ALLETE Inc (ALE) 2002 Q4 法說會逐字稿

Please stand by. We're about to begin . Good day, and welcome, everyone, to this ALLETE fourth-quarter 2002 earnings results conference call. Today's call is being recorded. Your line will be muted for the presentation. Then we will conduct a question-and-answer period. At that time, you can press the star or asterisk key, followed by the digit 1, to signal that you have a question.

This conference may contain forward-looking statements within the meaning of federal security laws, including statements concerning business strategies and their intended results, and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the earning release distributed this morning reflect management's best judgment at this time, but all such statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statement therein. Additional information concerning potential factors that could affect future financial results is included in the company's annual report and from time to time in the company's filings with the SEC. At this time, I would like to introduce the Chairman, president, and Chief Executive Officer, Mr. David Gartzke. Please go ahead, sir.

Thank you. Good morning, everyone. With me, again, this morning is Jim Vizanko, our Chief Financial Officer.

Today, we reported our financial results for 2002, which excluding the one-time charges resulted in an earnings per share of $1.80 compared to $1.87 for last year. The board of directors also declared a 2.7 percent increase in the common stock dividend, which resulted in an annual rate of $1.13 per share. Our year-end operating results fell within our revised expectations for the year, and reflected the difficult economic conditions that we faced in 2002. Jim's going to now give you some details about the year. Jim?

Good morning, everyone. As you know, low wholesale power prices hampered our earnings at Energy Services this year. Excluding the two -- $5.5 million one-time non-cash charge related to the indefinite delay of the Superior Generation Project, Energy Service' net income declined by 8 percent last year despite a 11 percent increase in kilowatt-hour sales.

For the quarter, net income was about the same as the prior year, excluding the one time charge, and including a reversal of a $2.8 million mark-to-market net income entry we made in the second quarter related to the Kendall County generating plant.

Net income in automotive services increased 24 percent over 2001. The increase was the result of the mandated goodwill amortization accounting change, lower interest rates, and operating efficiencies. The lower than expected volumes were due to a rental car market that never re-fleeted up to levels prior to September 11th 2001, and manufacturer incentives on new cars that temporarily but significantly disrupted the price spreads between new and used cars. As the market adjusted to the decrease in prices and the effect of manufacturers' incentives (inaudible) to wane (ph) conversion percentages improved in November and December.

Investments and corporate charges declined by $19.5 million from the prior year. In 2001, we experienced the largest real estate transaction we've ever had, and we had a whole year of income from the securities portfolio. Last year, we liquidated the portfolio midway through the year, after the posted negative returns .

Discontinued operations were about $10 million ahead of 2001, mainly due to the elimination of depreciation expense at our water businesses. In addition, we incurred charges of $3.9 million in 2002 related to the exit from our auto transport and electric retail businesses. The prior year's exit charge related to the automobile transportation business was $4.4 million. Dave?

Thanks, Jim. My remaining comments are going to be related to some events that occurred in 2002 and revisit that briefly to set the stage for 2003. I think it's important to put it in that perspective. Last year, we did liquidate the securities portfolio that Jim mentioned, and we exited other underperforming assets and businesses, and we are getting close to closing the sale of the water assets in Florida. When we complete that sale, we will have simplified this company, which focuses on the two significant businesses that we are very comfortable with and the markets that they serve, that being energy and automotive.

The board of directors and management of this company remain committed to seek all means to unlock the value of this company. Last year, we did undertake a thorough examination of the benefits and the execution risks of separating this company's energy and automotive businesses into separate companies. At that time, we chose not to do so because, first, the businesses of the company continued to benefit from the cash flows of one to the other and the strong credit position of the consolidated company.

And we also had to take into consideration the magnitude of the gap and the belief of the continuation of that gap in the -- in the not-too-distant future, weighed with the execution risk. We are again seriously reviewing this issue, this challenge, both internally and with outside advisers . And because we are in this process, I would expect that you would understand this and appreciate it that it's extremely premature to make any further comments about this process at this time, or to even prejudge the outcome.

I'm sure you've all read in the journal about the shareholder proposal recommending that we separate these two businesses. We don't disagree that a gap exists between our share price and the value of our company. I think I've always been consistent with that. But as I said, we are studying this very issue and that is the issue that is addressed in the shareholder proposal.

Now I'd like to shift gears and say a little bit about our expectations for 2003. First, again, we expect to receive the proceeds from the sale of our water asset this quarter. As you know, Florida Water Services, once sold, will result in total proceeds of 492-and-a-half million dollars. This year, we will receive 240 million, which, after tax and after repayment of the related debt, should net us about $180 million in cash.

