Black Hills Corp (BKH) 2008 Q3 法說會逐字稿

Ladies and gentlemen, we thank you for standing by and welcome you to the Black Hills Corporation third quarter investor update 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 at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Jason Ketchum of Investor Relations.

Good morning and welcome to our third quarter investor update call. With me is Dave Emory, our CEO, and Tony Kleberg, our CFO.

Before I turn the call over to Dave, I would like to make you aware of the forward-looking statement on slide two. This presentation includes forward looking statements as defined by the Securities and Exchange Commission, or SEC. We make these forward-looking statements in reliance of the Safe Harbor protections provided under the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts included in this presentation that address activities, events, or developments that we expect, believe, or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business.

However, whether the actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that among other things could cause actual results to differ materially from those contained in the forward-looking statements, including the risk factors described in the Item 1A of Part 1 of our 2007 annual report on Form 10-K filed with the SEC, Item 1A of Part 2 of our June 30, 2008, quarterly report on Form 10-Q, and other reports that we will file with the SEC from time to time.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time and it is not possible for us to predict all such factors or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statements. We assume no obligation to update publicly any such forward-looking statements whether as a result of new information, future events, or otherwise.

I will now turn the call over to Dave Emery.

Thank you, Jason, and welcome, everybody. Thanks for joining us this morning.

We are in Rapid City in the middle of a real bad blizzard right now and hopefully the local utility can keep the lights on so we can get through the call here. But we are expecting multiple feet of snow and very high winds and, literally, the city is kind of shut down. Bear with us if we have problems here.

We do have a presentation posted for the webcast and some of you are following along with that. If you are not, I think you will still be able to follow through and follow along okay, but we will be referring to that presentation as we go through today.

Several items that we want to do for you today. I will talk about some third-quarter highlights and some big picture issues related to happenings in the third quarter. Tony Kleberg, our CFO, will review the financial information for the quarter and year-to-date. Then I will discuss some of the forward-looking objectives we have and the progress we are making our long-term strategic goals and objectives. And then we will open it up for questions and answers.

Before I talk about the third quarter, I want to remind everybody that in our September 18 release we talked about -- and earnings guidance release we talked about new reporting segments for the company. We will have six segments. The primary changes in those are in the utilities areas.

We now will have a gas utility and an electric utility business segment for financial reporting purposes. This is the first quarter that we have actually reported with these new segment alignments in place.

As you are aware, we closed both of the Aquila and our IPP transactions in early July, July 11 and July 14, respectively. So this is actually the first quarter in close where we have the impacts of both of those transactions included and then the new reporting segment structure in place.

So moving on to slide number six in the third-quarter summary, from an earnings perspective we had a solid performance from our businesses in the third quarter. Income from continuing operations at $0.51 a share compared to $0.29 for the third quarter of last year. A lot of good things happening in most of our businesses.

Other highlights for the quarter as compared to the third quarter of last year. On the utilities side, the most notable change obviously is the acquisition of Aquila and the integration of those five utilities into our operations and reporting. The integration is going very well.

We are very pleased with our progress. We are still in the middle of a lot of one-time activities, rebranding and integration of systems and other things, but all of those activities are going according to plan and we are very pleased with progress to date.

The other changes, notable changes on the utility front of course are the addition of Wygen II power plant into the rate base of Cheyenne Light effective January 1 of this year. So any comparisons to the '07, pretty substantial differences between '07 and '08 because of that large rate base investment and the associated earnings with it.

Our Wygen III power plant, which we are constructing for Black Hills Power, is on schedule and on budget. Construction is going extremely well. Still looking at a mid-2010 service, in-service date for that facility.

On the non-regulated energy side, energy marketing earnings increased significantly in the third quarter. Recall we have had relatively weak first and second quarters. Market conditions have not been particularly cooperative, especially some of -- in the first quarter the basis differentials out of the Rocky Mountains on gas prices were quite low and the seasonal spreads were pretty flat.

There has been a return to what I would call more normal market conditions on the gas side. Particularly, the basis differentials out of the Rockies have widened adding a lot of value to our gas transport positions where we transport gas from the Rockies to both the East and the West.

On oil and gas, our production was lower compared to last year and we had anticipated that. Primarily due to a couple reasons we have discussed in prior quarters, permanent delays in a couple of our areas particularly the Piceance Basin; reduced drilling at several of our significant non-operated properties, a pretty large percentage. Over half of our production shortfall is due to the non-operated areas.

