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Black Hills Defers Debt Financing in 'Extraordinary' Credit Market

Black Hills Corp., in the face of "extraordinary developments in the financial sector," has revised projections for this year and next, cutting 2009 capital expenditures (capex) in half and going for continuing bridge loans instead of the previously planned long-term funding of its $383 million acquisition debt.

In an announcement and conference call Tuesday, the South Dakota-based diversified energy company said its income this year is expected to be in the range of $2.00 to $2.10 per share, down from the previously expected $2.10 to $2.25 per share. The guidance does not include an unrealized mark to market earnings hit on certain interest rate swaps.

Officials of the production and gas and electric utility company said that as of Nov. 21 mark to market value of the swaps was minus nearly $70 million, which would translate to a $1.17/share noncash charge to earnings in 2008. That is still a moving target, however. The interest rate swaps on $250 million had been purchased in connection with the expected placement of long-term debt to cover the acquisition of Aquila Inc.'s electric utility in Colorado and its four natural gas utilities in Colorado, Iowa, Kansas and Nebraska for $940 million earlier this year (see NGI, July 21). Because of the unfavorable credit markets, Black Hills is temporarily putting off going for the long-term debt and is working on extending its bridge loans

Noting that "the capital markets have been tumultuous over last eight weeks," Black Hills CFO Tony Cleberg explained, "it doesn't seem appropriate to commit to a 10- to 20-year high cost of debt, particularly if we can extend our bridge facility and take an opportunity to see if the market turbulence subsides." He pointed to widening credit spreads, saying "the underlying interest relationships, such as the negative spread between Libor [the London interbank offered rate] and the Treasury rate seem illogical." He added that the company had other debt financing options if any problems develop with the bridge loans.

How much of a hit the company takes on the swaps this quarter will depend on interest rates. "The actual earnings impact of these mark-to-market adjustments could fluctuate significantly. A 100-basis point move in the interest rate curve over the term of the swaps would have a before-tax impact of approximately $31.7 million," Cleberg said.

For 2009 Black Hills is lowering its guidance from $2.40-2.65 per share to $1.95-2.25. CEO David Emery noted that financial market conditions also have impacted its pension plan expense due to a decline in the market value of pension fund assets. The pension expense is expected to roughly double in 2009 to $10 million.

The company is cutting its planned capital expenditures in 2009 from $83 million to between $35 million and $40 million. Oil and gas production is expected to decline from an estimated 13.7-13.9 Bcfe in 2008 to 13.2-13.6 Bcfe in 2009.

"Given the uncertainty of future oil and gas prices and resulting impacts on capital expenditures, the company does not intend to provide guidance on future production growth rates," Emery said, pointing to the $1.99/MMBtu difference in Nymex natural gas between mid-September and last Monday and the $41 difference in oil prices in the same period.

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