Jan 29, 2010
Executives
Jason Ketchum - Director, IR Dave Emery - Chairman and CEO Tony Cleberg - CFO
Analysts
Michael Worms - BMO James Bellessa - D.A. Davidson Eric Beaumont - Copia Capital Tim Winter - Gabelli & Company Michael Chapman - Private Capital Management
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Black Hills Corporation's full year and quarterly earnings call.
At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session.
The instructions will be given at that time. (Operator Instructions).
As a reminder, this conference is being recorded. And I would now like to turn the conference over to our host, Director of Investor Relations, Mr.
Jason Ketchum. Please go ahead.
Jason Ketchum
Thank you, Laurie. 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 two of the investor presentation on our website, and our most recent Form 10-K and Form 10-Q filed the Securities and Exchange Commission for a list of some of the factors that could cause future results to differ materially from our expectations. I will now turn the call over to Dave Emery.
Dave Emery
Thank you, Jason. Good morning everyone.
Thanks for being with us today. We'll go over several things today.
I will cover kind of a full year and quarterly review of essentially operations highlights and then turn it over to our CFO, Tony Cleberg, for a financial review of both the quarter and the year. And then I'll wrap it up with some comments on overall strategic objectives and our progress towards meeting those objectives.
Before I do, a quick note here. We have modified the format of our webcast presentation slightly.
And rather than go through each individual subsidiary, we're really going to focus on the highlights of our utilities, highlights of our non-regulated energy group, and do it that way, as far as the call itself goes. But we have continued to include all the detail on the subsidiaries in the appendix to the presentation, so the information will still be available.
2009 was an extraordinary year for Black Hills. It was also a year I think that could be characterized by extremes.
One extreme I think from the standpoint of strategic achievement, it was a year of tremendous accomplishment for our employee group. 2009 was the first full year of operations for the five utilities that we acquired from Aquila in July 2008, and now operate under the name Black Hills Energy.
And we made meaningful progress integrating those utilities, improving our efficiencies and reducing our expenses. We also advanced several large capital growth projects during the year that will contribute to meaningful earnings growth for shareholders in the future.
Namely, the construction of three power plant projects, with the total projected capital spending of nearly $700 million. We also reduced our short-term debt substantially, by completing several key financings during the year at favorable terms, particularly considering the real challenging conditions that were in the market, especially early in the year.
I mean, it was as very tumultuous time in the capital markets in early 2009 in particular and we were fortunate to have the patience to await some of those market conditions and get some very favorable terms on some of our long-term financings, a little bit later in the year. At the other extreme, from an earnings perspective, the year was the most challenging we've had in a very long time.
The impacts of the worst recession in more than 75 years and in particular, its effect on natural gas demand and gas prices reduced our earnings considerably. Lower natural gas prices contributed to earnings declines in oil and gas, energy marketing and even reductions in off-system sales at our electric utilities.
So applied earnings pressure because of natural gas prices in all of those areas. For 2009, on an income from continuing operations basis, our earnings actually improved to $2.04 per share, compared to a loss of $1.37 in the prior year.
But much of the improvement was the result of some unique items. Tony will explain the earnings drivers and the unique items and results in a little more detail.
I'll try to just focus primarily on operational highlights and even with an emphasis on fourth quarter results, because a lot of the previous ones we've already talked about. So moving on, for those of you following through in the webcast presentation, moving on to slide six, we had great operational performance in our utilities this year.
As I mentioned before, obviously off-system sales at our electric utilities were weak, but other than that, we had a great year. Gas utilities exceeded expectations, a very positive bright spot.
We completed several key items in the fourth quarter, $180 million first mortgage bond offering at Black Hills Power, a very favorable rate on that. We also completed our customer information system unification during the quarter with the final company Cheyenne Light Fuel & Power being brought onto that system on November 1st.
Both the conversion of Black Hills Power which was done on August 1st and the Cheyenne Light conversion went without a hitch. I mean very successful conversions.
Now we have all of our customers on one single customer information system. Wygen III construction is well underway and I'll talk about that a little bit more in a bit.
In addition, in the quarter we filed a rate increase for our Nebraska gas utility. For the year, we had three rate cases take effect during the year.
We also filed a total of four cases including one that was filed right at the beginning of the year in Colorado Electric. So we've got substantial rate activity going on right now.
We also have several key construction projects which I mentioned earlier and I will talk about a little bit more here in a bit about the Wygen III project and the two plants in Colorado. On the non-regulated energy side, as I said before, natural gas prices and in particular low levels of natural gas prices kind of dominated the scene, if you will, particularly at our oil and gas and energy marketing subsidiaries.
Highlights in the fourth quarter, the new generation for our Colorado Electric utility is on track and significant progress is being made there. I'll talk more about the details of that in a little bit.
We completed a project financing on our Wygen I and Gillette combustion turbine properties which won Black Hills Wyoming subsidiary a $120 million project financing in December, again, on very favorable terms, another step towards a substantial reduction in our short-term debt this year. E&P did not spend much money this year, $20 million or so, very restricted due to the gas price levels, just didn't make a lot of sense for us to continue to plow capital into that business right now when the returns just aren't there.
As we see improvements, we'll begin spending a little bit more in the future. During the downturn, the E&P employee team did a really good job of keeping production up from current wells and also reducing the lease operating expenses pretty substantially during the year.
One item of note, it's not on slide seven, but it is in the press release and that's our oil and gas reserves, probably merits a mention. Oil and gas reserves at year end 2008 totaled a little over 185 billion cubic feet equivalent, based on gas prices of $4.44, and crude oil prices of about $33.
At year end 2009, our reserves had declined to a 119 billion cubic feet equivalent at gas prices of $2.52, and oil prices of a little over $53. Now, the SEC changed its methodology for reserve calculations, effective with the end of year 2009 reserve disclosures.