And then during the third quarter, September in particular, the Rockies Express Pipeline was down for maintenance and the Rockies net back gas prices got extremely low, down in the $2 range. We elected to shut in about 2 million cubic feet a day of our Piceance Basin gas production.

Those wells that we could shut in and then be comfortable that we could get the production back online when market conditions returned that we were willing to sell gas at, which did occur. Put the wells back on in early October and so they have been returned to production.

The IPP divestiture, I won't talk about too much. We disclosed the amount of net income included in discontinued operations this period from the transaction that closed on July 11. Very, very beneficial transaction for us from an income perspective, very good timing in the marketplace, the valuations for IPP facilities were very high. We were able to capture that opportunity and it has been very helpful in financing the Aquila acquisition.

Last week our Board declared a dividend, continuing with the $0.35 that we have been doing this year, equivalent to $1.40 annual dividend. I think it's a good sign of our continued confidence in our strategy and our liquidity and our ability to refinance any debt obligations we have to continue our dividend policy as consistent with prior practices.

Tony Kleberg will speak more specifically about liquidity and debt maturities and things. But in light of the condition in the capital markets, we have been managing our business very conservatively, essentially deferring what I would define as nonessential either operations or capital expenditures. Things that will not have a significant impact on earnings if we defer them. We have elected to defer some of those. Essentially, just conserving cash and being very cautious.

We are aggressively managing our counterparty credit risk particularly at our gas marketing entity, Enserco, and have done an excellent job there. We have had no significant counterparty credit losses. They have done a fantastic job managing our credit and will continue to do so literally a day-by-day, hour-by-hour basis.

Just overall we are being very cautious on our cash and in light of what is going on in the marketplace, I think that is very prudent. Maintaining availability on our credit facilities as we need those.

Now with that, I will turn it to over Tony Kleberg, our CFO, for the review of the financials.

Thank you, Dave. Good morning, everyone. As Dave said, performance from an operational, financial standpoint has produced solid results. Our financial results are very straightforward in contrast to the global markets, which are -- the capital markets are in turmoil. From a workload standpoint, putting systems and processes together has been extremely heavy since the acquisition and the divestiture.

With that said, let me put a little more color on the financial results that we sent out in our press release and highlight some of the performance drivers.

If you take a look at slide eight, performance summary drivers, what we have tried to identify here are just some of the things that were in the press release on the left side. The actual income impact from the various segments. Then we talk about some of the positive impacts and some of the negative impacts that have affected the numbers.

But with that, let me just move straight to slide nine and just take a look at the year-over-year performance on a quarterly basis. As you can see, the revenue is up 124%. What is really driving this is the Aquila acquisition. That is the most -- that is the largest part of that increase. Just a reminder, in the 2007 number we have excluded the IPP assets that were sold, so this is a comparative number year-over-year.

The Aquila acquisition alone added $143 million in the quarter, so without Aquila we had a 23% growth rate, which I will describe in a little more detail later. Moving to the operating income line of $43 million was up strongly over 2007. This reflects the Aquila acquisition and the energy marketing performance in the quarter.

In addition, the remaining power generation segments showed significant improvement. Again I will describe in a little more detail the operating income changes.

Moving down the income statement, the interest expense was $16 million. That is an increase of $10 million over a year ago. The main driver is the increased debt levels of $531 million and slightly higher interest rates.

Continuing down the income statement, take a look at the third quarter taxes. The rate was 35% and that is pretty much a pretty normal rate for us, 33% to 35%, in that area. If you compare that to 2007, the tax rate was 24%. Included in 2007 were some favorable adjustments or benefits from successfully closing out tax audits.

So from a continuing operations standpoint, the EPS was $0.51 in 2008 versus $0.29 in 2007, very solid performance improvement.

Moving to discontinued operations, this quarter included the gain on the sale for the Independent Power Production asset. The gain on the sale was $3.69. That amount is lower than what we gave in our previous guidance. We gave a number of $3.87 to $3.92.

The bad news is we just made a mistake in how we portrayed the book tax impact. The good news is we correctly handled the tax implications and more importantly, tax payment implications. With further work on the tax analysis, we will be able to defer more of the gain, which will reduce our cash tax payments related to the gain. So we are disappointed about the portrayal of the book to tax impact, but we are very encouraged by our tax analysis completed and our ability to lower the cash tax payments.

