ALLETE Inc (ALE) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to this conference call announcing Allete's third quarter 2004 financial results. Today's call is being recorded. Your line will be muted for the presentation, and then we will conduct a question and answer period. (OPERATOR INSTRUCTIONS) 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. Those forward-looking statements are made pursuant to the Safe Harbor provisions of the private securities litigation reform act of 19995.

The forward-looking statements and the earnings release distributed this morning reflect management's best results 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 or implied by the statement therein. Additional information concerning potential factors 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 President and Chief Executive Officer, Mr. Don Shippar. Please go ahead, sir.

Good morning, and thanks for joining us.

With me today is Allete's Chief Financial Officer, Jim Vizanko.

This morning, we reported our third quarter earnings. There were a lot of moving parts this quarter, some related to the recent spin-off of ADESA, some related to one-time events, and some related to ongoing operations. We are pleased with the results of the quarter, and based on our year-to-date performance and fourth quarter projections, have increased our earnings expectations for the year. Jim will give you the financial details for the quarter, and then I will make some additional comments before we take your questions. Jim?

Thank you, Don. Before we get to the quarterly detail, I want to call your attention to our new segment reporting structure. Beginning this quarter, we will report our results within in four business segments. The regulated utility segment will include results from the regulated operations within Minnesota Power and Superior Water, Light and Power.

Nonregulated energy operations includes results from nonregulated generation such as the Taconite Harbor and Kendall County facilities, and BNI Coal. Real estate and close results from Allete properties and other includes results from Enventis Telecom our emerging technology portfolio, and corporate expenses including unallocated costs and interest charges.

Compared to last quarter's segments, energy's services is broken down between regulated and nonregulated operations, and real estate is now a standalone segment. You should also note that income from discontinued operations now includes results through September 20, from ADESA, as well as Allete's expenses related to the spin-off.

For the quarter, net income at the regulated utilities segment was down $2.6 million from the same period last year. Income from sales to our retail customers was up for the quarter, largely due to a 13 percent increase in kilowatt hour sales to our industrial customers. The increased sales meant there was less generation available to sell to other power suppliers, compared to the third quarter last year.

After tax margins from these types of sales were $2 million less this year than last. Regulated utility O&M expenses were about $2 million net-of-tax higher than last year's third quarter due to increased pension expense and plant maintenance outages. A scheduled outage at the Square Butte plant resulted in about $2 million net-of-tax expense. As we have mentioned before, this project is expected to total $4 million of after-tax expense for the year, with the remainder being charged during the fourth quarter. Net income at nonregulated energy operations was $1.3 million less than the same quarter last year. Net income at the real estate segment was about the same as last year.

Incidentally, we were fortunate not to suffer any significant damage to our Florida properties during the recent hurricanes in the state. Within the other segment, we incurred $7.2 million higher net expense compared to the third quarter of 2003. This year, we incurred $10.9 million net-of-tax of debt prepayment costs associated with the July repayment of $125 million of long-term debt as a part of our financial restructuring in preparation for the spinoff of ADESA.

On a positive side, unallocated interest expense was about $3 million less after tax than the same period last year, due to the debt retired in July and debt that was retired with the proceeds of the water services asset sales over the last 12 months.

Net income from discontinued operations was $23 million lower than the same period last year. $9 million is from the water services business, which generated a small loss this quarter, as it winds down its operations. Last year, water services reported income from operations and gains from sales of assets. Additionally, Allete incurred about $1.5 million more spinoff -related expenses this year than last. The remaining $12.5 million reflects the difference in the income in ADESA over last year. This quarter, in addition to its normal operating earnings, ADESA incurred separation-related expenses.

Also, because of ADESA's IPO in June, Allete only recorded 94 percent of ADESA's earnings until September 20th, at which time it was spun off to Allete shareholders. As we prepared our financial statement for the quarter, we were informed by our independent accountants, that they believe EITF3-16 accounting for investments in a limited liability companies, requires the use of the equity method of accounting for investments in venture capital funds within our emerging technology investment portfolio. EITF3-16 was issued last quarter, and we both concluded then that it allowed us to continue to use the cost method of accounting for these investments.

To conform to the new interpretation of this accounting pronouncement, we have now changed to the equity method. With this change, the carrying value of the venture capital fund investments now matches the value reported by the fund managers. The cumulative effect of this change, an accounting principle, was an after-tax loss of $7.8 million, and is reflected in our year-to-date results.

