ALLETE Inc (ALE) 2005 Q2 法說會逐字稿

Good day and welcome everyone to this conference call announcing ALLETTE's second quarter 2005 financial results. [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. They're not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Secur -- Private Securities Litigation Reform Act of 1995. The forward-looking statements in their earnings release distributed this morning reflect management best judgement, at this time, but all such statements are subject to numerous risks and uncertainties, which could cause all results to differ materially from those expressed in, or implied by the statements therein. Additional information concerning potential factors that could effect future financial results is included in the Company's annual report and, from time to time, in the filing with the SEC.

At this time, I would like to introduce the President and Chief Executive Officer, Mr. Donald J. Shippar. Please go ahead, sir.

Thank you, for joining us this morning. Earlier today, we reported our second quarter financial results. On a GAAP basis, we reported a loss of $1.45 per share from continuing operations, which included the previously announced $1.84 per share charge related to our exit from a Kendall County purchase power contract. Excluding the charge, earnings from continuing operations were $0.39 per share, compared with $0,08 per share during the second quarter of 2004. ALLETTE's Chief Financial Officer, Jim Vizanko, will provide you with financial details in a few moments. Before he does, I would like to comment on significant events that occurred since our last conference call in April.

First, the Kendall County transaction was a key strategic accomplishment for us. The transaction eliminated approximately $8 million of annual after-tax losses, and it allowed us to exit a business that no longer fits our strategic direction. At ALLETTE properties, we recorded the first sales for the Town Center at Palm Coast project in northeast -- northeast Florida during the quarter. We expect this project to be a significant contributor to our earnings stream over the next few years. It is the first of three major developments we have planned for the fastest growing region in the United States. Demand for Florida real estate remains high, and prices for Florida real estate have continued their upward trend.

Also during the quarter, Minnesota Power's largest customer, United States Steel Corporation, signed an all-requirements energy contract for electric service through October, 2013. The two taconite production facilities covered under the contract take a combined 275 megawatts of electricity and represent about 12% of ALLETTE's annual revenue. We expect to be successful with additional industrial customer contract extensions going forward.

I'm very pleased with our financial and operational performance to date. As we en -- as we enter the second half of 2005, we are very comfortable reaffirming our expectation of 45% to 50% growth in earnings from continuing operations, exclu -- excluding the Kendall transaction and any earnings from investments we ha -- we may make in growth initiatives.

Now, I'd like to turn the call over to Jim.

As Don mentioned, we are pleased with our financial performance and remain on track to meet our earnings expectations for the year. At a regulated utility business, income from continuing operations was $7.8 million for the quarter, compared with $7.4 million last year. Regulated kilowatt hour sales grew by about 7% year-over-year. primarily from sales to say other power suppliers. Quarterly sales to our industrial customers remain -- remained strong and were similar to the second quarter last year. The $50.4 million after-tax charge for the Kendall transaction is included in this quarter's results bib-regulated energy operations. The elimination of the quarterly operating loss from the Kendall County facility was off-set by higher expenses at the Taconite Harbor generating plant and less income at other non-regulated energy businesses in 2005 compared to 2004. During the quarter, the Taconite Harbor facility incurred higher expenses for sulfur dioxide emission allowances than in the second quarter of 2004.

Our real estate segment recognized income from operations of $2.8 million versus $2.1 million a year ago. During the quarter, ALLETTE Properties sold 96 acres of land for $16.1 million. 7.5 million of this revenue was deferred in accordance with percentage of completion accounting required under FAS-66, Accounting for Sales of Real Estate. As of June 30th, we have $7.7 million of deferred profit on sales of real estate on our balance sheet. $5.7million was deferred during the second quarter. Remember that deferred profit is pre-tax and pre-minority interest. We expect moth -- most of this deferred profit to be booked to income during the next 18 months. I refer you to note one in our 10-Q for more information about real estate revenue and expense recognition.

During the quarter, the first sales closed for the Town Center project, 42 acres for $9.2 million, for an average revenue of about $218,000 per acre. The impact from these sales can be seen in the overall per acre numbers for ALLETTE Properties. In the second quarter, the average revenue per acre was $168,000, compared to $37,300 during the first quarter. The average cost of sales per acre was $51,000, versus $5,400 last quarter. And the average margin was over $117,000 per acre compared with $31,800 in the first quarter of the year. It is important to keep in mind that prices are dependent on the type and location of the property sold. Similarly, the cost of sales for real estate is dependent on the original acquisition cost, plus additional development cost for each parcel of property sold.