Moving to slide 10, displays the income for nine months ended September 30. The revenue increase, of course, is driven by the Aquila acquisition. The operating income was flat year-over-year. The improved earnings that we captured from the utilities and power generation were off-set by not being able to repeat the stellar performance that we had in 2007 during the first half for energy marketing. And to offset the added expenses related to the acquisition, the one-time expenses.

So if you look at income before taxes in 2008, it's $17 million below 2007. That is driven primarily by interest costs increasing $16.5 million. The tax rate for the first nine months was 33% average in 2008 and 31% in 2007.

Let me move to slide 11 where we laid out our capitalization over five quarters. If you take a look -- I talked about the interest expense being up and if you look in the middle of the page here, total debt has gone up $600 million to $1.1 billion. And that is the driver of the increased interest expense.

The debt was driven by the Aquila acquisition, construction on Wygen III, also completion of the Valencia plant last year, which we sold, and that was off-set by the sale of the IPP assets. Also just from the standpoint of -- the sale produced 756 pretax cash and now we are looking at with the reduced tax payments of that being roughly $700 million or thereabouts.

Moving -- the other things I think are interesting on this is the net debt line. And if you take a look at that and compare it to our total capitalization, our net debt-to-capitalization is 46%. So it's in line with over the last several quarters. If you recall, the third quarter is when we recorded the transaction for both IPP and Aquila.

One of the key things here is if you just take a look at our equity, it has increased about $180 million, $190 million. And that is a combination of recording the gain on sales for the IPP assets. It's the income that we earned during the quarter.

And also it's the fact that the other comprehensive income that negative actually declined, which was an improvement of roughly $28 million. So we feel comfortable about our net debt to capitalization at 46%.

Let me move on to slide 12. What I have done on these next two slides is from a quarter standpoint and a year-to-date standpoint, I have put the revenue and the operating income side by side on a year-over-year basis. So you can just take a look and see what is really driving our performance.

Obviously, you can see in the first line there, electric utilities, we almost doubled our revenue. The revenue is really driven by the Aquila acquisition and the rate recovery increase that we are getting out of Cheyenne Light. So at the utility line, our revenue went up 205%.

If you look at the operating income line, we are not getting the same kinds of margins on the Aquila properties that we have gotten on the existing utilities that we own. Part of it is the gas utilities. The third quarter -- the summer months are seasonally weak and in particular, the third quarter is very weak. So we are not earning a very strong margin on that compared to our electric utilities.

So you can see that the operating income did increase by roughly $9 million and most of that was driven by the existing electric utilities. Part of it was driven by the acquisition of Aquila, which in combination with an increase of roughly $4 million at the operating profit line.

From a non-reg standpoint, our revenue was up 23%. That is driven by really coal mining, which is up strong $6 million and then the energy marketing is up by $6 million. The nice thing about the energy marketing is when that goes up, almost all of that drops to the bottom line. As you can see on the operating income side we are up about $6 million in profitability also.

From an operating profit standpoint, the real drivers are the energy marketing and also -- I already talked about the utilities but in the non-regulated it's the energy marketing and it's the power generation. There is a couple things going on in the power generation that we need to talk about.

Last year in the negative $1.8 million -- $1.3 million we had an impairment charge of roughly $1.8 million so that explains part of the improvements. In addition in the 2008 number, we have had roughly pre-tax $2.7 million worth of emission credits that we sold.

The other difference here is -- and we have talked about this in the guidance and we talked about it at the second quarter is the fact that in the power generation numbers in the 2007 number, we were not able to reallocate the corporate costs related to the businesses that we sold.

That is just an accounting impact and that is roughly -- for just the corporate expenses that is roughly a couple million dollars. Roughly $2.3 million to $2.4 million in that. So those items really drive the improvement in the power generation market of about $8.5 million.

Let me move on. For me slide 13 is the year-to-date summary. Again, you can see the impact of the acquisition. The important thing to remember is the acquisition was recorded basically at mid-year.

You can see that from a revenue standpoint we are actually down 7% year-to-date. Here again I talked about the stellar performance in 2007 for energy marketing, and you can see that their revenue is down 57% -- excuse me, 53%. So that is what really drives the non-regulated revenue. The utility revenue is driven by the acquisition.

From an operating income standpoint, we are flat. I talked about that a little bit before and you can see that the energy marketing is down roughly $25 million. That is what is really driving it. In the corporate expenses, you can see those were up. Much of that is related to the one-time expenses and acquisition expenses that we incurred on the Aquila acquisition.

