ALLETE Inc (ALE) 2003 Q2 法說會逐字稿

Good afternoon and welcome to Allete earnings conference call. Today's call is being recorded. Your lines will be placed on mute for the presentation. We'll conduct a question and answer period at the end of the call. At that time you may press the star or asterisk key followed by the digit 1 to signal for a question. This conference may contain forward-looking statements within the meanings of federal securities laws including statements concerning business strategies and their intended results and similar statement 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 earnings release distributed this morning reflect management's best judgment at this time and 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.. And additional information concerning \potential factors that could effect 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'd like to introduce, the Chairman, President, and CEO, Mr David Gartzke. Please go ahead, sir.

Thank you. Good afternoon, everyone. With me, again, is James Vizanko, our Chief Financial Officer. We're really pleased to have the earnings per share result for the second quarter being 53 cents compared to the 47 cents of last year. Most important is the earnings from continuing operations where we had a 45 cent quarter compared to 41 cents last year. As before Jim will give you the details for the quarter and then I'll give you some details of the Florida water services transactions and then we'll take some questions. Jim?

For the quarter, energy services net income was about the same as last year, when you exclude the $2.8 million mark to the market adjustment for our Candle County power purchase agreement in 2002. If you recall, that adjustment was reversed in the fourth quarter last year. Kendall sales were up about 2% due to the full quarter of operations from the Kennel County and Taconite Harbor plants versus last year. Automotive services revenue and net income were both up 14%. Interest expense was lower due to reduced debt balances and lower rates. At Adesa Wholesale Auction vehicle sales were up 4% and the conversion rate improved by 1.4% to 61.1% over the same period last year. Like we saw in the first quarter, commercial vehicles sold were higher and dealer consignment vehicles sold for lower than last year. I'd like to point out that we've seen an improvement in dealer consignment sales over the first few weeks as used car prices have stabilized. In June, Adesa opened it's new Long Island auction. In October, Adesa plans to open it's new Atlanta facility which will replace it's existing auction. The accounts receivable portfolio balance at Automotive Finance Corp declined by 2% and vehicles finance were flat compared to the second quarter of 2002. However, AFC's net income contributions are the same as last year due to strong portfolio management which resulted in lower bad debt expense. Vehicles sold at our salvage auction business, Adesa Impact, were up 11% over the same period last year. During the second quarter we converted our old Adesa golden gate facility in Fremont to an Adesa impact site. Investments and corporate charges improved by 2.2 million dollars over last year, primarily due to a strong quarter from Elite Properties. This quarter also reflects lower corporate charges, a loss from selling some of our emerging technology investments and an absence of a loss occurred by our securities portfolio last year. Income from discontinued operations was up over last year, mainly because of exit charges incurred during the second quarter of 2002. Dave?

Thanks, Jim. Our board of directors continues to analyze the possibility of separating the assets of our company. As we told you last quarter, if the board reaches a decision to separate the businesses, we will inform the market at the appropriate time, with a filing with the Securities and Exchange Commission. We'll also inform investors through an SEC filing or press release if we decide not to separate. But until such a time, we will have no comment and can't comment on any specifics of the evaluations process, or the timing of such announcements. Today we also announce that we signed a purchase agreement to sell seven Florida water services systems for $296 million. We expect to close this transaction before the end of the year, which will net $158 million, cash, after taxes, transaction fees and debt replacement. This cash will be used to further strengthen our balance sheet by retiring debt. We continue to talk to other perspective buyers for the remaining systems and we'll announce these transactions when they're closed. As far as the earnings guidance is concerned, the creation values, as I like to look at it, we expect the net income from energy services in 2003, as I have said before, to be about the same as 2002, and automotive services net income to grow by the 15% that we stated earlier in the year. This concludes our comments. We'll now be happy to answer your questions.

This is Peter Passe from the Duluth News Tribune.

I'm wondering, as far as the water assets sale, how much of the total holdings is represented by this transaction that you've announced today?

