Black Hills Corp (BKH) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Black Hills Corporation's quarterly earnings conference call. (Operator Instructions) As a reminder, today's call is being recorded. Your hosting speaker -- Jason Ketchum. Please go ahead, sir.

Thank you, Kevin. Good morning, everyone. Before I turn the call over to Dave Emery, I need to remind you that during the course of this call, some of the comments we make may contain forward-looking statement as defined by the Securities & 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 at the Investor presentation on our Web site, and our most recent Form 10-K and Form 10-Q filed with the Securities & 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 Dave Emery, CEO of Black Hills Corporation.

Thank you, Jason. Good morning, everyone. Thanks for joining us today. For those of you who may have noticed, we filed a Web cast presentation yesterday. For those of you that have pulled it up, we will be following that as a discussion guide, and I will try to remember to state page numbers as we go along so you can keep up with where we are at. For those of you who do not have it, I don't think that will pose a problem either. We should be sufficient in our comments that you can follow along with what we're saying.

We do have a lot to cover today. So I will go ahead and get started. On Slide Three, I will cover the quarter-end review primarily from a business and operations perspective. Then our CFO, Tony Cleberg, will cover quarterly financial results. And then I will look essentially to the future and talk about some of our real key, core, strategic initiatives and ongoing progress towards those initiatives.

From an earnings perspective, we are not happy with our third quarter results. Low commodity prices and the mark-to-market impact of certain interest rate hedges had a substantial negative impact on our earnings. For the quarter, our loss from continuing operation was $3.9 million, or $0.10 per share, compared to income from continuing operations of $19.5 million, or $0.51 for the same quarter last year. Tony will discuss the financial results in more detail in a few minutes. For now, I will focus on Slide Five on quarterly business highlights.

Low natural gas prices impacted us directly or indirectly in several different areas. The most obvious impact of those lower natural gas prices was on our oil and gas business segment, where we posted a slight loss for the quarter. For our energy marketing segment, low gas price levels resulted in lower per unit margins for marketing. And also low Rocky Mountain basis differentials resulted in a large negative impact on our gas transportation margins. Finally, as a result of the lower gas prices, power prices have also been much lower this year compared to last year. Negatively impacting our off-system sales for our electric utilities.

Despite our disappointment in our quarterly earnings results, from an operational and strategic accomplishment perspective, we had a great third quarter. We made meaningful progress on several key long-term goals and objectives. From an overall corporate risk and credit profile, we have made significant improvements this year. In August, our Black Hills Power credit rating was upgraded. And then shortly -- not long ago -- recently, we were successful in $180 million bond offering -- first mortgage bond offering -- for Black Hills Power for a term of 30 years at a coupon of 6.125%, which is a fantastic rate. We are very proud of that and should have great impacts for rate payers going forward. That was another step in our continued effort this year of reducing our short-term debt and terming that out. We retired the bridge acquisition facility this year that we had for the Aquila purchase. We did some corporate bonds this spring, and now this Black Hills Power financing. Again, a demonstration of our access to the capital markets in our effort to term-out our short-term debt and solidify our balance sheet.

On the regulatory side, we filed rate cases in both South Dakota and Wyoming for Black Hills Power really focused on recovering the substantial investment that we have had made in Black Hills Power over the last several years, particularly related to the Wygen III power plant which we expect to be in service April 1st of 2010. Our efforts to unify the Company, streamline processes, improve efficiencies, save costs, and really create more scalable systems and processes continued in the quarter. August 1st, we converted Black Hills Power's customer information system. It was completed August 1st with essentially no problems or concerns at all. In the fourth quarter, we intend to convert Cheyenne Light to the same consumer information system. So by year-end, we will have completed conversion of all of our utilities on to a single customer information system. Obviously, there are some significant savings and operating efficiencies associated with that. We have started this quarter -- in the fourth quarter --of unifying our employee benefits program across the corporation. Both health and welfare benefits and pension and retirement benefits. That process is ongoing as far as discussions and meetings with employees, but the benefits changes will be effective January 1st. We have made the changes, as I said before, in the health and welfare benefits. Also, we're in the process of converting our pension from a defined-benefit plan to a defined-contribution plan.

As we look to the future, we have several key projects that will contribute to strong earnings growth over the next several years. The Wygen III project, I mentioned already. We're ahead of schedule there with an in-service date now projected at April 1st and ahead of budget as well. We're forecasting capital expenditures for the 100% project at around $247 million as opposed to the $255 million originally forecast. Black Hills Energy in Colorado, our electric utility there. We're in the process of building 175-180 megawatt gas-fired generation project there. Capital costs will be in the range of $225 million to $275 million. Projected in-service date for that facility is January 1, 2012. During the quarter, we also announced that our IPP subsidiary was the successful bidder in a request for proposals from our Colorado electric utility in order to provide 200 megawatts of combined cycle, gas-fired generation to serve Black Hills Energy's customers through a power purchase agreement. 20-year agreement there. That project is projected to cost $240 million to $265 million and will also be in service by January 1st of 2012. Finally, we extended during the quarter our Wygen I power purchase agreement between our IPP subsidiary, Black Hills Wyoming and Cheyenne Light, Fuel, & Power from its current expiration which had been in 2013 for another ten years, well into 2022. That contract extension has been approved by FERC and is in place today.

