ALLETE Inc (ALE) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the ALLETE third quarter 2003 earnings results conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS).

This conference call may contain forward-looking statements within the meaning of federal securities 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 earnings release distributed this morning reflect management's best judgment at this time, but all statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements 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 with the Company's filings with the SEC.

At this time, I would like to introduce the Chairman, President and Chief Executive Officer of ALLETE, Mr. David G. 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 third-quarter earnings of 57 cents, which compares to 55 cents for last year. Our earnings from continuing operations were 48 cents compared to 47 cents last year. We're very pleased that our year-to-date net income is 14 percent over the same period last year, and we are confident that our total earnings expectations that we gave you at the beginning of the year will be met.

Jim give you the details for the quarter, and then I will make the additional comments related to the press release that we issued this morning regarding the board's decision to refinance our debt and separate our businesses before we take your questions. Jim.

For the quarter, energy services' net income was down about $2 million from last year. Higher employee benefit costs and a onetime positive adjustment in 2002 related to an accounting change for the fuel adjustment clause were the major contributing factors to the quarterly comparison. Automotive Services revenue increased 8 percent while net income increased by 20 percent, primarily due to earnings performance at ADESA auctions. Vehicle sales were up 6 percent at ADESA auctions, as we saw an increase in the amount of dealer consignment vehicles. The conversion rate increased 6.1 percent to 61.1 percent compared to the same period last year, which helped improve the net profit per vehicle. If you recall, difficult market conditions prevailed in the auction business during the second half of 2002. So we've expected strong year-over-year comparisons for the third and fourth quarters this year.

Net income from investments and corporate charges declined by $1.5 million from last year. This quarter reflects higher corporate charges and less real estate sales than 2002, which is primarily offset by the absence of a loss incurred by our securities portfolio last year.

Income from discontinued operations was up $2.5 million over last year. Above normal precipitation in Florida resulted in 10 percent lower water consumption at Florida Water Services during the quarter. This was more than offset by the net gains associated with the sale of three water systems. To date, we have announced that 90 percent of Florida Water Services' assets are sold or are contracted to be sold. These sales result in total proceeds of $442 million, net cash of $260 million, and a net gain of $85 million. Some transactions have already closed. And we expect the remaining transactions to close during the fourth quarter. Dave.

Thanks Jim. Comments related to the second press release -- obviously, this is a very bid day for our company, and I'm sure you all appreciate that. We outlined, I think, quite well many details in our press release. So rather than spending time -- a lot of time -- discussing some of those details, knowing that it's in the release, I'll just briefly touch on some of the highlights, and then turn it to you for questions.

The Board of Directors did conduct an in-depth review, and did decide to spin off the automotive services business from ALLETE. This new company will be named ADESA Corporation. And that does include ADESA Wholesale Auctions, Automotive Finance Corp., and ADESA Impact. ALLETE will consist of Minnesota Power and all energy-related businesses and also ALLETE Properties. We expect this to be a tax-free redistribution and to occur in mid-2004. Both companies will have separate boards and separate managements, as we currently have today. We obviously believe investors will benefit from the long-term value creation, and more importantly or as important, from the clarity resulting from this separation. We believe ALLETE, Minnesota Power, will benefit from a simpler regulatory and risk profile and certainly more stable credit ratings, which will enhance its ability to pursue regional utility-related opportunities. We also believe that ADESA will be in a much better position to pursue growth opportunities, and it will appeal to a broader base of institutional investors -- back to the clarity comment I mentioned earlier.

We will continue to work on the details of this transaction, and as the details come forward, we'll continue to update you at the appropriate time. Now I'd like to turn it back to you and answer your questions.

(OPERATOR INSTRUCTIONS). David Schanzer with Janney Montgomery Scott.

Yes. Good morning. I wish it were only one question. But let me kind of limit so other people have a chance. I wanted to find out basically who is going where? Who's going to be in charge of ADESA and who's going to be running ALLETE? And then where is the current management team of ALLETE going to be working in the future?

At the present time, there's a number of details that have to be sorted out, and certainly some related to management will be as well. I think it's safe to say that I will be the CEO of Automotive Services or now we can say ADESA. The other person from ALLETE that is also going to Indianapolis that I can announce is Brenda Flatten, who is the Vice President of H.R. Today, that is it. The remaining ALLETE officers will remain at ALLETE. We will have to look at the management and the executives of Minnesota Power and ALLETE to blend the two together into a stronger publicly traded company at the top. But that is work in process. (multiple speakers) is currently the President of Minnesota Power.

