were those regulatory problems just paperwork or environmental, or was there any particular issue that was involved in that?

No, you have to get approval to begin sales and that is a, I'll just say it's a regulatory approval that is required before you can, before you can turn them on. That could be that it sat on someone's desk or they have a lot of work to do and they can only get to so many. I don't know the specific reasons for every individual case, but the wells, there's not necessarily -- we've already-- before we drill the well we have to do the environmental work and the impact to make sure that what we're doing is okay. We've gotten all of those approvals and we've drilled the well. We've completed it. We've tested it and we've hooked it up to the pipeline system, but in New Mexico, again, it's the only state that requires this in which we do business, we're required to get an approval to start sales. So we've submitted all of our paperwork. I think it is a paperwork issue, but I don't want to oversimplify it. It's -- we wait -- we have to wait for approval. Once we receive that approval, we turn on the wells and they flow for production.

Okay.

Not an operational issue of environmental or drilling or hooking it up to pipelines or compression or any of that.

Got you. Thanks.

Thank you.

[OPERATOR INSTRUCTIONS] And at this time there, are no further questions.

Okay. I would like to thank everyone for their interest in Black Hills, and encourage everyone to get out and vote in your local elections next Tuesday. Thank you very much.

Ladies and gentlemen, this conference will be available for replay after 11:45 Mountain time today through November 10. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 844547. Those numbers once again are 1-800-475-6701 with the access code 844547. That does conclude your conference for today. Thank you for your participation, and for using AT&T executive teleconference. You may now disconnect.