Of the total holdings, I don't know exactly, specifically, maybe Jim can, if you mean by the total holdings of our investment and water properties or the total corporation?

Of the water holdings.

It's about 2/3 of the water assets.

And I'm wondering, has there been any progress in regard to the sale of the heater water holdings that you have as well?

With Florida water service, with the Florida piece, basically, under contract, we will put certainly much more focus and time on selling heaters. So we expect something to be announced from here in the near future.

Okay. Anything else, Mr Passe?

One other question. In regards to the purchase price that you are receiving for this portion of the Florida water services, about 2/3 of the total picture, is this price -- how would you -- how would you compare it to the deal that fell by the wayside with the other two cities in the panhandle that you had been working on before?

Well, to compare them is difficult because of the deal we have with the panhandle. That transaction was for our entire system and not just the 2/3. Well and that, we had some payments that were being made over time, and this transaction will -- the payments will be made all up front. The way we look at it, we believe that this is -- is comparable transaction to that.

Very good. That's all I had for questions.

Thank you. The next question comes from Matthew Burg. He with Laffer Management.

Good afternoon Jim and David, just a couple of follow-up questions. I know with the original deal, I think with Gulf Breeze and the other county, there were some tails to the transactions or maybe some contingent obligations and I want to know if this recent deal with the seven water system contains any tails at all and whether all of the cash is up front. Just a little bit more color around that and then can you talk about what you're going to do, the plan for selling the remaining systems in Florida and then I have one more follow-up after that.

This transaction is all cash at closing. It does not have payments over time. It does not have liability tails associated with it, either. The liability tails associated with it, either. What we're planning on doing with the rest, we're in the process of negotiating with some of the other parts. Some have closed. We closed one transaction in the first quarter, a condemnation and we're in the process of negotiating the rest of the systems. It's our intent to sell all of the systems in approximately the same time frame that we have for this transaction, which would be by year end.

Okay. So does that mean year end would be the goal for the heater system as well?

Yes. It would -- yeah. I mean, the biggest thing that changes all of these is regulatory approvals.

Okay. Okay. And, just something else on the car side. You talked about opening of the Long Island site in June and then you'll have an opening of the revamped site in Atlanta in August, any other refurbishments of any of your sites or any new openings for the next couple of months or from here to the end of the year?

No. And Atlanta is October.

Yeah, okay.

Atlanta is is October and then we have the Fremont sale which we mentioned, which would be the opening of an impact or salvage facility

Okay. Is the board considering raising the dividend?

Not at this time.

Okay.

Next question from Mark Fluster, he's at Kerr Morback & Co.

Good afternoon.

Good afternoon.

I understand that your hesitation about talking about the separation of the businesses, but I want to go back and just kind of look at this from a big picture. When you came into your current role of roughly a year-and-a-half ago there was a lot of talk of unlocking shareholder value and that sort of thing, and, yet, here we are 18 months later and we sold a little bit of real estate and we sold a little bit of the investment portfolio but that's really all that's happened up to this point. If you don't do the separation, what other options are there for you to fulfill that objective of unlocking shareholder values? Can you just talk a little bit about that process.

Well, I think there's two aspects to it. Obviously, one is -- is creating the value and the second is getting the value recognition in the marketplace. And, I'm not making a statement as to the -- a decision that the board has made to separate it or not, and you can appreciate why I can't say that. But -- but the alternative of not separating the businesses, being keeping them together, would be to continue to work on the value creation side of the equation and manage the result of that, and the communication of that value into the marketplace in such a way that the value, that we think that the two businesses are worth, is recognized in the marketplace. That is the other option. Option -- there are certainly alternative mechanism for separation but generically separation versus not separation is simply what I think I just said. And the fact that automotive is growing and the electric side of the company relative to the growth in automotive isn't growing and the relative size of automotive total company being over half and with more cash discipline, I think, is a transforming situation, as well. So, in the alternative, we would continue to market this company to different investors who would appreciate the growth side and cash flow side of the company and get that value recognition in the marketplace.