Okay. What about Heater Utilities? That hasn't been sold yet. And I take it at least for the time being, it is going to be part of ALLETE. Is there any intention of maybe reverse course and maintain a water utility as part of ALLETE?

No. Heater is certainly for sale. We are in negotiations to sell that business.

David Schanzer As for ADESA, where will ADESA stock be -- (indiscernible) at New York or NASDAQ?

It has yet to be determined, David.

Can you give us a rough idea whether or not -- there's some thought, given the current, shall we say, propensity on the part of investors to want dividends, whether ADESA will have a dividend. I'm not asking how much -- but whether there is some thought as to whether there will be actually be an associated dividend with ADESA's stock?

I think I can say, and certainly that has to be determined by the respective boards of the two companies. I think it's safe to say we're currently going to pay the same dividend that we're paying today to the point of separation. After separation, both boards will look at the investment opportunities that they each have. And with respect to ADESA in particular, specifically, David, I think it is safe to say that they will pay out a modest dividend. But I think at the same time, it's safe to say that it probably won't be at the same payout level that we have today for the whole company as that company pursues growth initiatives. But I think that they will pay a modest dividend.

Okay. And then when will we have an idea of what the various balance sheets will look like? Or is that not going to be disclosed until the mid-2004 split out date?

Well, we obviously give a limited balance sheet split off in our SEC disclosures. I think more will be known on what that looks like when we finalize our refinancing of ADESA debt. That will start to shape up how they look separately.

And one last question before I let others get in and ask theirs. You kind of alluded to regional related opportunities for ALLETE. I would also think probably another name change might be in order. What generally, without getting specific, what kind of opportunities does ALLETE see itself wanting to take advantage of? I mean, is it just utilities? Or is it energy companies? Or is it noncore businesses as in the past?

Well, let me state the obvious, that maybe is not obvious to the market. To me this. We are extremely well positioned to leverage our low-cost power generation assets that we currently own, and also access to the power grid that we have in North Dakota with Square Butte. We have a potential to upgrade our assets in the locations where we currently have power plants, upgrading the transmission lines, to be the partial solution to the growth for power and energy to the south of us, at cost that probably should be their lowest cost, least-cost alternative. So we think we're well positioned, from a geography standpoint and from an asset standpoint, to be (indiscernible) solution. And that will be a part of their strategy.

Okay. Great. Thanks, guys.

Gary Prestopino with Barrington Research.

Good morning. I just want to talk a little bit about the auto side. Can we kind of drill down as to what you were seeing this quarter, both wholesale and salvage in terms of the fundamentals, and what your outlook is for say, the next six to 12 months. And then I have a follow-up.

I can give you a broad overview with respect to what we are seeing generally in the wholesale and the (indiscernible) side. We're seeing some recovery of the dealer business coming back, which I think is an indication of the retail buying, either of short-term cycles that we go through from time to time, but that certainly helps us; and bringing more dealers into the lanes to sell cars and also buy cars helps both sides of the equation. We are also seeing some reduction in the cars coming off lease, which was expected, knowing what their cycles are, which is kind of a trend. And that should come back perhaps mid to next year. With respect to -- and our conversions, I should add, because of stronger buying is higher as well.

On the salvage side, the claims have been down, perhaps it's a function of weather and other items. The normal growth in that business, as you know, Gary, is probably 2 to 3 percent and we're not experiencing that type of growth today. But hopefully -- again, we do have short-term cycles that are affected by weather and other factors. And we still believe that the trend will continue to be the 2 to 3 percent if not higher because of the economics of the situation on the salvage side -- at least that is going to be our bet.

Okay. Well just in looking at the oil operations itself, I kind of saw that your overall -- if I take all your revenues and divide it by your cars you processed, revenues were up about 1 percent. The operating income per vehicle was up pretty dramatically -- almost 20 percent. So, you know, could you address what is going on there? I guess the question would be that some of these, you know, car retailers have said that they are seeing -- it's a tougher used car market right now because of incentives to buy the end '03 models that are still on the lot. How is that impacting you?

