Black Hills Corp (BKH) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank your for standing by. Welcome to the Black Hills Corporation Quarterly Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. (Operator Instructions). I would now like to turn the conference over to our hose, Mr. Dale Jahr. Sir, you may begin.

Good morning and welcome to our conference call. 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 events and results will be led by Mr. David Emery, our Chairman, President, and CEO. Mr. Emery would like to start our call opening remarks before we open the call to your questions. Dave?

Thank you, Dale and welcome everybody to our call today. We've got some exciting news to talk about. As you're aware yesterday, we released two different press releases. The first regarding a sale of a portion of our independent power production assets and then the second was our first quarter earnings release.

Today, I will visit first about the IPP transaction and then I'll cover a discussion of first quarter earnings.

Related to the IPP announcement, we did put a separate presentation on our website related to that and it's titled "Black Hills Corporation to sell seven independent power plants presentation to investors." I won't follow that directly, but somewhat loosely as I go through today. So if you have that you can follow along, if not, I don't think you'll miss anything.

Now as we talked about the IPP transaction there is several events that led us to conclude last year that we should conduct a strategic review of the alternatives for portions of that business.

First, of course in February we announced that we were going to purchase five utility properties from Aquila for $940 million. As we looked at funding for that and disclosed at the time of the purchase that we were going to do it with a combination of equity, convertible securities, debt, and then internally generated cash. We decided to look at portions of our business that may sense to divest if we believe we can get significant value out of them relative to what the value of retaining them would be.

The market was very strong for independent power assets in 2007 and in continuing on into this year. So in October of last year we engaged Credit Suisse as our investment advisor and launched a review of those assets.

After looking at those assets in detail, we decided to put a portfolio of seven plants, total of 974 megawatts. All of those facilities being gas fired in a package. We didn't have any preconceived notions about which ones we may want to sell. We wanted to go out and test the market, after seeing the market and then reviewing them against the values that we had them, then we would make our decision.

We conducted a very, very thorough kind of standard two-stage auction process and had a lot of interest in the assets. We had a lot of interested parties, a bunch of bidders in the first round and a significant number of bids in the second round and as of yesterday we announced that a partnership or a joint venture between JP Morgan and Hastings essentially have the winning bid of $840 million. And we did decide based on the value, which we thought, was a significant value to divest of all seven of the plants or all 974 megawatts that we had in the package.

That represents a price of about $862 a kilowatt-hour. We really believe that's just a phenomenal value for our shareholders. If you look at the package of the assets we had Harbor Plant in California is just under 100 megawatts. It has a tolling agreement with southern California Edison. That agreement expires May 31 of this year so it'll be an un-contracted asset.

Our Las Vegas I asset we talked about in our 10K that we were negotiating a new agreement, a tolling agreement for summer months only with Nevada Power. And so we have that agreement in place, with the combination of those two plants being either un-contracted or lightly contracted, I think, speaks really well to the value that we've captured through this sale announcement.

Some of the provisions of the agreement, one of the unique features is that we have the right to retain the 240 megawatt Fountain Valley Plant in the unlikely event that the Aquila transaction does not close. While we remain really confident that the deal will close, certainly divesting of the entire package doesn't necessarily make good strategic sense for us. We would have an excess of cash that at least we don't have readily available opportunities to redeploy. So it's prudent, we believe, to keep that asset. It's one of the stronger assets in the package. It's in a good location. So in the unlikely event Aquila doesn't happen, we have the opportunity to retain that.

The way the deal is structured is the other six plants are valued at $600 million Fountain Valley at $240 million. It's possible we could have a two-stage closing. We will proceed to close as soon as possible on at least the first six plants or $600 million worth. And then just depending on the timing of the Aquila regulatory approval in Missouri assuming that, that's a positive approval, we may end up closing on all seven plants at the same time or we may end up closing on the Fountain Valley plant Later then the first six. We'll just have to see how the process goes.

The price is subject to just customary working capital adjustments and then we have agreed to provide transition services for the buyers and accounting and some of the other areas for a couple months in order to give them time to get systems conversions done and all of those things.

Under the agreement, we will complete the construction of the Valencia Power Plant in New Mexico, which will be under contract of public service in New Mexico. That plant is on schedule and on budget for June in-service date and that's one of the conditions of the close that we complete the project and it's operational. The plant employees will be retained by the buyer under a provision in the agreement for at least a year.