We also expect the sale of the heater utilities to close during the first half of this year, too, which is subject to regulatory approval but it shouldn't be a lengthy process, in our opinion. We will use the proceeds from the sale of these water assets to reduce debt, and that will significantly strengthen our balance sheet. And I think that that's critical in this day and age to have that stronger balance sheet, especially when you look at the businesses we're in.

It's -- the advantage of this company's strategy has been able to grow an automotive service company to be approximately two-thirds of the company today, but at the same time what comes with it, I think, is a perception of greater risk.

The resulting reduction in interest expense will not offset the net income contribution we received from the water businesses, but we think net-net, that this is certainly the best use of the proceeds. When we look at our company on a going-forward basis, on an apples to apples basis for your benefit and for ours as well, we look at the earnings of the two businesses, the core businesses that we're talking about, that being automotive and Energy Services, and we're expecting that the earnings from automotive services will grow into 2003 over 2002 at a rate of approximately 15 percent. In addition to continued improvement in operating efficiencies, we expect a pickup in the volumes at our whole car auctions.

The Golden Gate facility will now have a full year of operation. This was a significant expansion of capacity in that market. The Long Island facility will open in the spring. That will be the first auction on that island where 8 million people reside. We are also in the process of completing an Atlanta facility, which is in a major auction market, and that will be open later in this year as well, doubling our capacity in that market.

The normal weather -- and we're talking about Storms and snow and ice and et cetera, those types of events -- will help the ADESA impact or salvage auction business relative to last year as well. And we also expect the continued earnings growth that we've had and enjoyed with AFC to continue into the future. Switching gears to the energy side of our business, if the wholesale prices stay the same as we experienced in 2002, I think it's safe to say that the net income at Energy Services may decline slightly, and I use the word 'may' because it may stay flat as well.

But I think we have to be very honest with you folks and mention the fact that we have some industrial customers that are struggling, and a few of them cut back because of the demand revenue that we received from those industrial customers that could affect us slightly. We also have a full year of ownership and operation and a fixed obligation of the Kendall County's capacity, which is the 275-megawatt gas-fired facility located south of Chicago.

And I did mention 'owned' and I'm sorry, I should correct that. We don't own. It's a capacity obligation. It does dispatch at a higher cost than LTV or some of the other assets that we have, but it's well-positioned in that market. We just need to get transmission access to those markets to that I take advantage of that facility.

But we do have a full year of it this year, and depending upon market conditions, that could be very helpful to us, but it could also Nick us a little bit if we can't sell all of the capacity that we own or have access to. So the net-net for the Energy Services business is a continuation of results comparable to last year. Our real estate business, which is an investment that we really aren't characterizing as a business anymore, but it does and did last year contribute $10 million to our bottom line, or slightly above that, should be able to pull us post similar profits in 2003.

Our corporate expenses should stay the same, with the exception of lower interest expense from a reduction of debt. We're very satisfied with the performance of both Energy Services and automotive last year, given the markets and conditions that they faced, and we feel very confident with the relative position of these two businesses on a going-forward basis. At this point, I think it's best for me to conclude my prepared comments and turn it to you to answer your questions.

Thank you, sir. The question-and-answer session today will be conducted electronic Lee. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone phone. If you are using a speakerphone, lines make sure your mute function is turned off, to allow your signal to reach our equipment. Once again, please press star 1 and we'll pause for just a moment to assemble our question roster. We'll take our first question from David Schanzer of Janney Montgomery Scott.

Yes, good morning, Dave, good morning, Jim.

Good morning.

Three separate questions here. First of all, when we looked at the vehicle business over the past several years, the growth rate that you folks were suggesting was closer to 20 percent than 15. Could you give us , you know, some color as to the components that would bring it down into that 15 percent range, if there's anything other than, you know, the reduction in the rental car sendout and any other thing that you've discussed already?

Let me touch upon the items that I know are the -- the growth drivers of the business, and maybe come back around to that. It might help us. Certainly there's a top-line growth, which is the volumes, and in the last several years, because of the economy, especially, in particular, the rental vehicles, the demand for travel, et cetera, has impacted that, so that has affected the top line a bit, and we expect that to continue into 2003.