At the end of the quarter our emerging technology investment portfolio was valued at $15.6 million. 10.2 million of this total was a carrying value of venture capital fund investments within this portfolio. We continue to believe that the future value of these investments will exceed the carrying value, as successful companies emerge.

The impairment charge we recorded last quarter, was partially related -- was primarily related to directly-held investments in the emerging technology portfolio. At the end of this quarter, the carrying value of the directly held investments was $5.4 million.

Our balance sheet at the end of the quarter reflects a spinoff of ADESA and the retirement of debt, with the proceeds from the water services asset sales over the last 12 months, as well as the dividends from ADESA. Allete has a strong balance sheet with $390 million of long term debt and $173 million of cash.

Based on our year-to-date results and fourth quarter projections, we are increasing our 2004 expectations for income from continuing operations, excluding the debt prepayment charge, to $38 million, compared with $29.8 million in 2003, an increase of 28 percent. 2003 income from continuing operations has been increased by $1.5 million, due to the reclassification of 2003 spinoff related expenses, discontinued operations. Don?

Thanks, Jim. I'd like to comment on a couple of significant items before we take your questions.

As I mentioned in my opening comments, we are very satisfied with our financial results for the quarter and year-to-date. We are experiencing strong performance from our core businesses and expect this to continue as we go forward. We also announced today that the board of directors declared a quarterly dividend of 30 cents per share payable December 1 to shareholders of record on November 15th. Given our earnings outlook, we are comfort with this dividend, which is in line with the payout ratio of companies similar to us.

Minnesota Power recently filed a resource plan with the Minnesota public utilities commission that predicts energy demand in our service territory will increase at an average rate of 1.7 percent over the next 10 years. We see sustainable growth from our retail customer base, evidenced by the fact that a number of our industrial customers have announced expansion plans. One of our highest priorities is to address the net loss we continue to incur from the Kendall county purchase power contract, which we expect will be around $8 million after tax this year. We continue to explore alternatives to eliminate this drag on earnings and will report any developments if and when they occur. At this time, Jim and I will be happy to take your questions.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) And our first first question today comes from Jim Bellessa at D.A. Davidson.

This new segment reporting structure, will you be providing the historical numbers by quarters so that we can align our earnings models?

Yes. We plan on filing an 8K next week which will give the new segment reporting -- the new segments with historical information.

This change to an equity method for accounting for the venture capital fund that you're in, you indicated that has amounted to a $7.8 million loss year-to-date. Was that all in the third quarter or is that spread out through the year?

The loss is actually booked as a year-to-date number. We went back to the beginning of the year and compared what the -- the fund managers had on their books as a valuation and we wrote our balance down to that number.

So in a sense, it was, from all of the prior years. Because as that fund balance has changed over the years, we reflected that balance as it was the beginning of the year and compared it to ours. And it wasn't a charge in the quarter. We went back and it was retroactive charge to the beginning of the year.

And so there was no drag from this event, this accounting change, in this quarter that you have just reported?

That's right. The drag was, it's in year-to-date, but there was not an entry made this quarter for that. It did not affect this quarter's earnings.

Would you elaborate on what some of the options might be for the Kendall contract?

Well, some of the options we're pursuing is, of course, looking for opportunities to sell additional capacity from the contract that we have, to other buyers. And we also are pursuing looking at ways that we may extract ourselves from the contract.

And our next question will come from Dave Parker with Robert W. Baird.

Congratulations on another good quarter, guys. Just a question, if you can refresh my memory, what were average debt levels last year, and what are they expected to be after you pay down all the debts with the proceeds from the water sale and also from -- after the ADESA restructuring?

We have basically completed all of our debt restructuring and paydowns. We're at $390 million in long-term debt at the end of the quarter. That's basically where we see ourselves going forward. Where the debt balance was within this -- or the continuing operations, was $100 to $200 million higher. If you go back and compare to what our balance sheet was before, obviously it's mixed in with debt that we had for ADESA. We reduced probably on the continuing operation sense 100 to 200 million.

$100 to $200 million. Any other ideas or thoughts process on the cash you currently have or how that may be used in the near term here?

