ALLETE Inc (ALE) 2005 Q1 法說會逐字稿

Good day everyone and welcome to this conference call announcing Allete's first-quarter 2005 financial results. Today's call is being recorded today. We will conduct a question-and-answer period at the end of the presentation. [OPERATOR INSTRUCTIONS]

This conference 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 events. 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 such statements -- excuse me -- 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 containing potential factors that could affect future financial results are 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 turn the conference over to the President and Chief Executive Officer, Mr. Donald J. Shippar. Please go ahead, sir.

Good morning, everyone. Thanks for joining us today. With me is Jim Vizanko, Allete's Chief Financial Officer.

This morning we reported our financial results for the first quarter of 2005. Earnings-per-share from continuing operations were $0.66, versus $0.76 a year ago. Last year's first quarter had a larger than usual earnings contribution from our real estate business. We'll talk about that in a few moments. Included in this year's results is a $3.3 million after-tax , or $0.12 per share, charge related to two investments in our Emerging Technology Portfolio. Jim will give you the financial details in a few minutes.

We recently made a couple of significant announcements I think are worth noting again. The first is that site preparation is underway at Allete Properties Town Center and Palm Coast projects. Development cost will be financed in part with $26 million of special-assessment revenue bonds issued by the Town Center at Palm Coast Community Development District. Additional development costs, which we estimate to be about $26 million -- $11 million of which are reimbursable -- will be financed with debt at a subsidiary of Allete Properties. We're very excited about this project , that it's underway. Later this year we will see an earnings contribution from this project as pending sales contracts begin to close. By the way, the U.S. Census Bureau recently released figures that show Flagler County, where Palm Coast of course is located, to be the fastest growing county in the United States.

The second is that we successfully completed the transfer of the purchase power agreement we had with LSP-Kendall County, LLC. This transaction is a key accomplishment for Allete for two reasons. First, it eliminates significant ongoing losses -- about $8 million on an annual base. Secondly, it supports our strategic decision to withdraw from the merchant power business and areas outside of our region. Despite the Emerging Technology and investment charge, our financial performance for the quarter keeps us on track to meet our expectations of 45 to 50% earnings-per-share growth over 2004, excluding the charge associated with the transfer of the Kendall County contract and any earnings from investments we may make in growth initiatives.

Now I'll turn the call over to Jim, who will discuss the quarterly results in detail. Jim?

Good morning.

Before I discuss the quarterly results, I want to point out that beginning this quarter, we began allocating all corporate expenses and interest charges across the business segment. Prior to this year, these expenses were recorded in the other business segment. For comparative purposes, segment information for 2004 has been restated in our financial statements to reflect the new allocation method. This restatement has no impact on total Company net income or earnings per share. Within a few weeks, we'll file an 8-K that discloses the restated segments for each quarter of 2004. I'd also like to point out that interest charges in total are $1.3 million after tax -- less this quarter than in the first quarter of 2004. When you see our financial statements, you will see two new line items. Beginning this quarter, we're breaking out the minority interests associated with our real estate business. You may recall that we own 80% of the land inventory at the Town Center project, Lehigh and Palm Coast holdings. You can see the detail of our ownership in the outlook section of our 10-Q. Also, regarding our real estate business, in certain cases we recognize profit on real estate sales on a percentage-of- completion basis. In these cases, gross profit is recognized based upon the relationship to development cost incurred to the total estimated cost to develop the parcels. Revenue and cost of real estate sold in excess of what is recognized are deferred and recorded together as deferred profit on the balance sheet. The deferred revenue and cost of real estate sold will be recognized in future periods when the related development costs are incurred. For more information about this accounting policy, I refer you to Note One in the 10-Q.

Now I'd like to discuss the individual business segments. Net income on our regulated utility business increased by $400,000 from last year's first quarter. This year we incurred $1.2 million after tax of expenses primarily due to planned maintenance at our Boswell III generating unit. Regulated utility revenues were up 4.4% over last year, due to continued strong retail sales and a significant increase in sales to other power suppliers, combined with higher off-peak prices. A cold winter had a positive impact on residential and commercial sales and our industrial customers continue to operate at historically high levels. The nonregulated-energy-operations segment improved by $1.8 million over last year's first quarter. Net income from the - Taconite Harbor facility was higher than last year, mainly due to a power contract that began in May of 2004. During this quarter, the Kendall County facility posted a net loss of $1.9 million, about the same as last year.

