ALLETE Inc (ALE) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to this conference call announcing ALLETE's fourth quarter 2005 financial results. Today's call is being recorded. [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 facts.

These forward-looking statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the earnings release distributed this morning reflect management's best judgment at this time, but all such statements are subject to numerous risks and uncertainties which could cause actual results to differ materially from those expressed in or implied by the statements therein.

Additional information concerning potential factors that could affect future financial results is included in the Company's annual report and from time to time in the company's filings with the SEC. At this time, I would like to introduce the Chairman, President, and Chief Executive Officer, Mr. Donald Shippar. Please go ahead.

Thank you. Thank you for joining us this morning. With me is ALLETE's Chief Financial Officer Jim Vizanko. This morning, we reported our year-end financial results for 2005. As you can see, we've had an extremely successful year. Our financial performance was driven by vigorous sales at both our energy and real estate businesses, reflecting the vibrant economic conditions in the markets where we operate. Jim will provide a financial overview in a few moments.

We also had an extremely successful year strategically. Let me take a few moments to recap a number of milestones and strategic accomplishments for ALLETE during 2005. We assigned the Kendall County Power purchase agreement which eliminated projected annual after-tax operating losses of approximately $8 million. We announced our planned investment in the American Transmission Company, which is expected to be a significant contributor to our ongoing earnings. This is a good example of how we will use our cash to invest in the growth opportunity within our existing businesses.

We extended the contracts of five of Minnesota Power's customers in the Taconite Mine or paper and pulp related industries. One of these contracts has an earliest termination date of 2010, while the rest extend into the 2012, 13 timeframe. Minnesota Power announced a major environmental initiative which is expected to significantly reduce emissions from generating facilities in northeastern Minnesota, while maintaining reliable and reasonably priced energy supplies to its customers. Minnesota Power has requested current cost recovery outside of a rate case for this plan.

Minnesota Power entered into an agreement to purchase renewable energy from a new wind facility to be built in North Dakota and is continuing to pursue the purchase of renewable energy from a new wind facility being planned for northern Minnesota. At ALLETE Properties we recorded our first closings at the Town Center project, bind our first sales contract for the Palm Coast Park project and began the DRI process for the Ormand Crossing projects.

These three projects will provide significant earnings for our real estate businesses over the next several years. We sold our last remaining water and waste water utility completing our exit from that business. We sold in Enventis Telecom which provided us $29 million of cash, and we saw positive results from both the resolution of income tax audit issues and comprehensive tax strategy initiatives yielding one-time and ongoing tax savings.

In short, we had a very productive year. One that has positioned us for continued earnings growth. At this time, I will turn the call over to Jim who will give you the financial overview for the year and our earnings guidance for 2006. Then I will follow up with some additional comments before we take your questions. Jim.

Thanks, Don. And good morning. For 2005, we reported earnings per share from continuing operations of $0.64, which includes three transactions that were not representative of ongoing operations. And therefore, should be excluded when comparing year-over-year results. The first is $1.84 per share charge related to the assignment of the Kendall County contract that occurred in the second quarter. During the fourth quarter, we recorded income of $6.2 million or $0.22 per share, for two tax-related items that I will explain in a moment. Excluding these items, our earnings per share from continuing operations were $2.26, which we believe is most indicative of our ongoing earnings power.

The 2005 earnings base of $2.26 represents an increase in earnings from continuing operations of 71% from 2004. This follows increases of 15% in 2003, and 26% in 2004. We expect this track record of strong earnings growth will continue into 2006.

Now we will provide some details for each of our segments. For the year, income at the Regulated Utility business was up $8 million, or 21% from 2004. For the quarter, net income increased $4.8 million, or 50% over the same period a year ago. Kilowatt sales and margin were up for each of Minnesota Power's customer classes. Sales to retail customers increased, due to improved economic conditions in our service territory and due to warmer weather during the summer months. Minnesota Power's Taconite mining customers are operating at full capacity.

Sales to other power suppliers were also higher during 2005, as were market prices for off-peak energy sales. Fuel and purchase power expenses were lower than in 2004. Last year, we needed to purchase power to cover outages at the Boswell and Square Butte generating facilities. More on the topic of fuel, I want to point out that we have not experienced any delivery problems with our coal supply, as has been the case with many other utility companies.

Other O&M expenses were higher in 2005 than 2004. Expenses related to planned maintenance performed at Company facilities contributed to this increase. As did MISO transmission costs and higher pension expense. Excluding the $50.4 million one-time charge associated with our exit from the Kendall County purchase power contract, net income from the Nonregulated Energy Operation segment was up $4.8 million during 2005. For the quarter, net income was $2.3 million higher than in 2004.

This year, we recorded only one quarter of operating loss from Kendall County versus the full year in 2004. Net income from BNI Coal was higher in 2005, primarily because its largest customer, the Square Butte facility, underwent a maintenance outage last year. Therefore, BNI did not -- or Square Butte did not purchase as much coal as it did in 2004. Net income for the Taconite Harbor facility was down in 2005. Increased revenue from sales was more than offset by higher emission allowance and outage related expenses.