The deal requires several regulatory steps for approval primarily on a market power issue. Hart-Scott-Rodino antitrust firing and then because Hastings is an Australian entity owned by West Pac Bank, they require a separate review for foreign investments and critical infrastructure in the United States.

We don't anticipate any problems with any of those that approvals, should be relatively routine. We hoped to complete and close the acquisition late in the second quarter maybe early third quarter. And as we stated before, the Aquila acquisition is expected to close late in the second quarter. So again, that timing issue may impact the way we close the IPP transaction.

With those proceeds, obviously it increases our financial condition substantially. Provides us a lot of cash, very strong balance sheet with which to close the Aquila transaction and then continue to grow into the future.

We do understand that we have not disclosed some of the impacts of this including total net proceeds, income tax effects, and other things and relating to that certainly the impact that it will have on our 2008 earnings guidance. And I'll speak when I talk about the first quarter results, I'll talk a little bit more about earnings guidance, but we would anticipate updating that guidance and including the details of this transaction at that time.

As far as use of proceeds obviously, if the Aquila deal goes forward the net proceeds from this are substantial and will help finance the Aquila transaction. We have a bridge facility in place to close the Aquila transaction with. It's $1 billion facility. Again, depending on timing, if we close the IPP deal first it would significantly reduce the amount that we have to pull from the bridge to close the Aquila transaction. If we close Aquila first. Then we would use the proceeds to promptly pay down a big portion of the bridge.

We do believe the net proceeds from this IPP sale will allow us to either completely eliminate or substantially reduce the need to issue any new equity to close the Aquila transaction.

Use of proceeds in the unlikely event that Aquila does not close certainly we'll have proceeds of $600 million. That would be used for certainly our existing capital expansion opportunity's, Wygen III, our drilling program and other development projects and acquisition opportunities that we're always looking at, at any given point in time. Certainly, other general corporate purposes and then to short up the balance sheet or potentially even buy back shares if we need to that wouldn't be a preference though.

While we're taking advantage of this really strong marketplace and this great opportunity to capture what we believe is a substantial value for our shareholders with this IPP divestiture it is not signifying an exit from the business. We are experts at planning, permitting, constructing, and operating power generation facilities and we do believe there will be other opportunities for us to continue in the non-regulated power generation business as time goes forward.

There has been a recent trend by utilities to do more self build and so we've had less opportunities, but as you know we have the Valencia opportunity come up last year and we do believe we'll have others going forward.

In the meantime, we have a Wygen III under construction and then also are looking at the potential of constructing some generation to serve Aquila's Colorado electric utility once that is closed. So we'll definitely keep our expert generation staff busy in spite of this divestiture.

In conclusion, talking about the IPP deal the combination of this divestiture and the pending Aquila acquisition is really a transformation event for the company. Changes our revenue and income stream from a large portion being from non-regulated properties and assets to much more utility based, more stable, predictable cash flows allows us some more confidence in our ability to continue our dividend track record. Certainly improves our credit metrics and reduces our risk profile.

That being said, we do intend to stay with our current business mix. We believe it's a very good strategy. It's been very good to us and our shareholders over time and that is being involved in the fuel the generation and the utility businesses and using our marketing expertise to help us optimize the value of those three businesses.

Finally related to the IPP announcement, we're really excited about it. It's truly a phenomenal price; certainly exceeded our expectations and we're very, very pleased for that opportunity to sell those assets. They're a great group of assets. Great locations and they're extremely well run, our plant availabilities very, very high. So a lot of credit for the value we will be able to capture here it goes to a great staff. A lot of those employees will be going with the buyer, which I think is a benefit to them as well.

Shifting gears to first quarter 2008 earnings. Net income in the quarter was $16.8 million or $0.44 a share from continuing operations it was $16.6 million or $0.43 a share, down from $32.5 million and $0.91 a share in 2007.

I'll go through and discuss the significant variances and some of our activities by business segment. But one obvious change between '07 and '08 is there is an average, additional outstanding shares of about 2.8 million shares between the first quarter of last year and this year, most of that driven by our private placement of about 4.17 million shares in February of last year.

First for the non-regulated energy group of business is energy-marketing company in Enserco. They have the largest negative variance compared to prior year. Their quarterly earnings were about $0.3 million, about $12.4 million less than the first quarter of last year.