The methodology used to be, we would take the spot price of both oil and gas at December 31st, hold that price constant for the life of the production, and compute our reserves based on that. Now the methodology is we take a 12-month average price which is computed by averaging the 12, first of month prices and use that, held constant for the life of production to calculate our reserves.
Well, given the real low prices over the last 12 months, we're down evaluating reserves at a price of $2.52 for gas, very substantial decline in reserves. It's worth noting that had we used December 31st prices, in previous methodologies, our reserves would have been approximately 180 Bcf.
So a very slight decline, if you're comparing reserves on an apples-to-apples basis. The methodology change is what impacted it this year.
Now, if prices increase, as we evaluate reserves at the end of each reporting period, its possible those reserves can be booked again once they're economic. So that's just something to watch and pay attention to as we go through the year.
Moving on to slide eight. Corporate highlights for the year.
Lots of things happened and I won't reiterate all this financing activity, but we really had a tremendous year in the financial markets, we reduced a lot of short-term debt and converted that to long-term financing at favorable terms, a very significant accomplishment for finance and treasury folks. In the fourth quarter, a couple of notable items at the corporate level, another mark-to-market gain on our interest rate swaps.
If you recall, last year we had some interest rate swaps that we had originally put in place to hedge some of the debts associated with our Aquila acquisition. When we didn't place that debt on those terms, we had to de-designate those hedges and so we've been marking the value of those hedges to market at every period end.
We had a gain on those in the fourth quarter and had a significant gain on those for the year, partially offsetting the large loss we had on that mark-to-market in 2008. A very notable accomplishment in the last quarter of this year was we've been working very diligently unifying all of our benefits programs across the corporation including converting from a defined benefit pension plan to a defined contribution pension plan.
We're in the process of implementing all of that early this year in 2010. That was a combination consolidation of all of our health and welfare benefits for employees, as well as retiree benefits as well.
A very large project, a very significant achievement in the way of unifying our employee groups, still working on the final implementation. Finally, the Board of Directors declared our 40th annual consecutive dividend increase for shareholders this week.
The dividend was increased by $0.05 per share to $0.36 per share equivalent to an annual dividend rate of $1.44, up $0.02 from the previous year. We do expect 2010 to be another challenging year.
We have a large capital budget and so again this year, similar to last year, we increased our dividend by $0.02 rather than the $0.04 we have been increasing it that, primarily driven by the desire to be conservative related to cash, large capital spending budgets and also earnings pressure continuing until we see the end effects of the recession and see our earnings rebound. We're continuing to take a conservative approach to our dividend increases.
It is important to note that a lot of the actions we've taken and a lot of the projects that we are adding, particularly our large capital growth projects, utility power plants, things like that, will go a long way to help us ensure the long-term sustainability of our dividend payment to shareholders. Page nine, unification update.
I already mentioned the significant effort on employee benefits. On the system side, a couple of notable ones as well have already been mentioned, the CIS conversions, very notable.
Another thing we just did in December is we built our own bill print and payment processing facility here in Rapid City. We're starting to migrate all of our bill printing and payment processing here to this facility, will result in significant savings on an ongoing basis, pretty meaningful cost reduction effort on their part.
Slide 10 is just a timeline to give you an idea of what's happened over the course of the last year or two, and more particularly, what will happen this year and next year, gives you a general sense for the timing of a lot of our projects that are going on, large capital projects and some of our unification activities. We'll continue to update this.
We have all of this past year and we'll continue to show it to you every quarter so you can see our progress. That concludes my operational update.
With that I'll turn it over to Tony to provide the financial update. Tony?
Tony Cleberg
Thank you, Dave and good morning. 2009 has been a stress test for our company and our portfolio of businesses and although we're not satisfied with our absolute earnings, we are pleased with the way our diversified platform performed considering the economic issues and the collapse of natural gas prices.
As Dave mentioned, we've moved forward on a number of key initiatives that continue to strengthen our businesses and position us for longer term growth. Today I'll discuss financial performance both for the fourth quarter and the total year.
Moving to slide 12, we see the earnings drivers in the fourth quarter. Our income from continuing operations reflected strong performance in the gas utilities and the gas utilities were up strongly and our electric utilities were about flat.
That demonstrates good cost control in both utilities and the good cost control in electric utilities really offset the shortfall in the off-system sales. On the non-regulated side, the low natural gas prices significantly impacted our results in both oil and gas and energy marketing segments.
We have continued to minimize our CapEx spending in oil and gas because of the low prices and increased our emphasis on lowering our costs. For energy marketing, the realized margins declined slightly year-over-year, but the negative changes in the unrealized mark-to-market margins decreased substantially from 2008.
Slide 13, we're moving to our EPS analysis, and we adjusted our fourth quarter reported income from continuing operations to identify the impact of some of the unique items recorded during the quarter. The first adjustment subtracts the mark-to-market gain on our outstanding interest rate swaps.
This amounted to an $11.6 million or $0.30 per share which is a non-cash and reflects an improvement in the swap spreads during the quarter. This compares to a net loss of $61.4 million in the fourth quarter of 2008 or $1.61 per share.
The next adjustment adds back the integration expenses we incurred during the fourth quarter of 2009 and 2008 of $0.03 per share for each year. This is the last time I plan to show the integration expenses because although we'll incur similar expenses in 2010, we're at a point where the savings offset the integration expenses, so it should net to about zero.
By isolating these items, the fourth quarter income from continuing operations as adjusted was $0.57 a share, compared to $0.67 a share in 2008. Slide 14 provides the guidance we gave for the total year of 2009 compared to actual results.
The differences from our guidance resulted from a large improvement in the mark-to-market interest rate swaps, energy marketing, not achieving breakeven for the year, and oil and gas prices declining slightly from the prices that we gave in our guidance. So adjusting for these changes, we were near the middle of our guidance range.