Moving on to Slide Six. A couple of highlights on the electric utilities. We have had very mild summer weather in all of our service territories, and as I said before, our off-system sales margins have been impacted by lower gas prices. But despite that, we posted very solid earnings at electric utility. Another highlight, which we announced just a couple of days ago, is all three our electric utility subsidiaries were selected for Smart Grid awards, a grant funding from the Department of Energy. The total of those three grants is just under $17 million. We're proud of the fact that we received essentially three awards out of 100. But there was more than 400 applicants for the stimulus funding projects. And so we're pretty pleased that all three of our projects were selected. Also very proud of the fact that we're the only investor-owned utility in South Dakota, Wyoming, or Colorado to receive those funds. Look forward to the opportunity to complete those projects in future years as we negotiate final terms and conditions with the DOE. And then we, of course, make the matching investment to get those projects to fruition as we go forward.

Moving on to gas utilities. Typically, the third quarter is the weakest quarter for gas utilities. Results are pretty much as expected. Nothing unusual or unique this year. A few changes from last year -- some of which revolve around just the full quarter of ownership as opposed to a partial quarter of ownership last year.

On the power generation segment, Slide Eight. I already mentioned the 20-year power purchase agreement that we signed with Black Hills Energy Colorado Electric. That contract was executed on the 28th of September. We do plan to commence construction on that 200 megawatt plant in late 2010. And again, with the completion date of January 1, 2012. Coal mining. Very routine quarter, if you will, at our coal mine. We have made some notable increases in our overburden removal rate, primarily revolving around the commissioning of some larger, overburdened haul trucks that allow us to essentially move more overburden more cost effectively and more efficiently. Other than that, things at the mine were pretty routine. Good performance for the quarter.

On the energy marketing front, I referenced some of the challenges that we have had in energy marketing this year. If you recall in late 2008 and early 2009, because of the capital markets crisis and our concern for liquidity and trying to be very conservative with regard to liquidity, we significantly constrained the use of Enserco's credit facility and essentially asked them to really pare back their business. Conserve cash. Conserve capacity on their line. At that time, it was an unsecured credit facility. Wanted to make sure that, if anything happened, that we could support the business of Enserco. That did impact the amount of business that they did, and including business that they might have booked for later in the year. And that has certainly impacted the year. In addition to that, as I said earlier, very low natural gas prices have impacted our trading margins and the Rockies basis differentials have had a huge impact on the amount of margin that we have been earning from our transportation positions, which typically have been a real strong portion of Enserco's earnings and margin. The combination of all of those things have had a pretty significant negative impact on our earnings. However, we have not had any real concerning issues at Enserco, such as material trading losses or anything like that. A lot of it is just purely market conditions, and then our conscious decision to restrict our activity earlier in the year. As we look to the future, one real bright spot is that we have seen through much of this summer and fall, a real strong storage differential, the winter-summer price spreads that have been strong and have allowed us to accumulate a pretty good gas storage position, which we'll highlight a little bit in our 10-Q when it comes out. But they have some pretty strong margins already booked for 2010.

Moving on to oil and gas, Page 11. We have been talking about this since late last year. We have significantly reduced the amount of capital we're spending in oil and gas. Essentially, current price levels for both oil and gas don't support the activity levels that we have had in previous years. We're being very conservative about what we spend there. We want to make sure that what we spend and when we spend it, we're able to achieve a good rate of return for stockholders there. Where price levels have been, we haven't been spending much money. We have spent roughly $20 million year-to-date. A fair percentage of that, essentially, was carry over from projects that we drilled in late 2008 and finished in 2009. We'll continue to be very cautious in oil and gas spending. We are doing some, and in some of our areas, we are seeing some price improvement. Recently, we have seen some pretty good improvement in cash prices for both oil and gas. So that is encouraging. But I would say we are predicting another kind of challenging year for E&P as we look forward. Until we see some price improvement, we're just not going to be in a big hurry to spend a lot of capital there. We did put out in our press release that our forecasted spending for next year is only $30 million to $40 million. Again, anticipating continued low prices. If prices recover more quickly, we could always increase our capital spending if returns on those investments warrant us doing so.

Moving on to Slide 12. As a result of the Aquila acquisition in July, 2008, we have been spending a lot of time and effort on unifying systems, processes, benefits programs, pay programs -- all of those things. And we have been talking about that for almost a year and a half now. That activity will continue pretty heavily all the way through 2010. By the time we get through 2010, we would anticipate having completed much of that unification activity, particularly related to systems conversions and consolidations.

A couple of key notable items for the quarter. I mentioned the employee benefits unification that is taking place right now. That is a major effort, and we're very excited about it. It's going well. On the processes side, we have done some things like unifying construction standards at our three electrical utilities. Unifying inventory. Unifying inventory numbering systems. All of that which allows us to, essentially, reduce our overall inventory. So good progress on some of those. Also unifying all of our payroll systems, paydays. Things like that, to cut administrative costs. I mentioned the customer information system conversions. This quarter will be Cheyenne Light. Once that is done, our entire customer information system and processes will all operate on a single CIS system, which will allow us to continue to provide good service for customers, but also streamline the cost of doing so. Page 13 is a timeline of key events and activities. We have updated this for a few new projects, in particular the Colorado IPP generation project we announced in September. And we've updated the timing of a few other projects.

That completes my review of operations results for the quarter. With that, I will turn it over to Tony Cleberg to talk about the financial results for the third quarter. Tony?

Thank you, Dave. Good morning. As Dave described, since our second quarter call we accomplished a number of key item that we feel lay the foundation for strong, long-term growth. However, the near-term financial performance was disappointing. Income from continuing operations reflected a confluence of low natural gas prices, mild weather, mark-to-market movement in our energy marketing segment and also a mark-to-market negative on the debt swaps. The result all added up to a loss for the quarter.