Is there a time line in place as far as a final decision on the separation? Or is that more contingent upon completing the water sales so that you have that cash to help out with the balance sheet issues that might result from the separation?

We can't answer that question. I'd like to, but we just can't.

Okay. Let me try one more. If you don't do the separation, is it possible that you would use some of the cash from the water sales to buy back stock as opposed to paying down debt?

I don't think we can comment on that, as well.

Our intent is to pay down debt with the water proceeds, whether there was a separation or not.

Oh, I see, I miss understood the question, Jim is right.

Okay. Thank you.

And once again that's star 1 if you would like to signal to ask a question, star 1. We'll go to David Chancer, he's at Janney Montgomery Scott.

Hi, I have several questions. One of them concerns basic participation on the part of dealers. Could give us an idea of what the conversion ratio was like during the quarter and what you see it currently.

The conversion rate for the quarter was 61.1%.

Where is it currently?

Dave, is it different?

I don't think it's much different. We're into the third quarter. And I'm hearing that it's continuing to improve.

I think what we mentioned in our prepared remarks was that we've seen more dealer consignment vehicles being sold, which is a -- which is something we haven't seen as much in the first half, regardless of conversion rates. That's a real positive.

Yeah. This is more out of curiosity than anything, but we've been listening to second quarter results for a lot of the utilities through much of the United States and there's been a lot of rainy weather and I was wondering, does that increase the attendance at auctions or is that somehow a negative?

Weather doesn't seem to be much of a factor at these auctions, surprisingly, even in Phoenix where it can be 110 it doesn't seem to be much of a distraction. I would think a snow storm might be, but this kind of weather, rain or so on isn't that much of a factor.

The bigger impact is snow and that snow removal as well as attendance.

Right. That I know! Could you also, second question, could you talk a little bit about operating a maintenance expenses for the quarter and how you see the trend for the rest of the year?

I can't think of anything unusual with respect to our operating and maintenance expenses. It's unusual relative to the previous quarter. The things that cause it to go up is when we make acquisitions from time to time and we take on more operating expenses, but, hopefully there's additional revenue that comes with it.

Do you think the trend will be very similar for the rest of the year?

Sure.

And the third question as to do with AFC, you pointed out that performance was somewhat flat, is this an aberration or something we should look at for the balance of the year?

The dealers coming to the auctions, as you know, are the life blood of AFC, as well. And to the extent that there's fewer dealers and consignment cars coming to the auction and more captive and factories coming, in fact more so than what relative to our plans we launched for the dealers, might affect that a little bit. But we don't see any significant changes in terms of the vehicle being financed year over a year, than what we've seen in past years, which I guess is the long way of saying we expect the second half to be better than the first half.

In other words, historic growth rates for AFC is pretty much what you would expect?

4 to 5 to 6% in terms of vehicles financed.

Great. Last question has to do with the selling of the rest of the systems. Without getting specific, I was curious if you could characterize where the interest is coming from, with regard to potentially selling the rest of the Florida system, the Georgia wastewater, and obviously heater would be an investor own utility, the Georgia and Florida facilities, would you character the interest as being municipal condemnation kinds of things or characterize it as investor owned interest?

Well, we--

Or both?

We've had interests from both of those parties for both.

Uh-huh.

I think we believe, like we do for the seven systems, that the best buyer for these systems and the people that are most interested are governments.

Uh-huh.

And that's -- that's where we have seen most of the activity. But I -- I think that if there's certainly private people interested in the pieces as well. And I think, as we've said, that we think at the end, if we may end up selling eight pieces to a private buyer from the Florida sense, but I think some of the larger pieces will probably be sold to governments.

and to the extent that, perhaps, the government wouldn't be interested, you're fairly confident that an investor on utility or private person might be interested?

Absolutely.

Okay.

Absolutely. They're still interested. And they're very good properties and very good growth rate.