Slide 15 displays our income statement for the fourth quarter of 2009 and 2008. Last year fourth quarter included two sizable negative adjustments for a ceilings test impairment in the mark-to-market adjustment on the interest rate swaps, resulting in a quarterly loss.
This year we have a positive adjustment for the mark-to-market on the interest rate swaps so year-over-year improvement is substantial. Moving to the operating income before the ceiling test impairment, we were down $3.3 million year-over-year primarily driven by declines in energy marketing, partially offset by improvements in the gas utilities.
The operating income in 2008 included an asset impairment for the ceilings test in the amount of $91.8 million. Consequently, the year-over-year the operating income improved by $88.5 million.
The interest expense increased by $2.8 million, which reflects the higher interest rate on long-term debt compared to the interest rate on short-term debt. Moving to interest rate swap line, we had a mark-to-market pretax gain in the quarter of $17.9 million on $250 million of interest rate swaps.
This compares to a pretax $94.4 million loss recorded in the fourth quarter of 2008. Again, the year-over-year improvement is $112 million.
Since quarter end, these swaps have declined by about $6 million giving back some of the gain, but we think they're going to go the other way for the rest of the year. As you may recall, these swaps were put into place in 2007, for expected financing.
The swaps had to be de-designated as an accounting hedge in the fourth quarter of 2008 because we decided not to issue debt at that time. Consequently, any mark-to-market changes are 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. Moving to other income, it was a slight decline from 2008 by $600,000.
This was driven primarily by AFUDC equity income decline of $900,000. So income before tax shows an improvement of $197 million year-over-year.
Continuing down the income statement, the income tax rate for the fourth quarter of '09 was about the same as 2008. The resulting 2009 GAAP income from operations for the quarter was $0.84 per share, compared to a loss of $1.52 per share in 2008.
The discontinued operations as you'll recall relates to the IPP assets sold last year. Drilling down into the income statement, slide 16 displays 2009 fourth quarter segment roll-up of revenue and operating income compared to 2008.
The Electric Utility segment year-over-year revenue declined $7 million with a corresponding $300,000 decline in operating income. The decline in operating income resulted from lower margins from all system sales.
The natural gas prices impacted the pricing of off-system sales and have significantly decreased the margins in 2009. In terms of megawatt hours, the Electric Utility saw a decline of 7%.
Off-system sales megawatt hours declined 24% but our operating income for electric utilities remained almost flat in 2008, primarily due to good cost control measures. The Gas Utility segment had strong performance.
Gas Utility sold 3% more decatherms in 2009 due to colder weather. The gas states had about 4% more heating days compared to 2008.
In addition, the impact of rate cases settled earlier in the year and their emphasis on minimizing cost contributed to solid improvement in operating income. Moving to oil and Gas performance, during the quarter we saw a 39% improvement in average hedge price received for oil and a 4% decline for gas.
Production for the Mcf equivalent decreased 18% from the fourth quarter of 2008. Yet our operating income year-over-year improved primarily because of the lower depletion rate related to the ceiling test impairments that we took in the fourth quarter of last year and the first quarter of this year.
And also, reduced lease operating expenses. The next segment, Power Generation produced a $3.8 million in operating income, a slight decline from 2008.
Moving to the next segment, Coal Mining. The operating income increased significantly in the quarter, due to the completion of reclamation studies that reduced cost and improved our operating income by $3 million and should have a recurring benefit in the future of a couple million, at least a couple million on a go-forward basis.
In addition, a settlement on black lung tax in the fourth quarter improved income by $700,000. Coal production declined slightly but with a small improvement in pricing, our total revenue was actually up.
For the next segment, Energy Marketing, operating income was slightly positive for the quarter, but the year-over-year comparison was a decrease of $19 million. The realized margins declined only slightly but the unrealized mark-to-market loss caused a decrease of $20 million year-over-year.
These declines were partially offset by expense reductions, but the tight basis spreads and the low natural gas prices hurt 2009 financial performance. At the corporate level, we had an improvement of $1 million related primarily due to the integration costs at the corporate level.
Slide 17 displays the last four quarters of income from continuing operations. On the top line, reconciled to the income from operations as adjusted on the bottom line, this is included to display our performance over the trailing 12 months and if you add those up it's a about $1.43.
Slide 18 displays the income statement for the total year of 2009 and 2008. The operating income before the Wygen gain and the impairment loss declined by $3.6 million from 2008.
This was the result of some large changes. Utilities improved $33.4 million, driven by the acquisition of the BHE properties and the good performance on the gas utilities.
The non-regulated declined $48.5 million driven by lower oil and gas prices and energy marketing performance. Corporate improved by $11.5 million because of the reduced acquisition and integration expenses in 2009.
The interest expense increased $30 million over 2008, primarily driven by the financing costs related to the acquisition of the Black Hills Energy properties. And in 2009, we changed the mix of our debt, increasing the ratio of long-term debt to 84%.
The change in the interest expense impacted the bottom line EPS by $0.51. The mark-to-market interest rate swaps changed from a sizable negative in 2008 to a sizable positive in 2009.
Other income increased $3.2 million, primarily due to rent income on the Wygen land lease. The 2009 tax rate of 30% included a favorable impact of removal of uncertain tax positions amounting to $3.8 million in the first quarter.
So with all the changes in unusual items, our reported income from continuing operations increased from a loss of $1.37 to a positive of $2.04. Drilling down into the income statement, slide 19 displays the 2009 total year segment roll-up for revenue and operating income compared to 2008.
The electric utilities were impacted by the low margins on the off-system sales and although we had 6.5 months more revenue at Colorado Electric, the total year operating income of Colorado Electric was $2.5 million less than in 2008. Overall with focused emphasis on cost reduction the electric utilities were able to partially offset the reduced margins on off-system sales.