Moving to Slide 15, we see our earnings drivers for the quarter. We achieved solid performance from our base and electric utilities but have little upside margin from our off-system sales, and the mild weather worked against us. In terms of megawatt hours for the electric utilities, the off-system sales increased 18% in volume, but the margin was minimal. Gas utilities sold more decatherms in 2009 because it covered a three-month period verse a two and a half month period in 2008. By comparing the average daily decatherm sold, the result shows a volume decline of 10% from 2008 to 2009, which depressed our 2009 income. On the non-regulated side, low natural gas prices significantly impacted our results in oil and gas segment and energy marketing segment. We have continued to minimize capital spending, as Dave said, because of the low prices. Although energy marketing's realized margins improved year-over-year, the change in the mark-to-market adjustment decreased substantially from 2008.

Moving to the EPS analysis on Slide 16, we adjusted our income from continuing operations to help you understand the impact in notable items recorded during the quarter. By isolating these items, the income from operations as adjusted for the third quarter was $0.07 per share versus $0.54 per share in the previous year. The first expense item that was added back in the reconciliation was the negative mark-to-market on our outstanding interest rate swaps. This amounts to a loss of $5.7 million, or $0.15 per share, which is a non-cash and reflects the increase in the swap spreads during the quarter. The last expense item that's excluded from the reconciliation was the integration expenses that we incurred during the third quarter, which was $0.02 per share versus $0.03 per share in 2008. And that is for the integration of Aquila. So by isolating these items from the quarterly performance, our income from continuing operations declined substantially from the prior year.

Slide 17 just displays the last four quarters of income from continuing operations on the top line, reconciled to the income from continuing operations as adjusted on the bottom line. This is included to display our performance over the trailing 12 months. Moving to Slide 18, this displays our income statement for the third quarter of 2009 compared to the third quarter of 2008. The revenue at $226 million, a decrease of $66 million below 2008 reflects the lower natural gas prices. Moving to operating income, the total -- we were down $26 million year-over-year, and I will go into further detail about the changes by segment later. The interest experience increased pre-tax by $4 million, which reflects the higher interest rate on long-term debt compared to the revolver interest rate.

Moving to the expense rate swap line we had a mark-to-market loss pre-tax of $8.7 million on the $250 million of interest rate swaps. Since quarter-end, these swaps have already improved by $7 million, which almost erases the entire third quarter loss. As you may recall these swaps were put into place in 2007 for expected financing. The swaps had to be designated last fall because we decided not to issue the debt at the time. Consequently, any mark-to-market changes are recorded in the income statement. We chose to leave these swaps in place because we have other expected future financing, including future maturities of debt.

Other income increased from 2008 by $1.7 million, which was driven primarily by some offsetting items. The AFUDC equity income increased $1.2 million and rental income of $2.2 million was recorded. Both of these items related to Wygen III. These were partially offset by $1.4 million lower equity earnings in unconsolidated subsidiaries. Continuing down the income statement, the tax rate for the third quarter was unusual because, in effect, we were in a loss position. The more normal rate is 35% to 36%. So the 2009 GAAP loss from continuing operations was $0.10 per share compared to an income of $0.51 per share in 2008. The discontinued operations in last year related to the IPP assets that were sold.

Moving to Slide 19, and then just drilling down into the income statement, this displays our 2009 roll-up for revenue and operating income compared to 2008. The electric utility segment revenue declined by $8 million with a corresponding $2 million decline in operating income. The decline in operating income resulted from lower margins on off-system sales. The low natural gas prices impacted the pricing of off-system sales and have significantly decreased margins in 2009. The gas utilities segment operated at a loss for the third quarter, which reflects the seasonality of the business, and also, just the milder weather that we had this year.

Moving to the oil and gas performance, both revenue and operating income were affected by lower oil and natural gas prices. The average hedge price received declined 36% for oil and 38% for gas. Production for both oil and gas decreased 9.4% from the prior year. Spot prices at September 30th were higher than June 30th, so no impairment charge was needed.

The next segment, power generation produced $3.6 million in operating income, a decline from 2008. The prior year included the sale of reclamation trading credits, which is almost the entire difference between 2008 and 2009. Moving to the next segment, coal mining operating income declined primarily due to selling lower priced coal and increased expenses for equipment and mining-related expenses for the removal of 24% more overburden while selling only 5% more tons of coal.

The next segment, energy marketing revenue, was negative because of the mark-to-market loss. Partially offset by increased physical sales of crude and natural gas. The operating income declined by $16 million from 2008 and although realized margins improved by $5 million year-over-year, the unrealized mark-to-market change from 2008 declined by $22 million. In effect, we had a substantial unrealized gain in 2008 third quarter and an unrealized loss in 2009. So the result was a substantial decline in energy marketing performance. Tight basis spreads, particularly on oil and natural gas prices have hurt performance. In addition, our self-imposed credit constraint in the fourth quarter of 2008 and the first quarter of 2009, got us off to a slow start. And we just haven't been able to catch up yet. At the corporate level, we had an improvement of $1.2 million related to reduced expenses that we incurred in 2008 for integration costs.

Moving to Slide 20, this shows our capitalization. The bottom line is our debt-to-capitalization remains very healthy at 51%. As was mentioned earlier, we issued $180 million of 30-year, 6.125% first mortgage bonds within the last week, and we plan to pay down short-term debt. This will get us to about 80% of our debt in the long-term category. We still plan additional financings for 2009 to move more debt from short-term to long-term and position ourselves for the future capital spending. We are still looking at future financings in the near-term that include project financing and term loans.

Slide 22 summarizes our current credit ratings. Our corporate ratings are BBB at Fitch, BBB minus at S&P, and Baa3 at Moody's. Moving to Slide 22, this displays our credit facilities and debt. The main point of this slide is that we have a stand-alone and circle credit facility and with the recent 30-year bond issuance, we feel we have ample liquidity under our revolver. So from an overall perspective, the third quarter saw solid performance from our base in the electrical utility segment even with milder weather.