So let me move to slide 14 and just talk about credit and liquidity. What we have tried to do on this sheet is just lay out our key elements of debt. The first is the bridge loan, which matures in February 2009; I will talk a little more about that later. But anyway, we drew $383 million on that facility and that is a one-time draw. We pay LIBOR plus 55 on that loan.

The next item here is our Enserco credit facility. This is a credit uncommitted facility and it supports letters of credit at our energy marketing business. Currently we have 140 -- at the end of the quarter, we have $144 million in LCs.

And as Dave mentioned, we are trying to conserve cash and make sure that we are doing the right things from an overall financial management standpoint. So we have tried to keep this at the lower end of the range. Currently we are at 120 million LCs, so we continue to decrease our LC exposure in our energy marketing facility.

The next line item is our corporate revolver; that matures in May of 2010. We have utilized, as you can see, $245 million and we have $34 million of LCs under that. We have $246 million available.

The other items on here are debts that we have, long-term debt that matures over the next number of years. One question you would have and relates to our plans to issue $400 million to $500 million of long-term debt before February 2009 to replace the bridge facility.

And that is still our plan is to issue long-term debt, but with the capital market's turmoil we are considering a number of different options. One, and the one that we will pursue is to issue long-term debt. It would be great to issue the $400 million to $500 million, but realistically we may be more at the $250 million to $300 million level of issuing long-term debt.

Then we are looking at other options which include extending the bridge anywhere from one to three years and issuing term loans in the one- to three-year timeframe. So the capital markets are moving around quite significantly as you all know, and we are responding by making sure that we have available options to us.

The reason we haven't gone to the market yet is we have to get our 10-Q out to be able to be ready to really issue public debt. So that will happen next week, and we will start pursuing the various options.

From what we have seen, others in our sector are issuing debt, so we have no reason to believe that capital markets are closed. We haven't gotten any indications that would tell us otherwise, but as you all know, it seems like the capital markets can change on a dime here lately.

So with that, the only other thing I would mention on this page is our corporate revolver. You are probably aware that that is LIBOR plus 70.

So it has been an interesting quarter. Our business is a good, solid business. We are earning good cash flows. Capital markets are -- and the global climate is having an impact on everyone and we have to be aware of that also. So with that, I will turn it back to Dave.

Thank you, Tony. Moving on to slide 16 here to talk about strategic issues going forward. We have shown this slide in our last few presentations and conference calls, so I won't spend a lot of time on it. Other than I think there is a few items of note here, particularly the forward-looking items.

You look at the Colorado Electric Resource Plan in particular where we are proposing self-build generation for the acquired Colorado Electric utility. We have submitted our application with our Electric Resource Plan for Colorado. The commission has deemed that application complete.

Now we are in the process of starting the discovery and potentially getting some scheduling of hearings and whatnot. We hope to have hearings on that resource plan early in 2009, which would, if it all goes according to plan, would give us the authority then to start constructing power plants in mid to late last year. We will see how the hearing process goes.

Of course, as we said before, the burden is on us to prove that self-build is indeed in the best interest of the customers. We believe firmly that it is and we think we can demonstrate that to the Colorado Commission.

Other notable items on here, the Iowa and Colorado gas rate cases that were filed by Aquila shortly before closing in the transaction, those are both proceeding as well. They are in the discovery phase. We do not yet have hearing dates scheduled for those, but would anticipate they will be in the first quarter, probably mid to late first quarter or so before we have hearings on those cases. Optimistic about our chances of getting satisfactory rate treatment in both cases.

Moving on to slide 17. We have talked about this slide previously as well, but this is what I would call key strategic growth opportunities. This does not include routine capital, maintenance capital, new customer growth capital, things like that. Primarily focused on large, growth capital investments or strategic capital investments. Some will have -- are real significant.

Obviously the Wygen III plant is ongoing. Large project for us, one that we are anxious to get online and in service and included in the rate structure for Black Hills Power. The Colorado Electric rate base generation project I just mentioned, that is a several hundred million dollar project. We are anxious to get started there when we finish our regulatory process.

The Colorado Electric advanced metering infrastructure, or AMI Project, is a notable one, primarily because the AMI technology is something that a lot of utilities are starting to deploy. Provides a lot of future opportunity for us to manage energy efficiency to shave peak loads to customers, some of those things.