As a reminder, we have filed rate cases in South Dakota, Wyoming and Colorado to improve the cost recovery in the electric utility. The gas utilities revenue earnings in 2008 represent only 5.5 months performance.
But if you compare the last six months of earnings in 2009 to 2008, 2009 earnings improved by $5.8 million. The improvement was driven by cold weather, cost control and improved cost recovery from rate cases.
The reduced operating earnings in oil and gas reflect an average price decline of 28%. And the volume reduction of 8%.
Over the last two years we impaired $135 million for the ceiling test on our oil and gas properties, due to the low commodity prices. We believe these properties still offer substantial upside over the long-term, but the low commodity prices used to value these assets required an impairment charge.
Power generation had several swings year-over-year that resulted in a nominal change in operating income. The $51 million sale of 23.5% of Wygen I in January of 2009 created a gain on sale of $26 million, but the sale also reduced the related operating income by $1.9 million.
We were able to offset most of the impact by additional cost reductions in that segment. Moving to energy marketing, we incurred a small loss for the year and this is the first annual loss we've had since the business started in 1996.
As you know, 2009 has been the worst market conditions we've ever seen. Again, we feel 2009 was a stress test on our business portfolio and feel the balance of regulated and non-regulated worked during this economic storm.
Slide 20 shows our capitalization. The bottom line is our debt to capitalization remains very healthy 53%.
As mentioned earlier, we issued $180 million a 30 year, 6 1/8 first mortgage bonds during the fourth quarter and paid down short-term debt. In addition, we completed $120 million project financing during the quarter.
These financings have now given us our 84% of our debt classified as long-term. That moved from 42% as of year-end last year.
Our projected capital spending will require us to issue more debt in 2010, and probably equity. We will continue to take actions to minimize cash expenditures in 2010 so we have the opportunity to delay any equity issuance as long as possible.
Slide 21 displays our credit facilities in depth. The main point of this slide is with a standalone energy marketing credit facility and the recent 30 year bond issue and project financing, we feel we have ample liquidity under our revolver.
During the first quarter, we will be looking at renewing our corporate revolver which expires in May of this year. Slide 22 just summarizes our credit ratings.
They are currently BBB at Fitch, BBB minus at S&P and Baa3 at Moody's. So from an overall perspective the fourth quarter and the total year's performance saw solid performance in our utilities.
The low natural gas prices impacted off-system sales, but the cost controls and rate cases helped us maintain our performance. The oil and gas business and energy marketing suffered from low commodity prices and we expect some recovery in 2010 in these segments.
We are very pleased with the financing completed during the year, and we feel it gives us a capital structure that we can leverage in the future. So with those comments, on financial performance, I'll turn it back to Dave.
Dave Emery
All right. Thank you, Tony.
Looking to the future from a strategic perspective, we are very, very well positioned. We've discussed it several times, but we have a very clearly defined capital spending and growth plan for the next several years.
This year, 2010, in particular, we have a capital spending forecast of approximately $475 million, roughly 70% of that will be on utility investments, another almost 20% on non-regulated power generation assets. So a huge amount of capital being invested in good, long-term earnings stable projects, so very excited about what the future holds there.
As Tony said, we've got a great balance sheet, we’ve demonstrated good access to the capital markets. So we're very well-positioned to take advantage of the growth opportunities that we have today.
Moving on to slide 25, this is a look we've been showing you for a little over a year now, really highlighting not all of our capital expenditure plans, but just the projects that we consider to be growth opportunities or outside of normal, routine capital expenditures. Again, a billion dollars plus of investment over a several-year period there with an awful lot of that capital yet to be spent in 2010 and 2011.
As that capital spend, as those assets are converted to production and start returning earnings for shareholders, should drive considerable earnings growth in the future. Wygen III on slide 26, we are still ahead of schedule and under budget, very, very pleased with our construction progress there.
Construction is about 98% complete, almost done. Commissioning all the individual systems in the plant is about 70% complete.
We've achieved some very key milestones in the last 30 to 45 days, one of which is we did do our first (inaudible) on gas in December. We've completed all our boiler piping and steam blow cleaning and are getting ready and prepared to synchronize the generator to the grid and do our first fire on coal within the next month or so.
We do still expect to be in full commercial operation by April 1st, which is our projected commercial operations date. The generation to serve our customers at Colorado Electric, two projects here, one is the utility project which is a 180-megawatt facility consisting of two turbines.
We filed our CPCN there, certificate of public convenience and necessity with the Colorado PUC in June. We had a hearing on our settlement agreement in December.
We're awaiting a final order, and we don't expect any problems there. We filed the air permit for that facility in June of 2009.
It takes roughly a year to get an air permit. On the IPP side, we were selected through a competitive bidding process which was overseen by an independent evaluator appointed by the Colorado PUC.
We were selected as a successful bidder to build 200 megawatts of combined cycle gas-fired generation. We plan to co-locate that facility with the electric utility property.
So because of that, we had to amend our air permit. That new permit was filed in September.
So we still expect and hope that sometime basically within a year, we would get the air permit for the combined facility, somewhere and hopefully between June and September of this year. On the IPP project, we're aggressively seeking bids, procuring equipment and trying to get that process well underway, securing contractors and other things and as soon as we get the air permits for those facilities, we'll commence construction.
We would expect that to be probably third quarter of 2010. Again, both facilities need to be operational by January 1, 2012, and we expect to be able to meet that timeframe.
Slide 28, regulatory update. You're all aware of and we’ve talked about before, we completed three cases this year, annual revenue increase of about $15.6 million from those cases.
We have currently pending four other cases in various jurisdictions, totaling $71 million in annualized revenue increases. At least that was our filing.
We're working our way through the process on all of those cases. We expect hearing dates to be set soon, we are in the discovery process on several of those cases and expect to continue to work our way through those in the ordinary course of business and on the regulatory side.