Total sales under contract rose to $90.7 million, as of June 30th, 53.5million of which was for the Town Center project. Contract prices ranged from $45,000 to $685,000 per acre at Town Center, And 2,000 to $524,000 per acre at all other properties. Contract prices ranged from $45,000 to $685,000 per acre at Town Center, and $2,000 to $524,000 per acre at all other properties. The income we recognize from our real estate business varies from quarter- to-quarter and is a function of the timing of transaction closings. We expect positive quarterly comparisons in the third and fourth quarters over the same periods of last year, since the bulk of last year's income was recognized in the first quarter. Only a small percentage of real estate's income was recognized during the last two quarters of 2004.

Our other business segment reported income from continued operations of $300,000, compared to a loss of 7.2 million a year ago. Interest expense was lower this year, due to lower debt balances and refinancing activity. We also incurred lower corporate expense and higher income on our short-term investments this year compared to 2004. Last year second quarter included a $3.2 million after-tax impairment charge, related to the emerging technology portfolio. Don?

Thanks, Jim. Before we turn to your questions, I'd like to update you on two other topics. You may be aware in March, the EPA announced the final Clear Air Interstate Rule, or CAIR. Minnesota was included in the 28 eastern states named in CAIR. we believe in it's present form, CAIR contains flaws in its methodology and application that will have a negative financial impact on Minnesota Power and its customers, with little environmental benefit. We also believe that, given Minnesota's good air quality and low utility emissions, the state should not have inc -- included with the eastern states. Minnesota Power has filed a petition asking the U.S. court of appeals to review the EPA rule.

In Florida, a new growth management bill was recently signed into law. Generally, the bill requires that significant roads, schools and water supply be in place before future development can be approved by local governments. ALLETTE Properties, Town Center and Palm Coast projects were grandfathered under the former regulations, and will not be impacted by the new law. The Ormond Crossings project will be regulated by the new law. However, due to the large scale of this project, road, schools and water supply will be addressed in our developmental approvals. We believe this new law could lead to a competitive advantage for ALLETTE Properties, because smaller developments may find it difficult to comply with this legislation. I think this is a great illustration of the value we have added to our real estate inventory with our proven ability to entitle the property we have for sale.

At this time we will ask the operator to open up the lines for your questions.

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from David Lorber from Pirate Capital.

Of the 90.7 million acres, or million dollars contracted for land sales, it is a wide range, Can you give us a weighted average contract price?

No, we have -- we have not disclosed what our acres under contract are. I think on the last call, though, I think we -- we gave or arrived at a pretty close approximation on the Town Center acres under contract, at least at the first quarter. But at this point, we are not disclosing the -- the acres under contract. But I think it is safe to say that certainly it's not at -- at the low point of the range. I mean, you can see from the sales that we've had both this quarter and other quarters. I think that's probably a better indication of where things are going, than -- than is looking at some average of that -- of that range.

Okay, so I guess you'd say thing -- for Town Center, things are coming in on average well north of 200,000 an acre and others is coming in kind of north of 100,000 an acre? acre?

Well, the -- yes, the --

I guess I'm just trying to get a better sense of how to think of acres sold and, you know, the percentage of the mix that is high-value versus, you know, lower-value.

It certainly depends on each quarter on what property we sell, where it is, what type of property it is. But, at least for our first sales at Town Center, we averaged $218,000 an acre, and we'll have some quarters that will be less than that and more than that. But, a range for -- for -- on contract prices ranges from 45 to 685, so the 218 is certainly, within that range. And we're certainly not going to sell all our properties at 685 and we're certainly not going to sell all at 45, so I think that 218 for Town Center is certainly well within that range and--

That's good. That's fair. The current pricing outlook that you're seeing within Town Center, does pricing continue to escalate and if absorption is there? And then, also, could you just speak on Palm Coast Park and the timing of that development, as well?

The -- the prices and the demand at Town Center continue to be there, but that property is coming along very well. We had our first sales. We see, certainly, nothing slowing down that -- that effort. Palm Coast Park, we're in the -- we have permits. We are in the planning stages of that to look forward to our first sales. And then last, Ormond 's, we are preparing for the approvals form, and we are getting things ready to get approvals to move forward on that project.

Filing the DRI later this year.

