Black Hills Corp (BKH) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Black Hills Corporation first-quarter 2010 conference call. My name is Jenada and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Jason Ketchum, Director of Investor Relations of Black Hills Corporation. Please proceed, sir.

Thank you, operator. Good morning everyone. Before I turn the call over to our Chairman and CEO, Dave Emery, I need to remind you that 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 the factors that could cause future results to differ materially from our expectations.

I will now turn the call over to Dave Emery.

All right, thank you, Jason. Good morning, everyone. Thanks for joining our call today. I will be referring to the webcast presentation that was posted last night and so for those of you who have it, I'll try to mention slide numbers so you can follow along, and for those of you who don't, I don't think that'll be a problem. The information is essentially contained in the press release for the most part.

Starting on slide 5, we're off to a really good start in the first quarter of 2010. Basically a 23% improvement in income from continuing operations over the first quarter of 2009, $0.81 per share as opposed to $0.66. So things are off to a good start in all of our companies, essentially.

On the utilities side, up several million dollars over the prior year. Several things that led to that. Gas utilities did very well. We're continuing to work on our efficiencies there. We also had colder-than-normal weather in some of our territories, which helped.

On the electric side, our off-system sales of excess electricity improved this year over last year despite continued low natural gas prices. And that improvement was primarily driven by several other plant outages in the region, which allowed us to have a little bit stronger local market to sell our excess energy into.

Another item that contributed on the gas utility side was a small gain on sale related to a gas property in Nebraska that was annexed into the city of Omaha, and we had to then essentially sell that territory to the municipal utilities district in Omaha. So there was a gain on the sale recognized from that transaction as well.

On the non-regulated side, significant improvement -- $13-plus million over the prior year overall. Oil and gas improved primarily related to improvement in product prices and then also better depletion rates as a result of some of the non-cash impairments that we took in previous years.

Energy marketing had solid performance from our gas storage strategy. Historically, we've also had strong performance in our transport strategy. And this year, as tight basis spreads particularly out of the Rockies have remained very narrow, that's negatively impacted that gas transport business, and we do expect that to continue.

Moving on to utility highlights on the next page. Big item for us that happened in the quarter and right at the end of the quarter is the Wygen III coal-fired power plant for Black Hills Power began commercial operation on April 1st, several months ahead of schedule and about $7 million under budget, another very successful coal-fired construction project for our power generation team.

Related to that, we completed a seven-year power purchase agreement to sell energy and capacity to the city of Gillette, Wyoming, for basically 23 megawatts.

That agreement reflected the change in pricing driven by the addition of Wygen III to our resource base. It also included an option for the city of Gillette to essentially purchase 23% ownership in Wygen III on an equity basis. Gillette has stated their intent to exercise that option, and we would expect them, if all goes well, to close on that exercise during this year.

We implemented the interim rates for South Dakota customers effective April 1st, which was, again, the commercial operations date of the plant. We have continued our negotiations related to the rate settlement in South Dakota and hope to file a stipulation with the state of South Dakota PUC here shortly, early in this month.

In Wyoming we've reached agreement with the interveners over there and actually filed a settlement stipulation there a few days ago, so making great progress on having Wygen III included in our rates for Black Hills Power, in addition to the operational success.

Our plans to construct the two gas-fired power plants to serve Colorado Electric, both the utility plant and the IPP plant, are progressing very well. Still on schedule for a January 1st, 2012, in-service date on those facilities.

During the quarter, we also completed our agreement with the Department of Energy for matching funds and smart grid funding, totaling about $20.7 million. We anticipate completing those projects over the next two years, primarily 2010 and '11, which will essentially require similar amounts of capital from the Company in order to complete those projects.

And then finally, the completion of the sale of Elkhorn, Nebraska, to Omaha, as I mentioned before, was concluded during the quarter.

An important part of that transaction was the clarification of service territory boundaries between Black Hills and the Omaha city utility. That provision has to be approved by the Nebraska Public Service Commission but would basically put an end to years of service territory disputes between Black Hills and the municipal utility there. So we view that as a real positive part of that transaction.

On the non-regulated energy side, as I mentioned before, good improvement year over year in earnings. Several notable items there. As I mentioned before, the IPP plant for Colorado Electric is progressing extremely well. Lots of purchasing, contracting activity in the last quarter. Getting ready to hopefully receive our air permit there in the third quarter and commence construction on both the utility and non-utility plants.

Our non-regulated fleet was 100% available in the first quarter, which is a fantastic result from our operations folks on the power plant side.

E&P production is lower than the prior year. We only spent $20 million in E&P in 2009, and we're only projecting to spend about $38 million in 2010. At those levels, we would expect production to continue to decline slightly.

It doesn't make sense, as we've said before, for us to continue to put a lot of capital in E&P until we do see some improvement, particularly in gas prices, that would ensure we earn the returns we want to earn out of that business unit on any capital we would invest there.