Absolutely.

We put a lot of capital in them and they're very good attractive properties for people.

That's all my questions. Thank you and congrantlaces on a good quarter.

Next up Craig Shere with Standard & Poor's.

Hi, what are you all seeing as far as the pricing for uncontracted portions of the Taconite facilities and Chicago facilities and prospects for eventually building out that facility that was put off last year?

The Taconite harbor facility, the demand from that has been good. As prices have gone up, we've sold that off at certainly a better prices than last year. I think the Kendall County is a different animal because of gas, in that case it's the spread of power prices versus gas where Taconite harbor is versus coal so the economics at Taconite harbor have been much better than the economics at Kendall for that reason. The platt that we cancelled last year in superior, we have no intentions at this time -- we're not planning ongoing forward at this time on that facility.

What would bring the facility in the Chicago area into a better economic situation is for there to be an economic recovery, which will have a significant impact on the demand for power, which will, then, bring back the serious questions of needing to add capacity to accommodate the growth in the power demand. With the economic or the economy being relative flat since 9-11, as we all know, has put the demand for power in a very slow growth situation where the incremental dispatching costs are driven solely by incremental variable expenses. As so as the demand begins to recover to the 2 to 3%, I think there's going to be a demand for new capacity and the value for that facility and it's capacity would be back into the money, again.

What's the heat rate on that Chicago facility and did you run it -- or did you draw any of the power that you own from it that wasn't already contracted in the quarter?

Yes. There have been times. It's a peaking -- or, it is available to go up and down, and we have sold some power, other than the contract piece, during the quarter. It's not been what, certainly, we intended when we got into this contract, but, it has been dispatching power.

And I can't tell you what the heat rate is. If you care to know, give Tim Thorp a call and he'd more than happy to give that to you.

Sure. What are the prospects for more acquisitions in the automotive space especially in the total loss market. And as an adjunct to that, do you have a longer term, multi-year perspective on what growth rate you might expect from those operations, automotive, in general?

Automotive, in general, is expected to provide bottom line growth, in total, and this is whole car salvage, AFC, et cetera, of double digit growth. At least 10%, if not more. And its -- it comes from a variety of revenue and efficiency and expense opportunities. But that's the growth that we were looking at when we got into this business, absent acquisition growth, and we've been successful in maintaining that same store type of growth and we expect that to continue. With respect to the acquisition growth, in the sal vag side of the business, this is something that we have first been experimenting entrance into the new markets using combination sites. We currently have five locations that are combining facilities and we made one large acquisition in the North Carolina market. Well I think we need to add another facility in that market to have better regional coverage. And we've announce that we do have locations in the California market, Fremont being the large one, supported by two combination facility that should open up late this summer and all of our energy and attention on the salvage side of the business with respect to development, is focussed on the California market. There are other regional markets that we're looking at, but we take things one at a time to make sure that we actually keep these things in a very prudent manner.

When you say "combination facilities" do you mean nearby wholesale auction and salvage auction facilities?

I mean the fact we have about 51 or 52 whole car facilities in North America and about 40-41 in the United States. They're in great locations, if they have excess real estate and they're in a good salvage market and there's a number of them, then we're looking at utilizing that excess real estate to to leverage, because real estate is half the play with respect to entrance into markets, be able to enter the markets with a very small investment and build the business, over time, or as soon as we possibly can, through the major accounts, and if successful, and in taking to significant size, perhaps, 15 to 20 thousand cars, then, we might look at relocating that business to another stand alone facility but it's an excellent way to enter a market without spending tens of millions of dollars into a new facility to break into a market.

It also lets us leverage the back office of the whole car facility as well.

Thank you, if your question has already been asked and answered, you can take yourself out of the queue by pressing the pound key.. We'll now go to Gary Presatino with Barrington Research.

I want to touch on the auto business. These units sold, or -- could you give me some kind of same store numbers? Do you do that?

the same store numbers from the whole car auctions are basically the same. We do not have any new auctions that were not a part of both quarters for both years.