As far as what we're bringing to the bottom line, a lot of what got brought to the bottom line this quarter, relative to sales, was driven a lot by the conversion rate. The conversion rate was much higher than it was third quarter last year. So we end up touching cars less; I'm (ph) not doing less -- less expenses per car than we would with a lower conversion rate. And at least what we've seen in the quarter with dealers -- dealers, again, relative to last year are up significantly from what they were. So we see those dealers coming back into the market. I think some of the low-cost financing has been around a long time. It's really had an impact on the market. It's not necessarily a shock value as much any more. It's almost baked into the market in a lot of ways.

Okay. Then one more last question then I'll let somebody else go. What are your cash assets on the books? And your receivables?

The cash assets at the end of September were around $70 million. Most of the current assets that are on our books and current liabilities, for that matter, are associated with the auction business. There are some associated with the electric, but most of those are receivables/payables from --

So your cash assets are 70?

The cash -- we have $70 million of cash that could be utilized to purchase things or pay dividends or whatever. At the end of December, we're essentially in the commercial -- over last year in the commercial paper market, where now, we moved to a no commercial paper and a positive cash position.

Thanks.

Does that directly answer your question?

Yes.

Part of the confusion -- (indiscernible) too much detail with it is the cash that's on ADESA's books. The cash that is on ADESA books -- a lot of that cash is working capital cash. The $70 million that I'm talking about is cash that we could utilize.

It's a permanent improvement of our cash position, which is different.

I know. But I was asking what the actual cash and equivalent balances were -- not the improvement. I just want to see from quarter-to-quarter, where we've gone here.

Shall we go to our next question? We'll go to Dave Parker, Robert W. Baird.

Good morning and congratulations. Several questions. First off, on the auto before I close out on that. AFC has not -- the growth rates declined pretty significantly, and I see we are up a little bit from cars finance. Could you give us some color there, Dave?

I'm sorry. Could you state the question again, David?

Yes. I said AFC's cars financed -- you know, the percentage of cars increased, which is running at a pretty nice clip of double digits has slowed. Could you give us a little feedback or color on what is happening there.

On why the cars finance has slowed down?

Yes.

I think it's driven a lot by the economy as it has affected the product for the independence, obviously. As zero percent financing and others have provided trade-ins earlier than normal, it has given the franchise dealers, if you will, a product that they otherwise might go to the market for and rotate their inventory; and it kind of effects, also, the independent buying because of lack of product that they would buy. And also, the retail buying as well that affects the turnover rates for the independent dealer. So I think it's mostly driven by the economy and somewhat by the zero percent financing, that has affected the franchise dealer, as it affects their mix. That's, I think, it, in a nutshell. So as the economy improves, which it has lately, we've not seen an immediate pick-up in the cars financed; but I've been told there is typically a delay of two to three months in a recovery or a downturn mode when we should expect to see the car finance activity, that is directly related to the economy, improves. So we are expecting, because of the improvement now in the dealer business, that the car financing should begin to pick up in the fourth quarter.

Okay. Thank you. Any change in charge-offs or bad debt expense or something in that business, that's gone along with the economy?

No, we've not seen any change.

The credit quality has been outstanding for the last year or so. It has been better than it has ever been.

Yes. It's done; it's a good job there. As far as -- you give us updates occasionally on expansion opportunities not only for with ADESA and the wholesale business but also for salvage and salvage opportunities -- have been tough because of drive up of price. What is your outlook, do you think, Dave, especially now with this company being a stand-alone here in a while. Maybe you'll use your own currency for acquisitions or growth or growth? What do you look for the opportunities, whether it is acquisitions or new greenfield operations, or opportunities in the next two years or so?

That will certainly be the focus of the board of ADESA when it begins to look at strategic opportunities going forward. Because we do have a different cost of capital, if you will, to leverage to grow the business. And certainly, acquisitions in strategic locations combined with greenfield that would make economic sense, on the salvage side, will certainly be at the top of our discussion plate. But I'm not in a position today, Dave, to announce any kind of specific strategy as it relates to it.

But still opportunities still look good.

Yes, it does.

As you looked at the new greenfield operations, this year looks as if they've been off to a very good start. That has still been the case through this year?

The greenfield this year, and the whole car, is a Long Island site. And that got off to a very good start. In the salvage business, most of our additions this year have been combo sites. And combo sites usually start off very good (indiscernible).

Okay. Could you give us some color on the debt restructuring, just with the size it needs to get done there, Jimmy, and how long it may take to accomplish?