As Don mentioned, on April 1 we transferred our Kendall County power purchase agreement to Consolation Energy. We paid $73 million in cash and incurred $5 million of closing costs to complete the transfer. In the second quarter, we will book a $50.4 million after-tax charge for this transaction. You will see the net income contribution from the segment improve considerably with elimination of the operating losses we've been recording from the Kendall County facility.

Our real estate business started the year off strong by recording $6.9 million after tax of net income for the quarter. Let me give you some detail about the land sales for the quarter. Allete properties sold 483 acres and seven lots and recorded total revenue of $18 million for these sales, $1 million of which was deferred. The cost of sales for the quarter was $2.6 million. On a per acre basis, the average revenue for the quarter was about $37,200 per acre. The average cost of sales was about $5,400 per acre, and the average margin was approximately $31,800 per acre. Most of the sales activity this quarter was for properties in our Southwest Florida operation. Net income last year was $10.9 million in the first quarter, which was three fourths of its net income for the year.

As I mentioned before, net income for this business varies from quarter to quarter and is a function of transaction closings. In the remaining quarters this year, we expect significant, positive comparisons to last year, as most of real estate's 2004 net income was recorded in the first quarter, and because we will begin seeing an income contribution from the -- Town Center and Palm Coast project as this year progresses.

On March 2, we signed an agreement with Developers Realty Corporation to develop the first phase of the urban core area of Town Center and a commercial site, for anticipated revenue of $21.8 million. Including this contract, our real estate business had $83.6 million of pending sales under contract, $56.1 million of which are for the Town Center project. Prices on these contracts range from $85,000 to $685,000 per acre for the Town Center project and $2,000 to $154,000 per acre for all other properties. These contracts will close over the next several years. For additional quarterly detail, I refer you to our 10-Q that was filed this morning.

The net loss in our other segment is $1.6 million more than last year. As Don mentioned, we recorded a charge relating to two emerging technology investments this quarter for a total of $3.3 million after tax. We did not not anticipate this charge at the beginning of the year. But after review of these companies' latest estimates of future financial performance, we opted to fully reserve them. These were our last two directly held emerging-technology investments. Our remaining investments are in funds that we account for using the equity method. So their carrying values are adjusted quarterly and currently total $8.5 million. This quarter the Allete ESOP trustee completed its purchase of Allete common stock with funds received from the sale of ADESA stock last year. From October 2004 to mid--February of this year, the trustee purchased about 1,773,000 Allete shares and placed them in the trust for future distributions.

Currently, there are about 2,728,000 unallocated shares in the trust. These shares are not included in the calculation used to determine earnings per share. Don?

I'd like to make a couple of additional comments before we take your questions.

Now that the Kendall County power purchase contract has been transferred, and given our earnings outlook, Allete's Board of Directors has voted to raise the dividend the quarterly defend I. 5% to $0.31 per share, or $1.26 on an annual basis.

Our goal is to maintain a dividend payout ratio in the same range as similar Companies. On another note, on April 14, the Public Service Commission of Wisconsin approved an 11.7% return on equity and a 3.9% average increase in retail utility rates for Superior water, light , and power customers. New rates are expected to go into effect in early May, and we expect a revenue increase of about $2 million annually. Now, we'd like to open up the line for your questions. Thank you.

This question is from Dave Chancer [ph] of Janney Montgomery Scott..

Good morning. Congratulations on the solid quarter.

Thank you.

Thank you. Couple of questions. First of all, just to give us a little color about the Taconite business up there. Is this the demand still as heavy as it has been in the last year or so? Particularly from Asia?