Also, I think everyone's aware of the experimentation that General Motors has put in place with respect to their smart auction, which is a salvage auction process for their vehicles only, and by choosing to do that, they are taking a significant amount of manufactured vehicles out of the auction market temporarily. I'm not going to take a position on the economics of their decision. I have an opinion, and I -- I don't think, in the long term, it will prove to be economic for them, but in the short term, that has taken vehicles off of the market.

Strategically, we are focusing on ways to increase and make up that volume through fleet lease accounts and dealers in particular, so I think from our guidance our standpoint, we believe that we'll be able to pick up that short-come with respect to the top line and hopefully even have an increase, a pickup in the volume relative to last year, as I mentioned in my prepared comments, in a flat environment. In fact, in a challenging, decreasing environment coming from the manufacturing account.

So that could be a partial explanation for it, as it relates to the top-line volume in the short term. The efficiencies continue. In the last two years, Dave, we had significant pickup in efficiencies year over year because of the acquisitions that we've made, and the rate of improvement of the efficiencies as it translates to growth in the bottom line will be coming down as the EBITDA as a percent of revenue, et cetera, other measures that we use related to acquired sites, get closer to the more mature sites that we have. But we always expect contributions and growth from efficiencies of all of our sites.

The third is fees, and from time to time we continue to put in place, to the extent we can, slight increases in fees, and if you're -- if we're selling -- just to use a simple number -- 2 million vehicles, all in, including salvage, and you can increase the fees two-and-a-half, three bucks, that certainly helps a lot too. So we will continue to do that year over year.

And then we have new services, reconditioning, and other services that we're looking at all of the time that once we have the vehicles in the shop, so to speak and we've made the investment in the assets and the people to the extent we can provide more services to them for more fees might hurt our margin -- margins, on the appearance of Marines, but certainly helps our bottom line and that helps as well.

The last one, which is a financial one that I think is going to play a bigger role on a going-forward basis is the significant amount of cash flow that this business can generate, net of its -- of its appetite, and with that cash we can re-deploy it into other opportunities, and if we earn a decent rate of return, that will certainly provide for growth as well. So that's a long answer. The short answer, in terms of year over year, I would have to say it's diminished opportunities on the efficiencies side and the top line is actually, at least relative to our expectations, even higher than what we had last year. Long answer, Dave, but I hope that covered your question.

Yeah. Secondly, while the full year on operating maintenance expense was extraordinarily good, the fourth quarter was up about 5-and-a-half percent. Is that more indicative of where we're going in '03, or is the flat year more indicative?

I'm just thinking in operation -- I'm -- I'm not sure.

Could you repeat the question, Dave?

Sure. Be happy to. In the fourth quarter , operations and maintenance expense was up about 5 percent, I think.

For the total company.

Yeah.

Okay.

But flat for the year. And -- I mean that -- which was very good. My question, I guess, is: Can we expect it to continue to be flat for next year as well ?

Generally speaking , the operating and maintenance expenses of this company should increase modestly because of cost of living adjustments, et cetera. We're continuing to look at efficiencies which include elimination of jobs, positions, too, which should put us at a push position, if not even, from a labor standpoint and cost of labor standpoint, actually going south. That's a high-level observation with respect to the labor cost associated with that line item. Jim?

There's one item, too, Dave, that --

Uh-huh.

Operations expense includes, for the fourth quarter, the write-off of superior generation.

Oh, okay.

So that's $10 million of that increase.

Great.

That's probably the specific answer to your question, Dave.

Yeah. That answers it.

Okay. Thank you.

And then lastly, my last question, had to do with something that seems to be circulating with regard to embedded liabilities in Florida. Is there something that you guys are aware of, the kind of rumor about the inherent liabilities down there, and something you can discuss ?

The -- what, the letters, the e-mails that have been circulating?

Yeah, that's right.

I mean, obviously we don't believe we have any other liabilities the -- when the bonds get issued, I mean they'll -- there's obviously a statement of the risks in those bonds, and it will be laid out to what -- what we believe the risks are and how those risks are mitigated, if they are. I mean I --

So your attorneys have examined the issue?

Yes, they have.

Absolutely.

Okay.

Absolutely. And if it's related to selling the bonds, I mean there will be a legal opinion that the bonds are tax-exempt and there will be discussions of the risks associated with buying those bonds.

And without making an editorial comment, everyone receiving these e-mails at this time as we're approaching the execution of the bonds should be saying something as well.

Okay. Great. Thank you.

We'll take our next question from Allen Metrany (ph) of Copper Beach Capital.