This is really the pilot AMI project for Black Hills. We are deploying it to Colorado Electric first. Based on the success there, we may or may not apply it at our other electric utilities. But we are pretty optimistic about the potential of that system to help us in the energy efficiency area in particular.

On the generation side, we have spoken about these before but I think they are worth reiterating and that is the two generation upgrades we have, both at Neil Simpson II and our Wygen I facility. We are adding eight megawatts of capacity there at those coal plants for slightly less than $1,000 per kilowatt hour of installed capacity, which is an extremely cost effective use of our capital, adding low-cost resources for customers.

Bottom line, if we are successful in implementing all of these strategic opportunities for the Company, we are looking at spending over the next 3.5 to four years of somewhere between $900 million and $1.1 billion, $1.2 billion of growth capital, which is truly exciting from the Company and shareholder perspective.

Moving on to the rate case update. You have seen this as well and there haven't been any significant changes. I already mentioned the Iowa and Colorado gas rate cases and the status of those. The Electric Resource Plan for the Colorado Electric Utility I have already mentioned as well.

We do have a rate case pending, which is a transmission rate case for Black Hills power. We hope to have that in place by December 1, 2008. We are working with FERC and other parties to try to get that case settled and not go through the full-blown hearing process. We will see if we are successful in that are not, but we are working on it as we speak.

Next page, long-term strategic plan, we have made a lot of progress on a lot of these issues in 2008. We will continue to make progress for the rest of the year. There is several notable projects in progress. I have talked about most of those already so I won't reiterate it here, but we intend to continue to use this slide in future years.

We will finish out the year, tell you what we accomplished in '08, and then we will reset our list of objectives for '09 and report on those after we finish up 2008. So you will be able to continually see our progress on our real long-term growth initiatives for the Company.

Finally, before I turn it over to questions, I have been asked by several investors particularly over the course of the last couple months about Black Hills relatively heavy utilization of coal-fired generation and any associated risks that that may have for Black Hills or Black Hills shareholders. Particularly in light of recent election results and other factors that we have been hearing that question a little more frequently.

It's a great question and one I would love to answer. I think it's an issue that is of interest to most of our shareholders, and so I will take a couple minutes here to address it today. Before I talk specifically about Black Hills, I think it's important to note that coal is an extremely critical portion of our nation's energy supply. It comprises over half of the electricity generated in the US, and it will not -- will not be able to be replaced on a significant scale for decades.

There are technologies out there that can potentially replace coal, but they can't be deployed on a large enough scale to replace 50% of the nation's electric supply in any near-term scenario. The uncertainty of potential greenhouse gas and even federal renewable portfolio standard legislation does make utility decision making difficult.

You have probably heard that from a lot of other utilities that you see in the marketplace today. You have seen coal plants canceled and other things. But the situation for each utility is different, and I believe Black Hills is pretty well positioned.

I would summarize our position related to the threat of additional legislation for either greenhouse gases or renewable portfolios standards saying that for a utility that relies heavily on coal, we are in an excellent position related to the enactment of legislation on either front, greenhouse gases and/or renewables.

From a perspective of renewable portfolio standard, we have been aggressive in voluntarily integrating wind resources into our system for Black Hills Power and Cheyenne Light. We don't have a state mandate in either South Dakota or Wyoming, but have been adding as much renewable resource into our energy portfolio as we can. So in the event of a mandate we can mitigate any rate shock resulting from the implementation of the renewables to our customers.

In Colorado, which we just started operations there in July, we do have a state mandate there and a fairly aggressive one -- 20% of your energy supply by 2020. We are working diligently in making sure that we are compliant with that. That rule also has some solar requirements, even some solar requirements for the customer side of the meter. We have had good progress in accomplishing some of those objectives as well.

We are currently evaluating several wind generation sites in South Dakota, Wyoming, and Colorado. Have done wind studies in some of those locations looking at citing studies, potential permit issues, and other things. And we will continue to pursue those opportunities as we deem them prudent.

Our utilities -- we are fortunate in that our utilities, all three of our electric utilities are in good locations where if we must integrate more wind and do so relatively quickly, we are in good locations for the installation of wind resources and the ability to transport those into our service territories.

We have also looked in the renewable area at some biomass applications and other things as well. The Colorado Electric utility for Aquila is actually burning limited quantities of biomass mixed with coal in the plant at Canyon City. And we have investigated other projects even here in the Black Hills and will continue to do that on the renewable front also.

