ALLETE Inc (ALE) 2005 Q3 法說會逐字稿

Welcome everyone to the conference call announcing Allete's third quarter 2005 financial results. Today's call is being recorded. Your line will be muted for the presentation then we will conduct a question and answer period. [Operator Instructions].

This conference may contain forward looking statements within the meaning of the Federal securities laws including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and expectations that are not historical facts. These forward-looking statements are made pursuant with 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 also statement are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements there in. Additional information concerning potential factors that 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. Donald J. Shippar. Please go ahead, sir.

Good morning, everyone. Today we reported third quarter earnings per share from continuing operations of $0.58, a 61% increase over last year when you exclude the one time charge for the prepayment of debt in the third quarter of 2004. Allete's financial performance continues to be driven by strong sales in both of our businesses. Our year-to-date earnings are higher than we expected at the beginning of the year despite a $3.3 million after tax impairment charge in our emerging technology portfolio in the first quarter.

When combined with our expectation for the fourth quarter we are now increasing our 2005 earning guidance from our previously announced 45 to 50%, to 60% earnings per share growth from continuing operations over 2004 excluding the Kendall County transaction charge. We will provide guidance for 2006 during our year end earnings call in February. Some significant events occurred during the quarter.

Within the regulated utility business we reached a long-term power supply agreement with Mittal Steel company to provide all electric service needs through December, 2012, for its [Minorka] mine. Mittal is Minnesota Powers' fifth largest customer. That agreement has been filed with the Minnesota Public Utilities Commission for approval. During September the M. P. U C. approved the power supply agreement with the United States Steel Corporation which we announced last quarter. U.S. Steel is Minnesota Powers' largest customer.

We expect to be successful with additional industrial customer contract extension going forward. Also during the quarter, Allete properties filed a development of regional impact, or DRI, application for it's Ormand Crossings project. We expect the DRI approval process will be concluded within approximately 16 months at which time we would receive a development order for the city of Ormond beach. The development of this project will help ensure a continuing income stream from the real estate operation for years to come. Crossings.

At this time I will turn the call over to Jim Vizanko who will provide detail on our quarterly financial results. Afterwards, I will have some additional comments then we will take your questions.

Good morning, everyone. We had a very good third quarter with each of our businesses showing double or triple digit percentage earnings growth over the last year's third quarter.

Let me give you some details for the individual businesses. At the regulated utility, net income was up 29% over last year, reflecting higher margins for all Minnesota Power customer classes. Retail and municipal kilowatt hour sales were up 4% this quarter from the same period last year after being up less than 1% for the first half of the year.

[INAUDIBLE] customers continue to operate near capacity levels and higher residential and municipal margins were partially the result of very warm summer this year compared to a very cool summer last year. Net income was also higher than 2004 for not regulated energy operation, the primary reason for the increase is the absence of the loss from the Kendall County contract.

BNI Coal sold 90% more coal than in the third quarter 2004 due to a plant outage at its largest customer, the [INAUDIBLE] generating station last year. Higher emission allowances and other expenses more than offset the effect of higher margins at the Taconite Harbor generating facility. If you had a chance to look at the 10(Q) we filed this morning will you notice the expanded disclosure we have provided for our real estate business.

We are now reporting sales activity and inventory for the Town Center project in either square feet or residential units which are more relevant measures of value than acres sold for projects of this nature. We will continue to report sales activity for our non-project restate in acres. In addition we have begun providing the quantity and contract sales prices of real estate under pending contract. For the third quarter real estate net income rose by 167% over last year.

At Town Center we closed transactions for the sale of 246,000 square feet of commercial property for $5 million for an average of $20.33 per square foot. We also sold 521 acres of non-Town Center property for $7.6 million for an average for over $14,500 an acre. I would like to remind you that we recorded real estate revenue and expense in accordance with percentage of completion accounting.