The low natural gas prices impacted off-system sales, our oil and gas, and our energy marketing. And we hope to see recovery in these segments in the future. We're very pleased with the issuance of the 30-year first mortgage bond, and we are very pleased about winning the IPP bid to support our Colorado generation buildout. So with those comments on quarterly financial performance, I will turn it back to Dave.

Thank you, Tony. Looking to the future, moving on to Slide 24. We are very well positioned to provide future earnings growth and shareholder value. Good strong cash flows, solid balance sheet, and we termed out our short-term debt and accomplished some of those initiatives that Tony discussed. And we are, indeed, ready for a pretty strong growth spurt here related to a lot of the capital projects that I outlined earlier. Some of those opportunities are highlighted on Slide 25. This is a slide that we have been showing you for the better part of over a year now, trying to outline some of the key growth initiatives that we have as a corporation. This does not include maintenance CapEx, which is included in our capital spending disclosures in the 10-Q. This is focused more on growth-oriented opportunities. Ones that we believe will add significant value over the next several years for shareholders.

On Slide 26, I won't spend a lot of time on this Colorado ERP process, but recall that about 75% of our energy supply for our Colorado electric utilities is supplied currently through a power purchase agreement from Xcel Energy that expires January 1, 2012. We went through this RFP essentially to define where the replacement energy was going to come from for that contract when it expires. And now, with the end of September announcement on the IPP side, we have essentially resolved the entire puzzle, if you will. We're going to build a 200 megawatts of combined cycle, gas-fired facilities in our IPP subsidiary and supply that energy to our electric utility via a power purchase agreement. And then on the utility side, we are going to build two gas combustion turbines and put those in rate base for the electric utility. The combination of those two projects, which both will be in service prior to January 1, 2012, will replace the existing energy supply provided via power purchase agreement with Xcel today.

A couple of key points on Slide 27 related to the IPP project. Most of these you are aware of already, or I have spoken about already so I won't reiterate those. But the facility itself is going to consist of four General Electric LM6000 engines in a combination. Essentially, two each will have a 20 megawatt steam turbine attached and allow them to operate in combined cycle mode. We expect construction to only take 16 months or so for that facility, and that is an aggressive schedule. We're very confident in our ability to accomplish that because we have extensive experience in plant construction, and even more notably real extensive experience with this particular engine. Prior to the sale of our IPP fleet, or a large percentage of our IPP fleet in July of 2008, we actually had 19 of these engines in our fleet. So we have got a lot of experience on operating and constructing these types of facilities. Several of those were also operated in combined cycle mode, like we propose to do for Colorado. So we're pretty comfortable with what our capital expenditure estimates are, and our ability to meet construction timetables associated with that contract.

Moving on to 28. Regulatory update. I mentioned the Black Hills Power rate cases for Wyoming and South Dakota. The key to those is those are for recovery of substantial investments we have already made in Black Hills Power, primarily driven by the Wygen III plant which will come online in April. In Colorado, and some of our other service territories, Colorado Electric in particular, we're evaluating the opportunity of filing a rate case. Essentially, looking at our costs, and where we're were not recovering costs, we will file a rate case as necessary. It's possible that we could file a case in Colorado either late this year or early next year. We are still evaluating that. The rest of the territories we will just continue to evaluate when the appropriate timing for rate cases is in each of those utilities.

Slides 29 and 30 essentially outline the Black Hills Power, South Dakota and Wyoming rate cases. I think they are pretty self-explanatory. I won't spend much time on those. Our goal for both of those rate cases is to try to get rates approved and effective upon the commercial operation of Wygen III, which is April 1st of 2010. So that's our goal.

Slide 31 is a slide we have been showing you here for several quarters. Talking about our efforts toward improving the effectiveness of our rate recovery process, and the rate models that we deploy in our various territories. Not much change there, and we'll just continue to provide that as an update. On Slide 32, we talk about our efforts related to efficiency and renewable programs. One notable item of change for the quarter is we did -- that Silver Sage Wind Farm in Cheyenne, Wyoming, was put in service on October 1st. We have a 30 megawatt power purchase agreement to purchase the energy produced by that facility, and that energy is shared basically between our Cheyenne Light and Black Hills Power customers. So we have been utilizing that energy since October 1st, bringing our total for Black Hills Power and Cheyenne Light to 60 megawatts of wind energy. The total peak for those combined systems is approximately 600 megawatts. So we're making pretty good process on voluntarily integrating renewables into our portfolio.

Slide 33 outlines the DOE grant that we were notified of this week related to Smart Grid funding. I already talked about it, so I won't spend too much more time on it. These funds will provide essentially 50% of the project costs for the three AMI projects that we're looking at. That will really provide a tremendous benefit to our customers, in allowing us to implement those systems, improving our efficiency and improving our ability to manage energy efficiency programs -- demand-side management programs, things like that in the future, but at a very cost-effective manner for customers.

Finally on Page 34 here, is our strategy scorecard. This is something that we have been updating for well over a year. Again, it's just a way that you can judge our performance towards our goal of adding long-term shareholder value, and we'll continue to update that every quarter. And essentially revise the list at the start of each new year and set forth our goals for the year. And then, we'll go through those as the year progresses.

Moving on to Slide 36. In February of this year, we withdrew our earnings guidance for 2009. At the time, we were literally at the height of the financial crisis. There was a tremendous amount of uncertainty impacting our business, and we were not comfortable leaving a guidance number public. A lot of issues and concerns related to access to capital markets. What interest rates would be. When the timing of some of our key financings would occur; the impact of very low oil and gas prices. We weren't sure what that was going to do to E&P spending. And in return, what that would do to production rate and earnings at E&P and several other factors really contributed to our decision to pull guidance.