Energy efficiency and renewable programs, we've talked a lot over the last couple of years about our efforts to continue to advance those programs, even in states where we don't have mandates for renewable portfolio standards and other things. A couple of notable events here in the last quarter or in particular, this year.
We partnered with the South Dakota School Mines and technology here in Rapid City to install our renewable energy research facility there, consisting of both wind turbines and solar facilities. We will work cooperatively with the School Mines on the research associated with those facilities.
We're continuing to advance our AMI project, our advanced metering infrastructure project, and our Colorado Electric utility. We have installed nearly 60,000 meters to date and we’ll be continuing to expand that project as we go forward.
On page 30, we talked about this previously, but all three of our utilities have been selected to receive Smart Grid or AMI stimulus grant funding under the Department of Energy program. The total of those three grants will be just under $17 million.
Essentially, they will be matching funds, so the company would match that money to install AMI technology in all three of our electric territories. We're still in the process of working through the paperwork and agreements with the DOE, so we haven't received that funding yet, look forward to finalizing that paperwork process and starting on those projects.
We've already started as I noted earlier on the AMI project for the Colorado Electric territory in the city of Pueblo. The grant for that territory would be for the outlying areas of the smaller towns surrounding Pueblo and then in Black Hills Power and Cheyenne Light, those would be new projects from an AMI standpoint.
Finally, wrapping up here on slide 31, the strategy score card is something which started a couple years ago. We set forth for you at the beginning of the year our key strategic goals and initiatives for the year and essentially check the box as we complete those initiatives.
This will be the last time you’ll see a lot of these 2009 goals on here. Next quarter this will be updated with our 2010 initiatives and objectives and it will demonstrate on those as we go through the year, but I think this is a good way to demonstrate our own accountability towards meeting our goals and objectives for shareholders.
We did in our press release yesterday reaffirm the earnings guidance that we issued for 2010 in November. That was a range of $1.80 to $2.05.
In November, when we put that list out, we gave essentially a list of key assumptions related to that guidance and I won't reiterate those today. They're here, a very little change from what we put out in November, but some subtle changes to a couple of qualifiers and assumptions that we made.
The overall earnings assumption and forecast for guidance of $1.80 to $2.05 remains the same. So to wrap things up, we're very pleased with the strategic progress we made in 2009.
We accomplished a lot in a very difficult time, very pleased with our financing activity this year, put us in a great position to continue our future capital spending and growth efforts. We demonstrated our access to the capital markets and certainly look forward to continued financing success as we continue our build-out of some of our key projects.
Very focused still, on integrating the acquired utilities that we purchased in 2008. We have several more key systems projects that we will complete in the first few quarters of 2010, and really get all of that work behind us and be a much more efficient and cost effective organization.
Running parallel systems and multiple applications is very cumbersome and expensive, so we're very much looking forward to the day when we have that behind us and we're forging ahead with those projects, literally every day. For the year of 2010, we don't expect a huge recovery.
We put our earnings guidance out there, but we're being pretty cautious as far as was what we expect for earnings. We need gas prices to improve.
We need the economy to come back, new customer connections on the utilities, things like that to come around and we just don't see an immediate impact from that. I think it's going to be slow and gradual.
And while that's happening, we will continue our cost containment efforts, being very conservative on what we do with capital spending and expenses. So I look forward to the year.
I think it's got a very exciting promise. We expect things to get better, even in the gas markets and power markets throughout the year.
It will be a slow, gradual change. Looking beyond 2010, we're extremely excited by the prospects for the company.
We've never had as clearly a defined capital spending program as we do now for a couple-year window. I'm very excited about the opportunity that holds for shareholders and customers and employees alike.
So with that, I'd be happy to take questions.
Operator
(Operator Instructions). We have a question from the line of [Chris Ellinghaus] with Wellington Shields.
Please go ahead.
Unidentified Analyst
Dave, did you get a PV-10 value at the end of the year?
Dave Emery
Yeas, we haven't published it yet, Chris. That will be in our K.
Unidentified Analyst
Tony, you were talking about some of the cost reductions in coal mining for the quarter and ongoing benefits. Can you just characterize what we should be expecting going forward in terms of lower expenses?
Tony Cleberg
Well, from the reclamation studies, I would think that we would get at least a couple million bucks a year with the studies the way they came back. So expect that improvement next year.
We picked up most of it in 2009, so comparatively speaking that should roll forward.
Unidentified Analyst
Was that like a true-up at all in the fourth quarter?
Tony Cleberg
Yes, it was. We did the study for the year.
Unidentified Analyst
Given sort of the performance of E&P in '09 and the trajectory of production, can you characterize at all sort of what your expectations for E&P are for '10 in the absence of better pricing?
Dave Emery
Yes, we put our projected production range in the earnings guidance, Chris. I would say our spending is going to continue to be pretty conservative there.
We said we would probably spend a little bit more than we did in 2009 when we only spent something around $20 million. We expect to increase that some, but it is going to be price dependent.
At E&P, we scrutinize every project, project by project, and depending on the prices at that particular location and what the project looks like, we make the decision to drill. I would say we're focusing maybe a little bit more on some of our oil opportunities, just because oil prices are pretty good relative to where gas is, but it's not going to be a huge driver for production or spending.
As gas prices improve, we will do some more drilling. We have a few drilling opportunities that we'll do at these lower prices, but there's not a lot.
Unidentified Analyst
Is it still going to be pretty challenging to make a material income at E&P in the coming year?
Dave Emery
Yes, I think we talked about that a little bit in our earnings guidance. I don't think we expect a huge improvement there.
Hopefully we're past the point where we have these big impairments and things. As long as prices keep coming up you never know.
But it is going to be challenging at E&P. Prices are still relatively low.
We do have a little bit of benefit of reduced cost basis in our E&P properties because of the impairments, but we've also reduced our reserves. So when you look at it from a depletion calculation perspective, the net of those two means it's not really that positive.