Well, how much needs to be done -- the pieces of this is ADESA has debt on their books that you can see within our consolidated statements that they have -- $90 million piece, a $35 million piece; they also have an intercompany piece. And all of those pieces need to be refinanced. How much time? We believe now that the markets -- the debt markets -- are in very good shape, especially for this credit. So, (indiscernible). I mean I think we've said we are starting the process immediately. I think we believe it won't take a significant period of time. We will certainly be done within that mid-2004 period. It's one of our first steps as well in this process. It puts ADESA, certainly, more towards us being a stand-alone company with their own debt.

Any kind of a capital structure you've targeted for ADESA that would make sense? Or is that still to be determined?

Well, it is really a process of a lot of different variables. One is, refinancing the debt that they have. The other piece is, a cap structure that works for them. Another piece is the debt that comes back to ALLETE -- which allows to -- or the money that comes back to ALLETE -- to allow ALLETE to refinance and have a different amount of debt on their balance sheet. So, it is a lot of different pieces, well (ph) it's the cash that we have on hand. So it's a lot of pieces. But in the end, at the end of the day, ADESA will be capitalized to the point where there certainly can be a very viable -- have certainly more debt capacity business as well as ALLETE having -- not putting ALLETE in the spot where their rating will change either.

Okay. Obviously, to be determined, to work out with the rating agencies, etc., right?

And all of that is certainly doable. We've had conversations, certainly, with bankers and rating agencies. All of that is doable? I mentioned a lot of constraints. But it is not like, you know, this is any impossible equation to solve either. It is very solvable.

Maybe the last but not least question is, what kind of approvals do you need to get regulatory-wise to get this accomplished and done?

The SEC.

Anything with the Minnesota Commission need to be done?

No. The Board of Directors and the final approval and the SEC.

Grade. Well congratulations, again.

Back to Minnesota. Minnesota, with have to live within a capital structure. But again, that capital structure is really based upon what our debt rating is today. We are trying to maintain that in the same general cap structure. So that constraint won't really enter in at all.

All right. Great. Thank you.

I want to come back to the cash for one minute just because there may have been some confusion. What I mentioned was cash did go up about $70 million form the end of the year to this year. The actual number is about 260 out of that 884 that we show as current assets. And most of the rest is receivables.

Our next question will come from Barry Lafer (ph) at Lafer Management.

Barry Lafer. Good morning, gentlemen. Dave, congratulations to you and your senior management team and your board over this laborious process. I know it wasn't a straight line but we appreciate all the thoroughness along the way. I have a couple of random questions. The first relates to -- as you develop the capital structure for the respective public entities, what can we expect in terms of rating changes on the debt? And then secondarily, was there any indication you can give us of what the free cash flow generating range might be for ADESA? And is it fair to assume that one of the reasons the real estate is placed within ADESA is to shore up that balance sheet for greater growth opportunities? And finally, along the way of this mid-2004 timeframe, do you anticipate going for an IRS tax ruling? And what benchmarks can we look for as shareholders, to see whether this is April, May, June or August? And what would the next benchmark be?

I think one thing to clarify -- the real estate is staying with ALLETE, and is not going with the automobile business. The ratings that we expect -- we expect, and I think as part of this process, we're looking to have the same rating at ALLETE as it has now. The rating of ADESA, because of the newness of the company, because of the size of the company, will probably be high yield bond offering. What else? As far as an IRS ruling, I think that's to be determined. Did I miss anything, Dave?

The cash positions, we can give a general response to that, simply by citing what information you'd see off an income statement and a balance sheet. The depreciation for automotive, all in, is probably around $40 million. The income, as you know, is over $100 million. To the extent that we can manage the capitalization -- or the capital needs of the Company -- to be relatively close to the depreciation expense, would be the outflow, out-cash against that inflow of cash.

Thank you. And during this process, this roughly six-month process, to what extent will you be under any restraints? Or will you be doing road shows throughout the country to your existing or future shareholders telling the story?

We certainly will have to and will, do road shows with management of the two respective companies prior to the distribution. We will do everything we can possibly do to make sure the market understands the opportunities that exist for both of these companies.

Okay. And one last one. I thank you for your time on this. From the press release, it appears that 100 percent of the shares will be spun off in a tax-free fashion. Does that mean that the possibility of an IPO for a portion of one of the entities is not to be considered? Or is that one of those things that is potentially still on the table?