Now more recently, we have got a lot more clarity around many of those items. And as you can see, we obviously got comfortable with putting out guidance for the remainder of 2009 and for 2010. 2009 earnings guidance continuing operations is $1.75 to $1.85. There are three special items included in that, which you can see here. The Wygen I sale. The mark-to-market interest rate swaps that Tony mentioned, and then our non-cash oil and gas ceilings test impairment. We are assuming essentially normal operations and weather conditions. That impacts retail sales, off-system sales, maintenance projects, and otherwise. Not planning on any unplanned outages at our generating facilities. In energy marketing, year-to-date we have lost approximately $1.2 million in that entity. We project slight earnings improvement during the fourth quarter as compared to the nine months year-to-date loss.

Total oil and gas production will be in the range of 12.3 bcf to 12.6 bcf equivalent. For information purposes, we have been impacted by intentional shut-ins caused by low economic or low gas prices -- impacting the economics of operating some of our properties. We're forecasting that those intentional shut-ins -- economic shut-ins, if you will, will result in about a 0.4 bcf impact on what our production would have otherwise been. As far as oil and gas prices, we essentially used forward strips as of a couple days ago to set these, and we have laid out what those prices are. We have also shown you what the impact is to wellhead prices and then even including the benefits of our current hedges. And then finally, we don't expect any significant acquisitions or divestitures.

Moving on to 2010 earnings. Our guidance is $1.80 to $2.05. Several key assumptions there. One is our planned capital expenditures are estimated between $425 million and $475 million. That is both maintenance and growth capital. Included in that is, as I mentioned earlier, is oil and gas capital expenditures of $30 million to $40 million, and that assumes a slight recovery in oil and gas prices. This year, as I said before, we have only spent $20 million year-to-date.

The guidance doesn't include any planned debt or equity financings that we intend to do during 2010 to maintain the capital structure in the range of 50% to 55% debt to total cap. As we have mentioned before, we have got a lot of construction projects going on -- significant cash flow demands. We will have to do some financing. The benefits -- or the impacts of those financings are included in our guidance range. We have previously disclosed the mark-to-market impact on some of these debt hedges for guidance purposes. We're assuming there is no significant change in interest rates and no additional mark-to-market impacts subsequent to September 30, 2009. Again, we expect normal operations and weather conditions within our service territories. We expect Wygen III to be in service April 1st and included in rates. No significant unplanned outages, and we do expect pretty strong recovery in our earnings from our energy marketing subsidiary. Gas prices are improving. As I said before, we're seeing a substantial improvement in storage spreads. Hopeful that we'll see some modest improvement in basis differentials. Really believe that that unit will get back to a more normal earnings level. And by 'normal', I mean if you look at, say, 2006, 2007 and 2008 -- if you really throw out the high year and look at the range of the other two years, we will be essentially in that range as far as forecasted earnings. Again, back to a more normal year when looking back three or four years of history.

Total oil and gas production -- 11.3 bcfe to 11.9 bcfe. Really the variability there is going to be dependent on capital spending primarily. Oil and gas prices, again, similar to 2009 are based on forward strips adjusted to the wellhead and adjusted for hedges and no additional acquisitions or divestitures.

From a guidance perspective, in summary, 2009 has been and will continue to be a very challenging year for the Company from an earnings perspective. Impact of gas prices, on marketing, on oil and gas, on off-system sales of electricity, has been pretty meaningful and certainly is a big negative for us this year. We have had some other impacts, such as mild summer weather and other things. It's been a very challenging year. We're very excited about the strategic accomplishments of the year, not happy with the earnings results.

2010, we don't expect things to just get better overnight. It will continue to be challenging. We're not seeing immediate recovery in oil and gas prices. There are some promising signs, but nothing immediate. But we do look to our continued construction, rate case results, better weather, better marketing margins, and a lot of other factors to positively impact our earnings going into next year.

Finally, we're very excited about the growth projects that we're working on. We're confident that we'll be able to demonstrate strong earnings growth and growth in long-term shareholder value as we execute our plans and get those projects implemented over the next several years. That concludes my remarks. I would be happy to take any questions.

(Operator Instructions) We have a question from the line of Chris Ellinghaus from Shields and Company.

Hi, Chris.

In the guidance for 2009, the one thing that you didn't specify was, if I recall correctly -- there was a tax benefit in the first or second quarter. Are you including that as well?

Yes, that happened.

Okay. And Tony, can you elaborate on the mark-to-market swing in the third quarter? And what did you book for the third quarter?

Let's see, the delta -- what we had in 2008 is we actually had a substantial gain mark-to-market gain. And what we had in this quarter was a mark-to-market loss. Not huge, but just the difference ended up to be $22 million. So we're not trying to discount the fact that our operating earnings were substantially lower in the energy marketing, but I just wanted to say that we did improve year-over-year in our realized margins. So that is something that we're most concerned about, because you get whipsawed on the mark-to-market.

Will the Q have any further details on that?

It will.

Okay. Can you also, David, maybe, in the guidance for 2010, comment on the production mix that you are expecting?

From an oil and gas perspective?

Yes.

Yes. Historically, we have been in that kind of 83%-17% range, gas to oil. Maybe 81%-19%, somewhere in that range. We won't see a huge fluctuation in that, Chris. We don't typically see -- we have been pretty consistent give or take a couple percent in that range as far as oil and gas mix. I don't anticipate a big change.