When we put out our earnings guidance in November of '07 for this year 2008, we stated that we expected a decrease in energy marketing earnings due to really expected changes that we saw coming in natural gas markets. Those natural gas market conditions have changed dramatically when you compare the first quarter of '08 to the first quarter of '07.

The Rocky Mountain Gas basis price differential between Rocky Mountain and Henry Hubb prices has narrowed considerably. Last year we saw numbers in the $3 to $4 range a lot of times for that. This first quarter you saw numbers at times down below $1. So huge contraction in that largely related to the startup of the new Rockies Express pipeline, the first segment of that pipeline, which takes gas out of the Rockies to the midcontinent.

We also saw in the first quarter a significant reduction or narrowing in the seasonal spreads, the calendar spreads between summer and winter for natural gas, which impacts our ability to store and make significant returns on storing natural gas. In the prior few years, we've done very, very well on our gas storage strategies and this year the opportunity is just not near as large because of the contraction of the spreads between summer and winter prices. And then in general just overall volatility, the up and down of prices has been substantially less in this first quarter. You've seen a pretty much a steady slow increase in natural gas prices throughout the quarter. All of those factors impacted our results in the first quarter.

Our average daily gas volumes, physical gas volumes were down about 6%. On the bright side, crude oil volumes have steadily increased, we up about 17% there.

One of the most significant drivers over the earnings differential in marketing is the mark to market. We had a mark to market loss in this first quarter of '08 of $5.7 million. Contrast that against the mark to market gain of $4.1 million in the prior year. So just mark to market impacts, we had a swing of about $9.8 million after tax. Pretty large swing, it explains a large portion of the difference in our earnings between last year and this year.

Similar to prior years, when we've had these mark to market losses, they're typically recovered or a majority of them are recovered as we go through the year and actually close out a lot of those positions just through transacting the business under the contracts we have. So we do expect to recoup much of that mark to market loss as we continue through the year and into early '09.

Our oil and gas subsidiary, Black Hills Exploration and Production, our interim from continuing operations was down about $1 million from the prior year to $2.6 million in 2008. Overall, our production was down 4%, a little less than that on crude oil, but gas was down a solid 4%.

Several reasons for the production decrease. One was very severe winter weather in the San Juan basin in New Mexico. Our properties are in the mountains in northern New Mexico. They had a ton of snow this year to the extent where on the Hickory/Apache reservation they even called in the National Guard to help with snow removal and collapsing roofs and problems like that.

We've had delays in obtaining federal drilling permits in Colorado. There has been a lot of activity in the San Juan basin. Down around Durango, we have some properties there that have been delayed due to a very, very large environmental impact statement that's being done on the Southern Ute reservation. And then most of the delay that impacts us is in the Peance Basin on some of the federal lands there where you've seen an expansion of environmental income studies or environmental impact studies that have been ordered by the Bureau of Land Management. Where in prior years for small one and two and three well drilling programs in various locations we really weren't required to do those and this time we have and that's significantly delayed our permitting process there. We believe we will get those permits, but we'd hoped to have them last fall and we still don't have them yet. Waiting on results of some of these environmental impact studies.

We also had lower than expected drilling activity on several of our non-operated plays. Individually they don't have a huge impact on our results, but several of them are certainly large enough to result in a decrease in production on an overall basis for us. We're involved in a shallow gas play in north central Montana, which is quite large. The operator of that play is in the process of putting it's interest up for sale and so they've backed off significantly from their normal drilling plans as they prepared for the sale.

Our interest in the Woodford Shale play in the Arkoma Basin in Oklahoma, there has been significantly less drilling there. Part of that play, a different operator purchased, the previous operator that we were participating with and they've drilled a lot less wells focusing their efforts in other areas at the current time. And then in one of the areas, some of the drilling results were less than we had hoped and the operator there elected not to drill some wells.

We also have a small interest in a relatively small position in the Bakken Play in North Dakota. We've had excellent results on that program, limited results on that program, but there has been some delays there in just overall drilling and completion of wells and things. Nothing huge, but certainly less than what we'd originally anticipated when we forecasted and budgeted production for the year.

The sum of all those negative production impacts certainly doesn't put us off in a great spot to start the year. And it will be challenging for us to exceed 2007 production, certainly not impossible, and we're working very diligently to try to recoup the production lost in the first quarter and try to continue our streak of ten consecutive production increase years, but it will be very challenging for us to do so given where we started at. We're starting in a hole here.