Hi, thank you. Actually, a couple questions. I'm a little confused by David's last question. Maybe for those of us who don't read e-mails and message boards, you can give us a little bit of a background as to what's going on with -- with the risks in Florida. And second question, if -- can you -- are you planning on investing in new auction sites or buying any salvage sites this year? And maybe you can give us an update a bit on the salvage operations, given the weather.

Let me -- this is Dave -- comment on the second question, and Jim will comment on the first part of your question.

Okay.

We are expanding, with respect to just investments, the physical capacity of the auctions that are located in significant markets for the whole car auction. We've not made any acquisitions, as of late, and we do not have a strategic need to do so. We are in most of the markets that we'd like to do business. There's several that we'd like to be in that we're not, but because of the competition in those markets, I think it would be rather foolish to attempt to do so. So I think that we're well-positioned with the whole car side, absent expansion of some of the facilities we're in.

The salvage auction strategy was analyzed last year. We did not aggressively go out and acquire salvage auctions as we anticipated or contemplated when we made the first investment, but having said that, we have not put the growth strategy of our salvage auction play in a stall. We are looking at a better way to execute that strategy and all I can say at this time is that hopefully within the next few months, we'll be able to announce exactly what we're going to do there that will have a much better result than what we were originally contemplating. And it has a lot to do with having strong presence in regional and state markets before you enter the market, as opposed to buying an individual auction that's located in a remote area that's not close to the other facilities that you have. That is a very different market than our whole car auctions. So I have to be very careful as to the way that we approach these markets, which is different than the whole car side

So you'll be looking to cluster, in essence, in that market?

Yeah, that's a good way of putting it.

Okay. And with regards to the Florida?

Jim?

There's an individual who has written some letters and sent some e-mails out to a lot of local papers, a lot of -- just a wide audience, and giving his opinions of some of the lawsuits that -- that have been filed against the authority, and his opinions on whether the bonds will be -- become taxable or not because of the structure of the authority and how this transaction was done. There-- there -- this individual's opinion of what the conclusion of -- of that is. And we've disclosed and will close more when the bonds are sold, that there are these lawsuits out there. We've responded to those lawsuits. And, you know, we -- we've certainly disagree with these person -- or this individual's observations. And there's lawyers -- I mean lawyers certainly on our side that will give an opinion that the bonds will not -- are not taxable and that pins of what they believe the outcome will be of these lawsuits.

Okay. Can I -- with regard to that, do you have a timetable for the sale of the bonds for the February close? I mean, given that you're looking for a mid-February close and we're already towards the latter half of January, what's your timetable ?

Our timetable? We're currently operating under a stay to close the transaction in Santa Rosa County, and that, we believe, will be lifted soon, and we're prepared at that point to issue documents and price and close the bonds.

And we'll take our next question from John Casesa (ph) with Merrill Lynch.

Thank you. You know, I was just, Dave, wondering, GM seems to be in another program to terminate leases early, to bring these cars back so they don't flood the market. Do you expect there will be any change in your volumes from -- from things like that, that the automakers are doing?

Yeah. From time to time, we've always had pickups, peaks and valleys in the volumes that come to the auctions because of events like that. So the general answer is yes, we expect those things to happen from time to time, and when they don't work, then -- then the volumes increase for a short period, too.

Okay. Now, I -- maybe I missed this, but what is your general expectation for volume in the auto business this year?

We expect it to be between -- I don't know, I'll just pick a range -- 4 to 7 percent greater than last year with respect to the cars sold in total.

And that's got nothing to do with any of these special programs? That's just a function of what you think is the ongoing flow?

Based on the initiatives that we've put in place and continuation of the business that we've had in the past, plans for expansion of capacity or utilization of capacity in the existing markets that we're in, that's our best estimate at this time.

Okay.

And certainly realizing that our mix comes from -- from dealers as well as fleet lease as well as rental cars as well as manufacturers. So it's the combination of all of those. So one of those could be down and one of those offset that and it be an increase over last year.

And to that point, John -- and I don't know how close you've followed the company in the past -- when the mix of vehicles changes, we may end up with the same number of cars sold as the previous quarter or the previous year.

Sure.

But if the mix or the blend of the cars that come from different sources changes, that affects margins and sometimes it's up and sometimes it's down.

Right. Okay. I appreciate it. Thank you, guys.

Just as a reminder, if you'd like to signal to ask a question, please press star 1 on your touch-tone telephone. And we do have a question from Dave Parker with Robert W. Baird.