Coal sales were a little bit lower in the quarter compared to last year, primarily because of outages at some of our customer plants, particularly the Wyodak plant operated by PacifiCorp on a mine site there, and a couple other, smaller outages, both back in operation now or primarily back in operation now.

On Enserco, we have a current $300 million committed credit facility which is set to expire. We expect in the next couple days here to complete a two-year, $250 million standalone committed facility for Enserco. It will have a $100 million accordion feature, which allows us to expand it in the future if we need it.

Now, that size, the $250 million, is smaller than we previously had for Enserco, primarily related to our anticipated credit needs. With gas prices as low as they are, we don't really need the full $300 million, so in an effort to be a little more cost effective, we're doing a $250 million facility. But with the accordion feature, if gas prices do go up and we need additional credit support, it's available through the accordion feature of the facility.

On Monday we announced a leadership change in Black Hills Exploration and Production, and we did put out a press release on that Monday afternoon. But I'd like to provide a little more information around that change for everyone's information today.

We, as a corporation, firmly believe in our diversified energy strategy. And we expect all six of our businesses, both utilities and non-regulated energy businesses, to deliver the exceptional value that our shareholders have come to expect from Black Hills and our subsidiaries.

We've been in the oil and gas exploration and production business for almost 25 years. And over much of that time our oil and gas unit has delivered meaningful financial and operational results and good returns on investment for our shareholders.

In recent years, and we've talked about this on several calls over the last couple years, our performance in the E&P segment has been disappointing and not up to our expectations.

During the current time where we have low natural gas prices, we've intentionally reduced our capital spending in oil and gas to be less than the cash flow from operations there. And we intend to use that time of reduced capital spending to take a long, hard look at our strategy in oil and gas and the long-term strategic plan we have for that unit.

The goal is to better position that business segment to add long-term shareholder value when product prices improve, to the point where we're in a position to significantly increase capital spending in our E&P segment.

In an effort to take a fresh look at that business and a fresh look at the long-term strategic plan of that business, I asked John Vering, who's currently a member of our Board of Directors and has extensive experience in E&P, to serve as the interim president and general manager of Black Hills Exploration and Production.

In that role, he reports directly to me and is responsible for leading our effort to review our long-term plans and also to develop recommendations for improvement in our E&P performance.

Having John report to me relieves Tom Ohlmacher, who's our President and Chief Operating Officer of Non-regulated Energy, and he also leads our power generation group -- it relieves Tom of his E&P responsibilities, which will allow him to focus his attention on our power plant development activities in Colorado as well as on our energy marketing and coal activities as well.

I expect that John will serve in this interim role for a period of somewhere between 12 and 18 months. And toward the end of that assignment, part of his responsibility will be to help with the search and integration of a successor.

During the interim assignment, John will continue to be a member of the Black Hills Board of Directors. His status will change in that he will now be classified as an insider or non-independent director. So he has resigned his membership on the audit and governance committees as a result.

We do intend to have John continue as a board member following completion of his interim assignment, and acknowledge that there may be some time required for him to regain his status as an independent director following conclusion of his appointment as an interim member of management.

John has extensive experience in the oil and gas industry, about 37 years in E&P, including quite a few senior executive roles. He's worked at both Shell and Union Pacific Resources, and its predecessor Champlin Petroleum.

At Union Pacific, John provided leadership in several key areas. And I think, just to give you a sense for his background, I'll mention a couple of those here today.

In 1991 through 1995, John was the Austin Chalk business unit leader for Union Pacific. And during that time, UP was running up to 35 drilling rigs and spending almost $400 million a year in the chalk.

In four years, the production grew -- their Austin Chalk production grew from about 15,000 barrels of oil equivalent a day to over 100,000 barrels of oil equivalent per day. Very notable accomplishment there.

In '95 to '98, John served as the vice president of E&P services for UP. In that role he was responsible for drilling and seismic and all the other technical services related to the plays, company-wide, for the corporation. So very significant exposure to all the different development activities they had going on.

And then the last role I'll mention, which we also mentioned in the press release, is that in 1998 Union Pacific purchased Norcen, which was a couple-billion-dollar Canadian E&P company. They named John president and CEO of Union Pacific Resources Inc., which was the renamed Norcen, their Canadian affiliate.

At that time, Union Pacific Resources was about a $7 billion New York Stock Exchange company and stayed that way prior to their acquisition by Anadarko in 2000.

I think John's experience and background speaks for itself. I'm really excited to have someone of his caliber on our management team, and look forward to working with him and the rest of our oil and gas management team to enhance the strategic value of our oil and gas operation.

It will take a while for John to get up to speed and to start having an impact. So you should not expect, I guess, to hear a lot of real specific details or major changes in E&P at least for a little while here.

We do intend to gradually start increasing our disclosures related to oil and gas, try to provide a little more background for you as we work on some plays in the future. And then, of course, as always, we will disclose any noteworthy items as they occur.