This quarter we deferred $2.5 million of revenue and $700,000 of expense. As of September 30 with have $9.4 million of deferred profit on our balance sheet and we expect most of it will be booked to income over the next 15 months. Real estate pending contracts rose to $94.2 million at September 30 from $90.7 million as of June 30. Pending contracts for Town Centers rose to $64.6 million during the third quarter compared to $53.5 million in the second quarter. The prices on these contracts range from 20 to $50 at an average of $29.70 per commercial square foot.

At 15,000 to 40,000 at an average of $20,700 per residential unit at Town Center. Pending contract prices range from 8,000 to $524,000 at an average of $25,600 per acre for all other properties. For your information our real estate inventories sustained no material damage during the hurricanes that occurred in the southeastern United States this year.

Turning to our other business segment the debt prepayment charge of $10.9 million in the third quarter last year is a main difference year over year. As in the past we've elected this quarter to account for stock based compensation in accordance with APB opinion number 25, counting for stock issued to employees.

Accordingly while we recognized expense for performance share, awards granted, we do not recognize expense for employee stock options granted. We will begin recognizing stock options expense in 2006 and estimate that the implementation of these new accounting standards will not have a material impact on our company.

Now I would like to talk about our expectations for the fourth quarter. Year-to-date our earnings per share from continuing operations excluding the Kendall County transaction is $1.63, or 36% over the same period last year, excluding the debt prepayment charge. We expect that income for the fourth quarter will significantly exceed that of last year's fourth quarter and result in 60% EPS growth for the year.

Excluding the $11.5 million gain for the sale of stock held in benefit company plans last year's fourth quarter posted net income of $4.4 million. Earnings in the fourth quarter last year including a loss related to the Kendall County contract, an emerging technology portfolio write down, maintenance expenses related to a planned outage at the Square Butte generating facility and a small loss in our real estate business.

Our 2005 guidance of 60% earnings per share growth over 2004 excludes the $10.9 million early payment of debt charge in the third quarter of last year and the $10.5 million gain from the sale of Adesa shares held in the company benefit plans in the fourth quarter of last year. Don.

Thanks, Jim.

I would like to give you an update on some other items before we take your questions. A few weeks ago Minnesota Power announce add $60 million environmental initiative which is expected to significantly reduce emissions from generating facilities in northeastern Minnesota while maintaining reliable and reasonably priced energy supply to our customers. Minnesota Power will cease current cost recovery outside of a rate case for the plan. Also in October we proposed to redirect or Taconite Harbor generating assets from wholesale sales to regulated sales to help meat our forecasted base load energy requirements.

While we propose Taconite Harbor would become part of Minnesota Powers rate base assets as of January, 2006, current wholesale contracts sourced from this plant will be honored through their terms. We do not expect this proposal to have a material impact on earnings and I'll refer you to item five in our 10(Q) for more information on this topic. On another topic we have a contractual opportunity with W

PS resources to make an equity investment in the American transmission company which is constructing a 250 mile transmission line from Wausau, Wisconsin to Duluth, Minnesota. Consistent with our growth strategy we intend if approval by other parties to invest $60 million in AT C. by the ends of 2006 and we will update you on any new developments when they occur on this project. At this time I will ask the operator to open up the lines for your questions.

[Operator Instructions]. We will take our first question from James Bellessa from D.A. Davidson and company.

Good morning. Congratulations on a solid quarter.

Thank you

On your earnings per share guidance it appears that you've shifted from talking about an increase from continuing operation income to an increase in EPS from continuing operations. Is that correct?

No, our guidance at the beginning of the year was always on an earning per share from continuing operations basis. I think we've been consistent with that.

I had gone back to the previous guidance, I found that it was not on an EPS basis, it was just on a continuing income basis. But nonetheless is the base number of last year then $1.38, is that what we are talking about as the base year? And then 60% on top of that?

The base year of last year is $1.36.

$1.36.

