Black Hills Corp (BKH) 2009 Q2 法說會逐字稿

Welcome to the Black Hills Corporation quarterly earnings conference call. At this time all participants are in 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. Please go ahead.

Thank you, Robert. Good morning, everyone. During the course of this call some of the comments we make may contain forward-looking statements as defined by the Securities and Exchange Commission and there are a number of uncertainties inherent in such comments. Although we believe that our expectations and beliefs are based on reasonable assumptions actual results may differ materially.

We direct you to our earnings release, slide 2 of the investor presentation on our website, and our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to our CEO, David Emory.

Thank you, Jason. Good morning, everyone; thanks for being with us today. We plan to cover a few things today. I will give the operational highlights for the quarter; Tony Cleberg, our Chief Financial Officer, will then give you an update on the financial results for the quarter, and then I'll cover some of the forward-looking strategic items facing the Company.

The second quarter was a good quarter for us, operationally things went very well. We're very well positioned for the future and are continuing to position ourselves for the future. This quarter on the operations side all the businesses continued operations. The second-quarter was a little stronger than we had anticipated for our gas utilities in what is really typically a real weak quarter for them.

Probably one of the most significant items in the quarter was the completion of several real critical financing transactions for us. We were able to issue $250 million in senior notes, retire the bridge acquisition facility that we took out last July for the acquisition of the Aquila utilities, and then we also completed a $300 million standalone credit facility for our energy marketing company. And that was converted essentially from and non-committed to a committed facility, another significant positive step on the credit front.

Our systems integration and process efficiency projects are continuing; this is now the fourth quarter since the closing of Aquila last July and the combined operations are going extremely well, making a lot of real positive progress. This past weekend we converted Black Hills Power to CIS+ which is the customer information system that we're using for the Black Hills Energy or former Aquila territories.

That went extremely well, really have had no significant problems at all, I'm very pleased with that project. And then later this year we'll be converting Cheyenne Light, Fuel & Power onto that same system. So prior to year end we'll have all of our utility customers on a single CIS system which allows us to really optimize our customer service model.

Our generation products are continuing to move forward very positively. Wygen III, our new mine mouth coal plant in July at Wyoming is on schedule and on budget. We expect it to be in service in the second quarter of next year. We completed a sale of 25% of that plant to MDU in the quarter and expect that project to continue on schedule; it's going really well.

As you know, in Colorado we received approval from the Commission there to build two rate-based gas-fired combustion turbines. We've proceeded with those; the turbines are on order. In June we filed certificates of public convenience and necessity and air permits for those plants that were filed on June 8. So that project will continue to move ahead as well.

Finally, Neil Simpson II and Wygen I, we had a couple small projects going on there that we talked about last year to essentially add about 8 MW of capacity to each of those by upgrading our air cooled condensers there. Those projects have also been completed. And it's real inexpensive capacity. We essentially added those for less than $1000 per installed KW. So a very cost effective expansion of our capacity there.

Finally, the biggest impact on us from an earnings perspective in the quarter was low natural gas prices. Oil and gas, that unit is obviously impacted fairly dramatically by really low prices. But it also impacts our ability to get large margins and energy marketing -- just the low absolute price levels contribute to smaller margins there. And then off system sales even on the electric utility side are impacted because, especially in the West, on-peak electricity prices follow gas prices very closely.

Flipping to page 6 here on the webcast -- electric utilities, I won't cover all of the items here, but power price, as I mentioned, Mid C power prices is a good indicator of prices in the West. Significantly below where they have been in the last couple years for this time of year.

We had some scheduled plant outages, in both the regulated and essentially at Black Hills Power, that impacted our ability to have off system sales as well in that the amount of excess energy we had available was lower than in previous years.

Those outages essentially started as scheduled outages, we extended them because we found a little bit of damage beyond our original anticipation and we decided to extend the outages and essentially fix things right this time rather than have to take them down again next year. So that impacts off system sales in particular and even our retail sales because we had to purchase a little more power there.

The gas utilities, as I said earlier, slightly better than expected for the quarter; it's a quarter we don't typically expect to make much money in. We did a little better than that. We did get some help because of a couple recent gas rate cases in both Colorado and Iowa, we have positive results there.

Another item that's worth mentioning from a future looking perspective is in the Nebraska legislative session this year we were able to, with some help from legislators, obviously get a capital additions tracker approved for Nebraska which, as we continue to invest in our gas system there, will allow us to essentially add in that capital into our rates without having to go back in and file a separate rate case for that recovery.

Power generation, the critical activity there was the filing of bids for our Colorado electric utility. On the Colorado electric resource plan, the Commission allowed us to self build a couple plants, but basically the remaining approximately 200 MW of capacity they wanted us it acquire through competitive bidding. But they did allow our own non-regulated power generation subsidiary the opportunity to bid into that RFP.

We did submit some bids through our non-regulated subsidiary. I don't know where we're going to be on those bids yet because the electric utility is still working its way through bid evaluation and those things. And it's a very careful process that we're running there because of the affiliate nature of the bidding.

We have an independent evaluator and other people involved from the Commission standpoint just to make sure that we're doing everything at a pure arm's length transaction. So we should know, though, within the next few months whether we're the successful bidder or not.

On the coal front income was impacted this year several items, but primarily the operational issue that impacted us the most was an increase in overburden. We'd had some bad weather in the first quarter in particular and the amount of coal that we had uncovered had decreased from where we really would like it to be, so we actually increased -- temporarily increased our shifts for overburden removal, increased our overburden almost 32% over the prior year's second-quarter, essentially trying to catch up and even get ahead a little bit on overburden removal. That impacted us. Coal production was a little less than the prior year as well by about 100,000 tons or so, primarily related to those plant outages I referred to earlier.