As far as Palm Coast Park, when can we expect the first sales? You know, is it fourth quarter or first quarter of next year?

There will likely be some sales towards the ends of the year, but we expect most of the activity will begin next year.

Okay. And then, would you please touch on -- touch base on M&A activity, what you are seeing on the regulated utility side, as well as the real estate side? Thank you.

Well, we continue with our strategy, as we -- we've been talking about on our calls and communicating to the investment community, that we're looking for opportunities to grow, both in the regulated utility business and with real estate businesses, and with other businesses. We have a group of people that are actively exercising, looking opportunities and evaluating, and that's -- that's an ongoing effort and we will continue that effort going forward.

Thank you.

[OPERATOR INSTRUCTIONS] We will move on to Matt Bird with Highbridge.

Hi. Good morning, guys.

Morning. [multiple speakers]

How is it going? Just, I guess, a couple follow-ups on the last set of questions. This Growth Management Bill in Florida, will that slow down your DRI process in Ormond Crossing at all?

We don't -- we don't expect it will because all of the issues that were in the growth management bill, we were already addressing in our plans because of the size of the development. We don't see any -- any impact from that -- that legislation.

Okay. So we might see entitlement of that property by the end of the year?

I think our plans are that we will file our DRI plan by the end of the year and entitlement will follow, obviously, as we get approvals.

And then with the continued appreciation of land in Town Center, are you maybe more motivated to hold off on land sales, as -- as the price of land continues to go up? Are you, you know, holding off on some sales?

Well, I wouldn't say holding off, in a sense. Remember,Town Center is a planned development community. So we've been working with developers for several months and years on how that whole project will be developed and built-out. As those plans come together, as the property's ready to be developed, and as we get developers lined up and committed to that, our plans are to -- to build out that community along -- along the time line.

And our general process is as we sell out more pieces, our pieces become more valuable, not just because of price increases that may happen, but also because, now if there's a Walmart, other land becomes more valuable. If there's more residential, then more office space will become more valuable. So, it -- I think, as Don mentioned, it's a stage sale process that we have and will continue. I mean, we -- I -- we have no intent of stopping that process for a year or two, and wait for for prices [inaudible]. It's a stage process and we're continuing on that stage to sell property.

Okay. And then the first phase of the urban core area. Time line on when development of that will be completed?

The -- which was in last quarters Q, a contract runs until 2012, I believe, 11 or 12. But most of that is towards the front end. It'll be developed more towards, certainly, in the next few years. more so than out towards 2012.

Okay, so over the next two or three years.

Yes, I think most of that. I mean that's the general plan for Town Center within the next two or three years.

Okay.

Most of the selling development. And as we mentioned, with the deferred revenue we expect, or deferred profit to come back to be booked in the next 18 months. That's kind of the next 18 months to get the most of development work done, but what will come with that is sales, as well, along the same kind of time period.

Great. Exciting stuff, Thanks, guys.

Thank you.

We will move on to James Bellessa with D.A. Davidson and Company.

Good morning.

Morning. [multiple speakers]

The 10-Q addresses the RSOP, I don't know how to say that. Is that a R-SOP or -- I know ESOP's an ESOP, but what's a RSOP?

An RS -- RSOP includes the ESOP. It's retirement --

savings plan.

savings plan.

And it states that the RSOP owns 1.8 million shares of ADESA , and that the independent trustees will start to decide on the sales of those shares starting this September. If you were sitting on that independent board of trustees, what's a logical behavior there that would come forth? You can't -- you say that you are unable to predict their behavior, but what is the logical behavior?

These shares are the unallocated or -- I'm sorry, the allocated ESOP shares and shares that people have within -- maybe another way to describe this is a 401-K plan. So people have elected -- year ago, ALLETTE stock was in their 401-K, and they got allocated ESOP stock of ALLETTE, as well. Then the spin and they got ADESA shares within there. Some people have been moving that stock since the spin, last September, and some people haven't. And within this plan, we've decided that we -- that we do not or we won't offer ADESA stock a year from the spin. That they had a year to do something and then, if they didn't, then som -- we would sell that ADESA, we being the trustee, would sell that ADESA stock and buy ALLETTE. So that's kind of the background of what is going on there.