I'm thinking in terms of -- the middle of the range is something around a 9% production decline. Can you just talk about the spread between gas and oil in terms of declines? Or improvement? Is it going to be more heavily gas-weighted, which is the way I'm thinking?

If you look at where price levels are today -- just assuming that they stay where they are today. Not looking so much at the futures strip, we would probably be inclined to focus a little more attention on oil projects than we would on gas. Now, if you consider what the strip is and if those improvements in price of $1.00 or $2.00 really materialize early next year, and we have enough winter weather to sustain those prices, then we would probably shift to where it's maybe a 50%-50% mix. Maybe even a little more weighted toward gas, but it really right now, our oil projects are really the only ones that look real attractive to us at current price levels. With a few exceptions of an isolated gas project here or there. If we get to what the strip shows, then that will be spending a little more on gas projects.

Okay. Can you provide any color in terms of equity financing for next year? I'm looking at my balance sheet, and I have got an equity assumption already in here. But it looks like it might put you towards the upper end of your debt-to-cap range. Have you got any comments on equity for next year?

Obviously, we're not going to get real specific, other than anything we would do is included in the guidance range. The key driver is going to be, as you said, where we end up in the debt-to-cap range. Part of that is going to be driven on how quickly we start construction on those major Colorado projects. It's possible we could end up doing some equity. I wouldn't anticipate doing a lot unless market conditions really said the timing was good, and we should do more rather than less. It's really going to depend on where the capital spending schedule is, but we have incorporated the impacts of that in our earnings guidance.

Thank you. Thank you for the guidance, and we'll see you next week.

Thanks, Chris.

We have a question from the line of Neil Stein from Levin Capital. Please go ahead.

Good morning.

Good morning, Neil.

Congratulations on all the strategic accomplishments.

Thank you. We're excited about them.

My question -- I wanted to follow-up firstly on Chris' question on the tax gain from Q1. Can you quantify that?

$3.8 million.

That is about $0.10 per share?

Yes.

That is included in the '09 guidance that you issued today?

It's s included in the actuals, and consequently the guidance.

If we strip out some of the one-time charges you call out -- the mark-to-market, the ceiling test and so forth. And maybe if we stripped out this gain, I get to around $1.35 is the midpoint for operating guidance for 2009? Is that -- ?

Your calculation, I think is a reasonable calculation.

Okay. And then I was confused. I want to go back in time. You started in December with '09 guidance of $1.95 to $2.25. Is it possible at all -- could you bridge down to the $1.35 operating? What precisely happened in what specific areas of the business that took out roughly 35% or 40% of the operating earnings? I'm assuming that you started with an operating number back last December?

Yes. One of the complications there, Neil, is we don't typically give out segment guidance. We can at least try to talk you through some of those, which I would prefer not to do here. But most of them are -- we don't give the specifics of say, what we had for interest rate assumptions in our guidance. And what we had for timing of financing in your guidance. We do give oil and gas prices. We do give you some sense of where those things are. So from a looking at it perspective, oil and gas and energy marketing, you should pretty much be able to figure out the specifics of the other assumptions. Because we didn't disclose them in the first place, we probably wouldn't disclose them now.

I think, if you go back to that guidance though, and we talked about having a fairly normal year for energy marketing. And that just didn't happen. And if you go back to the credit markets and say we constrained that business in the fourth quarter of last year and the first quarter of this year and right up until the time that we had a stand-alone facility in Maine. Once you squeeze it down, you just don't turn the spigot back on and bounce right back. I think that is not prudent in that kind of business. We're pretty conservative, and we're pretty deliberate in our thought process. So that is a big change. The other thing is I don't think we thought that gas prices would be quite this bad all year long. And who could predict the mild, mild weather that we have had this summer?

It definitely seems like a lot of items outside of your direct control. What about maybe looking forward, if we think about -- is it $1.35 or $1.40 of midpoint for the more operating -- clean earnings this year. And going up to around $1.90 or $2.00 that your guidance is for 2010? Could you walk through -- bridge some of the drivers there? And how much of that is marketing versus the utility or what have you?

Well, when we talked about what the assumption was for marketing, you should be able to come up with a pretty decent estimate for what you think that would be. It you look at this year's earnings, we're going to get very little contribution from either marketing or E&P, either one. Those two pieces, as Tony just said, really brought us down in '09. We will have some recovery in 2010. The rate case for Black Hills Power, assuming we have a satisfactory result there. We're putting in a large capital expenditure with the Wygen III plant that we need recovery on. That assumption is built in, and that is a key driver. Just the normal weather assumption is going to have some impact on results as well. And then finally, based on the strips, we would also forecast some slight improvement in power prices.

In the west, power prices on the margin are driven by natural gas-fired facilities. So when you see an improvement in the gas prices, you also see a corresponding improvement in off-system sales. And that is part of our forecast as well. That is really the major items.

The marketing earnings, in part driven by some of these storage deals. Does that carry forward into 2011? Or will you need to replicate it?

It depends on the market.

Well, yes, it depends on the market. We have in the last year broken out for you what the percentage of our margin is in Enserco by strategy. If you look back at, say, the 10-K and where we have broken that out and even in this Web cast, some of the detail farther back, essentially the combination of storage and transportation and producer services, those three pieces of the business have a pretty substantial impact on the overall earnings results for Enserco. Producer services is pretty steady. Transport obviously depends on basis differentials out of the Rockies. Storage depends on seasonal spreads, and years when Enserco does really, really well -- a lot of times we'll have great basis differentials and decent storage margins.