No. The spinoff is our strategy at the present time. I can't rule it out completely. But it's not our plan today to use an IPO.

Thank you, very much, gentlemen.

Next question comes from Alan Mitrani. He's with Copper Beech Capital.

Hi, thank you. Can you tell us exactly -- you've referenced the water sales so far in terms of what the gross proceeds you expect. Can you just tell us exactly, from looking from here going forward, how much cash do you expect to get. What have you not received? Of that 260 million of net proceeds, what is not yet received on your balance sheet?

Well, most of it is not yet received. To date, we received approximately $60 million. We expect 260 in total. So there's another 200 million that we expect to receive.

Okay. So I'm looking at -- so if I look at your debt off the (indiscernible) this quarter's balance sheet, 753 million of long-term debt, 75 million of mandatory redeemable preferred. So roughly debt of 828; is that correct?

Yes.

So the 200 million that you are going to be getting -- is that going straight to debt paydown?

Yes.

Okay. So you expect to have call it 628 right after the proceeds. Any expectations -- you mentioned Heater -- any idea of the timing of when that could be sold. Or when you can have a deal on the table?

We're in negotiations right now. We expect to announce a deal certainly by the end of the year. Commission approval, we believe, will take us into next year for a final closing.

Can you give us a broad sense of what kind of revenue -- what kind of proceeds you can get from that?

No, not now. Not at this time, no.

What is the revenues and EBITDA of that business?

It's certainly much smaller than Florida. It's probably kind of off the cuff, probably about a tenth of the size of Florida, water operations, Heater.

Alan Mitrani; Why not an IPO? If I can understand, why did you decide to the spinoff instead of IPO-ing (ph) some, being able to get the company on its feet, use some of the company to pay (indiscernible) proceeds and then spin it off once it had some acceptance in the market?

We can appreciate what you are saying. I think we looked at all the alternatives, an IPO, including others. I think the only thing we can say at this point in time is that we just concluded that this was economically the best transaction, or the best approach from a structure standpoint for our investors. I don't really care to get into a discussion of the analysis of how we came to that conclusion.

Okay. Have you spoken to the rating agencies already about this deal?

Yes.

And you don't expect any specific near-term impact to your ratings?

No, we don't.

Okay. And do you have any idea of when we can see an S-4 potentially filed?

No, I don't believe so. It's our plan to work out the final details to make this initial filing with the SEC; and I think it is Form 10. And we certainly will advise the market when we do that. But those are the steps in the early stages of our planning that we will have to address. And we'll announce these steps as we go through them.

Okay. Lastly, if I can. Just so I'm clear, is that an '03 or an '04 event for an S-4 or a Form 10?

It's an '04.

An '04. Thank you.

Our next question will come from Terran Miller at UBS.

Yes. Good morning. I was wondering if you could just give us some indication of what happens to the ALLETE Corp. debt, specifically the 780s (ph)? What's the initial thoughts there?

Well, we are currently reviewing with the repayment of some intercompany debt from ADESA to ALLETE what bonds we would look to pay off from a variety means. We have not finalized which bonds we will be dealing with and what our plans are there. But certainly some of the ALLETE corporate debt will be refunded.

Okay. But there is no chance as currently figured that that bond would go with ADESA?

No. ADESA is going to sell their own debt and basically start clean form a debt perspective.

Our next question comes from Richard Larkin (ph) at J.P. Anhauer (ph).

Richard Larkin Good morning, gentlemen. I have a related question on debt. And this has to do with the sale of Florida Water Services. I know from various (indiscernible) the plans are to pay down some ALLETE debt for those facilities that have been sold off. But there are also some Collier (ph) County industrial development bonds for pollution control that are tax-exempt. At this point, have you made a decision as to whether or not those bonds are going to be called, or if they're going to be held to maturity through 2025?

We plan on -- ALLETE plans on assuming that debt.

Assuming that debt. Would there be -- or has anybody looked into whether or not there might be a problem, given the tax-exempt nature of these bonds? Would they still be considered tax-exempt by the IRS if you don't (indiscernible) the facilities?

Yes. We have looked at that; we have had tax lawyers look at that. We certainly would not do that if they were not continuing to remain exempt from taxes.

Very good. Thank you. That's it.

