Black Hills Corp (BKH) 2007 Q2 法說會逐字稿

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

At this time, I would like to turn the conference over to Mr. Dale Jahr. Please go ahead, sir.

Thank you very much and for those of you who may be new to our call, I'm the Director of Investor Relations. This call is related to our second quarter earnings release and 10-Q release yesterday. 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, as usual, will start with a review of recent results before we open to questions. Mark?

Thank you, Dale and good morning, everyone. We appreciate your interest in Black Hills. You may hear a slight roar in the background. That's not only a cheer from our dedicated and committed employees for a great quarter, but it is also the half a million people that are in Rapid City for the Sturgis motorcycle rally, which is a huge event that occurs annually and we have that going on. It is the tail end. It ends this weekend. So, if there is some noise in the background, that's what that will be.

We had a terrific quarter in the second quarter. We made $25.1 million or $0.66 cents a share compared to $11.8 million or $0.35 cents a share in the same period in 2006. Our income from continuing operations was $25.2 million, again, $0.66 cents a share compared to $12.4 million or $0.37 cents a share. For the year, for the six months ended, we were at $57.6 million and $1.56 per share compared to $37.9 million or $1.13 for the same in June last year. And from continuing operations, $57.7 million or $1.57 a share compared to $31 million or $0.92 cents a share in the same period. We had strength in every one of our business segments and improved earnings led by our energy marketing business, as we had extraordinary volatility in the markets that we were able to take advantage of again in the second quarter. They were up $4.7 million or $0.12 cents a share. Our power generation business last year had some power plants down and this year, all of our plants are running at very strong availability numbers. 98.2% availability for our fleet. And we were up $3.1 million or $0.08 cents a share in power generation.

Our oil and gas business was up $2.3 million or $0.06 cents a share and our electric utility Black Hills Power was up $2.4 million or $0.06 cents a share as well. We had an excellent second quarter and also for the year, which led us to increase our guidance for the second time this year and actually, from a perspective when we issued some shares, that includes the dilution of 4.17 million shares issued in February. When we issued those shares, we maintained our guidance even though it was a significant dilution and then we increased in the first quarter and again this quarter we increased our guidance $0.15 cents on both ends of the range, so our new guidance is $2.35 a share to $2.55 a share. We do expect -- we've had continued strength but we want to maintain some conservativeness in our forecast, as our guidance does include the dilution of the 4.17 million shares and improved outlook for marketing, but that is based on expected volatility and those markets are very volatile so we have to monitor that and we want to be conservative on what we expect there.

Our oil and gas production growth, we have moved to the lower end of our range for growth of 4%. We did show 4% growth in the second quarter. And we expect for the year to be at that lower end of our range of 4% production growth on an annualized basis. We also have included $0.05 to $0.10 cents per share of incremental costs associated with our pending acquisition of the Aquila assets that we announced earlier this year in the first quarter. That transaction continues to progress very well. We're moving through the regulatory process. And we expect to close that transaction in the first quarter of next year. All of the regulatory filings have been made and they are within the process of all of the different jurisdictions, both on a federal and a state level, to continue to progress with that transaction. From a business segment perspective, Black Hills Power again had good, strong retail growth and very strong availability in our power plants. Over 96% availability in our power plants, which really is to serve our native load. We had good native load increases.

ur offsystem sales were down slightly, well more than slightly, in the second quarter and in the year, primarily due to ice storms that hit east of our AC/DC tie and really effectively took that out of operations, but that came back up in June of 2007. So, we expect normal operations through this summer period which is very good for us. Cheyenne Light continues to progress on the construction of the Wygen 2 facility. We have made our filings with the state of Wyoming to have that asset become a rate-based asset and we continue to work through the regulatory process there. As an update to the construction, we're on track with our construction and expect to begin firing the plant in the late third quarter, early fourth quarter for an in service date of 01/01/2008 for that asset. That's a 90-megawatt coal-fired plant that will be dedicated to serve the customers of Cheyenne.