Moving on to corporate highlights on slide 8. A couple items worth mentioning. We did complete a $500 million, three-year corporate revolving credit facility. It also has a $100 million accordion feature in the event we have additional requirements there.

Our previous facility was about $525 million. We increased it to that due to the Aquila acquisition and some other activities. We believe $500 million is a very appropriate level for the activity you see coming up over the next couple years.

The Board of Directors approved a quarterly dividend on common stock of $0.36 per share at our board meeting last week, which is equivalent to $1.44 annual dividend.

Slide 9 on unification activities. I won't mention much here, but suffice it to say, we've continued aggressive integration activity between the Black Hills and previous Aquila or now Black Hills energy companies and subsidiaries.

The customer information system integration we explained was completed late last year, which was a key milestone. Now we're really focused on financial systems, outage management, mapping, and some other projects that we expect to complete this year.

Slide 10 is a timeline. I won't really spend any time on it, but it does give you a sense for the key projects that we have in the works now and when we would anticipate those to be completed.

With that, I'll turn it over to Tony Cleberg, our Executive Vice President and CFO, to go over the financial results from the first quarter. Tony?

Thank you, Dave. Good morning. As Dave indicated, we are pleased with a good start to 2010.

If you take all the noise out of both 2009 and 2010 first-quarter numbers, the EPS as adjusted increased 34% year over year. The 2010 results had minimal help from the economy, so we're obviously pleased with the improvement.

Moving to the EPS analysis on slide 11. Consistent with past quarters, we adjusted our first-quarter income from continuing operations to display the impact of notable items recorded during the quarter.

2010 was fairly straightforward, with a $0.04 reduction for the gain on sale of the Elkhorn property that Dave mentioned and a $0.05 addition for an unrealized loss on the interest rate swaps. So income from continuing operations as adjusted was $0.82, which compares to $0.61 in 2009.

As mentioned earlier, last year we had several sizable items going both ways that reconciled the income from operations as adjusted.

Moving to the next slide. Here we display the last four quarters of income from continuing operations. On the top line, reconciled to income from continuing ops; as adjusted on the bottom line. This included to display our performance over the last 12 months, which now is $1.64.

Just continuing to move on to the income statement. What we have here is -- slide 14 displays our income statement for the first quarter of 2010 and 2009. Highlights include higher revenue and margins driven by improved off-system sales and retail sales in the electric utilities, offset by lower gas prices in gas utilities. So that drove the revenue and some of the margin.

In addition, we had improvements in both oil and gas and energy marketing on a year-over-year basis. Our operating expenses declined in 2010 compared to 2009 due to fuel costs and reduced DD&A.

Also, we held our O&M and our G&A expenses to an increase of 0.7%. So we've really focused on strong management -- or cost controls.

The next highlight is the $16 million increase on the subtotal line, which is our operating income, excluding the notable items. This represents a 32% increase year over year. I will talk more about the operating income by segment on a later slide.

Moving down the income statement, we recorded a gain on the sale for the Elkhorn property of $2.7 million, pre-tax. Last year in the first quarter, we included a gain on the sale of Wygen I in the amount of $26 million, offset with an impairment charge of $43.3 million for the ceiling test valuation of the oil and gas properties.

With the use of the 12-month average for commodity prices and the improved prices in both oil and gas, no impairments have been required since the first quarter of 2009.

Moving down to interest expense, we had an increase of $2.9 million, which reflects the higher interest rate on long-term debt compared to the short-term debt. As you may recall, a year ago our short-term debt was 52% of our total debt. This compares to 20% for the current quarter.

Continuing down the income statement is the mark-to-market on the interest rate swaps. Last year we had a $14.8 million gain during the quarter, versus this year where we have a $3 million loss.

The interest rate swaps relate to $250 million of debt swaps, which were put in place in 2007 for an expected 2008 financing. The financings were pushed out due to the market meltdown in 2008. Consequently, these swaps were de-designated, and any mark-to-market impact is recorded in the income statement.

We chose to leave these swaps in place because of our expected future need for financing of capital projects and future maturities on debt.

Continuing down the income statement, the income tax rate for the first quarter of 2010 was 34%, compared to 19% in 2009. Income tax expense in 2009 included a $3.8 million reduction for the removal of an uncertain tax position.

The resulting 2010 gas income from operations for the quarter was $31.4 million, which represents an improvement of $5.4 million from the 2009.

Moving to the next slide, 15, revenue and operating income roll-up. This displays our first quarter to 2009. The electric utility segment revenue increased $11.5 million year over year, with a corresponding $1 million improvement in operating income.

Both the revenue and the operating income improvements reflect a 5.5% increase in megawatts sold, which was driven by off-system sales which increased 13% and retail sales which increased 3.5%.

The gas utilities segment had strong performance. Gas utilities sold almost 10% more decatherms in 2010 compared to 2009, due to colder weather. The gas states had about 10% more heating days compared to 2009.