Energy marketing performed better than the same quarter last year; even despite we're being very conservative in our utilization of their credit facility. If you recall, for the last couple quarters we've been talking about how we had restricted use of their credit facility just to preserve liquidity during the financial crisis.

Now that we have obtained a new standalone committed facility for them we're allowing them to essentially ramp up utilization of their credit facility, but they're still only using about $76 million as of the end of the quarter. Gas prices are down considerably, so you can do a lot of business with less credit commitments. Certainly those things will impact our business a little bit going forward if margins stay low.

On the bright side the storage spreads on the marketing side, the seasonal differentials in price are looking real positive. And we have increased the amount of gas we have in storage over the prior year. That really is not going to impact earnings until next year -- significantly impact earnings until next year. But a real positive development for marketing, nonetheless.

On the oil and gas side, the biggest message there I already mentioned is low gas prices. The low gas prices have resulted in a significant curtailment of our capital spending in our E&P unit and we really don't see that ending anytime soon. We will continue to be very, very cautious about what we're spending on the capital side until we see price improvements in natural gas that would justify the returns we want on our investments there.

We've done very little drilling and just essentially maintaining the production we have. We've shut in a little bit of production, less than 1 million cubic feet a day. But we're continually evaluating the economics of our various fields producing locations.

With the downturn in the industry, expenses and even capital costs have come down. We hope that trend will continue here for a while as just the overall industry activity has decreased some and we've also focused more and more attention on cost reduction there due to the low oil and gas prices.

Moving on to page 12 on the unification side, this is really focused on the integrating of the properties we acquired from Aquila last year. We've made tremendous progress in the last year. Several things are going extremely well. We've done a lot of work on the people side -- combining pay scales, benefits is the next project on the list where we're looking to consolidate all of our benefits corporate wide. We think that will increase our efficiency and reduce administrative expenses considerably by doing that.

And as I mentioned before, we just this last weekend converted one of our existing utilities, our Black Hills utilities, to the customer information system that the Aquila utilities are using. That has gone very well. We're continuing to focus efforts on different processes, purchasing is a good example. We just recently executed a corporate wide purchasing contract for office supplies, another area where we think we can add considerable savings by consolidating all of our buying.

Moving on to page 13, the time line. I won't really cover this; I think it lays out the key events, ones that have been completed and ones we're still working on, for the next couple years in several different categories. And we will continue to update this calendar so you can really see what's coming and what to expect out of us as we go forward. I will now turn it over to Tony for a discussion of the financial results.

Thank you, Dave, good morning. As Dave described, during the second quarter we had continued improvements in operations and in our capital structure. From a P&L standpoint the second quarter was a shoulder quarter for us and performed slightly better than our internal expectations.

Looking at the earnings drivers for the quarter on slide 15, our gas utilities had a seasonally strong performance in the second quarter from a combination of improvements in the rate case settlements and better than planned volumes. The electric utilities declined year over year from decreased off system sales, even though the megawatt hours sold increased with the addition of the BHE or Black Hills Energy properties. The decreased sales were driven by the low natural gas prices causing the margins to decline significantly.

On the non-regulated side of the business results were mixed compared to a year ago. The oil and gas segment was negatively impacted by low commodity prices. As noted in the first quarter, until we see an improvement in the oil and natural gas prices we will continue to minimize our CapEx spending for this segment.

Moving to power generation, the improvement year over year primarily reflects lower corporate cost allocations in 2009. Our coal mining segment was impacted by increased equipment depreciation costs and coal taxes, partially offset by lower fuel prices. Energy market segment showed an improvement over last year, but we had fewer opportunities -- were available driven by the low natural gas prices and the tight spread.

Moving to slide 16 we have our EPS analysis for the quarter. And we adjusted the continuing ops income down to an adjusted income from continuing operations to help you understand what happened. By isolating these items the income from continuing operations as adjusted for the second quarter was $0.18 versus last year which was $0.36 per share.

The first item excluded in the reconciliation was a mark to market improvement from March 31 on the outstanding interest rate swaps. This amounted to a $20.6 million or a $0.53 per share gain and reflects the reduction in the swap spreads.

The first expense item that was added back in the reconciliation was the write-off of fees for the bridge acquisition facility. The bridge acquisition facility was retired in the quarter and the associated unamortized fees were expensed. In effect the quarter included nine months of fees and we added back six months in this analysis to reflect a more normal level.

The last expense item excluded in the reconciliation was the integration expenses we incurred during the second quarter of 2009 and 2008 for the Aquila acquisition in the amount of $830,000 for 2009 and $950,000 for 2008. And this resulted in $0.02 per share in each year.

It should be noted that the amounts exclude internal labor cost and depreciation. So by isolating these notable items from our quarterly performance our income from continuing operations as adjusted was $0.18 compared to $0.36 in 2008, a substantial decline. The decline relates primarily to the increased interest expense which was at $7 million net of tax or $0.18 a share.

Moving to slide to 17 -- this displays our last four quarters of income from operations on the top line reconciled to the income from continuing operations as adjusted on the bottom line. This is included to help you understand our performance over the trailing 12 months. The important thing to note is the four quarters include 11.5 months of the Aquila properties.

Moving to slide 18, this displays our income statement for the second quarter compared to the second quarter of 2008. The revenue at $257 million is an increase of $104 million over 2008 and this reflects the addition of the Aquila property.

Moving to the operating income, in total we were flat year over year and I'll go into further detail about the increases and decreases by segment later. The interest expense increased pretax by $13.7 million. This includes $2.9 million pretax write-off for the bridge acquisition facility.

Moving to the interest rate swap line, we had a sizable mark to market gain on the $250 million of interest rate swaps. As you may recall, these swaps were put in place in 2007 for expected financing. The swaps had to be de-designated last fall because we decided not to issue debt at that time. Consequently any mark to market had to be accounted for through the income statement. We chose to leave these swaps in place because of our expected future financing of both capital projects and future maturities on debt.