Our wholesale operations, again, the energy marketing business had a tremendous quarter and year-to-date, we expect that they have an ability to take advantage of the volatility in the market to the extent that occurs and we want to maintain conservatism on our forecast there because it is very difficult to forecast our energy marketing results. I talked about the generation and the oil and gas business as well. But the coal mine also was up. So, each of our businesses were up in the quarter and we're excited about that. The biggest impact on the coal mine was comparatively the Wyodak plant was out last year for a major overhaul that you'll recall that occurred in the second quarter that affected both our electric utility as a 20% owner as well as our coal mine as we serve all of the coal there. With that plant back in service this year, our tons sold and our production on the utility basis from a coal perspective has been very strong. I would now like to turn the conference call over to questions.

(OPERATOR INSTRUCTIONS) We're showing a question from the line of Lasan Johong from RBC Capital Markets.

Good morning. Good results from what I can tell. Congratulations. Thank you. Couple of questions. On the power plant projects and the various different projects in drilling ENP area as well, what are you seeing to cost escalations?

On the power plant project? Or the oil and gas?

Both. Overall.

Okay. In the oil and gas drilling operations, again, we expect to spend $70 million to $75 million for the year. We have seen good rig availability and the cost -- our operating costs were lower in the quarter and we're -- because of the production increase and we're happy about that. The cost to drill continue to have some increases but we do have the availability of the rigs and we're waiting on permits. We haven't seen any significant change really in the quarter from costs. Costs are higher but it is also in part due to strong revenue -- the pricing environment that we see going forward that those -- the drilling that we're doing is still very economic given the forward pricing. So, we have seen some increase in costs but we don't believe that it is -- it is not escalating like it was last year and they continue to escalate. The rate of escalation has declined slightly but the costs are still there.

On the power plant side, that's largely on the Wygen facility that's largely contracted already and has been contracted, all of the components are there. The power plant is going up where we see the cost of the next power plant yes, we've seen increases in that. We still believe that a base load coal facility will be economic and we're looking at getting all of the regulatory approvals necessary and progressing towards construction of Wygen 3, which we would expect to begin in early 2008 and we don't see anything right now that would stop that. I have seen costs in metals and turbines but we have, we believe, all of that factored in and the plant still makes economic sense to move forward on.

You're saying that Wygen 3, the cost might go up relative to Wygen 2 but it still going to be economic?

Yes.

Okay. Could you comment on -- now that Babcock & Brown is out of Northwest and any thoughts on how Black Hills may or may not progress with that transaction? Potentially?

Well, there's not -- there's not a transaction per se. I wouldn't want to leave anybody with the impression that there is. We were interested in the Northwestern Company over a year ago, almost a year-and-a-half ago and Babcock & Brown was the winning party there. We are interested in good utility acquisitions. One of our strategies is to continue to grow our retail base and acquisitions but the -- Northwestern has come out and they have to -- they have to look at their stand alone plan to continue to grow their company and, to the extent there was interest on their part in something, we would have to evaluate that at the time but we have -- we believe that they're looking at what they can do from their stand alone plan. We're always interested in the potential for growing our retail base and if it would make sense for both parties, we would have to look at that.

Okay. And finally, I think it was a couple of months ago or about a month ago, month and a half ago, I thought it was Colorado's PUC staffers who rejected the deal for Black Hills to buy Aquila. How do you perceive that? Do you see that as an outright rejection of the deal or do you think this is a postulation on the regulators to basically a way to get -- ask and get for more?

Well, I don't -- I don't know all of the specific backgrounds of why they would come out and reject it, but we continue to work through the regulatory process, not only in Colorado but in Iowa and Kansas and Nebraska and believe that this transaction makes sense for the customers and the rate payers of those jurisdictions. And we believe we'll be able to show a benefit, certain of the standards are either a benefit or no negative to the customers, and we believe we can absolutely demonstrate that and the merits of this transaction are very strong. So, some of it is, whether it is posturing or not, I wouldn't want to comment on. We will work very closely with all of the commissions, we believe that's a strength of Black Hills to sit across the table and talk to the regulators and demonstrate the benefits of our transaction and we would expect to continue to do that.

