Black Hills Corp (BKH) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Black Hills quarterly earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be provided at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded Friday, April 27, 2007.

At this time I would like to turn the conference over to Mr. Dale Jahr, Director of Investor Relations.

Thank you, Matt, and I add my welcome to our conference call which is held in conjunction with the release of first-quarter 2007 results. Thanks 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 Theis, our Executive Vice President and CFO. Mark would like to start off with a review of results before we open the call to your questions. Mark?

Thank you, Dale, and good morning, everyone. Thank you for your interest in Black Hills Corporation. We started 2007 with a very strong first quarter. We had $32.5 million or $0.91 a share of net income. That compares to $26.2 million or $0.78 a share last year and from continuing operations $18.6 million or $0.55 a share. Recall that we had a gain on the sale of our oil marketing and transportation business in the first quarter and discontinued operations represented about $0.23 a share in the 2006 first quarter.

It was really started in all of our -- in most of our businesses. Our energy marketing business had a very good first quarter. Typically energy marketing has a very strong first quarter and fourth quarter and we saw that this year as we are off to a great start. There was a volatility in the natural gas business and basis differentials between the Rocky Mountains and other regions. Our marketing group was able to capture value from their strategies there and we were up $6.5 million or $0.18 a share quarter-over-quarter in the first quarter.

Also our power generation business, recall that in 2006 we had outages at both of our Las Vegas plants and we had a very strong availability for our power generation business this year. We had 96.1% availability versus about 86% last year, so our results were strong in power generation.

Our electric utility captured the benefit of a rate increase that went into effect 1/1/'07. That was just under 8% rate increase and our electric utility earnings were up $1.8 million primarily due to the effects of that rate increase. In our electric and gas utility, we continue the construction of Wygen II, our rate-based power plant or expected to be rate-based power plant for Cheyenne Light, Fuel & Power, we received the earnings benefit of allowance for funds used during construction, which has allowed for utilities and construction. That helped us to have a $1.7 million or $0.05 a share increase in our electric and gas utility.

We also filed with our electric and gas utility the rate case with the Wyoming Public Service Commission to start that process to get the Wygen II plant into base rates, which we expect 1/1/'08 that will occur. And we continue to move forward with the construction of that plant. That is going well.

Our oil and gas business has seen, like everybody else in that industry, increased cost. We had increased costs that are industrywide that has impacted us. We saw a decline in production and most of that occurred in the Denver-Julesburg Basin. Recall last year in the middle of the year we had well performance significantly decline. That basin peaked in the first quarter of 2006, so comparatively we are off on production primarily due to the Denver-Julesburg Basin.

Overall our corporate costs were lower and that is primarily driven by last year we were in the process of seeking a transaction with Northwestern Corporation and we expensed all of those of that transaction did not go through.

We continue to be excited about where we are with the Aquila transaction. That continues to move forward and we filed in each of the state jurisdictions that we are acquiring our rate -- or not rate -- but our filings to get approval from each of those four commissions. The integration process continues and that is all going very well.

With the strong quarter and our expectations for the future, we have increased our guidance by $0.10 a share on both ends of the range, so our current guidance for 2007 is $2.20 to $2.40 a share, and that includes several factors that have occurred. We had the equity offering of a private placement in the first quarter for 4.17 million shares, and that represents approximately a 10% dilution for 2007 for the year.

We have an improved outlook for earnings for our marketing operations. They had a very strong first quarter and we have an overall improved outlook for those earnings. We have revised downward our expectations, our current expectations for our oil and gas production growth. We are now at 4% to 6% growth on an Mcf equivalent basis based on our 14.4 Bcf production in 2006 and our expected capital deployment of $70 million to $75 million.

We have seen rising field service costs and drilling costs combined with the permit flow that has slowed some and we continue to work on that, but the permit flow in our two primary basins of drilling, the New Mexico property in the San Juan as well as the acquired Piceance properties, we have seen some permit flow delays and we continue to work those. But we thought that it made sense to bring that down for this year to the extent we still have a significant portion of our reserves improved undeveloped. We in the first quarter received an increased density order in our San Juan properties. So to the extent we can get permits for those properties, we will continue to drill, but they need to make economic sense given the higher costs. So we will continue to manage that and we have lowered our overall expectations there.

In addition, one final comment. We did recently announce a transaction to build a power plant for Public Service New Mexico and it is a 20-year tolling arrangement with Public Service New Mexico that we expect to be in service by June of 2008 and the total cost of that will be approximately $101 million. So we are excited about that opportunity to continue to grow in contracted generation.

We also declared our quarterly dividend. Earlier in February, our Board announced the 37th consecutive year of increased dividends as we look to provide both dividend growth as well as stock price growth for total return to our shareholders.

With that, I would like to turn it over to questions.

(OPERATOR INSTRUCTIONS) Gordon Howald, Calyon.

Congratulations on a -- which was a good quarter, I guess. You mentioned -- you did speak briefly at least, Mark, about the Aquila deal. I am sure you can't really comment on the Pirate lead litigation against Aquila. But they came out and said they support the transaction with you guys and you're still optimistic. But I am under the impression that the original agreement was contingent upon both transactions occurring simultaneously. Does this mean you're going to have to renegotiate with Aquila? How would it potentially impact the closing of the proposed acquisition?