Now the independent trustee realizes that -- that the plan does not want ADESA stock, and certainly not not for any reason of what ADESA stock is worth. It is just that -- that a normal ESOP does not have or 401-K does not have another company's stock offered in the plan. So I think the independent trustee is going to want to sell ADESA's stock, it's going to want to buy ALLETTE stock in a short period of time on behalf of the participants. But, at at the same time, certainly not dump the stock in a day or two, or buy ALLETTE in a day or two, and they want to do an orderly transactions on both sides. And I think a good example is what they did with the unallocated stock. If you remember, the unallocated stock, the sa -- the ESOP unallocated shares, the same trustee did the same work there. They sold ADESA stock and bought ALLETTE and that, if you remember, took us, I think, six, seven months to complete that transaction. So I think the same orderly transaction of selling ADESA and buying ALLETTE will happen.

It is hard for us to predict what -- what our employees will do with those shares, too. Whether they'll move them to other accounts or whether they'll let the trustee just do the transaction, as that deadline approaches of September 1.

And it is hard to predict blocks. It could be blocks of -- available of ALLETTE to buy. There do be large purchasers of ADESA stock. So, that's why we can't predict how long it will take.

At current prices of the two different stocks, that's about 900,000 shares of ALLETTE would need to be purchased, and you are saying that there could be blocks transactions that could help accelerate the completion of the Transition?

For either side. From either [inaudible], there could be a large buyer of ADESA stock

Is ADESA a natural buyer of --

They were a buyer of the unallocated shares. They bought a significant piece of those. They could be a buyer here. I mean, that's for -- up to the trustee to look for buyers of ADESA and the same side on the selling -- I'm sorry, the buying of ALLETTE.

How does it change, if it does all, the number of shares outstanding or that you use to calculate earnings per share?

It's no impact. The unallocated shares within the plan are deducted for earnings per share. These are shares that are owned by participants, so these do not affect our earnings. But what they do affect, certainly, is there'd be another buyer of ALLETTE stock in the market, once those ADESA shares are sold.

Thank you very much.

[OPERATOR INSTRUCTIONS] We will move on to John Hanson with Imperial.

Good morning.

Morning.

Just a couple of questions about, kind of, the power markets up in your neck of the woods, if I could. You seeing any -- any results of in kind of coal, rail issues and shortages up in your area affecting, not necessarily you, but the price of power or availability of power in your area?

Well, we understand there are some other companies that have had some -- some issues with coal. No, we haven't experienced any of those issues. It's hard -- it's to tell if those are affecting the prices. Obviously, we're a participant in the midwest independent system operator market, so we do transact regularly in the market, either buying or selling for our requirements. We've seen, I guess prices that generally have been what we'd expect them to be, based on weather, temperatures, demands, et cetera. So I can't see that we've seen any -- anything specifically that is related to shortages of -- of coal or coal deliveries.

With that regard to the SO-2 cost, is that becomes a factor?

The cost of emission credits, you'e referring to?

Right, right. In terms of market prices of power. Do you see that showing up more, or is that a bit hard to tell as well?

Well, it's very hard to tell again, because there is so much -- you know, within the footprint of the MISO and the way the pricing occurs, it is really difficult to attribute those types of things to whether it has a significant impact on the price at any given time or not.

Okay, let me move on to the contracts that you resigned. The market for -- for that kind of activity, is that a market that you see is favorable from your side or is it -- there's a lot of competition in that base?

By contract, are you referring to the U.S. Steel arrangement?

Yes, yes.

Well, the U.S. Steel is a retail customer of ours and has been. It's within certainly our area of franchise and we, with all of our large power customers, we've traditionally had long-term contracts that range from anywhere from, you know, a few years to several years. And in the case of that customer, we simply renewed that contract until 2013, and with several of our other large customers too. We're also talking about, again, renewing or extending those contracts out several additional years. But they are retail customers. In other words, they're not customers that are subject to customer choice. Minnesota is not a customer-choice state.

Just lastly, energy bill passing here, hopefully, this morning. Does that affect your regulated business, at all?

Well, I -- we think there's several things on the energy bill that we like. We like the provisions on the transmission, the back-stop authority. We think, generally, the PUCA repeal is positive. Hydropower relicensing, we do have several hydro facilities and, definitely, the reform there was necessary. Some of the other initiatives, the clean coal, those type of thing, we think are certainly be supportive of the ina -- of the future of the industry ,as far as new technologies, et cetera So, yes. Generally we think it's a favorable bill and we certainly supported it.

Good. Thank you.