At the Real Estate segment, net income increased $3.2 million, or 22% for 2005 over 2004. During 2005, we recorded our first sales from the Town Center project. 643,000 commercial square feet at an average of $23.60 per square foot. Also during the year, we sold 1,102-acres of nonproject land at an average price of $34,600 per acre. Which is more than 50% higher than the per acre average in 2004. At year-end, we have $8.6 million of deferred profit before taxes and minority interest on our balance sheet.

For the quarter, net income for the Real Estate business was up $4 million over last year. This segment posted a slight loss in the fourth quarter of 2004. During the quarter, we sold 44-acres of nonproject land for an average of $134,000 per acre. At year end, penny contracts were $94.9 million, and includes $63.7 million for the Town Center project, and $7.5 million for the Palm Coast Park project.

The prices for the Town Center contracts range from 20 to $50 at an average of $29 per commercial square foot and 15,000 and 40,000 at an average of $21,000 per residential unit. All land with an initial marketing phase of the Town Center project has been sold or is under contract. Additional land within Town Center will be sold after the this phase has been substantially built out over the next few years. This planned orderly buildout and sales strategy does not attract the speculation-driven buyers to our projects that others may be subject to. And this is by our design.

For the Palm Coast Park project, design has been completed, permitting is proceeding, and infrastructure construction is expected to begin this year. One residential development track is under contract at an average of $15,000 per residential unit. We may also receive participation revenue from this contract, which could substantially boost the per unit average.

Negotiations are currently under way to sell two additional residential development tracts. Commercial sites will be available for sale beginning in 2007. The Ormand Crossings DIR application was submitted in August of 2005. We anticipate the DRI approval process will be concluded in late 2006. We do not anticipate any sales to be made in Ormand Crossings until 2008. For more detailed information about this segment, I refer you to 10-K which we will file tomorrow.

Our other business segment recorded $2.9 million of income for 2005, compared to a $10.6 million loss in 2004. However, both years included events not representative of ongoing operations. The 2004 one-time events were at $10.9 million debt prepayment charge in the third quarter, and $11.5 million gain on the sale of ADESA stock in the fourth quarter for a net $600,000.

In 2005, we implemented a comprehensive tax planning initiative that resulted in a nonrecurring deferred tax benefit, and we successfully resolved some income tax audit issues from prior years. Combined, these two items totaled $6.2 million, or $0.22 per share.

You will note that we incurred a negative effective tax rate for 2005. If you exclude these items, the other business segment recorded in the $3.3 million loss in 2005, versus a $2.2 million loss in 2004, an improvement of $7.9 million. The increase is due to higher earnings on our excess cash, lower write-offs within the emerging technology investment portfolio, less corporate expenses, and lower interest expense due to smaller debt balances.

For the quarter, again excluding the one-time events, net income for the other segment was a $1 million this year, compared with the $1.3 million loss in the fourth quarter a year ago. The difference is mainly due to emerging technology investment portfolio write-offs last year.

As a reminder, all results from Enventis Telecom were moved to discontinued operations. Also included in discontinued operations are the remaining expenses from the Water Services business, and in 2004, the net income from our Automotive Services business that was spun off in September of 2004.

Our cash balance at year-end 2005 remains at around the $200 million level, in line with the balance at year-end 2004, excluding restricted cash. This is significant when considering the $78 million spent to assign the Kendall County Power agreement in the first part of 2005. The balance reflects strong cash flow from our businesses throughout the year, and the cash received from the Enventis Telecom sale.

In 2006, we were receiving approximately $28 million tax refund from the Kendall County transaction in the first half of the year. As for uses of cash, we have earmarked $60 million for the investment in ATC, $60 million to be spread over the next three years for the environmental initiative, and an increase in CapEx of about $50 million over 2005, primarily related to replacements, upgrades and environmental expenditures at the Regulated Utility.

Now, he I would like to turn to earnings guidance for 2006. Excluding the Kendall County charge, and one-time tax items recorded in 2005, earnings per share from continuing operations was $2.26. We expect 2006 earnings per share from continuing operations to increase by 15 to 20% over the $2.26 base EPS for 2005. This guidance includes earnings we expect from the ATC investment, but does not include earnings from additional investments we may make in other growth initiatives.

Net income from the segments that make up our energy business, Regulated Utility, Nonregulated Energy Operations, and ATC, is expected to increase, primarily from the elimination of the Kendall County loss and from the net income contribution of our investment in ATC.

We intend to invest $60 million into this business during the year and earn a return on equity in excess of 11%. We anticipate the high demand for electricity from our customers will continue through 2006. In the other segment, we do not project further write-downs in our emerging technology investment portfolio. We expect net income from our Real Estate business to grow over last year. The Town Center project will be a larger contributor to real estate earnings this year, as impending contracts continue to close.

Also, the first portion of the Palm Coast Park contract will close late this year. In addition, most of the $8.6 [million] of deferred profit on the balance sheet at the end of 2005 will be reflected in net income during 2006. We continue to see strong demand for our Florida properties. Developer inquiries remain firm. The quality developers and our relationships with them remain strong. Price points on contracts currently under negotiation indicate similar pricing to those in our current pipeline for comparable land. Don.