Good morning, everyone, and maybe my question follows on your comment, Dave, that you just made. When you're just looking at it for the year, I guess, for automotive services, the numbers came in generally where we expected. I guess we -- as you had forecasted, volumes didn't look to be robustly up for '02, but conversion rate was 59 percent and vehicle finance was up some 5 percent, but boy, if you look at the quarter, you know, conversion rate while it rebounded, if you look at EBITDA per car, that declined, and also, I guess, vehicle finance being up 1 percent was a little lighter than what I expected so I don't know if it's a mix or if it's -- or what exactly explains a little bit of the -- I guess change in the fourth-quarter profile of some of the key numbers here.

Part of the difference, in 2001 -- 2001 fourth quarter was a relatively good quarter for us because of September 11th . The September 11th cars came back in that fourth quarter in a large way in the last couple of months of the year, which changed the EBITDA percentage relative to what it has been in prior fourth quarters. So in some ways, that difference is because 2001 was better than what -- than what we would have expected. So it's not a trend that we think is here at all.

And, you know, with respect to the conversion rates, there was a holdback, as you know, when they introduced the 0 percent financing, a significant holdback in the vehicles, and they were running them through at what they call no sale sales, I guess, and they just weren't sold and we had to touch them and incur the costs and so on, and that significantly impacts the bottom line, as you know, and then up to a certain point, when the inventories grow to a point where it's not tolerable with respect to the cost to carry, then they may choose to flush them through and then you have a swing in the volumes in the short term, and that's what we're talking about here. Quarter to quarter. And the conversion rates then are very, very good. But on a normalized basis, I think your point about the 59 percent, which I think we've indicated 60 percent is normal or average, I think that that's what we come back to.

And just also your comment on the rental car re-fleeting. I believe that that activity starts in the first quarter. Any kind of sense or key drivers for that? I don't know if part of is tourism or what, but I don't know if -- what kind of signposts we could be looking for to see if that activity is, in fact, picking up here in '03?

We'll be watching that as well, Dave. You're exactly right, this is the time frame when they will begin re-fleeting, if they choose to do so and we believe, you know, the -- the vehicles in terms of manufacturing of the vehicles , from the large automotive companies, has to continue, and they have to find outlets for their cars. And that is a strategic outlet for their car and I think they may have to return to that.

Okay.

And perhaps keep them in a shorter -- a shorter time frame.

Yeah. Could you refresh our memory on goodwill and the different swing there with the elimination of that in the automotive services growth line there?

Well, the automotive -- when we started the year, we were projecting a 30 percent growth rate with the goodwill change, 20 percent without it. And we ended up with 24 percent with the goodwill. So the goodwill piece is about 10 percent.

It's about 10 percent. And it's from -- do you recall, Jim, from a -- just a dollar amount, what that was, after tax ? I guess I could -- I can get close to the numbers, if you don't remember. And while you're thinking on that's correct then I also was just wondering what out of the piece from income from discontinued operations of the 18.2 million, is all of that the water operations, or is there anything else included there ?

To go back to goodwill, goodwill is $11 million.

11 million? Okay.

What's in discontinued is water, Great Rigs, and the Electric Odyssey.

And Great Rigs and Electric Odyssey were both write-offs, right?

Yes.

Okay. Very good. I think that's the only questions I can think of right now. Thanks very much for your help.

Thank you, Dave.

Thank you.

We'll take our next question from Gary Steiner (ph) with Awad Asset Management (ph).

Yeah, hi. A couple of questions. I guess first on the automotive side, Dave, you provided some thoughts as to the '03 outlook, and volume growth. I think you said 4 to 6 percent was your guesstimate of '03. Since you have expanded some facilities and opened some new facilities, I was wondering if you might be able to take a stab at what you thought the same-store sales growth would be, let's say, ex- the San Francisco facility and the Long Island facility. What would you consider to be same-store sales growth and what sort of pricing expectations do you have built into your models for '03 as well ?

I don't -- I don't know if I can answer that question, Gary, to tell you exactly what it would be if we were to exclude the top-line growth. If we were to exclude certain facilities . With respect to the other question, which was -- what, Gary?

Just average pricing.

The price increases and so on?

Yeah.

I did make reference to a number of two-and-a-half, three bucks. It can be greater than that from time to time, but we think of a strategic approach where, on average, doing it in one location and another location from time to time, probably in larger quantities, results in an average across the whole system of two-and-a-half to three dollars, and that's not a significant number when you think about it relative to the -- to the fee on one side of $150, but it results in a significant number to us. Significant to the customer, but significant to us. And I think that that's our year-over-year strategy with respect to our fee strategy is just something in that vicinity. And we build that into our plans, and so far, at least by my experience, I've seen that we've been successful in doing that. I'm still coming back to the same-store growth on the top line, excluding these other facilities, and I can't think of a good direct answer for it so I think I'm going to have to pass on it and get back to you on that.