We will take a follow-up question from David Lorber with Pirate Capital.

I would like to clarify one point made prior, with regards to Ormond Beach and the DRI process. Upon completion of the DRI process, how long does it take to then entitle the land, actually make it ready for sale?

Well,I think it's hard to predict exactly that timeframe, because once we file a DRI, then we'll -- again, we'll have to meet all the requirements for, again, the things we talked about, schools, primarily road issues, traffic, et cetera. And that, typically, is a somewhat of a negotiating period that follows that, where those issues are resolved. So, to say exactly how long it'll take, but typically, DRI, after they file it, it could be a year or two years, perhaps even longer ,depending on the issues that we run into.

What we have there, as Don mentions, traffic mitigation can be a real significant issue. And what additional things or interchange that needs to be built. That can take significant time to -- who will pay for that, where the -- certainly where the funds are coming from and what does need to be built.

My understanding is from a political standpoint, though, it's very much advantageous for the area of Ormond to entitle that land. Could that push the process along?

It certainly -- it certainly helps because, clearly, the city of Ormond Beach and the -- many of the other local governments are very supportive of the project and supportive of, obviously, developing that area and the interchange that's proposed. So, from a local government perspective, there is no opposition. In fact, there a widespread support so, generally, that's going to be helpful to the project.

In fact, I would add that's true to all of our projects. We have outstanding relationship with Town Center, all of our projects as well.

Great. Thank you.

We now have a follow up question from James Bellassa from D.A. Davidson & Company.

Your sales to other power suppliers more than doubled in terms of kilowatt hours sales. Can you explain what happened, what the benefit of that is?

Well, that was -- that was somewhat unusual for the second quarter. We -- one of the primary issues was we had originally had an outage scheduled for one of our larger units for the second quarter and we had moved that outage to the first quarter. So we had additional energy available to sell to the market. We also experienced higher off-peak sales, again primarily due to pricing in the second quarter than previous years. So, really the combination of those two events led to those higher sales. It's not necessarily something we'll -- we expect to see on an on-going basis. Again, primarily driven by the change in outage scheduling for one of our large -- one of our large generating units.

And one that translates into the margin. Just though I'd mention, some of that is purchased ahead for an outage, so that was purchased at market rates and sold at market rates. So there wasn't a large margin associated with a lot of those sales, as well.

Thank you. That's helpful.

Our next question comes from Stephen Roundpost with Talent (ph) Capital.

Good morning, everyone.

Morning. [multiple speakers]

One quick question on the real estate side. At the end of the first quarter, you had 83 million of land sales under contract, and now you've a little over 90 -- 90 million and your land sales in the interim. I guess, of 16 million. So, can we just kind of take one from the other and add back the sale -- the sales you realized in the quarter to get, kind of, what your -- what your quarterly sign up was for contracts from backlog.

Yes, In fact, to take -- to take you through those numbers, at the first -- end of the first quarter, Town Center had 56 million of contract, they sold $9 million of sales, which was all from contracts. So it is $7 million of new contracts during the quarter, to get you to a $54 million balance at the end of the second quarter. If you look at the remaining piece, there is 27 at the end of the first quarter. We sold $7 million of contract properties, as well. Had additional contracts of 17 million, which then at the end of the quarter, that balance was 37.

Great.

So, generally the math from quarter-to-quarter is what we sell. If most of it has been under contract and the difference is what contracts we have added.

Do you have an expected trajectory of the sales over the next few quarters and year? I mean, how do you see tha -- when do you see the bulk of the land being sold off?

It depends on, certainly, what location. I mean, where the land's been coming from. f you remember the first quarter, most was from the southeast or southwest, I'm sorry, part of Florida. This quarter, most was from northeast section of Florida. Obviously, Town Center now, the sales have started, those will be over the next few years, so a lot of what is going forward -- We still have some land in the southwest, as well, to sell. But a lot of our sales now going forward are going to be from the northeast, and a lot of those will come from the contracts, Town Center alone is $54 million under contract at the end of the quarter, so a lot of the sales will certainly come from that as we go forward.

For Town Center, what kind of time frame do you expect to sell the property over?

I think majority is two, three years, kind of time frame.

I think the majority, again, because it is a planned development community, as we discussed earlier. We will, obviously, as the infrastructure is completed and built-out, very much along our plan of selling at the various residential, commercial developers to ultimately construct that entire build-out, if you will, of the planned community.