Hedge gas prices were down slightly from the prior year as oil prices increased slightly under 50% about 46%. We had one other significant negative in the oil and gas operation, which was a $1.8 million after tax accrual related to the settlement of a royalty dispute on the Hickory/Apache nation in New Mexico. When we bought that property back in 2003, there was a long-standing litigation going related to royalty payments. We settled that, but have not done or -- at that time and in the last couple years had not completed all of the different math and settlements related to royalty methodology, royalty payment methodology going forward. Finally, we hope we have that all cleaned up here now in this current quarter.

We saw and increase in LOE, which has been a pretty common theme in the oil and gas business with continued pressure on service costs and additional wells also of course drive that number up. Because you have expenses associated with those and our depletion slightly higher due to higher cost average reserves from some of the newer wells we're drilling.

The power generation segment of Black Hills generation our earnings there of $4.3 million, we're about $0.7 million less than the first quarter of last year. When discussed in our 10K's and 10Q's for a couple of years here that the termination payments we received for our Harbor plant relating to an old contract that was terminated there and in 2008 and they actually reduce this year for the month that they will continue. So we have lower termination payments there on that old contract and then we had some unplanned maintenance at Harbor as well.

We have higher corporate costs in Black Hills generation due to legal fees associated with the [Indec/Herda] litigation settlement that we talked about and disclosed in March. We issued some shares, stock associated with that settlement.

Our fleet availability in generation was excellent in the first quarter 98.6% overall fleet availability and as I mentioned before, it's that kind of operation I think that translates into the spectacular prizes we got for the divestiture of some of those assets.

In our coalmine, Wyodak Resources income was essentially level to 2007. We increased coal sale by about 27% through sales to Wygen II and an increase in sales to our trade load out customer there. Coal prices were up slightly, offset by an increase in cost. The increase in cost is primarily driven by overburden increases and we've been disclosing those here over the course of the last year or so that as our mine progresses farther to the north, we're essentially mining through a hill. So compared to a couple years ago when we were mining 1 to 1 over burden ratio to coal we will be pushing 2 to 1 and a little over as we move forward into the next year. So that's been anticipated and we've talked about it here for a while.

On the utilities group, Black Hills power on our electric utility earnings were $5.6 million, down about $0.9 million from the prior year. We had an increase in sales and an increase in off-system energy sales, but they were more than offset by expense increases, primarily higher fuel and purchase power costs.

Now if you recall from the disclosure of our rate case that we -- that what went into effect for Black Hills power on January 1, 2007 we do have the opportunity to pass through some of those costs. In particular, our steam fuel, which is our coal is a pass through and transmission is a pass through to customers. Natural gas fuel and purchase power we have essentially a sharing mechanism in place there where we're responsible for the first couple million of excess cost there in exchange for that we get to retain all the benefits of the off system sales. So if fuel prices stay high, eventually we'd reach a point where we would be passing some of those through to customers.

The Wygen III plant is an exciting development for us as well. In mid-March, we received our certificate of public convenience and necessity from the Wyoming public service commission and immediately less than 24 hours later, started construction driving piles for the foundation of the plant. That plant will be 100-megawatt facility, coal fired mine mouth plant owned primarily by Black Hills power to serve native load customers. Projected cost for that facility is about $255 million. We plan to have it in service in 2010, most likely mid to late 2010.

Cheyenne Light Fuel and Power, our electric and gas utility, was really the bright spot in earnings for the quarter, up a $1.5 million or so from the prior year. We had a revenue increase due to the rate case we did last year, which was an 8.2% increase in electric rates, which included Wygen II as a rate based asset and an 8.8% increase in gas rates that went into effect January 1.

Our operating expenses increased in Cheyenne Light primarily driven by Wygen II and that significant operating cost associated with a coal fired power plant. That Wygen II plant was completed on time and on budget, went into service January 1 providing all the energy needs for Cheyenne that they don't get from the contracts with a couple of our other facilities.

In the first quarter of operations, Wygen II was available 92.2%, which just is an incredible number. Really hats off to our employees at the plant, that's a great number during their first couple months of operation. You're up and down doing testing and other things, emissions control, certifications, things like that. So to have a number that's like that is really outstanding.