Great. One other follow-up. Black Hills is offering $940 million for the Aquila gas piece and the Colorado Electric piece. What -- has anything changed in view of the current credit situation in terms of how you plan to finance that?

No. You know, we continue to monitor the credit -- the credit situation and the impacts that the subprime lending market have on the markets and it has actually become a global issue with European banks coming out and I think the fed came out this morning to provide some support. We have a committed bridge financing in place relative to that, so we believe we will be able to finance that transaction when it occurs and also have the longer term financing capability. We have not specifically identified the amounts of equity and debt and potentially convertible transactions or internally-generated cash. We continue to monitor that. But we don't -- we are watching the credit situation very closely. But we have a committed financing in place and we believe we'll be able to -- the merit of this transaction and the strength of the company going forward will be able to support a good financing for us.

Great. Thank you.

Thank you, Lasan.

We have a question from the line of Eric Beaumont with Copia Capital.

Hi, guys, congratulations on a great quarter.

Thanks, Eric.

Just one -- a little bit of housekeeping here in particular. For the past couple of years, you've always said that the power segment has kind of had a run rate of $16 million. We kind of saw that the past couple of years after adjusting for insurance in particular last year. Looks like you're on pace to do significantly better than that this year. Should we still be thinking about a $16 million run rate in power or have things changed?

Well, the impacts in power and I'm looking at it -- we have had a good run. All of our plants were up and running and we've had some positives. We do have, if you recall, in 2008, a reduction of a termination contract that has some less earnings in 2008 and in 2009 that goes away. That's a contract that cannot be renewed. It is a contract on a termination agreement that goes away. And it is about $12 million in 2007 on a pretax basis that goes to $8 million next year and zero the year after. So I think the strength and power generation -- we've had good results and the $16 million, if we're up a couple of million dollars for good results, that's hard to -- we just want to have a baseline out there.

I understand, Mark. I guess though, part of the contract goes away, you would expect that to be back filled if not an entire year, potentially more from the New Mexico plant? Would that be fair?

Yes. We haven't put out the specifics but the New Mexico plant is a 20-year contract, $100 million of total cost. So, if you -- if you're looking at it from a capital structure and an earnings perspective, you can apply a debt/equity ratio and then a reasonable equity return on that.

Ok. Sure. Moving to the electric utilities. Again, very strong performance. Obviously, we need the rate increase. You didn't have the Wyodak outage. It seems a little stronger than that even. Can you break down at all for us what impact weather might have had in the quarter?

Well, you can see our retail sales were up for the year, 2.6% at Black Hills Power. It really -- weather -- I think we were up slightly in the -- in the quarter but I don't think weather has had a tremendous impact. We've seen a very strong July from weather. It has been hot. But in the second quarter, I wouldn't say that there was any real impact from weather. lot of it is the fact that we had the power plant up, the Wyodak plant up in '07 versus '06, the maintenance last year and then the strength of the rate increase.

Okay. And I guess just looking forward, as far as where power prices are sitting in the region now, it is still more advantageous to sell to your regulated customers than wholesale, is that a fair statement?

Well, we have an obligation to sell to our regulated customers.

But meaning when you have -- you would rather have it hot and have extra megawatt hours going to the utility as opposed to selling the offsystem based on the embedded price, is that fair? That always used to be the case. I'm just curious if it still is.

Yeah. We like to see strong retail sales in our jurisdictions. Yes. That's correct. And the prices, while higher in the market, aren't to a level that make it advantageous. Several years ago, you'll recall, Eric, that prices went crazy in the power markets and we took advantage of that. The other thing we always look at, and we did not have as much of that in the second quarter, is the ability to arbitrage the east and west grid.

Because of the --

And if we can take opportunities with that, it doesn't have to be our own generation. We can purchase power, move it across the grid and sell the power, either way and take advantage. We do that every day. We continue to do that.