And keep in mind that there's more contracts coming and certainly more sale. I mean, Town Center was 54 million under contract, but that certainly is not all the property. If you remember, there's 1,500, a little over 1,500 acres at Town Center available for sale and the contracted amount is certainly a lot less than that.

Yes. I guess what I was trying to understand was how the backlog is going to grow, how quickly your backlog is going to grow over the next co -- next year or so?

Well, the backlog of contracts is really the contracting land ahead of the sale. I mean, there's a general process we're going through, and a time line of selling this property, so that once we sell something, other pieces become more valuable. And certainly not wanting to sell it all on one day, for no other reason just for where prices have gone. And I think there's a general thought of two or three years, just taking the contracts up and taking the sales up, I think, as we go along.

Got it. I guess, Don made an interesting comment to start out on the reinvestment opportunities. Are you still looking in land in other parts of the U.S., like, I guess, in Georgia or southeast U.S. areas and/or other businesses? I mean, what kind of things are you looking at right now?

Well, we -- our looking for land is. again as we have said earlier, primarily in Florida and also in southeast Georgia. So we continue to look for parcels that we could purchase and entitle,as we have in the past, in those particular areas. We have efforts underway, again, looking at other opportunities, both in the utility side and in the other business areas, along the lines of our strategy to diversify and grow the Company. And, so, we have activities and we're looking and screening and evaluating. And, of course, when and if we find something, we will announce it at that appropriate time.

There is actually another company that is similar, I guess, in the sense that they have had a bunch of cash, a company called Central Hudson. It's a utility that's looking for awhile, and they have been hesitant to give the cash back to shareholders. I know you have been pressed on this a couple of times, so I don't want to belabor the point. But, I guess, how long will it take you, if you weren't able to find the right opportunities, over what time frame would you consider dividing the cash back or repurchasing shares?

We haven't set an absolute time frame on that. We -- since the separation of ADESA back in September, we've been less than a year, if you will, with the new ALLETTE and under our strategy. So, we certainly think there are opportunities out there. In fact, we know there are opportunities. We just have to find the right ones and that's -- obviously, that'd make economic sense and add shareholder value. So, that;s going to be, certainly, what we continue to look at for the foreseeable future here.

And we have completed our first strategic, I guess I would think of it as an acquisition, And that's buying out of the Kendall contract. I mean, the buying out of the Kendall contract, as I mentioned since the spin in September, was a large significant strategic move, as well as a use of some of our cash.

Yes, we're confident that we'll -- we feel pretty confident we'll find something and certainly we'll add shareholder value when we execute.

Good. Thank you.

Jessie Lauden with Zimmer Lucas has our next question.

Morning, guys.

Morning [multiple speakers]

I was just wondering, on the increased expenses at Taconite Harbor, how much of that is, kind of, one time in nature and how much of it might just have to do with, kind of, ongoing?

In that business segment, there was business expenses at Taconite Harbor for sulfur dioxide emission allowances. That is more an ongoing type expense. I mean, the cost of those, Taconite Harbor does need those emission allowances. The cost of those is up significantly from last year. That is more an ongoing type of thing that we'll see quarter-to-quarter. The other piece that was in non-regulated energy was less income within some of the businesses within that. And some of that, or a good part of that piece, was more not one time, but it is more of a timing issue. We had an outage. We had some land sales, Minnesota. We had some costs in revenue recovery from the transmission lines, so some of those pieces are time. But the Tac Harbor piece will an ongoing additional expense as the year goes on.

Just to follow up, how many, I guess kind of credits do you need at Tac Harbor or approximately?

I don't know.

That's not a -- that's not a number we have on the tip of our tongue here. think, as Jim said, the cost of the credits have gone -- gone up probably 60, 70% from last year, compared to this year.

Okay. Great. Thank you.

David Pickens with Deep Haven Capital.

Hi. A lot of my questions have been answered, but could you talk a little bit more about the contract situation you're seeing with the large steel producers up on the range? You mentioned on all requirements contract with U.S. Steel through, I think you said 2011, is that take-or-pay or there -- can you talk more about the details on that?

Well, there's a portion of it that's take-or-pay, but the real essence of the contract is that it's all requirements. In other words, they agree to take all of their future energy requirements, in the case of U.S. Steel, until October of 2013 from us So that, in essence, they're committing to that, which means they wouldn't be building any energy -- energy-generating facilities and/or if, for whatever reason, there was a some type of a customer-choice initiative in the future, they still would be committed to take all their electric requirements from us during that time period. But, there is a component in that contract of take-or-pay.