From the perspective of greenhouse gas legislation, I think we have several advantages for our coal-fired generation suite relative to many of our peers. One is our generation is extremely low cost. Our mine mouth generation model with the infrastructure we have at the Wyodak complex allows us to have low capital costs, low O&M costs, and real low fuel costs, delivered fuel costs because we don't have any transportation to speak of as well.

In the event of greenhouse gas or carbon capture and sequestration requirements, if those additional costs and technologies are required or mandated, we can afford those costs as well or better than any others because of the extreme cost advantages of our location. So we can still afford to add carbon capture and sequestration and still have a lower all-in cost than many of our peers in other parts of the country.

When doing our resource plans for Wygen II and Wygen III we made extensive runs, what if scenarios if you will, related to potential carbon and other expenses and ran a myriad of different scenarios for what potential carbon costs could be in the short run and the long-run. Basically under any of the scenarios that we thought were reasonable to evaluate based on what we know about what is happening legislatively, it still showed that the Wygen II and Wygen III resources were the best resources for our customer even with the carbon cost added on.

So from a prudency perspective, we believe we made the right choice on building those plants regardless of what may happen legislatively, again within reason.

We have been a leader in technology for coal-fired generation, particularly non-supercritical coal-fired generation, for literally decades. We were the first company in the Western Hemisphere to have air cooled condensing in Wyoming. We have deployed low NOx, kind of prototype low NOx burners at our sites. We are one of the first plants, if not in the first plant, with a new facility in operation scrubbing mercury emissions.

Our site is a great site where we are continuing to build plants. The construction cycle is relatively short, the scale of the facilities is relatively small, and it's a great host site for technology demonstrations. We have been doing that over the years; we will continue to do so.

We are evaluating different carbon capture sequestration technologies, including oxy fire technologies and the others. And may at some point if it makes sense even demonstrate those at our location if we can come up with a reasonable project that we think makes sense for both customers and shareholders.

One last point on carbon capture and sequestration, if we are forced to capture carbon or we deem it prudent to capture carbon and sequester it, the Powder River Basin Wyoming is probably one of the better locations in the country to sequester carbon dioxide. There is numerous oil fields there that would have great application for enhanced oil recovery using carbon dioxide.

Saline aquifers are also plentiful in the area, if we want to sequester in a saline aquifer. Just an abundance of locations where sequestration of carbon dioxide would be very feasible in very close proximity to our plant complex.

Finally, Wyoming has been very proactive on the legislative front and has addressed many of the issues related to carbon sequestration, including the ownership of pore space and some of the rules and regulations related to the injection of carbon dioxide. Wyoming did that in their last year's legislative session. So we are in a great spot from that perspective as well.

Finally, when you look at greenhouse gases or renewable portfolio standards, regulatory relations will be a real key as well to mitigating risk for shareholders. The cost increases related to either renewables or greenhouse gases will be very high. It will be a necessity, obviously, to pass those costs on to customers.

We believe we have always demonstrated a high level of prudence and a high degree of care for our customers and what they are paying. We have great regulatory relationships as a result of that. I think that will translate to the pass-through or rate basing of any expenditures we need in the event we have to make those expenditures to comply with regulations in the future.

So finally, kind of wrapping up here on this issue, I think we have got several advantages related to both greenhouse gases and renewables. We have got extremely low-cost generation, so we can bear some of those additional costs better than most. We are already being very proactive on renewables absent a mandate in a couple of our states and complying in the state where we do have a mandate.

We are an excellent location to test new technologies on coal-fired generation and we have a history of doing that for 30 years or more. Powder River Basin is one of the better locations to capture and store carbon. Our regulatory relationships are good.

And so while there are risks associated with greenhouse gas and renewable portfolio standards to Black Hills and our shareholders, I think the opportunities will be very numerous. I think those opportunities will outweigh the risks and we will be very well positioned to take advantage of those opportunities.

That is all I have for prepared comments. I would be happy to entertain any questions.

(Operator Instructions) Michael Worms, BMO.

Good morning, guys. Thank you for the detail on the presentation. That is very helpful; I like the presentation. Dave, I have a question for you and that is regarding the oil and gas production. In the 11% lower production in the third quarter, is that all due to the basis differential that you experienced early in the third quarter or does it go beyond that?

It goes beyond that, Mike. If you look at what we -- I don't recall the numbers right off the top of my head, but if you look at what we released in our earnings guidance, we gave a projected range for '08 production and that is and does represent a reduction from '07. The primary reasons are what we have talked about year-to-date is permit delays leading to drilling delays in the Piceance Basin.