Yes, it was $1.37 reported and there was a penny change for the two adjustments that we made. We took out the $11.5 million gain on Adesa stock and the $10.9 million expense for the prepayment of debt as both as unusual one time events.

The interest expense for non-regulated energy operations was 1.8 million in the most recent quarter. And that's up from 1.6 in the second quarter. And that, with the assignment of the Kendall County contract, I would have thought you would have had a decline in interest expense. What did I not understand there?

The assignment of the Kendall County contract is something that we are currently in discussions with. It has not happened. Our plan is if we get approval that is to have that transaction actually happen in the beginning of next year, 01/01/06. So that transfer has not happened yet.

Do you still own that contract, then?

Oh, Kendall, I was talking about Taconite Harbor, I'm sorry. No, the transfer of that did happen on April 1.

And then why didn't interest expense go down? You would have--

The interest expense of the non-regulated generation, there are still assets there. The assets that are there are associated with Taconite Harbor and we still allocate interest there, the Taconite Harbor facility is still within that segment. There was never interest assigned to Kendall because in Kendall we never did own the asset. That was a lease.

So the current level of interest expense in the non-regulated energy operation is about what it should be and will continue at this level?

It will continue at that level until Taconite Harbor as our plan is to move that into the retail operation and then it will decline.

And you are going to do that on January 1 of '06?

That's our plan, if we get approvals to do that.

And then the other segment had $0.5 million of interest expense. Is that a maintainable level going forward?

Yes.

In your data about kilowatt hours sold your non-regulated energy operation had a slight increase but I would have thought with the Kendall County contract being done you would have had a steep decline. What did I miss there?

With the Kendall County contract, because of the spark spread and because of power prices relative to gas did not operate very much during last year and during the third quarter. So that -- Kendall County certainly -- being gone made a difference but the amount of power it sold in 2004 was not significant in the third quarter.

Thank you very much.

Our next question comes from David Schanzer with Janney Montgomery Scott.

A couple of questions. Another kilowatt hours sold question. The large CN I. quantity sales number is the highest it's been in any quarter I've seen recently with the exception maybe of the fourth quarter of '04. And it certain is higher than any of the third quarter numbers in prior years. And I guess the question is, does this mean that the Taconite business is still as robust as it has been? And I guess the Chinese are taking every ounce that they can get? Is that a correct assumption?

Well, certainly the Taconite business has been very, very strong throughout the year and continues to be very strong and, based on what our customers are telling us, they expect it to remain strong. And I think that's due to certainly domestic steel production but also foreign steel production, a combination of the two. So they run at very, very high levels, as you said unprecedented levels and through the third quarter and we expect and anticipate they will continue to run at high levels.

Is there any idea how long that [INAUDIBLE] can continue? I mean, isn't this kind of a cyclical industry?

Well, certainly the history has been it's been cyclical. We obviously can't make long-term forecast as to how strong they will be off in the future but again they continue to tell us and information us of their expectations over at least the next several months, they expect to continue to operate at very high levels.

Ok, moving over to the real estate business , in your Q. you are showing some significant sales both at Town Center and other land resulting in potential contract sales prices of about 95 million. Is there any way for you to let us get a sense what have percentage of the real estate inventory that represents?

Yes. And that -- you can calculate this quarter as well as going forward, David, if you look at -- we give now the units under contract.

Right.

And then we give also the inventory that we have, the total inventory. If you look at Town Center what's under contract is a little over 40% of the total inventory.

Okay. And the other land what would that represent?

It's about 25, 27%.

Okay.

And that you will be able to calculate every quarter because.

That's great. That's great that we have that info. All right. Well that's super. Thank you very much.

Thank you.

We will take our next question from Todd Bensil with BB&T Capital Markets..

Nice quarter. Drilling down on those numbers that you were just talking about for Town Center and the other properties in the real estate segment, briefly, looking at the range of values that you sight for what you have in backlog pending contracts at 9.30, were residential units at Town Center, you are talking about a range of 15,000 to 40,000, can you give us any color on what the difference is between those two values and because obviously they are right in the same place, so is it different product types, is it different timing on when the contracts were signed?