I mean is it an on -- is it largely capacity? Is it, you know, in terms of the way the billing breaks down, is it capacity, is it monthly capacity, is it a annual capacity, with energy being, you know, a fairly small variable piece of it?

Well, there's -- yes, mainly it is capacity and what they do is they nomi -- they commit to a certain level of capacity and then on what we call pull season times of the year, where it's basically the winter season and summer season, they can up or down their nomination within a range. So, in essence, they nominate a couple of times a year within a range, and primarily it's demand and then, with a demand charge, obviously, and a energy charge.

What we did here is very similar to the contract we had in place, other than we extended the term. W'd like to extend all of these contracts under very similar economic terms to what we have, to lock these customers in place. And they're in the K. There's a page of disclosure on these contracts. Who they're with, how long they run, how much is committed for ongoing years.

Okay. I will take that out. Thank you. And can you talk, When this Arrowhead Westin line finally gets completed, about how that will change the picture for you in terms of opportunities for off-system sales or marketing excess power?

Well, generally when the line is in service, the ability to primarily export from our area to the south will increase substantially. We -- we've modeled and done estimates that that export capability from our system, again, south to southern Minnesota into Wisconsin will increase approximately 600 megawatts. So, again, generally it opens up and takes a lot of the congestion, if you will, that currently exists in the export paths away.

From a pure marketing perspective, we're generally in balance on -- on our load and capability. So we're not -- again, with our retail lull, we're generally in balance with our supply. We don't have a lot of excess power to sell, at any given time. But, what it does allow us to do is, obviously, expand the reach of when we buy power or we do have some to sell, to a broader region without having to deal with a lot of congestion. Now, of course with MISO, the congestion is really dealt with through congestion fees and charges. So, the fact that we'll have lower congestion should give us, generally, lower prices, less congestion, whether we are importing or exporting.

Okay. The last question I have has to do with the real estate in Minnesota. You have been selling a little bit of land, parcels here and there, but Minnesota Power does own a lot of, what would kind of be described as recreational land, waterfront land, that forever has been leased. Has there ever been a look at conv -- at selling that outright? Kind of, seems to me that given the income from the lease payments and what the land would probably be worth on the open market, that there might be opportunities to take that and reinvest in higher return businesses.

Some of the land that we lease around some of the reservoirs we have, we have to own. We can not sell that because it's a part of the reservoir, it's part of our utility operations. But some of the land that we got within -- that we received as part of the LTV purchase, we have been -- we have been selling off pieces of that.

I think the way to look at it is, as Jim said, the hydro reservoir land we lease is again -- because we have to control the levels of those reservoirs, as part of our -- all of our licenses and requirements for those water resources with the Federal Energy Regulatory Commission, that we don't see the option to sell that land. But the land that we received with the purchase of the Taconite Harbor plant from LTV, our strategy is to sell off the land. Again, as you said, rec -- some of that has water associated with it. But, most of it, much of it, is parcels of lands that's, you know, 160, 300, 400, 500 acre parcels of primarily woodland. But it does certainly have some attraction to people who are looking for camps, hunting facilities, et cetera. But we will sell the land off over time.

We wish we could move it to Florida. [laughter]

It's not quite as valuable up here.

Alright. No, I only ask because we have seen WPS take a fair amount of land that was on legacy reservoirs of theirs, and somehow managed to pull it out of the FERC license and title it in such a way they can still control the reservoirs, but still managed to sell it.

Yes, we're familiar with it. I think most of the land, if I recall, was along the riverways. I know they owned a fair amount of land along some of the rivers. And we have, in the past, sold some of our land along some of the rivers that we had land on, too. But the land that we are leasing now, they're strictly on the pond reservoirs, if you will. So, again, as part of our license, we have an obligation to hold and control that and, of course, it's also important that we do hold that land, so that we're able to control the waterflows for our hydro generation.

All right. Thank you.

There are no further questions at this time. I'll turn the conference over to Mr. Shippar for any additional closing remarks.

Well, thank you all for joining us today. We're very pleased with our year-to-date results, and very confident about our future, and we look forward to speaking with you again at the end of the third quarter.

And that concludes today's conference call. We thank you for your participation and have a nice day.