Okay. Just maybe a follow-up on the pricing issue. Has anything happened just relative to the sort of competitive environment? I mean, any major changes with your -- you know, your largest competitor or any of the independents in terms of allowing you to be able to continue to increase prices relative to history?

No, not that -- not that we've noticed. When you say 'increase prices,' I thought you were going -- I mean with that question I thought you were going to volumes and not prices but I think the answer is no to both.

Okay. What's the inventory situation like on your lots now? I mean, is it pretty normal?

It's higher than -- it's much higher than we've seen in past years. It's slightly -- it's considerably above normal.

Okay. And what do you attribute that to?

Well, I think that in part, it's due to the sellers being receptive to the prices that they get for their vehicles through the auctions.

Okay. I guess in the -- in the past, when you've had very high inventory levels, that's usually been the precursor of higher conversion rates in the next quarter --

And cars sold. Both, uh-huh.

Okay. And so would you expect that to be the same?

Yes. The normal cycles to that point usually are real good first quarters. Usually our first quarter is a strong quarter for the reason that you mentioned, that inventories typically are high at the end of every year, but they're higher this year than previous years , you know, by all accounts that we can see. And we usually have a pretty good first quarter for that reason and so then it's the second quarter and the anywhere quarter that becomes kind of a normal run rate challenge for us.

Okay. Just to switch gears for a second, in terms of the real estate, I think, Dave, you said that you expected the earnings out of that business to be flat in '03 versus '02. I thought that you guys were not buying as many parcels these days, so I was wondering how you're going to manage to keep the numbers flat in '03.

Well, we're not. And I know that there may be some confusion in the market with the recent acquisition that we announced up in the Palm coast area, which is extremely close to other real estate that we have that we can hope that we can -- we can package with our existing real estate to perhaps even sell it quicker. But we have -- our book investment of over, I would say, 50 to $75 million of investment in real estate that's currently on our books, and we've always talked about the multiples that we've been enjoying for years when we sell it in parts to developers, and last year I think we had a -- relative to our investment, we had a great year with a $11 million contribution and we certainly have enough assets on our balance sheet to be able to sustain that for the next couple of years, and that's what we're going to continue to do.

Okay. Just the last thing, Jim, do you have the -- on the charge that you took in the quarter, 5-and-a-half million, do you know what the pretax number was ?

Pretax is 9-and-a-half, I believe .

9-and-a-half.

I suppose you'd have to gross it up and do the math, but --

I guess I'm just trying to understand because it looks like your tax rate was a little lower in the quarter, and I was just wondering if that had something to do with the -- with the write-off that you took.

Yeah. The fourth quarter can be an unusual quarter for tax. It's kind of a true-up for other things that may have happened during the year, so -- because if you look at the two quarters, the fourth quarter of pie versus '01 versus '02 they're both relatively low relative to the rate for the entire year.

Okay. Got it. Thank you.

And we'll take our final question today from Michael (ph) Weinberger (ph) of York (ph) Capital (ph).

Hey, guys. Very good quarter I'm expecting. A quick question. I'm a little bit new to is this story and I heard what you said before about evaluating the situation. Have you hired bankers? If so, who are they? And when do you think you're going to come to a conclusion as to what the correct way to realize this value is?

We have not hired or engaged investment bankers at this moment. I'm sure that everyone is aware of the fact that we have relationships with investment bankers. Always have had relationships with them. And we also have a great outside counsel that we've been doing business with for a long time. We are going to, as I said in my prepared comments, engage such services to take a -- another look at the analysis, and especially the execution challenges and risks that would have to be addressed to do that, and certainly evaluations are a big part of it. As far as time schedules to announce or to report back to the market, it is certainly an extremely good question, and that is the one thing that we will be doing as we go forward is establishing if a decision is made to proceed in that direction. And I have to qualify it by saying 'if,' because the decision has not been made to do so. But we certainly would come back to milestones or time schedules, et cetera, to bring back to you. I would expect that we should be in a position, if not this next quarter, in the subsequent quarter, to be able to report back to the market whether or not this company is going to proceed with the analysis or not.