Our next question will come from Jacob Mercer at Piper Jaffray.

Congratulations on the announcement. Just another debt question. I was wondering -- as far as the vast majority of the refinancing in ADESA, is that going to be in the public bond market, then? Or do you have a target as far as how much you are going to do as far as bank and bonds?

I think it will end up being a combination of the two. And right now, we haven't finalized on what percent of each. But I think it will be a combination of both.

We will now go to Jay Hatfield at Zimmer Lucas.

I'm just trying to get some of the basic data. Do you know roughly what the rate base is of Minnesota Power?

550 to 600 million.

Okay. And what about the water business that is for sale?

The rate base is probably in the neighborhood of 300 million.

300 million. And what is the size of the intercompany note between the -- with ADESA?

That debt obviously varies from time to time because ADESA -- we issue commercial paper, essentially, and fund a lot of ADESA's needs; and it changes day-to-day because of their working capital needs.

So what does it cycle from, to, usually?

Ballpark is maybe 100 to 200 million.

Anything else, Mr. Hatfield?

So you would then pay that off and then need to get working capital lines then that would be stand-alone for ADESA? Is that the idea?

Yes.

Our next question will come from Brad Keyon (ph) at Bloomberg.

Good morning. You mentioned a couple of times that you're seeing signs of improvement in the economy. I was just wondering what signs you would point to in the macroeconomy. And what signs you are seeing in your business?

Used car sales and just car sales in general. We are seeing an improvement as it affects our business. And I think that we're seeing -- and I think we all read the same newspapers -- that there is a belief that the economy is recovering. And I think that that speculation of recovery is going to hopefully improve the economy for all of us.

One other quick question. You said that the transaction requires FTC approval or SEC approval?

SEC.

Securities and Commission?

Yes.

Ted Craig at The Used Car News.

Hi guys. A little point of clarification. Dave, are you going to continue to be CEO of ALLETE and ADESA at the same time, then?

I will be until the separation is finalized. At that time, (indiscernible) happen. At that time, I will step down as the CEO of ALLETE and become the CEO of ADESA.

So ALLETE will replace you with a new CEO, then?

Yes.

And as far as we're talking about clarity for investors, how are you hoping to present ADESA as an independent company? Would you consider it to be the same category as automotive retailers like AutoNation and Car Max? Or are you hoping people view it in the same category as insurance auto auctions and (indiscernible)?

I think the latter is probably, in our opinion, more comparable. Maybe Richey Brothers as well.

This is the second go around for ADESA as a stand-alone publicly traded company. What have been the big changes since the last time to make it viable in that way?

Significant size difference, Ted. At the time, I don't know exactly what it was trading at in terms of its market values. But we paid 167 million; it's 1.5 billion today, excluding the off balance sheet receivables. So size is a huge factor. And also, the positive cash flow that it (ph) generates (ph).

And become much more of a national player.

Certainly.

AS we've owned them and grown the business.

So it's become a true chain, which is what the original intention was when the acquisition of the 16 were acquired; but certainly the 16, in the locations they were at, I don't think had the coverage Jim was talking about.

And AFC has grown in multiples. We've added salvage auctions to the picture.

But the significant change is size. It is 10 times what it was before in addition to the geographic coverage. And also, the strength of the cash flows is significantly different.

Do you plan to maintain all the assets currently in automotive services?

Certainly.

We will now go to Chris O'Malley with the Indianapolis Star.

Good morning. Just wondering if -- might the Indianapolis headquarters have to grow initially -- if only because this will be a stand-alone company without certain support functions from ALLETE -- for example, might you need more bodies down here to support?

We will need to -- between now and the time that this separation occurs -- add the staff that we have in Duluth. And Duluth will continue to have to have the staff that it needs to have to be a publicly traded company. We'll have to add that type of structure support in Indianapolis that will include things like shareholder service; the income tax department, which is currently down here; corporate reporting; legal, etc. So all of the functions that are necessary to support a publicly traded company will have to be added to the staff of Indianapolis.

Is there a rough idea on the number of (indiscernible) of folks you will need down here to support that new role?

I don't think we've really put a number to it. It's not going to be 100. And it's not going to be 10. If I had to pick a number, maybe it would be 25, 30.

Arlena Sawyer with Automotive News.

Good morning. Dave, I understand that you will remain the CEO of Automotive Services. I'm wondering about Jim Hallet. Will he remain with ADESA? And what will be his title and duties?