Continuing down the income statement, our income taxes for the second quarter were at a rate of 36%. This is a more normal rate. In 2008 our tax rate was 31% where we enjoyed a greater benefit of the permanent differences such as depletion. So the 2009 GAAP income from continuing operations was $0.64 per share compared to $0.34 a share in 2008. The discontinued operations last year related to the IPP assets which were sold.

Moving to slide 19 and drilling down into the income statement -- this displays our 2009 segment rollup of revenue and operating income. Of course the operating income is pretax. The electric utilities year-over-year revenue increased $25 million and the operating income declined. The declines in operating income resulted from lower margins from off system sales and, to a lesser extent, lower retail margins due to planned outages and increased employee benefit costs.

The low natural gas prices impacted the pricing of off system sales that Dave pointed out and have significantly decreased margins in 2009. We were pleased with the gas utility segment, that it was asked a profitable in this shoulder quarter. The first-quarter rate cases and the cool weather in Colorado helped.

Moving to oil and gas performance -- both revenue and operating income were affected by lower oil and natural gas prices. The average hedged price received declined 42% for oil and declined 45% for gas. Production of both oil and gas decreased by about 7% from the prior year. Spot prices at June 30, particularly oil, helped us avoid an impairment charge in the second quarter. But if prices declined substantially from June 30 to September 30 this could be possible by the high levels of storage of natural gas that we're seeing right now. A third-quarter impairment could be possible.

The next segment, power generation, produced $2.9 million in operating income. This was a more normal level versus 2008 where a greater level of corporate expenses had been allocated to the segment.

Moving to the next segment, coal mining revenue increased 7% with a 6% decline in tons and a 14% price improvement. Coal mining operating income declined primarily due to increased equipment costs and mining expenses related to 32% more overburdened on 6% less coal sales. As Dave mentioned, the coal sales were down a little bit because of the plant outages.

The next segment, energy marketing, revenue increased as a result of increased physical sales of crude oil. Natural gas physical sales were flat year over year. The operating income improved $3 million over 2008 but fell short of our expectations because of the tight spreads and particularly on low natural gas prices.

At a corporate level we had an improvement of $5.5 million related to reduced expenses from 2008 which we categorized for pre-acquisition costs. This included $3.4 million for depreciation and internal labor costs assigned to the acquisition. So after all of those ups and downs our operating income was flat year over year.

Let me move to slide 20 which shows our capitalization. The bottom line is our debt capitalization remains healthy at 49% debt to cap. As mentioned earlier we issued $250 million of five year 9% debentures in May and paid off short-term debt. We feel much more comfortable with a 70% of our debt in the long-term category.

During the quarter we retired the bridge acquisition facility so we have that behind us. We still plan additional financings in 2009 to move a considerable amount of short-term debt to long-term and position ourselves for future capital spending. Some of the planned future financings include first mortgage bonds, project financing and term loans. As mentioned earlier, we obtained a committed stand-alone facility for Enserco during the quarter; we've managed this business with a very conservative capital structure over the last nine months because of the economic turmoil.

Slide -- the next slide, the credit rating, summarizes our current credit ratings and our corporate ratings are BBB at Fitch, BBB- at S&P and Baa3 at Moody's. At the beginning of this last week, or this week, we were pleased to receive from Moody's an upgrade on our Black Hills Power senior secured debt which went from a Baa1 to an A3.

The last slide in my presentation here is on our credit facilities and debt. The main point of this slide is the $250 million of unsecured debt issued and the stand-alone and circle facility. With this we feel we have ample liquidity under our revolver. Also the improvements in the capital markets should afford us better pricing on our future debt financing.

So from an overall perspective the second-quarter performance was slightly better than what we expected internally, even in this economic environment. We are pleased with the gas utility performance and we're pleased with the capital structure improvements that we made during the quarter. So with those comments on the quarterly financial performance I'll turn it back to Dave.

Thank you, Tony. Moving on to slide 24 here, looking for the future, we're in an excellent position. And we've been talking about this for the last year, but we've really undergone a pretty significant transformation here -- we've gone from one-third regulated utility to essentially two-thirds in terms of assets.

And if you look at -- and this year, particularly when our non-regulated capital spending is down because of low gas prices, this forecasted spending for this year is a significant amount of capital but nearly 80% being deployed into the utilities which will provide great future opportunities for us as we get rate cases approved and get that included in our customer rates going forward.

As Tony said, we've got a great capital structure right now, we're in very good shape, a significant amount of our debt shifted to long-term instead of short-term, very strong cash flows and a lower overall risk profile sets us up very well as we go forward on key strategic growth initiatives.

Moving on to the next page, we've talked about this slide before. These are significant growth oriented capital expenditures; they don't include maintenance CapEx or routine capital expenditures for things like equipment replacements and upgrades and things like that. Very significant projects on here, we've talked about most of them already particularly related to power plant construction, transmission, some of those things.

The electric automated metering infrastructure project in Colorado -- Colorado electric utility there is not a large capital investment, but it is a significant strategic project for us in looking at ways to help with energy efficiency programs and monitoring and as well looking at potentially new rate structures there as we move into the future to help with demand-side management and other activities. A great list of very key future projects that will provide good long-term growth for shareholders.

Moving on to the next page a quick update, and I've mentioned it a little bit already, but the Colorado Electric resource plan for the electric utility in Southern Colorado, and we've been providing updates on this since the acquisition last year. The utility owned generation process is ongoing. As I said, we filed our certificate of public convenience and necessity, we filed air permits and we filed them for two different locations in case we run into a citing snag at one we've got a good plan B. We need to have that generation constructed and in service by January 1, 2012.