Okay. And obviously if there is anything, hiring of bankers or something, in the interim, you guys would make some sort of announcement. One just question back to the business, I guess. If you could just help me understand the running of the utility business versus the auction business. And obviously the auction business has been what's really carrying the load. In terms of compensation for upper management just in general, what -- do you have a breakdown of what compensation is, and especially incentive compensation, for the -- for more of the auction side versus the utility side?

The incentive compensation for the two businesses is structure -- is structured very similar to each other. We establish internal budgets and plans, and we then fit our incentive bonuses or incentive awards to those expected outcomes relative to the budget, and they're very similar for both businesses. What makes them different, however, since they're relative to plans, is, for example, if the energy business is a business that is competitive -- is regulated, therefore its growth is somewhat a function of its investments that are unregulated, which is a -- perhaps a third of the business or slightly less than that, you can imagine that its growth potential isn't as good as the growth potential in the automotive side of the business. So the incentive plans address the growth potential that could be different in those businesses. But they're both tied to the budget and the plans.

And all of our salaries are based upon comparables within the two separate industries. Both businesses are not on the same basic salary scale. The electric salaries for management are based upon comparable electric company size salaries as well as ADESA is based upon general industry in automotive, and that's true of the incentives as well.

Thank you very much. I appreciate it.

And we do have time for one final question from Gary Steiner.

Okay. I guess it will be a multipart question . The -- you mentioned something about $2.8 million mark-to-market in the quarter. I didn't catch if that was a positive or a negative in the quarter.

It was a charge. We had booked , in 2002, in the -- in an earlier quarter, $2.8 million mark-to-market for Kendall County. We reversed that in the fourth quarter. There's a change in accounting regulations for mark-to-market . Utilities are no longer allowed to do that. Instead of doing that in '03, we reversed that in '02 to basically put that behind us.

Okay. And your -- in -- in your -- the section of the P&L where you -- where you have your corporate charges and investments and such, that number ticked up to 6.3 million in the quarter. I was just wondering if there was anything in particular in that number .

The -- the main -- the two differences in that for the quarter, the portfolio -- the securities portfolio was active in 2001. It was not there in 2002. And the real estate had the tar upon point in 2001 and did not -- no, I'm sorry, that's for the year-to-date. The main difference is portfolio for the quarter. Year-to-date, it's the portfolio and real estate.

Right. But I mean I guess that number has typically run maybe 3 million a quarter, and in this quarter it was -- it was 6 million. Were there just no real estate gains in the fourth quarter or were there any one-time charges for any of the management changes? Any clarity there ?

Well, the main difference is the portfolio. The portfolio was around in '01, it was not around in '02. That's -- that's the main piece.

Okay. I can follow up more on that off-line. Just one last thing. Dave, what sort of prompted you to sort of reconsider the splitting up of the two entities today, as opposed to, you know, any other time?

Well, I'm going to state the obvious. You know, this company, when you look at it -- and I don't know how close you've been to it in past years -- consisted of an electric utility with a number of other relatively small investments, and when we made the investment into automotive, we certainly had expectations that through acquisitions and the immaturity of the market, the lack of utilization from the larger suppliers and manufacturers and leasers, that it was a -- lease returns, that it was a great industry to get into that would give us growth and a tremendous amount of cash flow. And it surprised all of us that we were not only able to hit our expectations, but with these significant investments we made in the last several years, we've taken this strategy to another level. And it's two-thirds of the company. So I'm stating the obvious when I say when you look at our company, you have a third of it being -- or slightly larger than a third of it being an electric utility, and two-thirds of it or thereabouts being an automotive company, that it's extremely difficult from time to time for the market to appreciate the value of this company. So I'm just stating the obvious, and I think we're all aware of it. When you look at the company and the year-over-year growth of the income and the cash that we've been able to enjoy -- and now I'm looking forward, rather than behind us -- you know, it's a tremendous asset to have access to the amount of cash that comes from these two businesses for the needs of the two businesses from time to time. And the credit that we also enjoy from a consolidated standpoint, or the credit ratings that we have. So that is a strategic asset, and it serves us extremely well. That being said, I'm just going to come back and state the other side of it. You have an energy business and an automotive business, one being regulated and one being unregulated and some folks may say that these companies, if you were to do a separate valuation of the two, you might end up with -- with a result that looks like it could result in -- could -- and I'll say 'could' -- result in an evaluation that exceeds what it's currently trading at. And I think it would be remiss on our part to not -- to not continually look at this gap and to get the benefit of the outside, as I said, advisers to help us address this and do the right thing for the investors and the shareholders of this organization. Now, the right thing could be communication. It could be operating them differently. It could be doing a number of things internally to get better market recognition that better resembles what we think this is worth. But at the same time, we -- I think we always have to look at other options that could result in a much better outcome for our investors. So I think it's safe to say that this is not something that, like we did last year, that we looked at and studied, and I hope we didn't give the message last year that when we did that, that that was the end of the process. It's never going to be the end of the process. This will be a continued process. And I would expect that most companies who are in this situation would be doing the same thing. So the message, I think, that we're hopefully giving you folks is that we're -- we are taking this to the outside with advisers, and reviewing it again, and certainly because of that, we are not in a position at this time, because of disclosure requirements, to be specific as to what we've said. So we can't prejudge the outcome , and to your question as to why, I think it's just looking at the businesses we're in and the relative size of the two to the whole, I think it's just an obligation that we have to have to you.