Unidentified Analyst
Tony, I think I caught you saying that there was a $20 million mark-to-market swing in marketing in the fourth quarter? Is that correct?
Tony
Yes.
Unidentified Analyst
Can you disclose what the fourth quarter mark-to-market loss was?
Tony Cleberg
Yes, the mark-to-market, the unrealized mark-to-market in the fourth quarter was $20 million. Different, not $20 million in total.
We had a gain in 2008.
Unidentified Analyst
Right, so the swing was $20 million.
Tony Cleberg
So $20 million is the difference.
Unidentified Analyst
How about the absolute for the fourth quarter?
Tony Cleberg
We haven't disclosed that.
Unidentified Analyst
Okay. Would it be in the K?
Tony Cleberg
Yes.
Unidentified Analyst
Lastly, I think Tony you were alluding to trying to push off equity. Are you suggesting that you may try to push it out of '10 or are you just suggesting you'll try to push it as late in the year as possible?
Tony Cleberg
I'm suggesting that we push it as late as we can. I think we want to be very responsible and keep a strong balance sheet, but if there's ways that we can just defer cash on a lot of things then we would certainly push it as long as we can.
Dave Emery
Chris, our philosophy on equity has kind of stayed the same as we’ve talked about for a while and in a nutshell, issue as little as possible, as late as possible. We're still very focused on that.
Operator
Our next question from the line of Michael Worms with BMO.
Michael Worms - BMO
Just a quick question on the E&P spending. You said it was going to be higher this year than last year, yet it looks like production levels are expected to be lower.
So can you kind of just explain what's driving the higher spend?
Dave Emery
What we anticipate is the spending will be higher if prices recover. And so what that typically means is you don't start a lot of your drilling until summer or later, and so the impact that it has on current year production is relatively low, even if we do the spending.
So it shows up kind of late in the year and early in the year after. So that would be the reconciliation there.
We may spend more, but it's probably going to be in the third and fourth quarters primarily, some in the second quarter, and then that production doesn't show up until kind of late in the year and earlier the following year.
Michael Worms - BMO
On the electric utility side in the fourth quarter, can you kind of quantify what impact weather may have had on earnings?
Dave Emery
Hard to quantify, I would say we had a little bit colder than normal weather during some periods, but we also had still relatively weak off-system sales, so I would say the net effect of that isn't a huge swing on earnings one way or the other.
Operator
Our next question from the line of James Bellessa with D.A. Davidson.
James Bellessa - D.A. Davidson
The gas utility, surprises on the upside and partly due to the colder fourth quarter. What would have happened if weather had been normal in temperatures?
Dave Emery
Well, you certainly wouldn't have had the same degree of sales that we did. There's two drivers on the gas utility performance.
One is very good cost control, that group worked very, very hard this year, keeping their spending down, even capital spending down and certainly reducing expenses. So the combination of that, which was a meaningful part of the difference in appreciation there, and the weather were the drivers.
We haven't really disclosed the amount of each of those two. Certainly, if the weather hadn't been there, they wouldn't have done quite as well.
But a lot of that benefit was driven by cost control and some of the other efforts we made there.
Tony Cleberg
Jim, the other thing is that we had a very cold fourth quarter in 2008 and we were even colder this fourth quarter. So it was very beneficial for us.
James Bellessa - D.A. Davidson
Are we talking about as much as $4 million of profits, increase, because of the cold weather or that was the increase in income?
Tony Cleberg
No, I think there is a sharing of that of expense reductions and cold weather. From a year-over-year standpoint, I think it's probably half now.
James Bellessa - D.A. Davidson
Your slide for CapEx showed $475 million estimated for 2010. But your earnings guidance calls were 425 to 475.
What's the difference?
Dave Emery
A lot of it's timing, Jim. We think we will spend the 475 if the timing works out on our power plant construction the way we think.
It's really going to depend on what date we get those air permits in Colorado. If we get them earlier, we'll spend a little more, if we get them later, we'll spend a little less.
It won't change the total CapEx for the project. It will just change the amount that gets spent in 2010 versus 2011 and that's the primary driver of that potential difference.
Operator
We have a question from the line of Eric Beaumont with Copia Capital.
Eric Beaumont - Copia Capital
Are you guys going to break out what your earned ROE was in each of the utilities just so we can get feeling for headroom as opposed to consolidation. Obviously with how the Wyoming works with the Wygen and some of the opportunity sales, that can make overall-earned ROE look maybe more robust than it’s for the individual layers.
Dave Emery
We historically have not published those numbers, Eric, and probably don't plan to. We've talked through consistently with investors, related to what's been reported on FERC forms, as far as the amount of capital we have in utilities and that's a number that you can figure out by using the FERC forms, but it's not something we typically publish and wouldn't anticipate changing that.
Eric Beaumont - Copia Capital
Secondly, just with regards to all the refinancings, can you give us a feel for what the apparent debt load is at this point and weighted average cost of debt, or are we going to have to wait for the K on that?
Tony Cleberg
Well, if you look at my capitalization chart, you've got the amount of debt. From an interest rate standpoint, the fourth quarter is pretty representative, but it's probably a little higher run rate because we issued the first mortgage bonds and the project financing, just a little later and so there's a switch between a revolver at LIBOR plus 70 versus even a great rate at 6 1/8.
Dave Emery
But the K will have all the detail of the particular financings.
Eric Beaumont - Copia Capital
If we look at page 17, obviously you have income from continuing ops and then as adjusted is 143 and understand all those adjustments. When you give your '10 guidance, you give it assuming kind of no adjustments and just where things probably sit in energy marketing, given you took good advantage of some of the storage spreads which have weakened a little bit since then.
Should we think that there is any adjustments being in kind of the guidance number or those will be separate as far as mark-to-market and things that might be backed out and [nonrecurring]?