Understand. Now, just to touch on marketing a bit here. Obviously, you've done more this year than you did all of last year. And I understand volatility is significant. If we can drill down a bit. Obviously, we had extraordinary Rocky differentials compared to where we've seen the past years. Is it fair to say that that helped drive things, given the pipeline capacities that are typically rented and or leased as marketing?

Yes. That was a big driver in the first six months. We had an extremely strong first quarter. That continued in the second quarter. And a lot of that is the Rockies differentials and our access to pipeline capacity as you mentioned, leased pipeline capacity in and out of the region. So, that was a big driver and that is very, very difficult to forecast.

Yeah, no, obviously. I haven't had a chance to go all the way through Q yet, do you disclose the amount of pipeline capacities and the contract lengths for those capacities in the Q or will you?

We have not historically. We can consider that as we look forward, but we have not historically disclosed that. And we really, from a proprietary basis, like to maintain that internally, that gives us our opportunities to move natural gas. So I don't anticipate that we will disclose that, but we do have access to transportation through agreements and those agreements can range from up to a year. They can actually be monthly or up to a year and then actually longer. We have some agreements that are over five years. So, we look at where we move gas on a consistent basis and we did increase our volumetric amounts 5% marketing on a daily basis. So we believe -- we look at the pipeline capacity in those areas and we go out and have some contracts for capacity there. And we don't disclose that just so it allows us -- our marketing group to have their advantage of moving gas.

I understand, Mark. The last thing is almost more of a general comment than a question. Marketing is obviously somewhat become bigger and bigger and you guys have done a great job managing it, but given we can't get a lot of insight for competitive reasons into that, it almost would be helpful and I know there are a lot of moving parts, so it is nice to have one segment off another, it would almost be nice to have a guidance with and without the marketing just because it has been such a big swing card recently. And I mean I think we've all added up and can see where things are going and with Wygen 2 coming on, it would be a nice pickup. It kind of muddies the consistent earnings picture because of how volatile the marketing can be. Just some thoughts maybe on if you're willing to do that or call out marketing separately just so we can all have a feel, especially given you have (inaudible) JV and some other things. There's a little bit easier to value some of the marketing pieces now.

We'll have to look at that, Eric, in the future. It is very difficult to forecast but should we identify that, we can consider that. We would anticipate coming out with our -- we historically have come out with our forward guidance on the next year like '08 in our third quarter release so we'll have to look at that as we come out with the expectations for next year.

I appreciate it. Congratulations again on a great quarter, guys.

Thank you, Eric.

We have a question then from the line of Michael Worms with BMO. Please go ahead.

Thank you. Congratulations, guys. Good quarter.

Thanks, Mike.

Quick question for you. On the production side of the equation, can you give us an update as to what's going on in Colorado? I believe you had a little bit of an issue with an environmental thing related to a flower and also where do you stand on the production scale on the other properties you own as well?

I'm not sure, Mike, I understand an environmental issue?

Wasn't there like a problem in Colorado regarding a flower?

Oh, on the -- with the oil and gas company.

Yeah, right.

Yes, we performed our required study there and we would expect to be able to move -- we've issued or we've submitted -- I shouldn't say issued. We've submitted the permits for oil and gas in the Peance basin for the regulatory approvals of the various commissions and we did perform our study. So, we're on track working through the regulatory process there and we've filed permits for 2007 and early 2008 so we're -- if you recall from earlier years, we fill up that pipeline of permits in the process and as they come out, we have the ability to drill those. So, yes, we did complete that study and we're in process in the normal process in the permitting.

What's the timing on that? Do you have any idea of when this will get resolved?

The environmental issue we filed our study and we believe that that's resolved. It is the timing of the permits coming out of the various regulatory agencies isn't really under our control. We talk to them on a very regular basis to keep that moving and that has been moving in a normal manner. But I don't think, if you're talking about the timing of the issue on the environmental, I believe that's resolved. It is now just in a normal permitting stage and we expect permits to come out and to continue to drill those properties.