Finally, on the corporate cost side, our corporate loss for the first quarter was $2.4 million compared to about $0.1 million last year, primarily driven by about $2.7 million or $0.07 a share or so in Aquila related expenses. When we put out our 2008 earnings guidance back in November of '07, we said that we expected $0.10 to $0.20 of expenses related to the Aquila transaction. That was based on a late first quarter close. It's as the closing extents obviously that number may change slightly but having spent $0.07 in the first quarter, we're feeling fairly good about how we're doing related to those expenses. I mean we've done a lot of gearing up for staff and other things, so in order to be ready for the close.

Those cost increases were partially offset by a payment of a little over $1 million related to a power plant development project that we had initially started and then sold to another company under the terms of that sale if they reached certain milestones in the plant construction we would be eligible for payments. We received the first of those payments and there is an opportunity to receive another one, but again it's contingent on reaching certain milestones. So we may or may not receive that later this year.

Other significant activity in the first quarter, earlier this week our Board of Directors declared a quarterly dividend on our common shares of $0.35 a share, which is the rate we increased to late last fall equivalent to $1.40 a year annual dividend. This is our 38th year of consecutive dividend increases for our shareholders. That's a record we're really proud of.

Progress on the Aquila transaction, in February of last year we announced that acquisition, $940 million for the five utilities in conjunction with that Great Plains Energy and Aquila will merge and Great Plains will acquire all the corporate assets Aquila and of the Missouri Electric Utility. Our progress to date we've received essentially all of the necessary federal and state approvals for the transaction with the exception of the approval from the Missouri Public Service Commission for the merger of Aquila and Great Plains. Those hearings and that proceeding commenced on the 21st of April and are literally going on as we speak here today. Hopefully, they'll conclude maybe as early as this week.

We're still hopeful for a late second quarter close in that transaction and all of us, all three parties are working diligently on integration and transition planning to be ready for what we call day one, which is the closing day to take over our share of those operations. Making a lot of progress related to IT systems, customer service, call center, billing systems, accounting, HR, done a lot of staffing activity, done a lot of work on just electric and gas operational planning and have most of that all worked out, very detailed, transition plans.

We've also been working on the electric resource plan for Aquila's Colorado Electric utility. As we've said before, they purchased most of their energy for their utility under a long-term contract with excel that expires at the end of 2011. We're working diligently to prepare a resource plan that we will present to the Colorado public utilities commission after closing, hopefully justifying some self-billed generation for that utility which we believe is in the best long-term interest of the customers and certainly for our shareholders as well.

Looking forward to this year and even into next year, key priorities, obviously closing on the sale of the IPP assets, the Hastings and JP Morgan is first and fore frontier. Also, closing and integrating the Aquila asset acquisition is kind of all consuming for us.

We want to continue the construction of our Wygen III plant and have it in service, on budget by mid-to-late 2010. As I mentioned before, it's a big priority for us to file this electric resource plant for Aquila's Colorado electric utility immediately after closing so we can commence construction on some generation assuming that the commission agrees that -- with us that, that's the best alternative. So we can serve that utility with at least part of its resources starting in the beginning of 2012. And certainly, we'll continue to focus on improving and enhancing our existing business.

The 2008 earnings guidance, I mentioned earlier, that I would visit a little more about that. Obviously with the Aquila transaction, the impact of its income revenues and expenses on our overall income statement, certainly in the financing details associated with Aquila, the impact of the IPP sale, of the earnings that will be re-classed in discontinued operations. The details on net proceeds from that transaction including the tax impacts related to that deal. All of that needs to be disclosed in updated guidance. As soon as we can reach a point where we're confident in the numbers that we will put out to you, essentially we need to know closing dates, firm permanent financing plans and some of those things, which will come together quickly after we get the transactions closed. We will update our guidance to investors; we'll disclose additional details associated with both transactions and even update our guidance, if necessary, for any other changes in our existing businesses.

To wrap things up here, I'm really excited about both the Aquila and the IPP transactions. The impacts of those deals really, truly will transform this Company, will result in a stronger company with greater growth opportunities for the future and we're really excited about it and those opportunities will come, not just from the acquired properties, but from our existing utility and non-regulated energy assets as well.

With that, I'd be happy to entertain any questions.

Thank you. (Operator Instructions). Our first question comes from Michael Worms of BMO.

Good morning Dave, Dale.

Good morning, Mike. How are you?

Good, thank you. Congratulations on the IPP sale.

Yeah, thank you, we're excited about it.

I can hear. Couple of questions for you. With regard to the lower gas price basis differential and even lower volumes. Can you just kind of give us an update as to where -- what's going on right now since the end of the quarter.