We had some weather-related issues in New Mexico in the first quarter, in particular. And then some of our non-operated property and I discussed those last quarter. A couple in particular because of primarily the sales of those properties and new operators taking over the drilling activity ended up being significantly lower for this year than we anticipated.

Both of those properties are still very good properties with lots of upside drilling potential. We just need the new operators to get in, get comfortable, get their own drilling plans, and get started on those. We anticipate that to happen next year. So it's a combination of those.

So should we be looking at production for 2008 at the lower end or maybe even below the September guidance?

Probably lower end would be a good way to put it. When we issued that guidance, we had the well shut-ins so we were clearly aware that we would have that production in the Piceance Basin shut-in during that period.

Okay, then given -- going forward into 2009 and given all of the myriad of problems you have had on the production side, what kind of -- what gives you the confidence that production will be up as significantly as you suggest next year?

I think the critical issue is just going to be the drilling program itself. And as long as we continue -- I think we have got some great opportunities both operated and non-operated. We are drilling wells as we speak in some pretty good locations and we are pretty comfortable that barring any unforeseen circumstances that our drilling programs will continue.

We are pleased with the drilling progress on those non-operated properties that I referred to where drilling was quite a bit slower this year than we had hoped due to sales and new operators taking over and things. Both of those fronts we are getting pretty good reports out of the operators for projected drilling in 2009, which is a very positive news for us.

One of the key items, Mike, I think will be is we are going to be real cautious on spending here until we get our debt placed and make sure we are being careful from a liquidity perspective. If by chance we end up slowing down on our spending for that reason, it's possible that we may change what our '09 guidance would be. Right now we certainly hope we can get our debt placed promptly and not have to do. But just as one item that could lead us to be less, that is a possibility.

One last question on E&P. Can you give us the hedging program on that or do we have to wait for the Q to come out?

That is included in the Q. We anticipate issuing that probably on Monday.

Okay, very good. Thank you guys. And by the way, hate to tell you this, but while it's raining here in New York, it is 60 degrees.

Well, we are supposed to -- the Northern Hills are supposed to get -- the already have gotten almost three feet of snow. I don't know how much we have here, but it's a lot. The city is shut down essentially. We kind of all risk a ticket getting home from work here, because we are not supposed to be out on the street.

Good luck, thank you.

Eric Beaumont, Copia Capital.

Good morning, guys. Let me touch a little bit more on E&P. I understand they are reevaluating the guidance, but obviously the forwards have come down a lot on NYMEX since you gave the guidance. Have you -- would you care to give any sensitivity just so we can kind of work or track things ourselves?

Or are you just kind of waiting to get through the end of the year and see how in deep drilling capital works and see where commodities are at the end of the year before you really reevaluate and give us the '09?

I think that is exactly it, Eric, is we you do want to see what happens on capital spending plans. Obviously, if gas and oil prices continue to stay at the levels they are, they are significantly different than what we included in our guidance numbers. And those are -- we directly disclosed what we used for our guidance numbers, so it's pretty easy to figure out the differences.

Our take is that until we see the impact of several things, what we anticipate for capital spending and particularly some of the non-operated areas where we have to wait and hear from the operators what their specific drilling plans are and things like that. Once we know that and then make decisions on what we believe price levels to be, which may or may not impact our capital spending plans, then at that point we would be prepared to re-address any earnings guidance issues.

We also have, as Tony alluded to, the placement of the debt and what does interest costs are going to be. We would love to get that debt placed and know exactly what the interest costs are going to be before we specifically look at the guidance numbers for '09. Just because there is enough uncertainty there that it would be difficult to reproject at this point.

I did go back to previous releases and you did not give an assumed interest rate. Can you tell us what you were thinking about interest rate wise when you gave the previous '09 guidance?

I think the main thing that you can take a look at it is just what has happened to the spread since mid-September. We weren't anticipating that spread differential to happen. So I think you can look at what other BBBs are issuing at and come to a conclusion on that.

No, that is fair. I guess the other thing is one thing we have seen, although you mentioned that markets are necessarily closed, people are out there doing it. Nothing is really getting done at the HoldCo level; it's all going at the OpCo level. Can you refresh my memory as to what you are or aren't doing at OpCo versus HoldCo for the debt?