Well the -- all of the Taconite producing facilities are running at full capacity; In fact, several of them are working on some capacity expansions. Now and that will come on in the future next several months or next year, year and a half. Most of the Taconite here is being shipped to and consumed in the U.S. market. However, there is still a very strong demand in Asia and China in particular, which certainly has had a significant impact on worldwide iron ore and Taconite prices. So those prices in the market have increased significantly in the last several months. The facilities, again as I said, are running at full outlook, full capacity. And according to their estimates, they certainly expect that to continue for the remainder of the 2005. And I think as Don mentioned, I think what's really encouraging for us for the capital we're putting in. We're putting in capital and looking to restart our lines and really -- lease signalling to us that this is not a short-term situation at all.

That's what I was after. Could you quantify if there was any weather effect whatso ever in the first quarter in terms of utility performance?

We think there was some impact, certainly different than the southern states. The cold weather is a positive thing to us. We saw 2 or 3% increases in commercial and residential sales. We think a lot of that was weather-related.

Okay. And I know you guys were considering the rather weighty decision as to whether or not you'd want to file for rates in Minnesota. Any progress along those lines?

We have no plans to do any kind of a filing here in 2005.

Okay. And kind of a general question about Florida and the land. Redeployment. -- you're getting proceeds now. Obviously someone, at some point, will want to pull the trigger on redeploying the proceeds. Where do you think, without getting specific? Where do you think generally you'd like to move proceeds from land sales?

Well I think it fits into our general strategy. That's our general strategy -- to grow all of our business segments, and that being real estate, regulated utility, or possibly other investments. And -- in our last K we did exes panld the region somewhat as we're looking for properties. That is beyond Florida and into the southeast coastal United States. No specific part of the southeast at this point though? No. We continue to look for opportunities down there and look for parcels and properties similar to what we've purchased in the past. We have an active effort going on. But, of course, when and if we find something, we certainly will announce it at that time.

Great. Thanks.

Next question come goes to Matt Berg [ph] at Highbridge.

Good morning. Congratulations on the quarter. I had a couple of questions. One-- I look at your numbers. You ran through the charge on the writedown on your two investments. But that seems like a one-timer. When I -- I'm looking -- it looks to me like your EPS is $0.78. Can you just reconcile that for me? That's my first . question.

Yes. I mean we certainly look at the writedown as a one-timer. And that -- that $0.12 we would certainly look to add that back and compare that to what it was about the -- with what the earnings were last year.

As far as real estate, we're looking at the quarter more from the segments outside of the real estate as well. Real estate had such a great first quarter last year that to us it's without real estate -- even though real estate had a very good quarter last year. Last year was so much better. That that comparison -- this one-timer. Because of the sales in Florida, that will even out as well over the year.

Sure. But for comparison sakes, should I go ahead and use $0.78 for this quarter?

That's where we're looking as a one-timer. From a gas -- from the way we look at it, yes. We consider that 12 a one-timer. Which gets you to 78 versus 76.

Any update on or Monday in terms of the entitlement process there. What's your process on entitlements and developments, just relationship with -- the legislatures down there. The progress and the development.

Yeah. Development continues to move along, as you know. Of course, Town Center is the one that we're really moving forward on now. And Palm Coast Park and Ormond. We have very good relationships with the town of Ormond Beach and the county. We're continuing to move on that project and entitlements. We've got an interchange there that we're looking at ultimately having to be involved with in the future. So we're generally -- we're certainly pleased with the progress on that parcel and we'll be continuing to make progress expected.

Okay. Great. And then, just back to the balance sheet. I know that you said that you're looking to extend investments into real estate in the Southeast -- Southeastern United States. Would there be any interest in repurchasing shares with all of the cash that you have on the balance sheet?

I think right now, Matt, our strategy is to continue to look for opportunities to expand our existing businesses -- whether in the energy service side, the real estate side -- and to look for other business opportunities. That's our focus at this point with our strategy and we -- we're going to continue to pursue that going forward.

Okay. That's a lot of cash, Don.

We understand. As we've said I think in the past is if we can't find businesses or things that fit our parameters, our criteria, at some point in time, we would certainly look at other options.