Dave Emery
We were fairly specific in the guidance about our assumptions related to energy marketing, mark-to-market, our assumptions related to mark-to-market on the interest rate swaps, those things that would be unique items as we describe them on slide 17. We were pretty specific with what our assumptions were there.
So if you see conditions that are different than what our assumptions are, then you could come to the conclusion that we may have some of those unique items again this year, as long as those conditions hold true that we list in our assumptions and then I think you can continue to believe that we won't have a lot of those unique items again. It's just going to depend on how the year plays out, relative to that published list of assumptions we have.
Eric Beaumont - Copia Capital
I understand that, David. When you had the Analyst Day, you were talking in large part about energy marketing (inaudible) with respect to the pickup and how storage spreads were looking better and you anticipate some other returns to more normal market.
When we look at this quarter and you had mark-to-market hit and we go forward, I'm just trying to figure out given that the storage weren’t as robust as they were, if there's anything to impute there or you guys were able to accelerate things and how that may look?
Dave Emery
I would say our outlook hasn't changed dramatically there. When we talked in the fall and in previous quarters here, we said that we did expect better earnings from storage in our energy marketing unit this year because the spreads from last summer to this winter were quite favorable and we had booked a lot of that return already.
That's still the same. We did not expect a lot of earnings from our transport business.
The Rockies Transport in particular is out of the money in a lot of cases because the basis differential is so low. So we don't expect a lot there.
Our producer services segment in the marketing unit is pretty consistent. That's more of a fee-based piece.
And then the proprietary trading piece is really going to depend on market conditions and volatility and things. So it's tough to predict, especially what the mark-to-market impacts will be.
It's almost impossible to predict the unrealized mark-to-market gains and losses. But I think our view on the year is probably pretty consistent with what it was last quarter as far as how we see the marketing year shaping up.
Tony Cleberg
Eric, we do see quite an improvement in the energy marketing. We don't expect to repeat 2009.
So we do see quite an improvement.
Eric Beaumont - Copia Capital
When you saw decent spreads and you were contracting them for the summer, winter spreads, were those just kind of single season or did you take that multiple years just so we know that there will be adjustments on that, given the move.
Dave Emery
Some of it we do, park and loan storage which is a one time deal. The other things, some of our storage facilities we have a long-term lease positions in those facilities.
So some of those positions we can choose to roll forward, if market conditions continue to improve, rather than withdraw the gas this winter. So I think we've got a lot of flexibility there.
Operator
We have a question from the line of [Vedula Murti with CDPUS].
Unidentified Analyst
Can you tell us for the fourth quarter, what was DD&A for the fourth quarter in terms for consolidated company cash flow?
Dave Emery
That will be in the K.
Unidentified Analyst
Can you tell me what the third quarter was?
Dave Emery
It's $29.8 million in the third quarter.
Unidentified Analyst
If we basically say DD&A next year runs on a quarterly basis, somewhere between $30 million and $35 million a quarter, okay. That gives us about $130 million.
If you take about the midpoint of your earnings guidance, that generates about $75 million in net income. I'm not sure about any other major positive cash flow items.
When you use your CapEx and your current dividend rate, it would look like that we have operating cash somewhere in the 2, 2 1/4 range and we have cash expenditures, dividends and CapEx of about 500. I'm making sure I'm in the right ballpark, we have a $300 million delta that's going to be filled through a combination of debt and equity.
Am I thinking about this properly?
Tony Cleberg
You could think of it that way. I would hope that we can do better on the spend plans.
Unidentified Analyst
Let's say then the spend plans are at the low end, so let's call it 250 then. Okay?
Tony Cleberg
Okay.
Unidentified Analyst
Should we assume, then, that in terms of capitalization, that we ought to be thinking about this like 50/50 in terms of how it's done externally.
Tony Cleberg
50/50 is a good long-term assumption. Short-term, when we're looking at construction of power plants and particularly utility property, the debt number may get a little higher than that prior to doing permanent financing.
So we may let our debt run up say 53, 54, you knows some percent like, maybe even up as high as 55% before we do some of our financings. Long-term, 50/50 is a pretty good assumption but short-term it may fluctuate some.
Unidentified Analyst
Okay. And as part of your earnings guidance, do you have an assumption as to what the average shares outstanding are for the year for 2010?
Tony Cleberg
We have not disclosed that. I guess one comment on that.
Thank you. We did say in our earnings guidance that if we issue equity, we had assumed that that was included in our earnings guidance.
Operator
Thank you. And we will move on to our next question and one moment.
We go next to the line of Tim Winter with Gabelli & Company. Please go ahead.
Tim Winter - Gabelli & Company
I do sort of have a follow-up question to Eric's questions on the earnings walk in the marketing business. If you go take the $1.43 adjusted for 2009 up to the 2010 range, can you give me some sort of idea what is expected from the trading and marketing business.
I guess I'm backing into a range of somewhere in the $0.30 to $0.50. Is that accurate?
Dave Emery
Yeah, we haven't put a specific number out by business unit in our guidance. What we did say last fall related to marketing is we kind of expect things to get back to a more normal year.
Now, what's normal mean? I think if you kind of look at our past history and take out the real highs and lows, probably a good neighborhood to think about, but we haven't disclosed segment guidance and wouldn't anticipate doing so.
Tim Winter - Gabelli & Company
Okay. Are there certain mark-to-market gains that you're expecting that are included in that guidance?
Dave Emery
If we knew how to predict mark-to-market gains, we wouldn't be doing this.
Tony Cleberg
Our assumption basically says, Tim that we expect no meaningful mark-to-market gains or losses in the guidance itself. Just don't have any way to predict those.
Operator
And we have a question from the line of Michael Chapman with Private Capital Management. Please go ahead.
Michael Chapman - Private Capital Management
Thanks. Just a quick question about taxes for you guys.