In other years, you will see maybe storage is strong and basis is a little weaker, like what we see going forward here for some time. Or you can see the flip-flop of that, and you see that in our historical results. Until we really see 2011's market conditions unfold, which I wouldn't be comfortable making any predictions based on what current strips are. They change so much. But as we see through 2010 how the 2011 market conditions unfold, we will be a little more comfortable in saying where some of our earnings may come from, be it storage or transport. Now the pure trading -- buying and selling and moving physical gas. That is pretty unpredictable as far as -- it depends a lot on gas volatility. It depends on localized market, physical market gas conditions, and things like that.

Thanks for answering all of my questions, and see you at EEI.

Thanks, Neil.

Your next question is from the line of Eric Beaumont, Copia Capital. Please go ahead.

Good morning. I wanted to follow up a little bit on what Neil was asking. And one thing in particular is that obviously not a great year for the energy marketing. As I think about the mark-to-market loss, and obviously, you see good spreads for next year. And you are trying to lock them in. Is there any flow backward to this year as mark-to-market loss to lock those spreads for next year?

I'm not sure I follow your question, Eric.

Obviously, as you are re-baselining to lock things forward for next year, does any of that impact '09? And how you are accounting in '09?

I wouldn't expect real significant impacts in '09. A lot of the things that we talked about for next year are storage. And a lot of that we typically always hedge or sell forward. It's possible we could have some mark-to-market impacts in '09 there, depending on how perfect the hedge is. Or whether it's an effective hedge or not on some of those positions. It's very difficult to tell until we see what prices do in the next couple of months. It's very possible though that things like that could happen. Last year, we had a very substantial, unrealized mark-to-market gain at the end of the year that essentially moved pretty significant earnings from 2009 into 2008. That gets back to Tony's comment. We really have had decent realized margins in 2009, but a lot of the profit was actually booked as an unrealized mark-to-market gain in 2008. So it is possible that that could happen again. Hard to predict whether it will or not.

Okay. And then second, just to go back to the 2010 guidance. You gave a lot of detail of the drivers, and I was just wondering, how much detail you can give around it? Obviously, we can do the rates-based math surrounding Wygen III and annualized give or take -- call it somewhere in the $10 million,$11 million net income range. You are going to get that for three quarters of the year. When we think about year-over-year, how should we think about what the AFUDC bookings were in '09? So we don't double-count that piece going forward?

We disclosed the AFUDC in the Q, Eric. So when that comes out you should be able to ascertain how much was there. And then, one thing we have said about the Colorado project for the utility, where we would be booking the AFUDC there, we don't really expect to start major construction until mid-year. But we are ordering equipment and things. As the Q comes out, you will is see more detailed forecasts of capital expenditures for say, the electric utilities. And that should help you compare that to the CapEx this year versus the AFUDC this year. Look at our CapEx forecast for next year, and you ought to be able to estimate that impact.

Another piece on the financing. When we think about the amount of short-term debt that you have and interest for that this year. And how much is going to be rolled to long-term. Are we going to need to wait for the Q again on that? And kind of forward? Or can you give us a feel for -- we know where your embedded short-term rates were. Given the expectation for what the refinancing rate all-in? Should we use what you got on the $180 million to extrapolate?

I wouldn't necessarily assume that we would get the same rate as we would on a first mortgage bond. Tony basically said our objective is really to retire -- essentially term out most of the debt on our revolver. And before year-end, we're look at a couple of things, include a term loan or some other things. So it would be something along that line. Project finance or term-loan-type rates would be more indicative of what you could expect rather than a first mortgage bond rate.

And two more quick ones. One is on the LDCs -- obviously, the acquisition has gone well with the good year. Is my recollection correct and when you were talking about, in particular, Q1 of this year that things went better than you expected and part of that was weather? Are you are anticipating that there was any positive weather benefit to the LDC's in '09. Or are you pretty much expecting that to be a normal run rate?

The first quarter in the LDC's was very good for us. I am just not sure. It was a little colder in the first quarter that drove some of that. And what we have projected is more of normal.

We disclose degree days in our Q, including normal degree days. The difference for Q1 would be identified in there as far as what is related to weather.

Okay. And just the last one on marketing for 2010. And obviously it would be -- any return to normal, there would be numbers. But said to take a look at the past several years. You have had some years that were obviously gangbusters. And you had one that was, maybe, a little lackluster. Can you repeat the comment you made when you were talking about -- ?

Essentially what I said is if you look at 2006, 2007 and 2008 and essentially ignore the market exuberance, if you will, in the high year there. You can get a general sense of a trend. And I think what we're saying is that we're expecting a return to somewhere in that range for 2010.

So somewhere in the range. I guess if I get rid of the exuberance, I would say that means anywhere from $12 million to $16 million of net income? Is that fair compared to how you are thinking about it? Or you don't want to go there yet?

I would probably prefer not to pick a particular number. The process you are going through is probably fairly decent.

Okay. And I guess just lastly on that then. If we think about the number of shares you have out now. And I guess it seems like given the spending that you have to do in advance of some of the Colorado work, assuming the markets or lack of excess cash because of the commodities rally, we should be look at equity in the mid- to latter part of 2010?

Not necessarily. Again, as I said -- I think it was to Chris. It's really going to depend on the timing of our plant construction. If we get our [air] permit earlier, and we start earlier in the summer and really accelerate some of that spending, I think that would drive us to do something sooner rather than liter. It's conceivable if we don't get started until mid- to late fall, we may not have to do anything for equity in 2009. We would probably be getting close to needing to. We anticipate a combination of debt and some possible equity financing, and basically I built that in. Beyond that, not really comfortable pinning down a timing or a quantity, because there is a lot of uncertainty depending on when we really need it. Unless market conditions were really good for issuing equity, we're not in any hurry to go out and dilute shareholders, unless we really need the capital.