In addition, the impact of the rate case was settled last year. The cost controls contribute to the improvement in operating income.

Moving to oil and gas performance. During the quarter, we saw the average hedge price received improve for oil by 48% and for natural gas by 20%. Year-over-year production volumes decreased 15% for oil and 20% for natural gas.

That combination, along with cost control and lower DD&A, produced an improvement in operating income of $6.4 million year over year.

Next segment, power generation, was basically flat, year over year. Moving to the next segment, coal mining. Revenue decreased by 3% as a result of an 8% decline in tons sold and a 5% improvement in price received.

The lower coal volume resulted from a customer plant outage. The operating income improved, reflecting lower estimated reclamation costs.

The next segment, energy marketing, operating income improved year over year by $2.6 million. The realized margins declined slightly, but the unrealized mark-to-market loss also declined, which is a positive and amounted to $5 million year over year, pre-tax.

The tight basis spreads and the low natural gas prices continued to challenge our financial performance in this segment. Our storage business performed well in the first quarter, but the basis spreads hurt the transportation business performance.

At the corporate level, we had an improvement of $900,000 which primarily related to the integration costs being lower this year than the prior year.

Moving to the capital structure slide, number 16. This shows our capital structure, and in the far-right column you can see that our current debt and equity -- the bottom line here is the debt to the capitalizations were being very healthy at 53%. Our projected capital spending will require us to issue more debt in 2010, and equity.

The sale of the 23% of Wygen III to the city of Gillette will also help us fund some of the 2010 capital expenditures. We will continue to take actions to just minimize capital expenditures in other parts of the Company in order to help fund the construction of the Colorado build-out.

With the new three-year corporate revolving credit facility, and the two-year standalone facility Enserco, we have ample liquidity to conduct our business.

So with those comments on quarterly financial performance, I'll turn it back to Dave.

All right, thank you, Tony. Moving on to future strategy, slide 18. As we've been saying for a couple years, we're well positioned for growth and have several key initiatives going on right now.

We have a substantial CapEx budget for 2010 of approximately $477 million. From those capital expenditures come the potential for significant future earnings growth potential. We're excited about that.

We've got sufficient cash flows, good balance sheet, clearly demonstrated access to the capital markets with all the financings we've been doing. Overall corporate risk profile continues to improve, and overall, we're in great shape to continue our growth initiatives.

On slide 19 we speak to some of those initiatives. Key projects here have remained essentially the same. We've added a significant projection for capital investment in the utility AMI, our smart meter projects, as a result of the matching grant we got from the DOE.

We've also narrowed the cost estimate range of our Colorado Electric generation facility. It previously was a $225 million to $275 million estimate. As we've continued to sign contracts for equipment and receive bids for construction, we've narrowed that down to a $240 million to $260 million range, which does include the transmission interconnection capital we expect to spend as well.

Grand total of all these projects is roughly $1 billion worth of investment over several periods here that are specifically related to growth projects. Does not include recurring routine maintenance capital and those sorts of investments, or capital for new customer hookups and things. So a huge growth initiative for us, and one that we're well under way on.

Slide 20, related to Wygen III. We already mentioned this, but, again, a significant accomplishment and ahead of schedule and under budget. We've now built four plants at this complex using a similar design, truly state-of-the-art design from both an emissions and air-cooled condensing perspective.

A very notable accomplishment is we had no lost-time injuries during the complete construction of that facility, a very impressive safety record and way, way below industry averages for accident rates. So we're very proud of that. Not only did we complete it ahead of schedule and under budget, but also with a tremendous safety record.

Slide 21, on the Colorado Electric generation. I mentioned this a little bit earlier, so I won't spend too much time on it. But both of those plants, the utility and the IPP facility, will be co-located on a site near Pueblo, Colorado.

We've completed our water agreement. We're working to finalize other agreements with city and county governments. We've filed our air permits, and for both facilities, that air permit was put out for public comment on the 20th of April. And we hope to receive the permit in the third quarter so we can commence construction on those facilities.

On the electric utility plant for Colorado Electric, we did during the quarter obtain a certificate of public convenience and necessity from the Colorado PUC in February.

On the regulatory front, moving on to slide 22, we've discussed -- we've got several ongoing rate cases. Currently, settlement discussions have been progressing very well in South Dakota and Wyoming, which I already mentioned earlier.

In Nebraska, we're in the discovery process there and continuing to exchange information with the other parties in the case, and we did implement interim rates as provided under the Nebraska rules there, on March 1st. We do expect eventually to go to hearing there, potentially, and hopefully have a good outcome for shareholders and rate payers as well.

Colorado Electric -- that case, we are involved in settlement discussions there. Whether we reach an agreement or not remains to be seen, but we're kind of cautiously optimistic.

Finally, on the bottom of that slide is some information that we don't typically disclose. We don't usually disclose sizes or numbers related to anticipated future rate cases.