Okay.

Matt, we're not saying we wouldn't consider that in the future. Right now we're focusing on executing our strategy.

That makes sense.

Congratulations on a great quarter.

Thank you.

Next, to Dave Parker, Robert W. Baird & Co.

Good morning, everyone. A follow-up on Matt's question. ... Your guidance what you maintained it, I assume that your guidance includes that -- the charge from the fund that you took the tech fund?

Yes.

Okay. So I guess if he look at things and excluding $0.12 charge, and maybe guidance -- assuming guidance excluded that really -- we're moved up maybe a dime or so.

Yes.

Okay. Second question is Jim, when you ran through the numbers on the four contract sales, could you refresh my memory sort of what they were at year end when you laid those numbers out? And maybe just brief what the percentage change is is there?

Sure. At the end of last year, we were at $71 in total. Now we're at $83.6. Town Center at the end of last year was $30. And now we're at $56.1. And the center impacting those in the Town Center, we announced a new contract for $21.8 million. Then there were some additional contracts and then there were some sales that would reduce it. So you have the contracts going up and sales taking that down. But the major change in that was $30 million at Town Center, increasing to $56.

I want to make sure I understand this right. The sales weren't at Town Center or were at Town Center?

Other locations.

Other locations. The Town Center steals -- it is -- is may be a little different than what I understood. The end of the year is when you realize that cash. I sort of thought it was next year. Is that acceleration or did I just get it wrong before?

I think it's towards the end of this year. And then a lot of it, obviously, being in the future years as well. We do expect some this year as well. Maybe that's the slight move up of some of the timing we talked. The vast majority is in years beyond this year.

That's what I thought. I really was expecting things to pick up from Town Center in 2006 and then also with your other projects, contracts, projects maybe getting signed. That's still the same philosophy. But maybe better with Town Center activity moving forward.

Yes.

Thank you very much. Congratulations on a good quarter.

Next question to Stephen Rountose [ph] at Talent Capital. That's right. Good morning, gentlemen. Nice quarter for you guys. I had a couple of follow-up questions. One was on the DRC agreement. It said it runs through September 20 12. How are the earnings phased in over that time period. Mostly front end loaded? Hello?

Don, do you know?

I'm not sure. I would believe so. I don't know the exact number of years and the income.

Okay. But is -- it's not straightlined over that time period.

No I wouldn't belief so. I think it anything, probably it's front -end loaded than in the later years. Gu ran through some of the contracted sales pretty quickly. You said -- can you just run through them again.

Sure. The -- per acre basis or in total?

Per acre basis. On the the per acre basis, the average revenue for the quarter was $37,200 per acre. And if the average cost was $5,400 per acre. That's for the first quarter of '05. If you look at the '04 numbers, the '04 numbers -- the sales revenue were about $20,000 an acre and the cost was about $3,600 an acre. So '04 versus '05 we've seen significant change in value per acre and also the relationship between the revenue per acre and our cost per acre. Now obviously the caveat with that is this is just one quarter, it's not a year. Depending on the properties, location, the type of property. I mean I think as we mentioned in previous calls, but on the other side, certainly real estate values in Florida have certainly improved over the last -- over the last year.

I think you had run through the contracted sale prices too. Right? You gave two sets of ranges on what the contracted sales were. Can you run through those again?

The prices on the Town Center project range 85 to $685,000 per acre. And the other properties -- these are all properties under contract, range from $2,000 to $154,000 per acre.

Can you give us weighted averages?

We're just --

Or how about acres, I guess?

We haven't disclosed how many acres are associated with this under contract or the weighted average. Other than to say the $2,154 certainly not the $2,000 that we're selling all of it.

Both ends of that are certainly extremes. The $2,000 and the $685,000 on the Town Center. I think as we've said before, they're very, very location sensitive.

That's why they're such a broad range of prices on those properties, depending on where they're located in the actual property with access to roads, highways, et cetera. It's really difficult to have a weighted or an average price on these properties. Because the extreme sensitivity to location.