Yes, I believe both of that. I mean the contract types, I mean one thing -- residential unit could be a multi-, multi-family, it could be residential lots, certainly location and certainly with all these contracts the timing of when we signed the contract. I think you're absolutely right on those, two, and the difference here is also the type of unit that it is, single versus multi-family versus nursing home versus some different residential.

I guess, part of what I'm getting at is how much of an impact the timing factor on that might have had, so can you talk about maybe for contracts you signed recently or land that you are marketing now; you know, how those prices would compare to the prices of what you have in backlog, sort of how that whole thing is trending?

I don't have any exact numbers but certainly the trend in values has gone up. I think you -- we have not sold a residential unit but you can certainly see it in the commercial. We've been selling -- for the quarter we sold at an average price of $20 per square foot and the contracts are closer to $30, just a little under $30 per square foot. So I think some of those kind of thing you can really see in our commercial piece.

Okay. And I was actually going to come around and ask about that. Obviously there's always going to be partly an issue of mix and partly an issue of timing but is that increase from your sales as you say at 20, your contracts are closer to 30, is that primarily related to just the fact that we have gone through and are at a later stage in the project and the market has appreciate add little bit, so is that partially timing or is there more of a mix factor in that?

Both of those, certainly some of the mix, some of the timing of the contracts. The [INAUDIBLE] for our commercial our first quarter of sales -- the second quarter was the first quarter of close sales for Town Center and some of those were early contracts which we tried to get people signed up so then that brought in more additional buyers. So some was used to get large parties in, not a loss leader but to bring in players that would follow some of those original buyers, some of that, some of the timing and certainly some of what type of commercial as well as residential units we sold.

Okay. Thanks a lot.

As a final reminder, [Operator Instructions]. Next question, David Lorber with Pirate Capital.

Good morning. I think that what Todd is trying to get at is, you know, right now the commercial square foot is running just under $30 per square foot. Sales that are being contracted today, are they above $30 per square foot? Are they below $30 per square foot? How do we think about what the market looks like in today's environment and in the future environment versus when some contracts may have been signed that may be dragging down that number a little bit?

Well, certainly a piece of that price difference from 20 to $30 is timing. It's certainly the market prices have gone up in Florida as well as our properties. So certainly that is, is a piece of that. Certainly another piece of that is the mix of the types of property we are selling that incorporate that, but I think the answer to whether the property values are increasing since we've done these contracts I believe the answer is yes. If you followed some of the reports in Florida I think the one report that was, that we referenced housing prices generally across the state have gone up 30% in the last 12 months.

So certainly that's one indication of what's happening with the residential real estate at least in Florida. If prices should go up as well as some of the sales happen which leads to more development which leads to more value to all of our property that we have.

I think as Jim mentioned on some of the commercial sales we also have efforts to track certain anchor tenants to some of these areas that obviously tend to draw in other commercial developers and commercial projects once those major tenants locate in some of these critical, or certain areas in some of the developments.

So kind of globally speaking for Town Center both in the commercial and residential side, if we look at the current mix of contracted square footage in units and look at the potential remaining mix of uncontracted commercial square footage in residential units, how does that mix compare to the mix that's in the contract universe today and do we expect that contract number of 20,000 per units for residential and 30,000 per square foot -- $30 per square foot on the commercial to continue to rise?

Generally speaking again with the trends we are seeing down there in Florida with property values continue going to up as they have in the certainly in the past several years particularly but the last year we would expect that future prices would continue to rise.

The $60 million investment by year end '06 with W PS what type of return threshold are you looking for on that investment and when is the timing of actually realizing revenues from that investment?