Certainly, as we said before, Jim is the President of the ADESA whole car side of the Corporation. And that won't change. Brad Todd will continue as the President of AFC. And Cheryl Munce will continue as the President of Impact, the salvage side of business. And I will be the CEO of the total organization.

Okay. Thank you, very much.

We will go back to Alan Mitrani at Copper Beech Capital.

Thank you. Can I understand what your guidance was this quarter? It seemed like from continuing operations, your numbers missed estimates. Can you just walk me through exactly what your guidance was for this quarter?

We don't give quarterly guidance. But for the year, we give guidance that electric will be basically flat from last year.

Is this revenues? Is this EBITDA? Is this earnings?

Net income.

What about your revenue? Can you walk me through what your revenue and net income guidance is for all the groups for the year?

We don't give revenue guidance. We give just net income guidance for the two pieces. And we gave net income guidance of electric being basically flat, and auto being up 15 percent. We believe that we are basically on target to achieve both of those by the end of the year.

You know, we knew that on the previous years, we've always attempted to give guidance on a forward-looking basis for one year and one year only on an EPS basis. This year being a transition year -- significant transition year -- as maybe was begun last year when we announced that we were going to unlock value and we had a lot of asset sales that were small, some are large, that had write-offs had in-gains (ph), etc. -- that certainly was compounded into this year with the water transaction specifically. So rather than attempting to give guidance on an EPS basis, which could be very difficult to assess, in terms of valuation for you folks, we thought it made more sense for us internally as well as the market, to focus on the two businesses that we were intending to be stand-alone businesses, and focusing on their level of profitability improvement. So therefore, we did something different this year by just focusing on automotive and their income relative to last year; and the same thing with automotive, indicating that we expect the bottom line performance to be at least 15 percent, which is what we are currently expecting it to be at the end of year. So that is why we departed, perhaps, from the approach that we've taken in the past. Going forward, we would expect to come back to the guidance, as we normally would and other companies do as well, but only on a forward-annual basis.

Okay. So when can we expect to hear 2004's guidance?

We would hope that as we are approaching the next board meeting, which is a strategic meeting every time we have one in January, at that point in time, we should have a pretty good handle on what these two businesses will be looking like for the year on a going-forward basis, which is our normal schedule; it coincidentally falls into the plan that we had -- not by coincidence, I guess -- by plan, for our plan for separation. So we would expect that by January that have a pretty good handle on the guidance for both of these businesses.

Okay. Also just some housekeeping. How many shares do you have outstanding, including options with you that are vested today? I just want to know what the new share base is of the company.

About 85 million shares.

85 million total? Okay. Also, I'm a little confused as to what it means, "recapping the debt." I understand if you have $828 million of debt now, and you get the net proceeds from the water business paid down a couple of 100 million. Maybe if Heater comes in at the end of next year, you pay that down to get below 600. But what exactly -- was I clear -- did I hear you right that you said the new company, ADESA, may start with no debt?

No, ADESA will start with new debt. The debt that ADESA has right now -- they have intercompany debt. And they have debt that is guaranteed by ALLETE. So we need to make them more stand-alone, so we are essentially giving them debt based on their own credit -- selling debt based on their own credit alone, paying off the intercompany and paying off the debt that is guaranteed by ALLETE, so they become much more of a stand-alone company. So that's what we mean by refinance. If they had debt on their own, with their own credit, I think maybe we could leave what we had in place. But because of that, we need to do something.

Do you have any sense as to how many times leverage, as a multiple of EBITDA, you expect the stand-alone business to be from ADESA? What are you comfortable with? I mean, you have 200 plus million of EBITDA from that business; correct?

Yes. Maybe two times -- sometime in that. And I'd say that's what we're comfortable with; I think we believe that ADESA could take on more debt. But I think kind of the general range we've thrown around -- they have what, 130 million of debt, 140 on their own; intercompany let's say in 100 to 200 million, kind of gets you in kind of two times (multiple speakers) that you are looking for. The way all this comes together, ADESA, we certainly don't believe will be, by any stretch, overleveraged. And this will allow, with the intercompany, to have ALLETE maintain its current rating, which we believe is very important for ALLETE.

These are a lot of details, and we would love to answer all of these specifically. It's rather difficult at the present time. But certainly in January, we will be in a great position to be able to give you all of the details that all of us would like to have down to the level that you are interested in.