And these are just prices for the contracts. Per acre prices under the contracts. So we have a lot of land that's not under contract as well that's in the development stage. So there's also large chunks of property that are incorporated here. But what we wanted to do with these prices, at least, give an idea of the kind of ranges that we're talking about, depending on location, entitlements and things, and to try to give more flavor of what we have and release the values of some pieces.

Yeah. Just difficult -- you can drive 25 trucks through that range. Yeah.

[ LAUGHTER ] And I think as Don mentioned, that's the reality. Somewhat the point. On the other side, if you look at Town Center, the low is $85,000. And we've sold this last quarter our average price per acre was $37,200. Just from that, $85,000 per acre, the lowest that any of these contracts are is certainly a substantial number. When do these contracts generally -- what's the timeframe of most of these contracts?

Most of the contracts are year or two type contracts. Except the latest one that we just talked about. Developers realty. That runs much longer. Most of these are in two- or three-year timeframes.

Gotcha.

Thanks again.

Thank you.

Will go to David Loiter [ph] at Pirate Capital LLC.

Last year real estate sales in the Southwest -- why were they stronger this year or on a per acre basis. Or is there any any dynamic that's changed in the market down there?

A lot of it is just prices in Florida. Price appreciation in Florida, and certainly related to what were the -- where the location is and all of the other caveats.

A lot of is price appreciation year-over-year.

Also the other thing is the timing and when some of these parcels are available for sale and are prepared to be sold and a lot of conscious can be deferral months even a few years before they're actually sold as they're being prepared. All of the permits, zoning and everything, infrastructure, et cetera, being put into where they actually get closed and recorded as a sale. Actually these are very mature properties that we have. Yes.

In southwest Florida versus Northeast Florida is much new, a lot of it going through the entitlement process. Southwest properties tend to be smaller parcels near heavily developed areas. Again, just a fairly lengthy period of time to get that to the point where the sale is closed.

At the end of last quarter, about 105 acres were contracted at $0.10. Where does that in stand today?

The basic addition to that is the Developers Realty Corporation addition. The $21 million contract. That's made up of two parts. There's the commercial site of 51 acres in urban core area.

So your two parts to the 51 acres?

Two parts to that contract. A contract for $21.8 million is the main change that went from 30 to 56. There's two pieces for that. The commercial side of 51 acres and the urban core area of Town Center. So those two pieces are basically the acreage that got added. There is some other smaller pieces. But that's under contract. Those are two pieces that got added.

How many acres is the urban core?

That -- that is not -- it's not something we've released. It's something that some ways we don't have an exact handle on it. It's something in the development stage right now. But it's not hundreds of acres. As you could understand, an urban core. Not a large, huge piece of property.

Okay. So it's 51 plus however many acres the urban core is?

Yes.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to James Ballesa [ph] with E. A. Davidson and Co.

The guidance that you had at the beginning of the year has been unchanged. You've admitted ... earlier in the call that your implicit guidance is going up. What is the key factor driving that to increase?

If you look at the business segments aside from real estate, because real estate quarter-to-quarter -- we talked about that comparison. If you look at the other pieces, electric, utility business, the regulatory business is up $400,000. We're seeing same or increased demands from industrials as staying at relatively high levels, even higher than last year. And commercial residential are up. We also in the first quarter had a $1.2 million outage expense. So that's certainly not a one-time thing. But for the quarter essentially it is. Really you can look at that being spread out through the whole year. The quarter for the regulated business was up significantly from more of an ongoing kind of basis from last year. As well as the non-regulated generation. That was up substantially as well again versus last year.