So we've been very careful to make sure we have a site in an alternate site. The two turbines are on order and expect delivery of the second half of next year at which time construction will really start ramping up. We would expect to get air permits roughly a year from now and be able to proceed full-scale on construction at that time.

On the resource solicitation on the other side, the IPP bid, as I mentioned before, we did some submit bids. The internal team at Black Hills on the utility side that's working on bid evaluations are supposed to complete that process this week, begin to commence negotiations with the successful bidders with the goal of have a contract negotiated and announced, or multiple contracts negotiated and announced by early December or so. We'll find out obviously through that process on how our IPP bids fare in the process as well.

Regulatory update, really no new news here. Except for during the quarter we completed the Colorado and Iowa cases and orders were finalized there. We were feeling pretty good about where we were at the end of last quarter on both of those cases, but we do have final orders and things on those.

But we do expect to file a case for Black Hills Power later this year that would allow Wygen III to be included in rates immediately upon its commercial operation date in the second quarter of next year. Very similar to what we did with Cheyenne Light a year or so ago where we had a rate case approved and it was effective on the day of first commercial operation at Wygen II.

On the Colorado electric side we do anticipate having to file a significant rate case there as well as we go forward related to the construction of the rate base power plants there, the two gas combustion turbines.

The next slide is just -- gives you some analysis on our rate structures and we've been providing this for a couple quarters. I would say one significant change there which I already mentioned is in the Black Hills Energy Nebraska gas utility. We do have now approved by the Legislature a capital additions tracker mechanism there which allows us to efficiently get capital recovery in rates as we continue to grow our system there.

Page 29, we have considerable activity going on related to energy efficiency programs and renewable energy deployment, even in states where those activities are not mandated. South Dakota and Wyoming are good examples; we're integrating significant quantities of wind into our system there and we don't have any state mandates in either state.

South Dakota has a 10% renewable objective, but it is just that, an objective. And we're certainly trying to get as much renewable energy into our portfolio as we can before we receive any mandates either at the state or federal level which will lessen the rate impact on customers by doing it gradually over time. But pretty proud of all the activities we have going on in that area as well.

On page 30, this is a strategy scorecard that we've been showing you for about a year now. This is something we intend to continue to keep up to date. I don't need to spend a lot of time on it, but essentially we will set forth our major goals and activities for each year related to long-term strategic planning for you and we'll show you as we complete those, so you can see our progress towards key strategic activities and goals. Making excellent progress on a lot of different fronts there, as you can see.

Finally, to wrap up, we have elected, and I'm sure you noticed in our press release, to not issue earnings guidance for 2009. We withdrew our guidance in February and I know we've been discussing with many of you when we might reinitiate guidance. In our mind there's still enough uncertainty that did make sense to do it at this quarter. Several of those natural gas prices obviously have an impact on several units.

As Tony mentioned, we're looking at financings. When they might occur would impact what we have for interest expenses if we do some additional debt offerings and further reduce our short-term revolver borrowings. Things like that. We are evaluating the possibility of issuing 2010 guidance maybe later this year, possibly even in conjunction with our third-quarter release. At that time or sooner we may update guidance for 2009. But we have elected not to do that yet at this time.

Very pleased overall with how our operations are going. I said earlier our earnings are certainly impacted by natural gas prices on several different fronts, but from an operational perspective things are going extremely well.

Making great progress on our integration activities which will result in future efficiencies and cost savings and we're very pleased with progress there, key growth projects particularly generation construction, transmission investment, automated metering infrastructure. Those things are going very well and set us up great for future earnings growth as we get the rate cases in and approved over the next couple years for efficient recovery of that capital.

And as Tony mentioned, we're in excellent financial shape. I'm very pleased with where we are on the amount of long-term debt we have relative to the short-term debt we have. No immediate maturities of any long-term debt that we have to worry about replacing of any significant size. So very satisfied with where we sit right now as far as looking to the future. So that concludes my remarks. I'd be happy to try to answer any questions anyone may have.

(Operator Instructions). James Heckler, Levin Capital.

Hi, it's actually Neil Stein. I just was hoping to explore a little bit the reasons for not updating '09 guidance. Could you explain that in a little bit more detail, some of these factors? The interest expense, I think, was one you mentioned and oil and gas prices. I mean, I know they're not -- oil and gas are not where we would like them to be, but there are forward strips that are actively quoted. And on the financings, you did your major ones; I suppose there are some smaller ones maybe yet to do. But I'm just wondering why that precludes you from giving guidance.

It doesn't necessarily preclude us from doing so; it's more of a judgment call on whether we believe it's beneficial for us to do it at the current time. But several items, oil and gas prices impact more than just the oil and gas unit. And as we see how the gas market unfolds over this next quarter that impacts our transport business and our energy marketing company, certainly can impact the margins at our energy marketing company that we make. If your absolute price of gas is quite low you just can't make the margins that you would normally make.

And in particular the off system sales of electricity may have some impact; it's very difficult to guess what those are going to be. Just because gas prices are low doesn't necessarily mean we will have low off system sales. But they probably won't be as high as they would be at higher power prices. And so we'd like to get another month under our belt essentially during a season when off system's power sales are pretty critical to us and have at least a reasonable impact on earnings to make sure we know where we're going to end up there. We have had had a decent July on that front relative to June which was real weak for us. But that is an unknown area.

On the financing front we've talked about for a year now there are several things we want to look at to reduce our short-term borrowings, particularly when you look at that growth oriented capital slide that shows all the projects we have coming up over the next few years. We really would like to get our short-term debt down pretty low; we have to renew our revolver next year so we went to get as much off of that revolver as we can in anticipation of a large ramp-up in construction, in capital investment, even in oil and gas and other things as prices rebound.

So we've looked at, and Tony mentioned these things, like perhaps doing first mortgage bonds at the utility to help finance a power plant construction potential of project finance and maybe our IPP unit, some of those facilities, things like that. And the timing of those financings will impact interest expense fairly significantly because our rate on our revolver is basically 70 basis points over LIBOR which is pretty low right now.