Well, on a unit basis we're talking about, on 3.7%?

Pete, for the whole car. On a total loss there is some -- there is some difference in same-store because we did start up the -- that combination site in California, so the same store is a little different than the total loss. And in the wholesale the same store is the same.

On the total loss side if you hadn't started up these stores would you think you would be flat or down? What we're hearing from others in the industry things are still sluggish there.

The growth rate is about half on the same store basis. Instead of being, if you look at the quarter, instead of being 11% it's up 5% on the same store.

And some other questions are you still on target to spend $55 million of cap x on the auto side this year?

Yes, we are. But the majority of it is dedicated to the relocation of Atlanta.

okay. Well that's great. And then, could you drill down a little deeper of what you're seeing in both markets on the whole on the salvage side or what you anticipate over the next six months.

With respect to the top line, Gary?

Just overall what's going on in the industry itself. You already said what you think it's going to do, from an earnings contribution but just what you're seeing in the industry. Fundamentally.

Oh, fundamentally we're seeing some interest in, to us, any way, of some of our major locations which we're pleased about. We're in the Los Angeles market a few years ago with the store that was almost a greenfield and right now it's almost at full capacity, San Francisco is the facility that's twice the, in terms of capacity, what the run rate was at the other location and we're's starting to see pick up in business is there. So we're starting to get at least some market displacement in the major markets from these larger acquisition we've made. Well that's very encouraging to us. With respect to the industry in total, we're probably being a bit redundant but we have seen, relative to our expectations and relative to last year, a significant decline in the dealer cars coming to auction. Still being influenced by the 00% financing. Now, the franchise dealer, in particular, because of the 0% financing are getting trade-ins that are less than two years old on average and giving them a great product on resale enabling them to sell at retail without going to the whole car auction to get rid of their trade-ins, they're good value and good cars to put back to the market. And not get back that margin by running it through the auctions and I don't think that's a fundamental shift in the industry, I think that's driven by ab event, being the 0% financing so the question, how long is is that going to continue and how long is it going to continue to have that kind of impact? We're encouraged by the pick up. Some pick up that we've seen so far this third quarter in the dealers consignment cars comic back to the auction. So shall hopefully, that's a short term situation. We're pleased at least we're pleased, being the lead automotive in Adesa in seeing that the factory and captive and even the fleet cars, relative to our expectations in the last year, have more than displaced what we think we've lost, relative to our plans, from the dealer cars. And that has maintained our bottom line growth by 15%. So I think that we're getting some market displacement on the commercial side of the equation and I think that all of us in the industry are being affected in the short term by the loss of these dealer cars.

What about on the salvage side?

On that side of the business, as you know, it's a business that has year over year growth, weather, if you can take weather off the table, it's a pretty attractive rate of growth, probably 5 to 6%, but it is a business that is significantly impacted by weather. That's what drives the business! And that's why it's relatively important, I think, not to have all of your investment in one market. We're in Canada, we're in the northeast, we're in the southeast and I think getting into the California market and eventually into some other regional markets so we have the benefits of the weather in those different regions is rather important as well. But, we can continue to see the same trends, driven as you know, by weather, but, then, the fundamentals of the economic value of these vehicles as they're being in the risk associated with the damage of these vehicles, when they've been involved in an accident. And I think that that looks pretty good for us. I know that our competitors have experienced some relatively flat quarters, we're encouraged by by some modest growth, if you consider 5% to be modest, in the vehicles that we're seeing coming to our store.

Okay. Well and then one last quick question. It seems that your revenue per vehicle was up about almost 6.6%, are you raising prices or just channelling more services into each vehicle that you auction?

Well, we did mention that we've seen the shift in the vehicle, and mixed the factories displaying the dealers and with that comes more reconditioning and other services, which, have affected about half of the revenue growth ber car. The other half is straight from fees.