However, going through the proceeding in Colorado, the Colorado PUC specifically asked that we provide them with a filing that estimates the rate increase that will be required when we place the two new plants, both the electric utility plant and the IPP plant, in service on January 1st, 2012, and replace our current long-term power purchase agreement with those two plants.

We anticipate making that filing pretty soon and bottom line is we would expect an increase at that time that would take effect in early 2012 in the range of 8% to 15% above the rates that customers will be paying just prior to that increase. So we do have the increase pending now that we're negotiating, and then we will have another filing and another increase in the range of 8% to 15% coming in the future.

But that will be a public filing, and so we're choosing to disclose it today, but not something that we typically do. We usually don't disclose rate case numbers until we actually file the case proper, so a unique situation here.

Slide 23 is our strategy scorecard, something we started a couple years ago to let you know what our goals are and what we've accomplished related to those goals. We've got some aggressive goals for 2010 and '11, and we're making some good progress. Off to a great start towards meeting those goals and objectives in the first quarter.

Finally, on slide 24, as I mentioned before, we're off to a great start. Despite some continued effects of the recession, we are fortunate in our service territory that we're starting to see activity, construction activity, and things gradually starting to pick up, which will hopefully help us overall.

Quarter over quarter as adjusted, as Tony said, 34% improvement. So we're very, very pleased with that as a start to 2010. Lots of key initiatives on track that I've already mentioned.

Our ongoing strategic objectives, particularly some of those larger projects and our focus on improved operational performance through integration activities and cost efficiency activities, will continue to create strong shareholder value in the future.

Power generation projects, as we said, are progressing as planned. We're very pleased with progress on those plans and excited about the opportunity they have to add value for shareholders in the future. And we're also seeing kind of slow, steady improvement in the E&P and marketing segments as well, so excited about what the future holds.

Now we'd be happy to entertain any questions that investors may have.

Ladies and gentlemen, we are ready to open the lines up for your questions. (Operator Instructions). Please stand by for your first question. And your first question comes from the line of Ella Vuernick with RBC Capital Markets. Please proceed.

Good morning.

Good morning, Ella.

I had just a couple follow-up questions. The first is regarding some plant outages that you've mentioned. You mentioned that this quarter both benefited electric in terms of off-system sales and also resulted in lower volumes at coal. Could you expand a little bit on the nature of those plant outages in the region and whether they were planned?

Yes, the one that affected us most dramatically, particularly then on the coal side, is -- as I mentioned, the Wyodak plant of PacifiCorp's was down. Essentially had an issue related to a scrubbing vessel. And they were down for a period of time and were able to operate with basically two of three vessels on the scrubber side, so they came back up. But they're one of our largest coal customers. Also doing some other outages, small plant maintenance outages as well.

Now, the ones I was referring to that primarily affected off-system sales are certainly the Wyodak outage. Also the continued delay in southern Colorado of getting the new Comanche plant online there has helped us in off-system sales.

We forecasted that Xcel would have that plant in operation early in the year, which would've been a negative from an off-system sales perspective. Not having that plant in service has helped us on better market prices for off-system sales in that Colorado region.

And when is that Xcel plant now scheduled online?

I don't know the answer to that.

Okay. Okay, great. I had one other question, then, about -- turning to gas utilities, helped obviously, by the colder winter, which you've mentioned. In your slide deck, you also referred to increased efficiencies. I was wondering if you could quantify the weather impact and also expand a little bit about what those efficiencies are that you're seeing.

I think it's just -- Ella, this is Tony. The efficiencies are just good cost control from the standpoint that we're really not letting our O&M and G&A go up, even though you have some normal inflation year over year. So that provides a little bit of help. The real driver was the weather, the 10% more decatherms.

Okay, very good. Thanks very much.

All right. Thank you.

Your next question comes from the line of Chris Ellinghaus with Shields & Company. Please proceed.

Hey, everybody. How are you?

Hey, good morning, Chris.

I don't know if I missed this, but did you give the gross proceeds of the Elkhorn sale?

I don't believe so, Chris. They will be in the Q.

Okay.

But I don't think they're included in the press release.

Yes, I don't think I saw it or heard it anywhere.

The details of that transaction will be included, but --

Okay. And then --

Well, it is in the press release. It is $6.1 million.

Okay, great. Thanks, Tony. Just trying to figure out how much of it might help offset equity. David, in terms of Enserco, it feels a lot like it's shaping up to be a year like last year. Can you give us any color in terms of what you're expecting for the rest of the year? And does it seem like you might be challenged to make your guidance at this point?

Well, we talked about guidance in the press release, and I think -- we said basically that our transport strategy is probably doing a little worse than we'd hoped because those basis differentials have continued to be very narrow, particularly out of the Rockies.

Our other segments in Enserco are doing reasonably well. Producer services continues to be pretty strong. Proprietary trading depends on volatility in some price levels, but we don't expect that to be particularly negative.