So any of those financing and the timing of those could have a material impact on just interest expense and things. So our preference is essentially, Neil, to just wait a couple more months until we get a little more definitive certainty around a couple of those items.

We could give guidance now for '09, we'd have some pretty big qualifiers on the numbers all contingent on some of these items and we figure we basically have gone halfway through the year, eight months through the year, seven months through the year without the active guidance essentially. And having another month or so to provide some clear certainty before we re-issue guidance seemed like the appropriate thing for us to do.

It just seems, because you mentioned you would also give 2010 guidance maybe in a couple months. And I'm just confused as to why it's hard to forecast '09 earnings when we're midway through the year. And at the same time you'd be in a position to issue 2010 guidance three months before the year starts with 12 months of uncertainty to the extent none of those months have happened yet.

Well essentially it gets back to the issues that I said. We know there's going to be some things we will do over the next couple months here that will impact earnings, and not just for this year but next year as well, long-term financings, things like that. So when we know those then I think we can get back to issuing guidance and then I think everyone by that time is probably going to be more focused on 10 than nine anyway. We'll be able to list kind of our standard assumptions which are gas prices and a few things like that and not have quite such a long list of uncertainties to qualify our guidance with.

Any thoughts on issuing equity? Is that one of the uncertainties?

Well, we've said for a while that we anticipate needing to issue equity at some point, but we're certainly not in any hurry to do that. I mean, if you look at our cap structure we don't need any equity right now. And we do expect that if you look at that spending, if we end up spending $1 billion over the next few years at some point we will have to issue some. But it really depends on how strong cash flows are and everything else.

But we want to maintain that 50% to 55%, 53% debt range. And so as we ramp up construction, particularly in Colorado and some of the other areas, there will be a point where we would anticipate issuing some equity. I'm not sure when that is, but we're certainly not in a big hurry to go out and do it now. It doesn't make any sense in our opinion. If prices are relatively low, which doesn't make any sense either, it would be more dilutive.

Okay (multiple speakers).

Neil, just on the equity front, as Dave said, it doesn't make any sense to issue it right now. And if you look at the prices it doesn't make any sense. And one of the things in the prices, we talk about our growth plan from the standpoint of building these plants and you can go through the rate recovery process and figure out the kind of earnings that should come from that and we just don't believe that's built into our stock at this point in time.

Okay, thanks very much.

Ella Vuernick, RBC Capital Markets.

Thank you, good morning. You've partially answered actually my question with the previous gentleman's comments. But if we could go back to the electric utilities and talk a little bit more about the lower off system sales margins. Could you -- I guess two things. One, is there a way to quantify what portion of the year-over-year decrease is attributable to those low margins? And also, I know that you mentioned it's a little bit tough to forecast the full year, but any insights or color as to what you see in terms of this trend playing out to the end of the year would be very helpful.

Some of that is pretty difficult. We do I think breakout just what the decrease year over year quarter over quarter is in off system sales. The margins are down basically $2 million from last year in the same quarter. Typically third quarter would be one of our stronger quarters for that. I certainly would not expect us to outperform last year.

If you look at the power markets in the West, very closely approximate the price of natural gas. And a rough, rough, rough rule of thumb would be if you've got $3 or $4 gas in the West you probably have $30 or $40 power prices on peak, in a lot of the locations that we would be selling in anyway. And so last year at this time gas prices were $11 to $12 in this region, power prices were around $100. So there is a significant difference there.

Now the absolute price isn't the only thing that allows us to have revenue from off system sales. If we have light load in our local territory and not much heat, which we've had earlier this summer and even in July haven't had a lot of heat, and that allows us the opportunity to sell more just because we haven't used as much energy as to serve native customers. But it's very difficult to give you a real foreshadowing of what we expect because there are so many factors that impact it.

If you recall, we have access to the eastern transmission grid here through and inner tie in Rapid City; we do a lot of buying and selling across the eastern and western grids. It's really hard to predict what impact weather, gas prices and other things may have on the combination of the two markets as well.

But a lot of that -- the third quarter is typically a pretty strong quarter for us in off system sales area. So I think when we get a little better sense for the third quarter we'll be much more comfortable with the overall guidance and being able to give a little more direction which would be a little more on point to your specific question.

Very good, thank you, that was helpful. I don't have any additional questions.

Kathleen Vuchetich, W.H. Reaves.

Good morning. I was wondering, could you tell me what the total CapEx is expected for this year and next?

Yes, hang on just a second. We will have it in our Q which will come out here in the next couple days. Not -- at least this year's CapEx isn't going to be materially different from what we put out last quarter, Kathleen. But a significant difference is -- we talk about oil and gas spending and I believe we had $38.6 million in the K for CapEx for 2009 and we've said and are continuing to say we may spend as little as $20 million in oil and gas this year if prices stay low. But the numbers aren't materially different than they were last year.

Do you have a rule of thumb of gas prices when capital spending starts to go back up?

Well, it really depends on the area. I would say we would want to see -- in most of our areas we would want to be in that $5 to $6 range gas range before we spend a lot of capital. There are some exceptions to that, I mean we've got a few plays that we have smaller interest in that we would drill all the way down to $3 or $2.50 probably and we are doing a little bit of activity there. But in general it's going to be $5, somewhere in that range. Some of it may start up at $4.

Great. And final question. Rate treatment on the two new plants in Colorado. Do you collect any cash through construction or is it all delayed until the plants actually go into rate base? Is there any CWIP or CWIP equivalent that would augment your cash flow in the interim?