I am not going to say too much about what has occurred. You are correct that the deals are cross contingent with Black Hills and Great Plains with Aquila. They both have to go for the current deal to be a valid deal. They are both cross contingent.

With respect to the litigation that Pirate has filed, that is really not for me to respond to. We believe that the transaction makes a lot of sense and they have to, the Aquila shareholders and Great Plains shareholders, have to have their vote this summer on what they believe. So I wouldn't really -- we continue to move down the path of working towards a transaction. We filed, as I mentioned, we filed with all four of the states in which we are looking to acquire their properties with the commissions that have oversight authority there, and we expect to continue down the process as if the transaction is going to go forward.

But from the perspective of litigation or anything else, I'm not going to really say anything about that. That's more for the Aquila folks or the Great Plains folks to talk about.

I guess the time -- you're still shooting for the same time even though there may be a couple of things that could occur I guess between now and then? Still looking for the beginning of --?

We expect the transaction to take about a year to close and that is fairly normal. We are still on that path we continue to move forward with that.

Got you. I will ask one more and I will turn it over to other people. When is the Wyoming PUC going to either approve or disapprove Wygen II for rate base? What is the timing on that?

They have about nine or ten month process to do that. We filed early in March to get that request with the expectation that the plant could go into service 1/1. Cheyenne Light has a contract with a public service company of Colorado for all requirements that goes through 12/31/'07. So we are on a normal timeframe there and we would expect that the Wyoming Public Service Commission will go through their normal process and we would expect by the end of the year that we would have their ruling on that.

Excellent. If I have more questions, I'll follow-up afterwards. Thanks.

James Bellessa, D.A. Davidson & Co.

On the production growth, reduction of gold there, the 4% to 6%, that is just not for 2007? That's long-term as well, is that right?

Based on our current expectations, we really need to see some improvement in the permit flow. Again we have a significant portion of our reserves in proved undeveloped properties. We did get increased density in our San Juan properties, so we believe we have the opportunities to on a long-term basis continue to grow our production in our reserves. But we want to see some movement on receiving permit flow and see some of the economics with the rising field service costs and drilling costs. You know, we're going to add reserves as they make economic sense and to the extent that improves, we have the locations. We need the permits and we will continue to drill that up. But at this point, yes, we're saying we are a long-term basis until we see some change in certain of those instances, that's what we're going to have for our expectations at this point.

What is causing the permit delays?

A variety of things. We talked earlier about in the San Juan Basin in our New Mexico properties, they had some organizational changes in the organizations that are required to provide permits for us and we have not seen much movement on any of our permits out of that organization. In addition in the Piceance Basin, there is a requirement for an environmental study that can only be provided, only be done -- a new requirement for an environmental study that can only be done in the first two weeks of May for a certain plant and so that has pushed us back some. But we continue to work all of those areas and we believe that it just is going to take some time.

Talking about your coal and your Wygen II/III/IV and whatever it might be, is there some time -- sequestration, is there a plan to figure out how to sequester carbon or are you going to try to avoid that?

Well, we continue to look to add in each of our plants the best available control technology that is out there. In the Wygen II plant, which is currently under construction, we have that technology in that plant and we believe that will be one of the cleanest plants to come into service. We expect that to come into service the end of this year, so we continue to watch that.

There is getting a lot of press and a lot of discussion around carbon sequestration. We still believe that coal plants make sense and we also -- Wygen II is under construction. Wygen III we just received the air permit earlier this year and we expect to continue down the path of looking for contracts or utility approvals or other regulatory approvals to begin the construction hopefully later this year or early in 2008.

But we are very in tune with what is going on in the carbon sequestration and look to make sure that our plants are for coal-fired power plants have the best environmental technology that there is out there. Then we have been able to do that each time since we built three plants in 12 years when Wygen -- we had Neil Simpson II, Wygen I, and now Wygen II and we continue to improve that technology.

I see where the laws, the legislative laws, along the West Coast of the United States are going to block those states from receiving electricity from coal-fired, new coal-fired plants that do not have carbon capture abilities. How about Colorado? Does that have a plan in place that might cause you should have to think sequestration?

I'm not aware of anything specific in Colorado, Jim. Colorado has focused on renewables and they have an initiative on renewables at 20% of the energy by 2020 will come from renewables, but we continue to have load. The Wygen II plant is to serve Wyoming customers in Cheyenne for our Cheyenne Light, Fuel & Power Company that serves Cheyenne and the surrounding area of Cheyenne and Wyoming has approved the coal plant. They have a lot of coal in Wyoming and we continue to have again the best available control technology in our plants. So to the extent laws change and rules change, we will have to address that when that occurs.

Thank you very much.

Jeff Gildersleeve, Millennium Partners.

Just looking at the improved guidance, I was wondering -- I forget if you have done this in the past -- but any way you could just sort of break out the components or on a percentage basis from one segment (multiple speakers)?