Was reading one of the FERC filings that in the Wygen build-out you get accelerated depreciation on that. Does that also apply to the Colorado build-out and if it does apply, is it applicable at the parent level or only at the utility level?
Thanks.
Tony Cleberg
I mean, utility level is where you take the write-off. The accelerated depreciation was really a function of the way the tax law is right now.
I don't know if that will be extended by the time that we put the Colorado Electric in play.
Michael Chapman - Private Capital Management
Does the Wygen build-out have enough to protect most of your income this coming year? Because I think it's 47% is what they said you were allowed to take on depreciation in the first year.
Tony Cleberg
I'm not sure, are you trying to get at a cash tax number or…
Michael Chapman - Private Capital Management
Yeah.
Tony Cleberg
While we're doing very well on cash taxes and we expect to do very well on cash taxes in 2010, and I think that's all I can really say at this point.
Michael Chapman - Private Capital Management
So, one of the previous callers was trying to bridge the cash flow number from your CapEx and then your net income plus your DD&A and came up with 250 to 300 number. There is a decent possibility then that the net income number, well, I guess the cash net income number would be a lot higher given the ability to shield that from taxes?
Tony Cleberg
Yes.
Michael Chapman - Private Capital Management
Okay, so that could create some of the other areas. Are there any other operations that you or any other financing mechanisms, kind of like the sale of to mend other assets that would lessen the need to issue equity?
Tony Cleberg
Yeah, we would certainly consider other alternatives.
Jason Ketchum
We don't have any planned right now. But we always consider and always look at high grading things.
Michael Chapman - Private Capital Management
So the number of shares that you would eventually issue, I know you said you like to keep that to a minimum and I'm assuming you're going to do that equity raise in one tranche, so you'll raise all the equity you'll need to finance the total $980 to $1 billion build-out over the next two years in one offering or would you expect to do it over more than one offering.
Tony Cleberg
We really haven't pinned that down. I mean, we'll take a look at the market, what's the best way to do that at that time.
So we don't have a set plan. If we did have a set plan, it could change tomorrow.
So I think the general thing that we're trying to do is we're trying to minimize cash flow. We have to go forward on these major projects.
We're very committed on those. And we'll look at other ways to in effect minimize our cash expenditures and we'll look at other alternatives to keep as little equity and debt as we have to issue to fund all of these.
So that is our strategy.
Jason Ketchum
I think another issue there is, the markets have changed so dramatically over the course of the last 12 months, both equity and debt, is that we're trying to be real flexible with our financing plans because we would like to be able to opportunistic if we've got very favorable terms. For example, on equity, we may choose to go out and do a little more.
Kind of to your point, if we don't have those, we're going to delay it as long as possible and do as little as possible. And similarly on debt.
If we get some real advantageous terms we may issue a little bit of a long-term debt a little sooner rather than later but the conditions have been so volatile, but seem to be improving on both fronts, debt and equity. I think times at least for awhile is an ally but we want to make sure we take advantage of best we can the optimum conditions in the market.
Michael Chapman - Private Capital Management
And then just thinking about Colorado or how should we think about the Colorado build-out for 2012. I mean it looks like you're going to be spending around all-in $500 to $550 million to get that up and going and in your most recent filings with Colorado Electric, the rate on rate base that you're allowed is 9.75 and given the average life of these assets, you kind of back into what an EBITDA number for that spending assuming that while you earn offer that $500 - $500 and it seems like the EBITDA potential from that out in 2012 is relatively substantial in the $75 to $85 million of EBITDA ranges.
Is that too far off-base?
Dave Emery
Yes, I won't comment on the specific number, but I think the assumption that you're making, remember half of that capital is regulated utility capital. The other half is going to be spent at our IPP subsidiary but the way we look at our IPP business is very utility like as far as how we finance those projects and things.
So from an overall assumption basis, I think you can look at it like essentially $0.5 billion worth of utility investment. Both projects will come into the earnings stream on January 1, 2012, assuming successful construction completion.
So I think you're looking at it the right way. We haven't put out specific EBITDA numbers and don't intend to do that until probably we put out earnings guidance for 2012.
Michael Chapman - Private Capital Management
Okay. But the rate that you have, the return on rate base that you have for Colorado now, you would think a commensurate number would be is what you would expect for the build-out there.
Dave Emery
Yes, depends on what the regulatory climate is. We just filed a case in Colorado and we'll see how that case goes.
That may give us a more clear indication of what returns we would expect going forward in Colorado. The regulatory environment is a little tougher right now than it has been for a while.
Operator
We have no further questions. I'll turn it back to our speakers for any closing remarks.
Dave Emery
Laura, well thank you for being on the call today everybody. We appreciate your continued support.
As I said before, 2009 was a very challenging year for us but one in which I think we accomplished a great deal towards building future value for the company and our shareholders. So, we'll appreciate your continued support through another year that we expect to be a little bit challenging on the earnings side, but again, I think we'll continue to make very significant progress on these growth capital projects that should set us up very, very well going forward.
The economic recovery is going to be key to 2010 earnings, I think. We need gas prices and power prices and things to rebound a little bit, but we're pretty optimistic about where we sit, very happy with our capital structure, access to capital markets and pretty excited about our spending plan.
So, thanks for your interest in Black Hills and thanks for being on the call today.
Operator
Thank you. Ladies and gentlemen, this conference call is being made available for replay.
The replay of the conference begins today at 11:30 am Mountain Time. And we'll run through the date February the 5th at midnight, Mountain Time.
You may access the AT&T teleconference replay service by dialing 1-800-475-6701, and please enter the replay access code 139497. That number again, 1-800-475-6701 and the replay access code is 139497 and speakers do you have any additional closing remarks?
Dave Emery
No, not from us, thank you.
Operator
All right. Well, that will conclude our conference.
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