Well, not really. Most of our territories we don't have a CWIP type provision. You will see the AFUDC in the earnings line which will show up then in future earnings and the total capital cost of the project. But we don't -- in Colorado, South Dakota or Wyoming where we're doing major plant construction have the ability to have a CWIP provision right now for those major capital expenditures.

Okay, thanks so very much.

Vedula Murti, CDP US.

Good morning. A couple of things. One, you alluded to the higher interest expense in terms of when we're looking at the quarter here for the second quarter. And I think if I heard you properly, I think we were talking about on a pretax basis, interest expense was up I think -- excluding the adjustment that you referenced -- approximately $10 million.

On a pretax basis? I think I said $13 million -- $13.9 million.

Okay I thought (multiple speakers).

And -- but that included $2.9 million of the write off of the bridge fee.

So if you -- so that write off will not continue going forward, correct?

That's right. That acquisition facility is paid off now. So --

So if we're just thinking about comparing the second half of 2009 versus 2008 in both the third and fourth quarter you probably have approximately -- before we think about the terming out of the incremental short-term debt that you'd like to do -- approximately $10 million pretax each quarter, correct?

Well, I think $13.9 million minus $2.9 million is $11 million.

Oh, $11 million, okay. So that would be about $22 million then in the second half of the year versus last year. And when we're talking about terming out the debt here that you want to do, how much are you really talking about wanting to term out that's currently at LIBOR plus (multiple speakers) or whatever?

What we have talked about is in fact shooting for almost a very small amount of short-term debt by year end. And so there will be a little bit of increase for going into gas storage, there will be a little bit of usage of cash to build up gas supplies by year end. So -- what I've signaled and mentioned a number of times is that we're kind of shooting to be close to zero and maybe it's $75 million or $100 million or something like that. But that's what we were looking for is to shoot for about zero short-term debt by year end.

Okay. So if we -- just so -- I don't have that slide right in front me, so how much are we going to take out then?

I have to go back to the slide myself. At the end of June we had $300 million worth of short-term debt.

Okay. So on the $300 million we'd be basically thinking like in these credit markets do you think based on levels you're talking about probably 500 to 600 basis points incremental over what you're currently -- what your current cost of funds are?

You know, what I would suggest is just take a look and take a look at what other people are issuing first mortgage bonds for it and capital and project financing and take a look at that. And that should give you a pretty good estimate.

Okay. And if I go back to the operating income slide I think it was slide 14, I think it is.

Okay.

What I want to get a sense of here in terms of, again, the rolling forward. Because you indicated that production at the oil and gas unit in particular I think was down 7% and obviously with the minimal amount of capital that's being put in I think it seems probable that there will be continued declines in production at this point.

And also given that prices peaked out in the July timeframe, we're probably still going to have some negative pricing comparisons year over year. I'm just wondering whether if we looked at the oil and gas segment in particular, whether the operating income differential is somewhat representative of what we should be seeing over the next two quarters until we normalize?

I would say there are priced strips out there and take a look at what our production has -- the decline curves have been. And that should be -- that should kind of lead you to your answer there.

Well, I mean the slight here or I think the next build out slide that shows you the trailing -- that shows the following quarter doesn't give you the operating income for the oil and gas segment for the second half of '08 versus say the $12.3 million that we have here on slide 19 here, excuse me. So I'm wondering if you happen to have that number for the second half (multiple speakers).

Oh, I see, for the second half.

It would be in the 10-Q.

Yes.

The '08 first- and second-quarter 10-Q's.

It you can't find that number (multiple speakers).

No, I'm looking for the third and fourth quarter.

Right, right, of 2008.

Correct.

(multiple speakers), yes.

Because then that way we'd have a sense as compared to likes of the current run rates that we've seen here what the potential delta is. It would appear to me on the surface that given curves as well as declining production that while the differential might be somewhat -- might move somewhat that the relative percentage type magnitude here would be fairly indicative, at least until we get to a point where we've experienced the bottom of commodity prices, particularly in oil and gas which really kind of, we start seeing probably something comparable by the end of the year, early in 2009.

So I mean, what I'm trying to ascertain here is that if we think about where things are today the interest expense line in and of itself on an after-tax basis is about $0.37 negative during the second half of the year and that's before considering terming out the short-term debt and any incremental expense associated with that. And that was simply taking the $22 million that we talked about for the second half of the year and using -- tax affecting it by 35%.

Then it would appear to me then that on an operating income basis that we may have about another $20 million or something over the second half of the year on the oil and gas side where, there again, we're probably talking about another 30 some odd cents a share. So I'm just thinking about the headwinds such that we have the appropriate base off of which to then build back up on 2010 the given some of the growth projects you have.

I would say I believe we disclosed the operating income at the end of the third quarter last year and the fourth quarter last year on oil and gas. And I don't have that with me right here. So if you would call us back on that we can certainly -- that's been disclosed. So we can give you that number, I just don't have it.

Okay, thank you very much.

Eric Beaumont, Copia Capital.

I want to kind of rehash a little bit on what Neil said and just touch base on a few things. First, I understand things are uncertain, but you only have five months left. And I understand you're probably trying to get a little more focus on [time] and progress. But if I could just run over a few numbers then you could guide me again trying to get (inaudible) do a little as I'm thinking of the base, we're looking at 10.

For '09, the second half of '09 you guys had about $19 million in marketing income. And obviously given what you said prior to current conditions and now knowing that, who knows what happens with gas, but some of the transportation volumes might not be there for you. Obviously there's going to be a significant variation there for '09. And you've pointed to in the past saying that when you don't go into your -- like last year was exceptional, that you said somewhere like -- you pointed around $12 million being kind of a run rate you expect in that business on an average year, is that accurate?

Well what we've said is if you look at trying to come up with an average year, I mean that business is all over the map. But somewhere in a -- last year certainly we had great earnings, so that probably wouldn't be a good year to look at and the year before or the year before that would probably be at least reasonable for a base expectation in a normal year.