So it's -- the change from last year strong sales, again, and not only strong sales to our customers, but strong sales to other power suppliers weekend up substantially as well in the first quarter. And we saw a large increase in off-peak prices. We were able to realize more income in the first quarter than what we had thought. Some of that will continue for the year, some of that -- most of that was benefit in the first quarter. On the off-peak prices, they were substantially higher in the first quarter than we anticipated. Some have come down to a level where they're in line with what we thought they would be. So that increase in price off-peak was a surprise to us. And resulted in some additional margin on sales in the off-peak periods to other power suppliers. The doa.d Company that you hired. What was the name of that entity again? Can you tell us a little about that? Is this the sole developer? The Company that we signed an agreement with developers realty corporation. That is one piece of Town Center. $21.1 million. Contract that we have with them. They're a national developer of properties. We're working with them to get the project for what we want to be. We work very closely with this Company to really make Town Center what we want it to be. It's a very structured theme. It's very structured the way we want this to happen. We picked this Company to work with to really -- for both of us to develop to what we want it to be. It's over a long period of time. We want to develop this thing in the right way and bring in pieces over time. What we think will several increase the value of our property as we do. As Jim mentioned, not the only developer we'll be working with in the area.

One of our core, if you will, developments. In the southwest Florida area, how many acres remain there? And are -- are you running out of land in the southwest Florida to sell?

Yeah. We have been running out of land. We have -- looking at our -- in Lee high we have 827 acres left in cape coral, 89 acres.

Thank you very much.

Thank you.

We'll go next to John Alley [ph] at Zimmer Lucas Partners.

Quick question about the Wisconsin utility. I guess that you were getting a -- close to $2 million increase? Is that true?

Yes.

Revenue increase.

Revenue increase. Trying to figure out the timing. And the rate base? Rate base. We'll have to -- we'll have to look at that real quick here on the rate base. -- and the timing -- Early May.

Early May?

Yes.

You said --

Yes.

And what kind of cash structure are they giving you? Or is that predicated upon?

Roughly 50/50.

They're total assets, which isn't exactly rate-based, about $50 million.

Sure.

Anything else for you sir?

That's all.

Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]

A follow-up from David.

A follow-up on your balance sheet with cash you've generated.

Cash usage.

Any more guidance or understanding of your internal hurdle rates on potential acquisitions? And what you will look for with regards to returns for investors?

It depends on what we're looking at. I mean -- we would have certainly a different hurdle rate for a real estate which business than a regulated utility. It various certainly on the risk, the risk of the transaction as well. So, it's hard to give just one specific number.

I guess speaking on the utility side more importantly. Speaking on the utility side, we'd be looking at something in the neighborhood of 8% return on capital.

And other assets out there currently that are attractive?

Yes. There are. We've been looking at some opportunities and evaluating those opportunities. As we mentioned earlier, we're looking in both of our existing businesses, along with new businesses. But within real estate and within the energy service, we have been looking at some opportunities and evaluating those. Yes, there are some out there.

Thank you.

As you know, the issue obviously comes down to strategic fit. How do they fit within our organization? And obviously the economics are very critical to make sure that we make those investments. The kind of returns that we need too to make sure we exceed those -- immediately meet or exceed these hurdle rates. -- on an outlook for the deployment of that capital that you have on your balance sheet?

As I mentioned earlier, we -- since the spinoff of ADESA roughly seven months ago, we put in this new strategy to grow our businesses and new businesses. I think for -- certainly for the next several months at least, we'll continue along that path and look for these opportunities and pursue them. Now at some point, if we don't feel opportunities are there and not economic, we would re-evaluate that and see if there's a better way, if you will, to use that cash for the benefit of our shareholders. As far as other things happening, there was a huge strategic event on April 1 in the transfer of the Kendall County --

Yes.

Transaction. We see that as a large strategic move as well. Certainly not the only one we plan on making. But that certainly took resources, time to make all of that happen as well.

Absolutely. The numbers look a lot better this year because of that. Thank you.

Thank you.

And gentlemen, we have no other questions in the cue at this time. I'd like to turn the call back Mr. Shippar to thank you for your questions.

I'm pleased with our performance in the first quarter. The Kendall County exit was a key strategic accomplishment and certainly a very good use of our cash. Allete -- other -- progressing very well. Our regulated utility industrial customers continue to operate at very high levels. We continue to enjoy a strong financial position and are confident about our prospects going forward. Thanks for calling in today. Look forward to speaking you again in late July.

Thank you, that does conclude our call. Thank you, that does conclude our call. [OPERATOR INSTRUCTIONS]