Great. Well, as shareholders, we certainly appreciate that. Let me just ask one last question. You've given some guidance in terms of your expectations for -- for energy and for automotive, and you've commented a little bit on the impact of selling water, you know, until you can redeploy some of the proceeds. Would you expect that when you roll up all of those different businesses and the change in the -- in the structure a little bit of the entity going forward, that there will be some earnings growth in 2003, or is it more realistic to expect kind of a flattish year?

In the two businesses that we're talking about?

For the -- for the entire --

In the entire business?

ALLETE versus --

The best way to look at the company and -- I was going to make some closing comments with respect to it, but now is the better time. The way we're going to look at it, and I hope and I expect that the market will look at it the same way when they look at the operating performance of our company, financial performance of our company, is to attempt to do so looking at the automotive and the Energy Services performance. It's been segmented -- segmented in the past financial results of our company, and going forward, you should look at the year-over-year growth, quarter-over-quarter if you choose to, of those two businesses. As we exit the water business, there's going to be a lot of noise -- or water business, there's going to be a lot of noise associated with it. We're going to be enjoying the cash considerations when we sell it. We're going to -- so therefore, the income associated with it will be gone. We'll be retiring debt, . Interest expense will disappear. So the magnitude of the re- -- refinancing and the monetizing of that asset is going to make it extremely difficult to compare to the bottom line earning performance of last year. We will attempt to do that as it occurs so that you'll see it and you'll be able to quantify it, but until it's all said and done, I think that you're best served by looking at the year-over-year growth of the energy and the automotive, and that's what we've attempted to do in our guidance this morning is to basically say that we expect the Energy Services business performance over last year to be pretty much the same, and automotive services growing at 15, or about, percent. And that's the best we can do, given the complexity of the timing and the -- and not only the receipt of the cash but how we -- and when we retire the debt capital associated with it.

Thank you .

Mr. Gartzke, I'll go ahead and turn the call back over to you for any additional or closing remarks, sir.

Thank you very much, everyone, for calling in this morning. We had a great -- great attendance and great interest this morning. Much more so than ever before, probably for obvious reasons. But we thank you for that. My closing comments, I think, have already been addressed in the Q&A, so I won't be redundant and waste your time and perhaps mine doing it. I just want to just make it clear to everyone that we hope that we are doing what we say we're going to do last year. We said that we would be exiting a lot of businesses and we've done that. We are somewhat frustrated with the delays that we've had in Florida but we're going to get it done. We have two very strong core businesses that we certainly think are well-positioned in the markets they serve. The strength of our energy business is with low-cost power and I just can't say that enough. And the recent addition of LTV, being another Coal-based facility within our backyard in a region that we serve that we can leverage with the power trading just adds to that strength . The strategy for the automotive group is the service. And these people are -- and this company are extremely good at providing outstanding service to the customers that they serve and we believe that we -- we're well-positioned in the major markets across the United States and Canada, and we feel extremely good about that. From a financial standpoint, both of them generate very, very good free cash flow to this organization, and to that, again, is -- speaks to the strength of this organization.

My last comment is, as I do every year, I mention to you that I spent a lot of time visiting with the investors that are interested in us. Either investors like yourselves, if you do have an investment with us , all you simply need to do is to contact Tim Thorp and when I hit New York, San Francisco, et cetera, we want to make sure that if you want to see me, I'm going to see you. If you're a potential investor and you have any questions and you want to see me, or Jim Vizanko, we will be there to see you. So with that, I thank you for your time this morning, and I -- I enjoy these discussions and I look forward to either seeing you or talking to you in April. Thank you very much.

This does conclude today's conference call. Thank you for your participation. You may disconnect at this time.