Yes. No, again, I'm just trying to think of where -- this year is probably going to be a below-average given the headwinds you've said trying to think about where to extrapolate that out for an average year, you're going to have a partial year for Wygen III coming in next year. Obviously without a return to more normal commodities we're still going to see some variation and a challenged year there next year.

I'm just trying to go through -- and obviously you had an exceptional year Q1 and even Q4 of last year on the LDC side partially weather driven. So I'm just trying to think about how to normalize, again, understanding you hope to be able to give 2010 guidance out there. But obviously without having '09 guidance that you're ready to give yet and '10, we have to sit here and kind of put the pieces of the puzzle together to figure out where life sits compared to your peers who have given guidance and more significant drivers just on the valuation and growth metrics.

So is there any color you can give on kind of -- you gave the 12-month rolling, but obviously Q3 and Q4 of last year are shaping up to be significantly different than this year both from financing, from marketing, from the gas cost. And I guess I'm just trying to figure out how we can normalize a few of these issues so we can look to '10. Is there any color you can give on that, David?

Well, I think we've given most of what we're willing to give, Eric, except for I would say the marketing unit you address specifically. I had made the comment, our credit facility utilization is fairly low there. Certainly if you look at the basis differentials out in the Rockies, if you go back to say our 10-K for last year where we gave a three-year history in marketing on the percentage of gross margin that came from the various strategies, storage and transport and producer services and proprietary trading.

You look at the transport numbers, just basis differentials out in the Rockies are significantly lower than they've been in the past. Storage, even if those margins are good, realistically the income -- most of it's not going to show up until next year anyway because (inaudible) season is going to be there. So I think you can look at those couple pieces and ascertain that there's probably going to be a significant shift in marketing earnings as compared to the prior year. And that's essentially I think what we're comfortable disclosing at this point.

Okay. One more question, we'll see how it goes here. It's just I look at where last year was and I look at kind of the Street's estimates for '09 and '10. Can you say anything about a comfort level in and around what you've been talking to Street and where they are?

No. You know, if I say I'm comfortable with what the Street has out I might as well put guidance out, right? So, no. I think that if you look at how the Street projected this quarter you can look at how we've performed. And I think based on some of the issues that we've been talking about I think you can probably draw some assumptions and conclusions from that.

As I said before, one of the key quarters for us I think in either meeting Street expectations or even our own internal expectations is going to be just how well we can do in the third quarter in particular and the timing of some of the debt placement and things. Once we get a couple months down the road I think we'll be much more comfortable with where we're at.

I appreciate it. One kind of a last comment. You're giving a lot more disclosure and I think we all appreciate that. But one overlay you might be able to give is kind of getting to a normalized condition type slide. So when you think about the normal year -- and yes, there's never normal for weather and gas prices -- but if you give the drivers from a normalized base and just make assumptions whether that's where reality lies or not so it's easier to think about where you picture normality or a normalized year, I think that would go a long way towards helping us out in figuring some of these issues.

And I know with the acquisition, it's a little bit in motion now, but since you're giving all this additional detail to the extent you could kind of give a baseline for which we can kind of vary things off of that would be very helpful.

Yes, and we'll continue to look at how to improve our disclosures. The issue is here, and obviously everybody knows this, but we as a company have undergone a huge transformation in the last 12 months and then the world as we know it has undergone an even bigger one over the last 12 months. So I don't know what you even call normal right now which is one of the challenges. We obviously have a better idea of where we think that is than you do and we'll work on trying to improve our disclosures around that.

Okay, thanks, guys.

James Bellessa, D.A. Davidson & Co.

Did I hear you and Dave say that the overburden is increasing and that the seam under that overburden, that increased is narrowing? And that (multiple speakers).

Yes, the amount of coal is the same, the thickness of the coal is the same. We typically like to keep five to six or seven months of coal uncovered in case we run into real bad whether that would slow our overburden removal down for a few months or whatever. And because of the severe winter this last winter we got down to where we only had a few months worth of coal uncovered. So essentially we ramped up the overburden rate in this quarter to just get back ahead a little bit so we would get back to the six months of coal uncovered.

You've been over there and seen how it works, we basically try to keep about a six-month supply and in this case it would be about 3 million tons of coal that has all the overburden removed already. And we got a little lower than that and so this last quarter we ramped up our overburden and spent considerably more money to move another 30% more overburden than a normal quarter. And we extended shift times and everything else to accomplish that.

Now once we get back and we're getting close to that, getting back to five to six months of coal uncovered in inventory then we will back off of the overburden a little bit.

Then the Aquila acquisition that you made 11 and a half months ago -- or now it's been a year, but for your reported period it's 11 and a half months. You paid over $900 million for that transaction. Can you give us just an approximation, how much of that expense, that investment went to cover the gas properties?

I don't think we've disclosed our purchase price allocation.

Here's what I'm trying to ask, Dave. In the last 11 and a half months of reporting you've had a little less than $22 million of earnings from that gas business. If I guesstimated $600 million of the total purchase price went to that, that's less than a 4% return on capital. And so I'm just trying to see what the potential is going forward?

Today you said that the gas utilities proved good earnings -- excuse me, the gas utilities provided good earnings results compared to the seasonal expectation. And yet they were quite small. And so I'm trying to understand what your real expectations for the gas business are?

Well, I think if you -- obviously the first year of operation with some of the cost issues and all of that cloud things for especially a couple of the quarters last year. But we've had I would say a year now or almost a year of reporting operations in the gas utilities and the last couple quarters I would say are more kind of a normal operation without all the one-time costs, things like rebranding and that sort of thing.

If you look at it, I don't think we've disclosed the real specifics of our purchase price allocation there, but if you look at it in terms of the goodwill that we have disclosed on the books, if you think about those five utilities that we bought, the one that has a large amount of at least upside investment potential is Colorado Electric because of the self build generation opportunity there.