Well, we, as we talked about on the call, we have growth within our -- certainly within our regulated businesses that we mentioned is 1.7 percent over the next several years. We continue to look for growth opportunities within our -- within in our real estate business. We certainly think there may be some opportunities there, and consistent with what we said in the past on our strategy, we are exploring other growth opportunities also in other businesses. So those are really the 3 pieces that we're laying out for the future. We would be looking for opportunities for growth and for potential use of some of that cash.

Okay. For at least the near term anyway, sort of expect that it will be invested in some kind of marketable securities and make some kind of return there? Is that a good assumption?

That's right. It will be money market-type, very liquid securities.

And your average cost of that, now, Jimmy, is?

About 5 1/2.

About 5 1/2. And one last question on Kendall, maybe a follow-up to Jim's question, I know you're -- at least I thought you were maybe looking at this Don, as far as your options for Kendall for some time. Any kind of expectation as far as timing on when we may know more, year-end earnings, is that too early? Or is this going to be a 12-month kind of investigation?

We're not really able to speculate at this point when that will be concluded. And, as I mentioned earlier, of course, when and if we do get a solution to that, certainly we will let you know, and that will be disclosed. But, we really can't speculate right now, Dave, if it's going to happen this year or next year.

Is it improvements in the Chicago market helped out that -- your investigation there? Can you comment on that?

Well, I mean, obviously, you're aware the gas prices continue to remain quite high. The spark spreads are negative, so from a near point perspective there hasn't been a lot of improvement in the market.

Okay, great. Thanks very much and congratulations again.

We'll go next to Michael Lapides from Hibernia.

Hi, guys, congrats on the quarter. Can you break out in the investments category, you talked about the emerging technology, and I may have missed it. Can you break out what the value of the real estate and the debt and equity securities are?

What we have in investments within the venture capital side, we have about $15 million there. We have about $50 million of land associated with real estate. With that, we have a shopping center and we have some receivables. But the land piece alone is $50 million.

And so, I assume the rest -- I'm trying to get back up to that $190.6 million. So the rest --?

There is one other change to that, that hasn't been in that account in prior quarters. It's because we have -- the ESOP now owns ADESA shares. When the ESOP owned only Allete shares, we did not record any of those shares on the balance sheet.

But, now that we own some ADESA shares, we now have to record the value of the ADESA shares within the ESOP plan on our balance sheet. So out of that $190 million, 50 million of that is the ADESA shares in the ESOP.

Okay. So I get 50 million of real estate, 50 million of the ADESA shares, 15.2 million is the emerging technology. I seem to be missing a piece. What's the fourth piece?

The last 2 pieces are with real estate. There is about 20 million of shopping center, I think it's 15 to 20, and then there's another 15 to 20 of receivables.

Got it. Thank you.

We will go next to Ira Saket (ph) with [INAUDIBLE]

Can you elaborate on -- your press release says today on the guidance for the full year, it says income from continuing operations was 34.1 million for the 9 months, excluding all charges. Then you go on to say you're expecting 38 million from continuing operations from 2004. Does that mean you're only going to make 4 million in the fourth quarter?

Yes. And 4 million is comparable to the fourth quarter of last year. Fourth quarter last year from continuing operations was approximately $4 million as well.

And some of the things that are unique this year fourth quarter versus last year, is we have the continuation of the Square Butte outage, which we expect to be about $2 million, and we also have relative to last year, we have the additional costs of the pension benefits.

Also, we are looking to have an outage in one of our nonregulated generations at Tac Harbor as well. So, yes, in summary it is about $4 million. It's similar to last year, plus we have some unusual events compared to last year that -- we believe it will be a good quarter, relative to last year, given the 4 million.

And can you give what the CapEx was for this quarter and what you project for the fourth quarter.

What it was for the quarter was -- for the continuing operations, it was $14 million. We did have some ADESA as well, as we continue to own them through the 20th, which for the quarter was about 8 million. So in total it was 22. What we expect for the remainder of the year is basically flat. We don't expect very much additional construction for year going forward. It will be relatively small addition to that.

Fourth quarter? And last item. Can you tell us what the actual tax rate, I guess from continuing operations would've -- was for this quarter since on the overall basis they actually had a tax credit?

Yes. If you look at it in total, the total looks like, obviously, a very high tax rate. The main reason for that is, it's the rounding of the numbers. Our tax rater for the quarter, if you look at the segments is basically what we expected it to be. We expect to run about 40 percent for every quarter. If you look at year-to-date and you look at the quarters last year, we run somewhere 38, 39 percent.