Sure.

Are we the same or we improved, can you just talk about that?

Yes. In general, we're seeing some changes in the gas market conditions overall and particularly related to the Rockies Basis differentials. If you look out on the forward-curves into later this year and early next year, you see some of those basis differentials widening out of the Rockies from the numbers we were at, which are down at $1 or so up in excess of $3 to $3.50. So that'll definitely improve the profitability of our various transport positions out of the Rockies and we're excited about that. It was a tough quarter. That basis was about as low as it's been for a long time and certainly the calendar spreads have been really low, too.

We're not seeing too much widening over the calendar spreads yet, but we're hopeful that if we get into summer here, some of that may start widening back out again, too. Overall storage levels are not really low so there may be some opportunities for some price weakening in the summer, which will change that spread.

Of course, price weakening helps in Enserco in the summer, but it doesn't help our oil and gas in the summer, so it kind of cuts both ways. It's been a much better price environment, obviously for our E&P unit with [Meril] Rockies basis differentials.

Second question. Thank you. With the -- on the mark to market loss. You indicated most of that would be recoverable through the end of the year. Will all of it get recovered or is some of it just lost and can you just go over that a little bit?

Well we typically get it all back at some point, Mike.

Okay.

Its not necessarily all recoverable in the same calendar year. It's really transaction-by-transaction, you know, if the transactions extend over the end of the calendar year, then we may or may not recoup all of that in this calendar year, but we do expect to get most of it back in '08.

And then --

He means most of those transactions are relatively short in nature.

Okay. On the settlement agreement, can you just go over again the issue with regards to recovering the purchase power and how your fuel costs. I think I kind of missed that little bit when you were explaining it.

From the settlement agreement?

(Inaudible) settlement agreement (inaudible).

Yes, essentially the way that rate case works is we receive the rate increase. We receive essentially three different mechanisms to pass cost through to customers related to fuel or purchase power or transmission.

We have three clauses. One of them is a transmission clause, which is a pass through for changes in transmission tariffs and other things. There is no contingency on that. You know, it's calculated and passed through.

The other one is a steam fuel adjustment, which relates to the intercompany price for coal that we charge the utility, which is the cost and -- cost base, plus a profit margin contract. So as we have changes and our fuel costs, which we are now as we go into heavier overburden areas, the mining costs go up, those cost increases are passed directly through to customers as well through the steam fuel adjustment.

Now on the natural gas fuel and purchase power expenses the deal we made with the commission there to retain all of the profits from off-system sales marketing is that we essentially are responsible for a portion of the risk on fuel and purchase power. If you recall we -- on gas fuel and purchase power, if you recall we used to be responsible for all that risk. Now we're essentially responsible for the first couple million dollars and after that, those costs are passed through to customers. So early in the year, obviously, if you have an increase in those costs, that comes out of our share first, before we reach the thresholds to pass those through to customers.

Are these automatic pass throughs or do you have to file with the commission?

We file, but --

Okay.

-- they are typically not contested.

Okay. And then one last --

Because we obviously sit down and make sure with the way we're calculating the pass throughs, but.

Okay. One last question, with regard to that settlement agreement, just remind me when you can file again? Is there a lockout in terms of filing for higher rates?

For a rate increase?

Yes.

Yes. We agreed to keep rates constant until January 1, 2010.

Okay. Fair enough.

Yes.

Okay. Thank you very much.

Than you, Mike.

Our next question comes from James Bellessa of DA Davidson and Company.

Good morning, Dave.

Hello, Jim, how are you?

Doing real fine. Say, you talked about guidance of $0.10 to $0.20 for pre-closing cost for Aquila and now today you told us that it didn't close in the first quarter and so there was only, what was it, $0.07 or something like that. Are there additional pre-closing costs that will be taken then in the second quarter of the $0.10 to $0.20 or have you changed that range?

Well, we haven't changed the range and we're hopeful we can stay within it. It really is going to depend on how long the closing gets delayed. We hope we can stay within the high end of that number certainly. I think we did reasonably well in the first quarter, but as we continue to ramp up and get closer and closer to the closing date, those costs go up a little bit, but.

Whey wouldn't you have taken out --

We have not revised it.

Why wouldn't you have taken all the cost that you have calculated into the first quarter and get done with it?