So they probably got a little more allocation of goodwill at that utility than say the gas utilities did. I don't know if that helps you much. But we haven't disclosed our purchase price allocation by utility at this juncture.

The other thing you have to remember is we deferred $185 million worth of taxes on this acquisition. So the way we look at it from a net investment standpoint is a little better than the $900 million that we actually paid.

Those responses are helpful. Thank you.

John Hanson, Praesidis.

Good morning. Just a question on the E&P business. Production -- just to make sure I'm clear here. We expected production to continue to kind of decline here for the remainder part of the year the way things are -- you're investing in that business right now, right?

Yes, we're going to have a natural production declining if we're not replacing production and reserves and expanding the level of $20 million or less which is where we may be if prices stay where they are will not replace reserves and production. So we would expect a decline there year over year.

I didn't see any information here, at least in your presentation, about how hedged you have that business right now. Do you have any -- I know there is some information about some of the hedges back in the Q, but are you generally pretty well hedged in that business for gas and oil?

Well, we typically have, and the numbers for the hedges will be disclosed in the Q which will come out in the next couple of days here, so you will be able to see those definitively. But we have a hedging program where essentially we hedge around three-fourths of our crude oil production, two-thirds to three-fourths of our crude oil production and between 50% and 75% of our gas production and we hedge it out about two years.

So typically in any given quarter we're looking at the quarter that's two years from now and hedging what our volumes will be at that time. We're not hedging in anticipation of additional drilling or anything, but we're hedging existing production, what we think those wells will be producing two years from now in this same quarter and initiating hedges for that.

So the hedge schedule itself is very detailed and pretty well defined. And we have been able to enter some at least reasonable hedges for the couple years out period. But still if you look at the numbers even disclosed in this quarter's Q we're still 40% I think less than the prior year if you take the net price after hedging.

While continuing to hedge though, too?

Oh, yes.

Thank you, thank you very much.

Michael Worms, BMO.

Thank you. Good morning, everyone. Just a quick question to -- Dave, you mentioned earlier that the off system sales picked up in July versus a poor June. Just wondering what was driving that change and what you might be seeing with regard to this for the rest of the quarter?

Well, there are so many things that drive it. But if you look at the key drivers as to how much do we have to sell and which markets do we sell it in. So if you look at our weather here this quarter, the end of the first quarter and even the third quarter here now, it's been quite mild which allows us more -- provides us with more excess energy to sell. Typically we either sell that in the WECC or across the interconnection into the Mid-American Power Pool and MAPP.

The southwest has been very, very hot here lately, so that's allowed us to move some energy to the west and do a little better there. But as far as predicting what's coming in the balance of the quarter, it really depends on what the weather does in the west or potentially in MAPP that provides us an opportunity to sell there. If gas prices increase and there's any demand on natural gas from power peaking needs or whatever, that helps us across the board in that the power prices come up a little as well.

Do you have an internal forecast for gas prices?

Yes, I mean we do. For the current year we typically look at the strip, it's probably as good a guess as anything. The Rockies of course are significantly below where NYMEX is now.

And then just a couple of other quick questions. On the shut-ins, are they continuing, are they increasing or -- can you give us a status of it?

Yes, they're not really increasing. I'd say the production that we shut in in the first quarter is pretty much still down and don't anticipate bringing it back up any time soon. But we haven't shut in any additional production and assuming prices stay where they are or in the neighborhood of where they are, we wouldn't anticipate shutting any additional production in. But we do monitor that literally on a daily/weekly basis where we look at what our marginal cost of production is and if we're not clearing it we would look at shutting the wells down.

But typically this time of year expenses are fairly cheap, especially on gas production with the exception of areas where you have a lot of compressors. And those are some of the wells that we did shut in earlier in the year.

My final question is on the coal cost side. Are we now done with the incremental costs or will that continue throughout the rest of the year?

Well, I wouldn't say we're done with the incremental cost. There are two reasons for the incremental cost and we've seen over the last several years our overburden ratio has been increasing. That drives an increase in cost. This particular quarter we actually accelerated the overburden because it was delayed a little in prior quarters with bad weather and things, so that kind of exacerbated the cost there.

If you look back a year -- if you recall we made had to make an accounting change in the way that we account for overburden as well, which essentially requires us to a expense the overburden in the current period. We used to smooth it under the accounting rules and as of last year we no longer do that. So kind of the combination of those three things make those cost numbers look a little worse now than they would have say a year ago because of the changes there.

As we mine through the hill that we're essentially mining through now we do expect overburden to go back down slightly. It's not going to go way down where it was before when we were at an overburden ratio of essentially one yard overburden per ton of coal, now we're well over two. We would expect that to come down under two again as we move forward over the next couple years, but it's not going to come way back down.

Thank you.

And then essentially you've got some timing issues with when that shows up in your coal price and things.

Thank you very much.

Thank you. And at this time we have no further questions. Please continue.

All right. Well, thank you, everybody, for being on the call this morning. We appreciate all the good questions and feedback. We are excited about where we sit for the future. We've got a very well-defined plan, great growth opportunities and operations are going extremely well. Certainly have some challenges with the current gas price environment, but on the operating side things are running extremely well.

And all of our integration and efficiency activities are going well and we'll start to see the fruits of those labors here as we move forward with some of these major software conversion projects and benefits unification projects and other things that we're working on.

So we're sitting well, look forward to the future, hopefully we'll get a little cooperation from the overall economy in the markets here and then gas prices getting back to some semblance of normal would be a very nice benefit. But in the meantime we'll continue to grow and grow strongly our utility properties and then we'll maybe ramp back up on some of the non-regulated activities as prices cooperate. So thanks for being on the call this morning. Thanks for your interest in Black Hills.

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