Thank you. Also lastly, who advised you on this deal and who will be the bankers for the spinoff?

The advisers and the bankers have been UBS Warburg and Merrill Lynch.

We will now go to Mark Linenberg (ph) with Cowen Capital.

I might have missed it. But could you tell me what the equity is on the balance sheet of all the operations of the automotive businesses that are to be spun off?

I don't believe that we've disclosed that, Mark. And I guess we're not in a position to disclose it today if we haven't before.

How about how much debt is associated with just the electric utility piece?

Well, which I think we've discussed, taking a look from the other side, the amount of debt that ADESA has that is not intercompany debt, is approximately $130 million. And there's a piece of water debt all in, a little over $100 million.

Okay. So if I back those out, I'll get roughly what the utilities got left in debt?

Yes. And if you look at the -- our 10-K -- the 10-K details those pieces of debt as well. And most of the debt that is associated with electric business is all first mortgage debt and pollution control debt.

Okay. And now -- do you believe that you will get the debt -- ADESA refinancing done before you'll file the Form 10 or the S-4?

Probably.

Okay. So will there be an 8-K out on that?

Of the refinancing?

Yes.

Yes.

Okay. So when will you start to get some financial information, then?

Yes. I think -- we are looking at that is kind of stage one of this process. And I think when that happens, certainly people will be aware of that process. That makes ADESA a much more stand-alone company; and the next stage is preparing for SEC and getting SEC approval for a final separation.

Dave, are you going to be at EEI (ph)?

Yes, I am.

We will see you there.

We will now go to John Camp with Dow Jones News Wire.

Good morning. You mentioned earlier how the separation would provide more regulatory -- sort of a more stable regulatory profile, I guess. I was hoping you could kind of flush that out a little bit. and explain in what areas, perhaps, you guys are looking for a little bit more sure footing on the regulatory front?

Starting perhaps from a higher level, knowing that the businesses combined has a contribution and an asset base, comparable anyway, of perhaps 60 percent of the total being automotive, and 30 percent being electric, and approximately 10 percent being water as it is currently structured. So we may be stating the obvious by a separation -- the company being ALLETE/Minnesota Power, certainly will have a more focused governance and a more focused strategy toward utility-related initiatives. That is stating perhaps the obvious. And that is a very important point, though. And I don't want people to lose sight of that. Clarity with respect to the market is important. But certainly, the clarity that you have from a governance and a strategic planning standpoint from a pure play is important as well. Specifically, with respect to the utility-related growth initiatives again, is the fact that we do have very low-cost assets. I think we're about the second or third lowest cost electric utility in the United States, with mostly coal, 90 percent coal, and 10 percent hydro facilities. And we do have the ability to upgrade facilities, upgrade transmission, and some of these coal-fired facilities, and then transport that relatively low-cost power into the grid and export it to the regions to the south of us where the demand for power is increasing significantly. And they are in a situation to where they are looking for alternative sources of power that they have to either build or import. And we believe we will offer the least cost alternative for them.

Okay. Thank you.

Gentlemen, we have no further questions at this time. So I will turn it back to you for any closing comments.

Thank you, very much, everyone. This is a very important event, as you all are aware of. You can imagine how much this means to our company, given the significance of this. It culminates, to me, the conclusion of the strategy that we announced two years ago when we said to the market that it is our objective to look to the long-term value of this corporation. And I use the words, phrases, I guess, unlocking shareholder value, which was all about the clarity -- the definition of clarity -- of what we consider to be significant assets, certainly ADESA, Automotive, and Minnesota Power -- to get that value recognition in the marketplace. As you know, the utility business is a good business. It is a good income business with slight growth. It is a very high-valued opportunity for our investors. ADESA has, I think, outperformed even our expectations with respect to its market presence, it's growth. And we're extremely excited about the opportunity to actually execute the separation for the benefit of our investors, as it is a different investment.

So this culminates, again, the conclusion of that strategy. The strategies going forward for both of these businesses, once separated, is obviously very, very important. And now we will be in a much better position to pursue those strategies for the benefit of you folks and ourselves as well.

Again, thank you, very much, for your patience. I know that you are all interested in the details. And as the details become available, we will share them with you. Thank you.

Thank you. That does conclude our call. We do appreciate your participation. At this time, you may to disconnect.