And our next question will come from Steven Rountus (ph) with Talon.

Actual I have two questions. The first was actually as it relates to your -- to the kilowatt hours that you sold in the current quarter. I noticed that industrials, as you mentioned, was up 13 percent. Residential/commercial, anywhere from 4 percent to 7 percent, for a weighted average of 6 percent overall. The 7 percent and the 4 percent declines in residential/commercial, that's what you -- would be the impact of weather, correct?

Yes. I think weather would certainly be a part of that. I mean, we don't consider those to be significant changes, and probably weather did play a piece of that. I mean, we don't expect, obviously, a decline going forward. It is more of a seasonal.

More of a seasonal thing from third quarter of '03 to third quarter of '04.

Yes, I think so.

What would the impact of the weather be on a net-income basis if you could, I guess guesstimate it, if you don't have a number offhand?

I don't think it would be material.

Okay. On the real estate side, I know that you mentioned in '04, as a whole, previously, that you're looking at $15 million in net income contribution from the real estate. Looks like you have done that through the third quarter. Can we assume there will be no additional contribution from real estate in the fourth quarter?

We don't break down our estimates by quarter. But, I think if you look at what real estate has done quarter-to-quarter, this last quarter, we made $1.6 million from real estate, and certainly it's not as high as it's been the first 2 quarters of the year.

But, in your previous guidance, you said 12 to 15 was a -- or 10 to 15 was a range for each year, and you're at the high end of that range. Are you still going to see some income in the fourth quarter? Or --?

There might be some, but it's not going to be a large number.

Richard Roloff (ph) with Luminus Management.

Hi, guys. Actually, my questions have been answered. Thank you.

We go next to Paul Debbas with Value Line.

What was the loss for the Kendall County plant in 2003?

It's been close to that $8 million number year-over-year because we have -- 8 million is really generated from the payment that we make to -- under the lease less the payments that we receive from our sales, our capacity sales. And in the last couple of years we have not made significant amounts of money in the selling on a spot basis from that unit. So it's run close to that number other years.

Okay. And do you have the pretax amount of the charge for the early repayment of debt?

About $17 million.

Okay. And do you still have that one more waste water property in Georgia that you still have to sell, and what do you expect for the timing of that?

Yes, we do. In fact, on the balance sheet we have $8 million of assets discontinued. It is 2 pieces that are left now. We still have the building that Florida Water was using as an office building to sell and we do have Georgia Water. We still expect to sell that this year.

We'll go next to Aaron Vaughn with Robert W. Baird.

I was wondering if you could freshen our memories or tell us where we are with the ESOP and then the selling of shares for ADESA and the timing with that?

We have the ESOP shares, obvious the ESOP now holds the ADESA stock. The trustee of the ESOP plan is charged with selling that stock and buying Allete with that. ADESA now is open to discussions with the ESOP trustee. So I think that will continue.

ADESA was not interested in buying those until this quarter release, so that opens up that avenue. As far as what the trustee has done, it is an independent trustee that is doing the buying and selling. We're not a part of that. And they've had less than a month to do anything. I think the next major step would be what happens in negotiations with ADESA.

Is there a time period that it has to be done by?

The time period, according to IRS code, is 90 days. We have asked for a private letter ruling from the IRS to extend that to a little over 600 days. We have not received that yet, but we have been in contact with the IRS, as this process moves forward, and we do expect to receive the private letter ruling relatively soon. And we do expect to receive similar days -- similar things that we asked for.

What would be 90-day period --when would that have started?

September 20th.

(OPERATOR INSTRUCTIONS) We will take a follow -up from Michael Lapides.

One easy question. How much of the current liabilities, how much of that is short term debt?

There isn't any short-term debt on the balance sheet.

At this time we have no further questions standing by. I'd like to turn the conference back to Mr. Shippar for any additional or closing comments.

Thank you. Allete is certainly beginning a new era. We've concluded a separation of ADESA, substantially sold our water services assets over the past 12 months.

The new Allete has a strong balance sheet and a bright future. There is growth on the horizon on our regulated utility business, and we operate in a robust real estate market in Florida We are actively continuing our efforts to eliminate the Kendall County losses. We have reduced interest expense and we will continue to explore growth opportunities.

I am excited about our future and look forward to sharing with your our year-end results and our 2005 earnings guidance early next year. Thanks to all of you for joining us this morning.

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