Okay. Great. And one comment and then I will be happy to let you go. I appreciate the time. Getting back to Neil's comment. Obviously this has been a very transitional year in many ways, and we greatly appreciate the detail you are giving and the pointers you are giving us for guidance. If it's at all possible to basically put together an earnings walk to help the financial community to think about what is a more normalized, less-stressed case of the world. So if you build off of '09 and go to 2010, I think we have kind of gotten there here, but just to see what each component is and put that in the deck at some point or something along those lines. I think that would be greatly appreciated by all of those on the phone and who follow the Company. But again, I appreciate the time, and we'll see you down at EEI. Thanks, Eric.

And the next question from the line of Oliver King with [Cameron Lucas]. Please, go ahead.

Hi, I would just like to echo those comments. If there was more of a segment breakdown or walk, it would really clear up a lot of the confusion, and I think it would really help us and help you. So I just want to echo that. My question is for -- in your 2010 guidance, your average weighted wellhead prices of $4.70. That implies you have a basis differential of almost negative $1.20. Is there any transportation cost in that number, or is your basis really $1.20?

That is an all-end price, Oliver from a wellhead price perspective. So it would include any impacts related to transport or anything else.

Okay.

And it's an average, Company-wide. So it's not necessarily indicative of -- if we add a new gas in a particular area, it wouldn't be indicative, necessarily, of that basis. It's just if you look at what the total of transport, Rockies, [Stinaimex] basis -- all of those things together add up to -- that's essentially what that adjustment is.

So the transportation -- that's not in your LOEs? It's going to be in this wellhead price?

Correct. In the Q, we break out our operating expenses, not for transport, but compression and gathering and other lease operating expenses. And that detail will be coming out in the Q. Anything else essentially would be captured in this differential here.

Great. In terms of AFUDC, I know you will be booking some in Colorado some electric? Will there be any in the [Smerchant] project? Or is that -- is there no AFUCD there?

There is none.

Okay. And what kind of load growth assumption are you assuming between 2009 and 2010 at the utilities?

I would say we're not disclosing the specifics of our load growth assumptions, but a good reasonable assumption is that they are going to be fairly modest. Our forecast -- and I made that comment that we do expect at least the early part of the 2010 still to be a little slow to recover as far as demand and new load additions and things like that. So I would tend to be a little more conservative in what you might estimate there relative to a 'normal' year for load growth in a few of those territories. A couple of them had pretty high growth. Colorado, for example, in previous years, prior to the last year and a half or so. I don't think we're going to jump all the way back up to those rates by any stretch of the imagination. I would say from a forecasting perspective, we would hope to be back to normal levels of load growth in our territories in that 2011 and beyond timeframe, not 2010.

Okay. My last question is going back to the Aquila acquisition. Were there any savings that you realized, and are you seeing any of savings at either corporate or at the utilities?

When we announced the Aquila acquisition, and we put out guidance at that time and described what we thought combined earnings results would be, we specifically flagged a couple different projects that would save in the neighborhood of $2 million a piece in operating savings. Those are the projects that we're working on related to the unification project list that was in the slide deck. We have not provided any additional disclosure about what the actual realized savings were, or if we anticipate more. I would say that the deeper we get into the integration activity, the more opportunities we find for additional cost savings and efficiencies. But we haven't provided any update on what those numbers are since really September, 2008 -- we put those out, Oliver.

Thank you very much.

You bet.

Next question is from the line of Ella Vuernick, RBC Capital Markets. Please go ahead.

Thank you. All of my questions have been answered.

Our next question from the line of Vedula Murti, CDP US. Please go ahead.

My questions have been asked and answered also. Thank you.

Thank you.

Next question from the line of Jeff Gildersleeve, Millennium. Please, go ahead.

Thanks. Hello David, Tony.

Good morning.

I just wanted -- Eric was talking about the marketing. You had the marketing comment about earnings from '06, '07, '08. I had roughly -- the mid-point was roughly $0.50. When you said the marketing earnings, do you mean net income? Or do you mean EPS when we look at the -- throw out the high, throw out the low?

I would say we were looking at it from essentially from a net income perspective. Yes, net income perspective.

I think that was '07. I have like $34 million you made. Does that sound right?

In '07?

Off the top of my head, I don't recall the exact number.

And '08 was $19.7 million? Okay . So my numbers are probably right. And in the disclosure in the past, you have broken that out,

Yes.

Okay. And as far as that earnings projection for 2010, it sounds like you have a pretty good idea and certainty around that, given the storage transactions?

Well I wouldn't say we have certainty around the whole amount. I would say we're very encouraged what we see in the market, and the Q will include what we have done as far as current positions in storage. The other pieces -- the transport, the margins from buying and selling gas -- those we're just going to have to realize as we go through the year. But we're encouraged by what we see in the market conditions.

Right.

Transport side we feel real good about because we know what we have in storage already.

Would it be fair to say 50% of the earnings projection of the $0.50 is locked in?

I think if you looked back, Jeff, at the numbers that we put out for the percentage of margin that comes from our various strategies.

Right.

And just kind of look at a general sense of what storage comprises of that. I think that will give you at least a way to estimate that.

Thanks very much. See you in Florida.

Sounds good.

At this time, we have no further questions in queue.

Alright. Well, thank you, everybody. We certainly appreciate your time and attention. As I said, we had a lot of information to cover today. We had a pretty long call. Appreciate you sticking with us here and allowing us to go over a lot. Adding the guidance back in, obviously, led to a lot of additional questions, which we're happy to answer. Thanks again for your time and thanks for your interest in Black Hills. And for those of you who will be at the EEI Financial Forum, we look forward to seeing you there. Thank you.

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