Well they have been incurred yet. A lot of them are for additional staff as their, say we started a new call center in Rapid City, we've staffed it, we're training people, continuing to add people there. So those costs have not yet been incurred in some instances if they have been incurred or we could accrue those we would have done so.

You've talked about the Colorado business and filing an electric resource plan and you have a contract, a purchase power contract that expires, I think I heard you say in 2011 and you're thinking about a self-build activity. What -- can you build a plant and get it up and running by 2011 to replace that expiring contract?

We probably can't replace all of the resources by the end of 2011, Jim, and the whole thing is contingent, obviously, on the Colorado PEC supporting our plan. We believe we can prove that self-build is in the best interest of the customers. We've done it very recently at both Black Hills Power and Cheyenne Light. So we're pretty comfortable we can do it again. But clearly it will contingent on approval of that from the commission. We would need a combination of base load and peaking resources and we would expect that we would do that as quickly as possible. We may need to sign some temporary contracts or temporary extension of a contract or something like that to cover us, because more than likely we can't have all of the generation in place by January 1, 2012.

Excel has stated in their resource plan that they filed with the Colorado PEC that they do not intend to renew that contract. So it certainly puts the pressure on us to get going on construction for new plants. First we have to get approval from the Commission to do so and then get started on construction and secure maybe some short duration, power purchase contracts, to bridge the gap between our construction timing.

What would Aquila do if their transaction and Missouri isn't approved? They continue to own that property, what would they do to replace the power?

Well when we purchased them, Jim, we talked about in that initial presentation on the acquisition that they had an active RFP for energy supply going when the deal was announced and we jointly went to the Commission and asked the Commission to put that RFP on hold. The presumption would be and I really don't want to speak for Aquila, you'd have to ask them, but the presumption would be that they would just resume that RFP if the deal falls through.

And that could be an activity for your IPP business?

Certainly. Yes, if the deal fell through, we'd probably at least want to look at bidding a resource into that RFP.

Today you talked about dramatic changes in the natural gas marketing business in the first quarter versus a year ago and also during the first quarter; you had a management change there. Are those two related? Did they get on the wrong side of the contracts? Did they not make the right decision that would have had a better quarter? Did that --

No. Yes, no, no, those absolutely are not related. Our previous Vice President, general manager there just left and he essentially pursued some other opportunities he's wanted to do for a long time. Left on very agreeable terms, very happy with his time here and we were very happy with him. He had done a very good job of succession planning for himself and so we've really hit the ground running and are very excited with Tory Campbell in that position and her management role and literally didn't have anything to do with the results in the first quarter there.

You've been wearing two hats on the first quarter as CFO, I believe, and CEO. What are the opportunities there for a replacement to come and be put in place?

Hopefully soon. It's been a busy first quarter here. We disclosed previously that we'd hired a firm to help us look for a CFO candidate and we have been interviewing some candidates and we'll continue to interview a couple more. I would like to get what I call the first round interviews done here in the next couple weeks or so and then be able to narrow the field to a couple and do our final interviews. And hope that by mid-to-late May, maybe we could at least have an offer accepted, depending on the who the individual is and what they're doing currently. It may impact how soon they can actually be available to come to work, but we'd love to have the decision made in May sometime.

Thank you very much.

Thank you, Jim.

(Operator Instructions). Our next question comes from the line of [John Salleur] a shareholder.

Good morning, Dave.

Hi, John.

Hey congratulations on the sale of the IPPs, that's the pending sale. But, I have one question regarding that. The press release states that the Fountain Valley asset can be pulled from the sale for about $240 million of the purchase price. Is that correct?

Yes.

So that leaves about $600 million, which you stated earlier, in proceeds. I'm just curious as to the allocation in your mind of the value associated with the $600 million directly for the Lass Vegas Cogen II project?

We haven't disclosed any allocation of value to any of the other facilities, John, and nor do we intend to except for the Fountain Valley price, which was disclosed.

So you have no opinion as to what that value might be?

Not one that I would share publicly.

Okay. Thank you.

You're welcome.

I'm not showing any further questions at this time.

All right. Well thank you everybody for your time and attention this morning. As I said before, excuse me, we're very excited about the news. Truly pleased with the proceeds from our IPP divestiture, looking forward to closing that and the Aquila sale. Really getting on with new business makes for the company. We're excited about it.

We do intend to be at the American Gas Association financial forum in Miami this weekend and early next week. So if you happen to bet there, please look us up. We'd love to visit with you. Thanks again, everyone.

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