Okay. Thank you.

we'll now go to Dave Parker at Robert W. Baird.

Good afternoon and congratulations on a good quarter.

Thanks.

Can you identify -- first talk about auto then I'll jump to water for a second. We've seen flatish sort of sales throughout all of last year and then with that pick up this year, despite the fact it doesn't sound like the that the first half of the year, dealers weren't coming to market, what do you attribute that to, gaining on manufacturing accounts or how do you account for that?

As I mentioned, David, the 0% financing has allowed the dealers to, especially the franchise dealers to get a great product to resale without going to the auctions to buy, or, when they get a trade in it's a nice product that 25% of the time, they normally take to the back lot and to the eventually to the auction, they're selling direct.

Right. The 4% increase and just overall activity in sales this quarter, we really haven't seen for a while, what do you attribute that to, Dave?

I think the majority of that is due, at least on our account, the captives and the factories picking up what we lost on the dealer side. Due mostly to the market displacement that we've been fortunate to have achieved because of our entrance into those major markets with those good stores.

Okay.

Los Angeles San Francisco, Atlanta soon to be opened. That has been serving us quite well and not only does it help us in the major markets, but, these are regional and national relationships that can have ra trickle down effect, as Reagan would say, and some of the other stores we do business with.

And have you picked up any key accounts?

Yes, we have.

Into water, can you give us any kind of - what the sales price was, a multiple of book or anything like that to put our finger on? I think we're looking at previous sales roughly over 4 times book, can you give us anything, Jim.

The numbers for these systems turns out to be about three times book.

As you said, the difference basically being you're realizing a lot of your cash up yont. And secondly, thirdly, or fourthly, whatever it is. Do you have any idea what these assets are contributing to earnings to Allete for the last year?

No, we don't keep profit by system.

Okay. It's probably not safe to say 2/3 of what was contributed was tied to these assets?

I think the best way to answer the question, David, and probably others interested, please call Pam and we'll get that for you.

Okay. Good. That would be helpful, other than that, all of the other questions are answered.

We now go to Gary Steiner, he's at Awot Asset Management.

Just a couple of follow ups. Dave, in terms of the used car environment, I mean it's been a pretty horrific environment now for a good year-and-a-half and there's a couple months where used car prices have stabilized, I wonder could you take a stab at qualitatively giving a sense of what kind of impact that's had on the business in the last year-and-a-half and what sort of benefit you might get out of the stabilization to the extent that it continues to be stable going forward.

I think the positive of the stable is if dealers come back and become a bigger, bigger growth than what we've seen in the first quarter, I mean, that will add significantly to our business because we have -- we've increased market share in the commercial side, if the dealers come back and they'll be very positive, as to the second half the year.

And is there a way to get a sense of what kind of negative impact it has, in fact, had on your business over the last year-and-a-half?

Well, we've been fortunate to make it up with commercial accounts. If we would have had all of those cars, plus our commercial accounts, we would have been significantly better. I don't have a payment to the number, but, it would have been, certainly.

I can generally, I think, speak to a number that, if we say it here I guess it's disclosed to everyone, that we're -- our dealer, our dealer sales are off 10% from last year, year to date.

Okay. That's a bigger number than I would have thought.

But, again, we've made up more than that and another 10% from the commercial captive factory accounts.

You must be picking up pretty good amounts of market share on the commercial side.

Yes, we are.

Okay. That's great. In terms of, I guess, could you just, maybe, talk a little bit about how the combined auctions are doing, what kind of synergies you're realizing and going forward, do you see continued opportunities to do more of these?

The synergies, Gary, is the ability to enter the market, as I said before, without making the significant investment in the plant and equipment to enter a market. With little down, any business is a very good return. And to the extent that we can build a book of business up to the 10 to 15 thousand cars to be able to give us the positive economics for a relocation into a major facility is what the combination strategy is about. The synergies of the back office billing and other things and utilization of labor force certainly help but the synergy is mostly about the entrance into a new market and the joint use of the real estate.