One other question. With regard to the regulatory process in relation to the pro acquisition, other than Colorado, has any other state come out and said anything or any staff mentioned anything so far?

Well, we have ongoing discussions with all of the -- with all of the regulatory bodies in which we've filed. I don't think that we've had anything that concerns us in going through the regulatory process. We have comments. We have ongoing dialogue with each of the jurisdictions and we continue to move through that process and we believe that we're on track to get regulatory approvals and close the transaction in the first quarter of next year.

Great. Thank you very much.

Thank you, Mike.

Thanks. We have a question now from the line of Chris Ellinghaus with Wall Street access. Please go ahead.

Hi, guys. How are you?

Chris, I got my haircut.

I know you did.

Just for you, my friend.

I can't imagine it took that long. Can you give us an update or discuss the offsystem sales in the quarter? Did you estimate what the impact of not having offsystem sales was and how much would the fact that your retail load was growing cut into offsystem sales anyway?

The fact that our retail load is growing absolutely reduces some of the offsystem sales opportunity from our own generation. We always have the opportunity, because of our location between the east and west grid, to arbitrage that and with the eastern grid, east of our tie out because of ice storms, we were not able to move as much power between the grids and wholesale. The impact of that, it really depends -- as long as we make a margin, a good margin on those sales, we will do that. It is not necessarily significant to the utility earnings in these particular quarters. You know, there have been times where that dislocation of price between the grids has been very strong and we try to identify that. But I would say this was -- we had strong growth in our retail business and that does cut into the availability of our generation for wholesale sales and then the limited ability to cross the tie did, but again, that's been revolved so we would look forward to additional offsystem sales. Now, in the third quarter, typically, we're peaking and in fact, I don't believe I mentioned in the early -- we did have a peak at Black Hills Power in July of this year at 430 megawatts up from 415 megawatts a year earlier. So, we don't have as much power to sell offsystem, but we like to sell to our native load customers. I think that was the question earlier. We do think that's -- that's not only an obligation but we believe it makes a lot of sense for us.

Right. Well, did you -- bottom line, did you feel like you had missed an opportunity having not had as much offsystem sales this quarter? Or were the condition irrelevant?

I think maybe incrementally we may have. I don't know because the availability of that tie was down, we didn't go back and say what if. What were all the prices on a daily basis. We just continue to look at it on a daily basis and say what can we move powerwise. We can still move west even if that tie's down, so the extent that we have an access to the western market and have generation available and the margin makes sense, we'll move that. But we didn't go back and say well, what if the tie was up, would that have had an incremental impact. I don't believe that it would have been material. I don't think we missed a significant opportunity by any means. We didn't see any major dislocation in prices. But is there some margin that if it would have been up, we otherwise would have made? Yeah, there probably was some.

Based on the new peak, I estimate that your reserve margin is sort of dipped below 15%. Does that make Wygen 3 sort of a foregone conclusion and make it an easier sell?

I don't -- we look at it and we look at what our needs are. When you're building a coal plant, you're looking for long-term in the future. And we think it makes sense to build that plant and I don't know that the new peak comes out and says well, geez, now we absolutely have to. We think it makes sense. We've been working on this for some time and we believe it does make sense regardless of the new peak. The new peak is a demonstration of -- we do have some strength in our service territory and we've had consistent growth in Black Hills Power for a very long time. And we do believe that, you know, Cheyenne Light fuel and power has good growth prospects as well. So, we think that that plant makes sense. We just have to go through the process. That takes some time to be able to build it and first quarter of next year is not that far away to say we're expecting to -- we could begin construction on that within seven to eight months.

And as far as the Harbor plant goes, given that you have the reduction in the termination payments but are not going to recontract that, have you done any estimating on what recontracting Harbor or market sales would do to offset the termination payments?

Well, the termination payments are different from contracting the Harbor plant. I mean we have a contract for the output of the Harbor plant and we look -- when any of our from contracts expire, we look to recontract those and southern California, that's a great location, where that plant is, so we believe we'll have opportunities to recontract that plant. The termination payment is just an entirely different contract in which we receive payments over the course of a ten-year period and that period ends in, I believe it is October 1st of 2008. That just ends. That's from a QF that occurred a long time ago. And that's just -- that runs its course. There is no ability to renew that contract.