We haven't really -- we really provide guidance a companywide basis and one of the drivers was we had a very strong first quarter. We had a very strong first quarter but it is just the first quarter. We still have nine months to go and we want to make sure that we do this in a prudent manner, looking at what our expectations are. So we based on the strength of the first quarter and what we expect going forward from each of our businesses and we kind of laid out those components in the press release, that we were very comfortable moving to the $2.20 to $2.40 range for guidance for 2007. As the year progresses we can update on that.

Okay, because E&P, the growth rate came down a little, but then energy marketing was -- did better than expectations. Is that sort of the right way to think about it?

Energy marketing had a very strong first quarter. They were up $6.5 million or $0.18 a share. Energy marketing generally or historically has their strong quarters in the first quarter and the fourth quarter and we had a strong fourth quarter last year, but you don't know what that will be. It will depend on where the volatility in the marketplace and as we go through the rest of the year, so we want to make sure that -- that is a very difficult business to forecast. We want to make sure that we do that in a prudent manner.

Oil and gas we have seen, you know we did reduce our overall growth expectation, but it is still production growth and 4% to 6%. We believe that the primary driver, as I mentioned earlier, was permit flow and we want continue to watch that. To the extent that improves, we will have to look at that, but at this point we believe that 4% to 6% growth makes sense.

great, thank you.

Michael Weinstein, Zimmer Lucas.

Actually my questions are all answered. Thank you very much.

A follow-up from Gordon Howald.

Lower CapEx budgeting E&P, subsequent new peaking plant in Mexico, what do they all do to your capital budget for 2007 and 2008? I apologize if you answered that during your presentation.

We're down some in the oil and gas from an overall capital budget. I don't know that is a significant move. The new project, approximately $101 million between now and June of 2008 is in addition, but again, I think we have for a balance sheet our size we do not see that as a significant change. It is significant just to the capital for 2007 and 2008, but we think that plant makes a lot of sense and it has got a 20-year contract, so it is a good investment for us.

You see like -- could we just assume like somewhere in the neighborhood of $40 million to $50 million in 2007 and the same in 2008 for that plant? I'm just trying to (multiple speakers).

I don't know how the specific amounts break down. Probably more in 2007 as you get a lot of the equipment purchased in the remainder of 2007 so we can put it on the ground and get it hooked up for a 1/1 -- sorry -- or for a June 2008 in-service. So I would say probably a greater percentage in 2007 then '08, but I haven't really said specifically what those percentages will be.

That's fair. The coal sales contract, Dave Johnson plant, I think that is the one that ends at the end of this year. Could you -- is there any progress on that or what can we expect moving into 2008 from coal specifically?

Well the coal contract does end in 2007 but we have a put opportunity in 2008 and 2009 with that contract for up to one million tons a year to serve Dave Johnson to the extent it makes sense economically. We have the ability to do that. We can continue or we will have some discussions with PacifiCorp, who that contract is with for the Dave Johnson plant, but it is really too early to say anything about whether that contract will be able to come to terms on that contract or have an extension or not. But we do have a put opportunity for 2008 and 2009 to the extent it makes economic sense for us to do that, i.e., make a profit, we will do that.

Got you. I appreciate it.

Michael Worms, BMO.

Can you talk a little bit about the plant in New Mexico, what kind of -- what the regulatory situation is, site permitting, and all of that? And how are you going to finance it up front?

Well from a regulatory perspective, it is in -- I don't know if I will mispronounce it -- Belen, New Mexico, and they need power and peaking resources, Public Service New Mexico, and was willing to sign a long-term power purchase agreement that is a tolling arrangement. So we believe that we will have the ability to get that with all the permitting and the needs to construct a power plant to have that in service by June of 2008.

So that's -- we think that is very doable and we have to go through a lot of different permitting, but a lot of -- that site does have a number of permits already. So we believe the construction period is a reasonable period to get that done from a financing perspective. Again, it is approximately $100 million [net]. We have financing needs as we go forward. Assuming that the Aquila transaction moves forward, we're going to have to raise significant capital there as ours is a cash purchase of those assets. And we will look at the overall financing, but we believe that we can do that just through the corporate -- we have access to capital markets that we will be able to finance that plant. It is $100 million. We think we will be able to do that.

Does the Public Service of New Mexico already have the regulatory permit or authorization to purchase the power from that plant? Or do they have --?

Well they were able to sign the plant. Whether they have regulatory approval or not or even need to have regulatory approval, we have a contract with Public Service New Mexico that they are -- their company is required to do that, so --.

Fair enough. And can you just talk a little bit about the hydro conditions in the Pacific Northwest?

Well I am not -- my understanding was that they have had a lot of early flow in this spring and it has been reasonably strong. But I am not -- I have not heard a lot about the hydro flow, Mike, so I can't really speak to how we anticipate that impacting us. It really depends on when you get into summer how quick that water goes off. It is just; they're just into that right now.

Fair enough, thank you.

(OPERATOR INSTRUCTIONS) Gentlemen, there appear to be no further questions. Please continue with any additional comments.

Well I would like to thank everybody for their interest in Black Hills and have a great day. Thank you.

Thank you, sir. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for participating. You may now disconnect.