Noting that it went public with its offer to merge with NorthWestern Corp. only after the targeted company made the offer public last week, Black Hills Corp. CEO David Emery Monday emphasized that his company considers it imperative that it expand in the regulated utility sector. He made the comments during a conference call with the financial community. Black Hills filed a Securities and Exchange Commission 8K filing Monday, and it expects to close the deal by the end of next year, Emery said.

Black Hills hopes that NorthWestern can decide by early next year to pursue negotiations of an eventual detailed merger. The offer is being characterized as “accretive” for both earnings and credit to both sets of shareholders in the first full year after the deal closes, Emery said during the conference call.

In response to questions on the call, Emery indicated that Black Hills would not close the door on lowering retail utility rates in Montana as a condition for approving the merger, nor would it preclude the need to be able to supply power from its merchant generation plants to Montana retail customers and perhaps expand into coal production for use in coal-fired generation projects in the state.

While emphasizing that the proposed $1.25 billion stock-for-stock merger proposal is only an “offer” at this point and thus limited in detail, the Black Hills CEO said his company has been eyeing NorthWestern since the latter was immersed in Chapter 11 bankruptcy last year. He said NorthWestern is obviously strong on the regulated utility side and in the regulatory arena, while Black Hills’ strengths lie in its wholesale generation and fuel management assets.

The two companies — both based in South Dakota — are “very complementary” to one another, said Emery, noting that Black Hills’ “refined strategic objective” has been to expand its regulated utility business holdings. Black Hills has 131,000 electric/gas utility customers, NorthWestern has 617,000 customers. Black Hills owns 1,400 MW of generation (nearly 1,000 of merchant generation) operating almost all of it, while NorthWestern owns about 550 MW, operating only 107 MW.

An issue surfaced as part of the questions from financial analysts concerning the current Montana state law banning distribution utilities in the state from owning power generation (NorthWestern relies on contracts with PPL Montana and 13 qualifying facility contracts for the power it distributes in Montana). Emery has indicated his company would be ready to work with state lawmakers and regulators to obtain a change or exemption that would give the NorthWestern operations a chance to provide some of its own electricity.

“My understanding of Montana law is that as of today utilities are precluded from owning generation to serve their own customers,” Emery said. “There could be a modification of that, and it is our belief that is something that is going to probably be received somewhat favorably in Montana, but certainly not without a lot of discussion and work.”

Emery would not comment on what a merged entity might do with the expiring power supply contract with PPL Montana that runs out in 2007.

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