Right, right. Let me rephrase that. Do you see the market opportunity for Harbor incrementally positive that would help to offset the loss of those fixed payments?

I don't know that it is -- it is not going to be enough to offset the loss. We see some strength in southern California. Edison is out with requests for power and we believe that plant has a great opportunity to fit into that and generate some continued longer term earnings, but it is not going to -- it is not going to recover that balance. Where we'll probably offset the difference of that contract in power generation, as I said earlier, or -- I think it was Eric Beaumont indicated that we're going to bring in Valencia in June of 2008 which will add to our power generation earnings. But I don't think we're going to have an ability -- that's just one that we would expect once that contract is done on the termination payments, it is done. And then our other growth in power generation will come from the addition of the Valencia plant and then the only contract renewing as you mentioned, in the very near term is the Harbor plant. We think we'll -- we continue to work on recontracting that and when we come out with any changes to that, we'll have to announce that, but at this point, you're not going to replace that earnings from that contract.

Okay. One more question. Are you seriously considering any asset sales in the equation for the Aquila financing?

Well, we look at, as part of our overall financing and with or without the Aquila transaction, if it makes sense for any assets based on what their value and their expected performance will be, we always have to look at that. If you look over the past several years, we sold our communications business. We sold our Houston-based pipeline and marketing business, so we're always looking at what opportunities are out there relative to where we're going with our businesses. The Aquila transaction, yes, is a significant amount of capital so we do have to look at that. But to the extent our businesses make sense, we'll continue to do that and this we'll access capital through the capital markets. We just have to -- we're always doing that evaluation and we have really nothing specifically to announce. If there were assets that we determined were noncore and had a good value, I would announce that at the time.

Thanks a lot.

Thank you.

Talk to you later.

We have a question then from the line of Kathleen Vuchetich With W.H. Reeves. Please go ahead.

Good morning. I was wondering if you could talk a little bit about the demand increase you saw at the utility, whether that's a change in the number of customers you've added or use per customer.

Well, we have -- we have, in our 10-Q, by customer class, we've put out that information as to what that is from a total perspective by customer class. The specifics of what percentage of our growth is additional customers, we continue to have our normal customer growth, which has been about a percent a year and we expect to continue to have that. And then the use per customer really is dependent on over 60,000 individual customers, what they're doing. So, we don't really disclose what percentage is based on a new customer basis and what percentage is based on a use per customer increase. We do disclose, Kathleen, what our amount is per customer class.

Okay. Okay. And have you made any changes to your expected Cap Ex for the year?

Well, with our Cap Ex, we continue to -- we just announced recently, the Valencia project, not that recently, but this year, the Valencia project which would be approximately $100 million that we're building with a contract to Public Service in New Mexico. So that is new from the 10-K and we continue to work and progress toward the Wygen 3 plant, so we will have some is expected capital expenditures related to the Wygen 3 plant. But other than that, I don't think we've had any significant changes to our capital expenditures.

Mark, what do you think the total Cap Ex will be for this year?

We -- we currently expect our CapEx -- we had through June, $162 million for CapEx. And we expect it now, for the year, to be approximately $270 million. And that includes about $81 million for the power plant in New Mexico. Now, that all excludes the $940 million purchase price on the pending acquisition. We expect that to close in 2008. We do incur, excuse me, we do incur some capital costs or capitalized costs of that transaction and through June, it is a little over $7 million. But our expectations for capital for this year are just under $270 million.

Thank you so much.

Thank you.

Thanks. We have a question then from the line of James Bellessa with D. A. Davidson.

Good morning. I think your quarterly home run is better than Barry Bonds'.

I'm not going to comment because I could get myself in trouble with that, Jim because there is a lot of controversy on Barry Bonds, but we're very excited about our quarter.