Actually the investment will be in the American transmission company in Wisconsin and they are currently regulated by the Federal Energy Regulatory Commission, the FERC so to speak, their current allowed ROE, or return on equity, is in the mid 12% region. So what we are working on now and the details of the arrangement, again we mentioned our intent is to invest $60 million by the end of 2006 and we are currently working with the American Transmission Company and with Wisconsin Public Service Resources Corporation and working out the timing of those investments and when they would actually go in between now and the end of 2006 but we expect that we will be up to the 60 million level no later than the end of next year.

And with regards to the balance sheet away from that investment what can we expect cash to be used for that is coming in for real estate transactions? We have not heard anything on that front away from this one arrangement which had been an option to be guys for quite sometime, what do we expect to here in the future or can we expect stock buybacks given where the stock is today your real estate is probably cheaper than any real estate you can go out and buy?

Again I think with our investment in the American Transmission Company, the fact that we are going to be investing approximately $60 million in environmental upgrades at our existing facilities which again we expect to get current cost recovery on, with the Kendall transaction we did earlier this year and certainly I think we made several significant moves to use that cash in an appropriate manner that provides the relatively high and what we feel are good returns. Beyond that, Jim, I would ask you for any other comments far as the cash position.

Our strategy hasn't changed in that we are looking for growth opportunities in real estate as well as in the regulated electric business as well as other businesses and we do plan on deploying that cash during the year and in other investments. And I think as Don mentioned we made that commitment with the funds that we get out of the Kendall contract, the $60 million investment in transmission, the $60 million in growth in the electric business and pollution control investment. So I think we are moving along on that strategy and plan to continue that strategy at the current time without share buybacks.

And even though those investments we just talked about are on the utility side I want to emphasize again that we continue to look for additional real estate in Florida and other parts of the southeast near Florida and also to continue to look for other businesses and diversification efforts along again the strategy that we outlined approximately 18 months ago and we continue to work on.

Thank you.

We will take a follow-up question from Todd Bensil. with BB&T. Capital Markets.

Can you give us any color on how demand trends are showing up at your customers at the Town Center property? I mean can you talk of anything about any wait list that there maybe for residential units or the demand that the developers who are buying land from you guys are seeing?

We continue to have a great deal of interest from all parties down there relative to those parcels whether it be residential or commercial. And just to remind everyone that Town Center is a planned community development so to speak so we have certainly a significant say in what gets built there, what type of buildings, what type of development to all keep that in the context of what ultimately we would like to see that planned community look like. But certainly there is an ongoing tremendous amount of interest from homebuilders, commercial developers, et cetera, in those lots and located in that particular development. Beyond that I mean we can't specifically say who the parties are or how many exactly there are but just there is a lot of interest.

Thanks.

James Bellessa from D.A. Davidson and Company has a follow-up question.

The guidance for fourth quarter, would you please review that again, please?

The guidance for fourth quarter is last year, if you take out the gain from Adesa stock we had a quarter of $4.4 million last year. And within that, within that income of $4.4 million, there was a loss for Kendall County because we owned Kendall County in the fourth quarter of last year -- or not owned but we had that contract in place. We had a write down of emerging technology during the quarter. We had an outage that continued into the fourth quarter for Square Butte which we will not have this year and we had a small loss in our real estate business. Those are pretty much the one time type of events that happened in the fourth quarter of last year which we do not perceive happening for the fourth quarter this year which helps explain some of the difference between the income of $4 million last year and what we expect to get this year to get our 60% guidance.

I'm looking at the 10(K) -- or 10(Q), rather, and looking at the square footage of the commercial property at the Town Center. Has that changed? I had a figure of a little over 2 million earlier and now it appears to be 2.9 million.

We've added what we say is commercial now; we've added all of the nonresidential piece. We've added -- while we used to have commercial office and industrial, are now combined into one column of commercial.

Thank you.

As there are no further questions at this time I will turn the conference over to Mr. Shippar for any additional closing remarks.

Well, thank you again for joining us this morning. We look forward to speaking with you again when we report our 2005 year end results and provide our outlook for 2006 next February. Thank you and good morning.

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