Well, our plans, at least for this long-term debt issuance, would be to issue senior unsubordinated holding company notes. We have done some limited financing of utility first mortgage bonds primarily Black Hills Power and Cheyenne Light, but our plan for the Aquila is to do it with holding company debt.

And so that I think is -- gets back to Tony's point on looking specifically at short-term alternatives. If we are not comfortable, we can get that long-term debt placed.

Okay, in the event that HoldCo debt remains a challenge, do you have an opportunity to go in and do OpCo debt or any first mortgage or secured at the Aquila properties?

Well, we certainly have the ability to do it. It's just that would be a conversation we would need to have with rating agencies and others before we made any decisions like that.

Okay, I guess lastly good results at marketing again. Can you just refresh our memory or talk to -- do you have any expiring contracts or new contracts with regards to firm transportation out of the Rockies? Obviously when the basis is slow, good for marketing, not as good for the E&P. But do you have any contracts that are of significant capacity that are rolling off or new ones coming on for '09?

We don't disclose the specific contracts, Eric, but one thing we do put in our Q is kind of a representation of what we view as the forward value of our book. I think when you see the Q you will see that we are adding value for forward periods. Some of that is due to the widening of the basis. Some of it is due to additional transport positions that we have taken.

Some of our transport, particularly the longer dated stuff a lot of times have a roper rights on it as well. So we have the ability to extend those when they do come due. Now that is not true of all of it, but we don't have any significant losses coming of transport capacity. We have some additions; nothing huge, but some additions.

Great, and with respect to the right of first refusal, I would assume that you would get that, but the pricing could be significantly different based on expectations of the counterparty on basis differentials and other things --?

Well, most of them are on FERC-regulated pipeline, so essentially you pay the FERC tariff. So there isn't a substantial difference in pricing. What you see on a lot of the transport positions that are being bid today in the market, where someone releases their capacity and bids it into the market, they can't charge -- in a lot of cases, they can't charge more than the FERC tariff.

There is some exceptions, but -- so they essentially bid it as to term. That is what differentiates the bids.

Okay, I guess one last thing, again. You know, you obviously got the permits delays which were an issue back in the day. Where do we stand now? Obviously we can understand the shut-ins and what you done for permits. Is anything freeing up on the permitting for the E&P side?

We are getting permits. Not as fast as we would like, particularly in the Piceance Basin. We had hoped to get 10 to 12 or more permits this year and we are getting them in groups of about two at a time. Much slower than we had originally hoped and -- but we are getting some and we have drilled some wells there this year.

The San Juan Basin we have continued to manage to keep a rig busy there, so we have enough permit flow to do that. Getting permits in Wyoming and some of the other areas, it doesn't seem to be as big of a problem. Just the two basins that primarily impact us are the San Juan and the Piceance. The Piceance has been the frustrating one this year in particular.

Okay, great. I appreciate it, guys. We will see you in Phoenix.

(Operator Instructions) James Bellessa, D. A. Davidson & Co.

Good morning, first of all on questions about your pre-closing and post-closing of the Aquila transaction. On the pre-closing, you said in your guidance that you would have $0.11 of pre-closing costs for the year. Was there any in the most recent quarter?

There is just a little bit for those first few days in July that happened for the pre-closing, but other than that everything else is in that post closing. We gave guidance on that, Jim.

The guidance for the year for '08 is in the order of $0.20 to $0.25 of post closing. How much hit in the third quarter?

We hit about $0.09.

And in the talk about your considerations of what you might do to finance the bridge loan, you talked about perhaps a $250 million to $300 million long-term debt issuance. And then extending the bridge loan for one to three years was an alternative to that -- term loans of one to three years.

Right, or some combination of the above. So it could be a combination of issuing $250 million worth of debt and a term loan for $200 million or something like that. We are considering extending the bridge because that could just be an easier transaction for the banks that are involved.

Very good, thank you very much.

(Operator Instructions) Presenters, I have no further questions in queue.

All right. Well, thanks for joining us, everybody. We appreciate your time and attention this morning. Certainly look forward to speaking with some of you at the EEI Financial Conference next week in Phoenix or Scottsdale.

If you have any questions, as always, please feel free to call any of us. Jason Ketchum typically fields those and does a great job. So thanks for your participation today. Thanks for tuning in.

Thank you. Ladies and gentlemen, that does then conclude our conference for today. We do appreciate your participation and thank you for using AT&T executive teleconference. You may now disconnect.