On this New Mexico plant, you indicated you need to capitalize it. What kind of equity ratio would be a reasonable assumption?

Well, anywhere from 50 to 55% debt for a range. We look to have that as a corporate structure and we continue to have when we do our evaluations of power plants and that's a power plant with a very long-term contract, a 20-year contract. So, it is very much I'll call it a utility-like asset. It is a sale to a utility directly. So, that would be a reasonable estimation. And that's consistent with where we expect to be. Right now, our capitalization is different than that, because of the equity we issued earlier in the year, but we expect to be in that range post the Aquila transaction. So longer term, that's where we expect to be.

On the Harbor plant that you have a termination agreement with, I think you said that it expires in October of '08, was that right?

Correct.

And it produced $8 million of revenues in '08, is that your estimate?

Yes.

And it goes to zero thereafter. What was the -- what's the 2007 number that you cited? I didn't catch that.

That's in our 10-K, it's around $12 million, Jim. I don't remember the exact number.

Okay.

It is around $12 million. But that is disclosed in our 10-K.

When is the Aquila special shareholders meeting set?

I don't think that's been set yet. Both Aquila and Great Plains have filed with the SEC and they're waiting for the SEC to complete their review and once that review is completed, they'll be able to get their proxy out and set their date. So I don't think we have a date yet set on that.

Mark, if I just take the production that you reported for the second quarter and extrapolate it into the third and fourth quarters, you would have a 2% increase in MCFEs for the year. So, how is the second half shaping up in terms of how it progresses from what you just reported?

Well, again, we begin our drilling in the spring, when you can get into the fields and drill. So we would expect with drilling continuing through the third quarter, that we would have the ability to increase our production and that's why we came out with our expectation of the bottom end of our range but still, 4% production growth for the year. So, it is not just taking the existing -- because we have continued drilling through the third quarter and into the fourth quarter, that if we can get the wells on-line, that will add to our production.

You're really saying your fourth quarter production, which should be higher than the third quarter?

We're saying our third quarter and fourth quarter production, we expect that to be higher than the first six months to get us to a level of approximately 4% production growth.

And you can't characterize it, which one's higher, the third or the fourth quarter?

Off the top of my head, Jim, I don't know exactly. But we would expect, as you're drilling, you would expect to increase in the third quarter and increase in the fourth quarter as you continue to get wells on line.

Thank you very much.

Thank you.

We have a question then from the line of James Heckler with Levin Capital. Please go ahead.

Good morning.

Good morning, Jim.

I was wondering if you could just elaborate a little bit more on the composition and timing of your financing plan for the Aquila transaction.

It really hasn't -- we haven't really changed anything from what we put out when we had the announcement of the transaction. And we would expect, as we get closer, as we get a shareholder vote in, that we will come out with more information on what our expectations are, but at this point, we're still in a position very similar to where we were when we announced the transaction. So I wouldn't expect us to change and we didn't come out with any specifics because we continue to look at what we -- what we have in the access to capital in the various markets including again, as we said, debt equity, some convertibles, possibly some hybrids and internally generated cash. I don't really have anymore color to provide on that.

Is it conceivable that you could get to a point in the process where you're comfortable enough that the transaction will go through and markets would be supportive enough where you prefund some of the transaction?

If it made sense and we had -- right now, we don't have any approvals including shareholder approvals or regulatory approvals. So, from that -- from that perspective, it would be somewhat premature. As we move through the year, and start having some approvals from a shareholder basis and a regulatory basis, it is -- and if the markets were right, we would consider that. But I can't -- I can't speculate as to what that would be and how much. We would absolutely consider what we need to do. We do have, again, a bridge financing in place to fund the transaction, so we have that ability and flexibility to say if it makes sense to do it, then we would look at doing that. But to be able to speculate on what we would do and when, it would just be speculation. We absolutely will consider that and look at that and if it makes sense to do that, economically, you know, we would look at doing that.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) At this time, I'm show nothing further questions in queue.

Well, we want to thank everybody for their interest in Black Hills.

And have a great day! Thank you.

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