Overall guidance, what we said is that Enserco's a little bit weaker, primarily driven by transport. But because our other businesses are off to a good start, we're basically holding our own on the guidance and maintaining that guidance.

As far as Enserco per se, probably not wanting to put a specific number out there, obviously, for income. But in the context of the overall corporation and guidance, we believe it'll do reasonably well, which allows us to keep our guidance where it's at.

Okay. And on the E&P front, based on your sort of continuing declining production, would it be fair to say that the first quarter -- unless prices do something a little more dramatic, that first quarter might be sort of peak quarterly earnings?

Production was down a little in the first quarter because of weather-related issues, which has a tendency to happen in the first quarter.

Right.

And you also don't typically see much for drilling results in the first quarter for drilling activity. So anything you typically would see for new production in the first quarter would've been drilled in the fourth quarter of '09, and we just didn't do much late last year. So that kind of exacerbated the decline in the first quarter.

Going forward, we do have a little bit of drilling activity going on, and certainly we won't have the typical first-quarter weather issues in second, third, and fourth quarter. So I wouldn't necessarily say that it's all downhill from there.

Okay. And one more thing on Enserco. Can you give us any color on what you did with your storage position in terms of drawing down for the quarter?

There'll be a little bit of information in the Q related to that. But it should explain some of our forward positions and the value of some of those forward positions.

Okay, great.

I think that'll help a little bit.

All right, thanks a lot, David.

You bet. Thank you.

Your next question comes from the line of Gordon Howald with East Shore Partners. Please proceed.

Morning, guys. Can you hear me?

Yes. Good morning.

Good morning, Gordon.

How are you?

I'm doing fine, thanks. When I look out at the opportunities you have over the next few years, it certainly looks like things are coming together as you assimilate Aquila and the generation build-out.

That said, I realize you won't give us possible changes in strategy, but from a big-picture standpoint, could the E&P strategy under John Vering include acquisitions or maybe taking a more aggressive operating stake in fields? Or maybe stated another way, what in hindsight could've been improved in the direction that you guys had taken that E&P over the past couple of years?

Yes, certainly I would say all options are open for E&P, and clearly, by putting someone like John in who's got a wealth of knowledge and experience, and particularly in the Rockies and some of the plays that we're involved in, I think allows kind of a fresh set of eyes, if you will, on all of the different play activities that we are involved in, the ones that we're considering becoming involved in, and others that we may want to become involved in.

I would say everything's on the table. Certainly drilling and optimizing the properties that we have now is on that list. But would we consider additional opportunities if the economics warranted? Yes, we would.

So I think the timing may provide opportunities. Low-price environments typically provide opportunities, and we wanted to have a basically fresh set of eyes and a different twist on our leadership there to help us look at things a little more objectively in trying to formulate which activities we want to focus on as prices improve. So really, anything that you mentioned I think is on the table as far as [being fair game].

Okay, and if I could just follow up with one other quick question here. Your proposed settlement with Black Hills Power, a $32 million rate case. You've got interim rates in effect. I think that's $24 million. I realize it's typically a black box, but could you maybe provide a little bit of color on the settlement? And how does the early completion and lower cost of Wygen III impact the rate case, or will it impact the rate case at all?

It really -- the early completion really won't have any significant impact on the rate case. By the time we filed and through the discovery process basically provided information that we did expect to come in under budget, about where we came in and ahead of schedule a little bit, so the case was filed to where hopefully it would be effective April 1, and we did implement interim rates April 1.

Now, the settlement itself is not filed yet and so is still part of confidential negotiations and things at this point. But obviously, if we agree to a settlement, we view it as overall a satisfactory result for shareholders and certainly for (inaudible-multiple speakers) --

Okay. Got you. I'll let someone else ask questions. Thank you.

Yes.

Your next question comes from the line of Jack Moore with Harpswell Capital. Please proceed.

Good morning. I was wondering if you could talk a bit about your capital structure and where you'd like it to be over the next few years.

Well, we've talked about in the past as being in that range of debt to equity of probably 50% to 55%. And depending on the construction and things like that, at times we'll be at the higher end of that range. But that's our basic overall strategy that we've communicated in the past, Jack.

Right, so no change from that?

No.

Okay. So your BBB-minus now, it seems like you're comfortable with that?

Well, we'd certainly like it to be higher. And I think as we get these major projects completed and get those into rate base with the strength of those earnings, we're optimistic that we'll improve our ratings.

That makes sense. And then finally, share count -- do you see any movers there in -- I guess you're at 39.2 now?

Yes. What we've talked about in the past on several calls is that, with this large capital spend over the next few years, we will probably issue equity. So that is in our plan, and that helps us, in effect, keep in that 53% range. But that's why I mentioned the city of Gillette; that'll help us offset some of the capital expenditures and the requirement we might need there.

Perfect. Thanks a lot. Great quarter.