And there's not significant distraction to the existing auction.

No.

Where is dragged down performance or anything like that?

No, no, that's a very big concern that the General Manager of the whole car auctions have when we do this, but we've done it before and we have to make sure that that is the case, that one doesn't interfere with the other.

Okay, great. And, just, on the energy side, any comment at all about terms of the upcoming quarter, how the market is looking for your power trading business? I guess this is your big quarter?

It is our big quarter. We're getting into the July and August periods up here where it can get pretty hot for a sustained period of time, 24 hours, in a day, and we're in an excellent position to accommodate that. We should know, though, that we do have Taconite harbor contracted right now, not 100% of it, but a good share of it, so if people are expecting that if prices were to double or quadruple that we'd make a small fortune on Taconite harbor, that won't be the case. At the same time, if the market goes into the tank, we're not going to loss anything either. The opportunity, obviously, is our ability to get exclusive sales which is released energy and capacity off of our native facilities but dispatched off of coal into those markets, and when that occurs, we do quite well. That's what we've been doing for the last ten years. So we're always in a good position, with respect to those assets, to arbitrage coal against gases as Jim was alluding to.

And as prices go up we'll also make additional profits in our Split Rock partnership and Great Rivers Energy.

Jim, where there any unusual items in last year's third quarter that you recall? Did about $17 1/2 million of income.

There was a one time earnings for the fuel cost in last year's third quarter that won't be duplicated this year.

It's a true up adjustment.

Okay, you don't remember offhand what it was.

It was, I believe, $4 million after tax. It was essentially, our fuel costs have a lag and we, in that quarter, made them essentially the same time period. And that caused a one-time adjustment to earnings.

We carried that lag for many years, the accountants insisted that we recognize that difference.

Okay.

That was either in the third quarter or fourth quarter last year.

Okay. Thank you.

Our next question will come from Barry Lafer of Larer Management.

Congratulations on a solid quarter. Dave, could you describe what you're seeing in terms of potential acquisition of auction sites and have any auctions actually traded in the last 12 months.

For acquisition of potential auctions, we have no need to acquire whole car auctions currently, thinking that we have the majority of the major markets covered. There are several major markets that we're interested in but, we have -- don't have a deal pending in those markets. If an independent in those markets were to offer it up for sale, we'd take it, as long as we were able to maintain the certain -- or the -- the multiples that we attempt to stick to when we make those acquisitions. So, I guess that's the long way of saying we don't have anything on the table, but we're certainly interested if several markets open up we could buy into on the whole car side.

I don't think we know of any transactions.

No, we don't. But we do have interest in several but we don't know of any. On the salvage side we do have interest in some markets, as I said earlier, we're focussed on California, but there are other reasonable markets that we'd like to enter and we do have some sites in mind at the time but we can't disclose at this time.

And as a follow up, on the Florida transaction, could you describe what regulatory bodies have to opine on the state or municipality level to close the transaction?

I believe it's the Public Service Commission, isn't it Jim?

No, some of the systems that we're selling do need approvals from their county regulator boards and some need approvals from the Florida Public Service Commission.

Thank you.

Our next question comes from Teddy Cain at SM Investors.

Hi, there. I was wondering if you could give us an update on any changes in the financial situation of your industrial customers in the energy business?

I think that the one Taconite customer I think that we have discussed in prior calls, Evelet, they did have a shut down and it was something that we were expecting this year. They're still continuing as a customer of ours. But they have ceased operations temporarily.

And you guys have a forward contract with them for how long?

I don't know when the contract -- a chunk of that contract will be taken if the requirements contracts so if they were to permanently shut down, part of that contract would essentially go away.

And I think it's important to know, and I think the health of the remaining part of the industry seems to be very good. Hypothetically if we were to lose another Taconite customer, given the current environment unlike last year with respect to the opportunity to resale that capacity and energy, the current market is such that we could earn the same rate of return, if you will and get the same prices for energy and capacity in the wholesale market under a long term contract as we would have currently under the tarriffs that we have in our retail customers.