Thank you.

Thank you.

Your next question comes from the line of Jeff Gildersleeve with Millennium Partners. Please proceed.

Good morning, David. Good morning, Tony.

Hey, good morning.

Morning, Jeff.

How are you?

Great, thanks.

A question on corporate expenses. When I sort of normalize the charges for the two different quarters -- first quarter '09, first quarter '10 -- it looks like, actually, corporate is going down a little -- in other words, improving --

It is.

-- from Q1 '09. Could you just break out how much of that is interest, how much is integration expenses that are going away?

Yes, I think from the operating income line, we have a corporate line there, and you can see that that went down $900,000. A lot of that is just less integration expenses in the first quarter of this year versus last year.

The interest expense -- and we are up year over year in total by the $2.9 million, which is comparable to the fourth quarter. In the fourth quarter year over year we were up $2.8 million. And that's really a function of just more long-term debt versus short-term debt, and also just -- even the renewal of the credit facility, the rates are up.

Right. And so how much is allocated to corporate, and are you able to capitalize some of that interest expense?

We do. I mean, from an AFUDC standpoint, we do, and that'll be all spelled out in the 10-Q.

Okay. Thanks. The Enserco, I guess the profile historically has varied, but as far as the storage side of the business, it seems like first and fourth quarters typically tend to be the stronger ones. Should we expect any change in that profile going through the year?

No, I don't think you -- typically, those two quarters are much stronger for Enserco than the summer months. And there are some opportunities, obviously, in the summer months, but the strong quarters are typically fourth and first.

The only caveat I'd put on that, Jeff, is it's very difficult to predict what might happen on the mark-to-market basis on quarterly earnings. So from a realized earnings perspective, typically first and fourth quarter are the strongest and that we would anticipate staying the same.

Okay. And my final follow-up was just -- I noticed in the slides, under energy marketing, the eastern expansion of gas marketing strategy under way. I just wonder if you could talk more about the opportunities you see there, and what scale are we talking as far as expansion into the east?

I don't think it's anything that's a huge scale or a huge impact. But what's driving that is -- the Rockies Express Pipeline's a good example where, historically, we would have stopped a little shorter, and we now have the ability to take some of those sales and markets as far east as that line goes.

So that's led us to look for and add some additional trading expertise more in the eastern markets rather than just kind of stopping at the mid-continent. Not a huge push, but something that will gradually increase a little bit of our exposure over time there.

Great. Thank you very much.

All right, thank you.

Your next question comes from the line of Tim Winter with Gabelli & Company. Please proceed.

Good afternoon, guys, and congrats on the quarter. David, I was wondering if you could maybe provide a little more color on the comment of firmly believing in the diversified strategy and the strategic review of the E&P business, along with the cutback in CapEx because of pricing and the need to issue equity. Might that be a business that you would consider monetizing to hold off on the need to issue equity?

Well, we've had that question in the past and have talked about that pretty openly in the past. We do have significant reserves that I would put in the probable and possible category at E&P. And if you look at our year-end results, our proved undeveloped reserves went down significantly. The reason for that was just the change in the pricing methodology. So all those reserves are still in the ground. They're still under lease. They're just not included in our booked reserves because we had to use a price that was too low for those to be economic, and so it essentially zeroes them out.

Bottom line is we have a lot of probable/possible reserves and previously proved undeveloped reserves that are not developed. And so the true value, I think, of E&P would not be recognized in a sale situation.

That being said, I think as a public company we've got to acknowledge that everything's for sale at the right price. But if our intent was to just simply sell E&P, would've been much easier to just go ahead and do that rather than make the management change and the strategy discussion with some of the other things we're going through right now. So that's not the intent that's driving that change.

Okay, great. Thank you.

You bet.

Your next question comes from the line of James Heckler with Levin Capital Strategies. Please proceed.

Hi, good morning.

Hey, good morning. How are you?

Doing well, thanks. I'm going back to marketing for just a moment. You hadn't given specific guidance for that segment in the past, but you did talk about some kind of bookends, and I think you'd characterize it as being -- we could look back a couple years, maybe '06, '07, and '08 -- years 2006, '07, and '08. And maybe I would think about '07 as being representative of maybe the other two years. And those represented -- when you put it in those terms, it represented a pretty decent amount of earnings.

The commentary in the press release regarding the guidance made it seem as though maybe you're not going to meet those objectives that were originally set, but they're going to be made up from elsewhere in the business. And I was wondering, one, if maybe you could put new bookends on how we should be thinking about marketing earnings this year; and, two, specifically where those earnings might be being made up for in 2010.

As far as expectations for energy marketing, I think what we suggested is that at least the transport part of that business we expect to probably be a little lower than we'd originally contemplated. And we're just not seeing any improvement in transport margins, particularly out of the Rockies.