Great. Thank you.

We now go to Jim Mcfadden, he's at Emerits

Hi, Dave and Jim.

Hello.

A couple of questions. With respect to a couple of questions ago. Will energy services be flat this year? What are you assuming for wholesale prices, especially in the real important third quarter here, versus last year?

I think the prices in the wholesale markets for the third quarter and fourth quarter are expected to be higher than last year. But we're being conservative with respect to our guidance as it relates to that. The first quarter was an excellent quarter, with respect to the power prices and it has declined since then. So, we are very conservative right now with respect to our outlook for the remainder of the year, but as it relates to the projection of prices, so we're holding our outlook to the current level of power prices. If things heat up in July and Aug, it could be very good. Last year, that didn't happen.

So you're assuming last year's wholesale prices for this year's forecast, kind of?

No. I think as David said earlier, when he started, I think in his first remarks to your question, we do have slightly higher prices than last year in the remainder of the year but they're not certainly at the same increases that is we saw in the first quarter. At all, so we have higher prices in for the second half of the year. Some of -- I think it was mentioned earlier, as well, some of Taconite harbor a bigger piece we sold off versus last year so we locked in some of those profits, and in comparison to last year, I think, part of that, what we had last year, was, again, that adjustment for the fuel clause that we will not have this year, the second half.

Okay. And separately, just, what -- the after tax gain will be what on the Florida water sale?

the Florida water piece for the piece that -- for the seven municipalities is$55 million dollars.

After tax?

After tax.

Okay. And when you pro forma the balance sheet for the gain and debt retirement, how does the equity ratio change?

can I get back to you Jim? That's the calculation we don't have in front of us and I don't want to waste the time of doing it now, but if yu could call Tim or Jim we'd get that to you.

Okay, thank for your help.

Mr Gartzke, we have no other questions at this time, so I'll turn it back to you for any closing comments.

Well, thanks again for tuning in on our conference call. I many very, very pleased about how this year is shaping up. The power prices have begun to recover, which certainly pleases us. Last year, was a year with respect to prices where I think everything could go wrong did go wrong, weather was an event that we always have to deal with. It was unusually cool the whole year and gas prices were very low. Not to say that everything is screaming this year, but certainly things have improved and I don't -- not to use the word normal, but certainly much improved from last year, which I think, on a going forward basis is something that, hopefully, we can realize and as the market tightens with respect to weather, it will only serve to help us more. So, on the energy side of our business, I'm feeling much better this year than last year. Automotive services, as we said earlier, is up. And hitting our expectations in spite of an off year from the franchise dealers, as I mentioned before, due to the continuing effect of the new car incentives that sooner or later have to come to an end. So we're feeling the benefit of the entrance into these major markets and I think that the successful execution of our service strategy in our wholesale and our salvage auctions. We're very pleased about, as you might guess, and I'm sure you are, as well, of our agreement, purchase and sale agreement and our monitorisation of our water assets. This is a very important part of our strategy, as some of you may know when we entered into this business in 1985, we expected to put additional dollars into these facilities over time, which we did. We built good, strong systems and we met all of the environmental requirements and brought them up to code and managed them efficiently and if you look at the rates in the State of Florida for the customers they've been well-served. It required a lot of capital over those years and consistent with the strategy to not only earn a return on our income statement but to get a cash return as well, it reached a point in time where it was time for us to exit and realize the cash return on our investment that we had put in on the 15 years. So at the end of the day, once this strategy has concluded, it will have served the customers in the State of Florida extremely well and by us realizing the values that you're hearing today will have served our investors from a cash standpoint very well as well and it comes at a good time for our organization for obviously reasons. Thanks again for tuning in. We look forward to talking to you, again, at the end of next quarter.

Thank you, that does conclude our conference call, we do appreciate your participation, at this time you may disconnect. Thank you.