The basis differentials essentially are down to variable costs on the pipeline. It really can't get a whole lot lower than they are right now, and they have not improved. And we'd hoped that it'd improve slightly. We didn't expect a big gain there, but we did expect them to improve slightly, and we have pretty large transport positions. So we don't expect that to happen.

To the extent of that change, that would modify what our overall thought is related to energy marketing. And we haven't put out specific numbers, and won't put out specific numbers, on what we expect from E&P. But if you look at how we talked about it last year, that we'd be back to a more, quote-unquote, "normal year" I think is how we phrased it on our call, we certainly probably won't do quite that well because of transport.

On the other side, we've disclosed that we've seen improvements in several of our other businesses. And we would hope to hang on to at least a portion of that and potentially improve even a little more in a couple of those businesses as the year goes on and make up for anything that we would be short on the transport side at Enserco.

Thanks. Can you identify specifically where those other strengths were?

Well, we talked about utilities, and particularly we talked about a little improvement in our coal mining and operation. That's the primary drivers.

Yes, we talked about off-system sales in the first quarter. That was better than what we expected. We talked about the fact that Comanche's still offline. So there are opportunities to improve on a year-over-year basis in those other areas. The gas utilities performed great in the first quarter, so we're ahead there.

Got it.

Another --

So we --

Oh, go ahead, Tony.

So we feel that the guidance range that is out there is still appropriate.

The other thing we are realizing -- and Tony talked about it a little in response to an earlier question but -- is we are doing a good job in starting to realize the benefits of our integration activity. And our overall expense increases are significantly less than an inflationary rate, and that is a benefit. And we will continue, hopefully, as we complete additional integration projects, to realize some slight benefits from those as well, which will also help offset any loss in earnings from Enserco.

Great, that's very helpful. And one more, if I could. On the financing plans, I understand you probably won't be needing a lot of the cash that you spend on the Colorado generation until later in the year and into 2011. But just given the strength of your stock year-to-date, I was wondering if you could comment on how you think about that strength of the stock price and issuing equity versus waiting for the time when you actually need the cash. Do you kind of strike when the iron's hot rather than necessarily waiting when the markets might not be as favorable for you?

On that front, what we've said in the past is that our goal is to issue as little equity as late as possible. I would say, in general, that's still true. But to your point, if our stock were to continue to perform really well, we're continually evaluating that. There's always a chance we could go to market a little sooner with the equity rather than just wait until, say, late this year or next year, if our stock price continues to do well. The last few days have been a little wild here. We'll see how things sort out. But it's something that we're continually evaluating. But in general, our plan would be to issue as little as we can, as late as we can.

Got it. Thanks so much.

And Tony did mention, but if we do complete the sale of Wygen III that interested Gillette, that's a significant amount of cash which would help us further delay issuance of any equities.

Absolutely. Thank you.

Thank you.

Your next question comes from the line of Vedula Murti with CDP US. Please proceed.

Good morning.

Good morning, Vedula.

Let's see. Given the rate settlement and interim rates, is there any -- I assume that then would cover the operating and depreciation and all that type of thing of Wygen III such that there's not a timing issue for the second quarter?

Correct. Yes, because we did implement interim rates effective April 1st, which was the first commercial operation date of the plant.

Okay. You indicated that the rate increase in Colorado for the proposed new plant would be 8% to 15%. Can you put that in a dollar number or some ballpark of what that is, like in millions of dollars, please?

Well, it's very difficult to do because it's the rate case after the current case, and it's also net of the effect of the expiration of the Xcel contract. So, currently, we get about 75% of our energy and a large percentage of our capacity on a long-term power purchase agreement with Xcel. That contract expires December 31st, 2011.

We're putting both the IPP plant and the rate base electric utility plant in our rates effective January 1, 2012, and then any additional changes between now and then would also be included in that. So there's a lot of moving parts, up and down, in that estimate.

And we really, frankly, didn't want to put that number out, but the commission specifically asked us to at least make a stab at it. And we do intend to file that with them here, so we wanted to go ahead and make it public because it would be public anyway. But it's very difficult to quantify the dollars of each of those individual pieces for you, and we don't intend to do that.

When we file that case, those details will become known. It's a very unique situation where we would even attempt to provide an estimate like that with all the different moving pieces. It was just a specific request from the commission, and we qualified it, saying there's lots of ins and outs in there but here's our best estimate, and that's 8% to 15%.

And just lastly, given how low interest rates are at this point, in terms of meeting equity requirements, how seriously are you guys considering possibly using hybrids at this point?

We look at all options of what's the best way to get the lowest cost of capital. So I guess that's all I can really say there is that we look at all options.

All right. Thank you very much.

All right, thank you.

At this time, there are no further questions in the queue. I would now like to turn the call back over to David Emery for any closing remarks.

Well, thanks for being on the call today, everybody. We're excited about a good start to 2010, with strong first-quarter results and lots of key progress made on all of our long-term strategic projects. So thank you for your continued interest in Black Hills, and have a great weekend.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.