Thanks, Jim. As we head into 2006, our strategy remains fundamentally simple. We will pursue a consistent growth in our Energy and Real Estate businesses and invest in business ventures that build shareholder value. As Jim just mentioned, our performance over the past several years has rewarded our shareholders while setting the stage to deliver strong earnings growth once again in 2006.

Now, before we take your question, I would like to make a couple of additional comments. First, I will give you an update on the Minnesota Public Utilities Commission action regarding MISO Day 2 costs. On February 9, the MPUC granted a rehearing to the MISO Day 2 docket. The MPUC will review the MISO Day 2 costs to determine which costs should be recovered currently through the fuel clause and which costs should be accumulated and deferred for potential recovery through base rates.

On another note, due to our strong balance sheet and our near and long-term earnings outlook, the elite Board of Directors recently declared a $0.3625 per share quarter common stock dividend, an increase of 15%. Based on our earnings guidance, the analyzed dividend will result in a payout ratio of approximately 55%. The Board is confident that we have the ability to provide consistent future dividend increases while at the same time funding our growth strategy. At this time, I will ask the operator to open the line for your questions.

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from Bob Chewning from BB&T Capital Market.

Good morning.

Good morning.

Couple of questions here. First off, regarding taxes, if I take out the special items, it looks as though the effective rate for this year was about 33%. I don't know if that agrees with your calculations, but I'm wondering what the effective rate we should be assuming for '06 is?

The effective rate will be slightly more than that. The reason in 2005, if you take out those two items, there were some permanent items that impact and make that tax rate lower as well, and since we have a lower income in 2005, because of Kendall, than we will in 2006, that tax rate will be going up. The permanent impact since it's fixed will be less. So we will be closer to 40% in 2006 than the number for 2005.

Okay. I guess secondly, with regard to Taconite Harbor, so that had lower than expected earnings contribution. Can you give us an idea as to what its contribution for the year was? And what you would expect for '06?

For '06, it will become a part of Regulated. Part of the resource plans that we submitted with the commission, that's going to become a part of the Regulated Operations. So its costs will be similar to costs at all of our other generating station, the Boswell 4, or other generators. So it will be part of their rate-regulated piece, and the fuel and things will go through fuel costs.

Contribution for 2005, the primary reason for the dip in 2005 is we had some -- call it extraordinary outage expenses on one of the units in particular. We have a scheduled outage this year, and we had some unexpected outages that we had to repair and several boiler leaks, two leaks, et cetera. So that really resulted in the lower performance for 2005. Certainly, we're not expecting that to be any kind of a permanent issue at all.

Would it be fair to say that the income levels should be around 4 million or so from that project?

The earnings of 2004 were about that level. And they were lower in 2005, because as Don mentioned, the outage and they paid additional amounts of money for sulfur dioxide credits. So it was lower than that.

Now, when it goes into the Regulated piece, the contracts that are still with that, that the selling of the power will still remain. So we continue to get the revenues from those.

So it should -- it should make the same contribution that it has in the past. One advantage is that the SO2 credits that they were purchasing, now they will use some of the extra credits that we have from the Regulated business, because now it will be part of the whole Regulated Operations.

Okay. And lastly, with regard to Real Estate, you suggested that income would be above that in '05. Could you give us maybe a range for what income from that segment could be in '06?

We expect it to grow. As far as individual segments, guidance, we have not done that. I think similar to what we have in the past, I mean we're trying to make Real Estate consistent and growing, and I think it -- this last year increase, we had from last year, we had 3, almost a little over $3 million increase from '04 to '05. I think that's somewhat of an indication of what we're looking at for '06. I mean, we want to continually grow the earnings from this segment.

Okay. Thanks a lot.

We will go next to David Schanzer with Janney Montgomery Scott.

Hi, good morning. Congratulations on a good year.

Let me ask that last question just a little bit differently, so you don't get -- have to get specific. If you were looking at this projection of growth for '06, this 15 to 20%, would it be fair to say that about three quarters of that growth would probably be from Real Estate? I mean is that an easier way of looking at it?

I don't know if it is exactly that number.

Oh, no, I meant in a range. 2/3s , 3/4s, something like that.

Well, you got the ATC in there.

I would think less. You've got emerging technology write-offs, about $4 million in '04 -- or '05 that won't happen in '06, so that is a significant piece. And then you have the new ATC investments as another significant piece. Kendall County not having a quarter of that, that is a couple million dollars. So there are significant other pieces, too. So I don't think the Real Estate is that large of a total.

Okay.

So, you know, it is something maybe less than two-thirds but in that range.

Well, probably less than half.

Oh, less than half? Okay.

Because there are a lot of other positive things. I mean I think the lack of Kendall, the lack of venture capital, ATC, and certainly, Real Estate is a positive goal in the '06 picture as well, but there are a lot of other pieces to it. It is certainly not all Real Estate driven.

Okay. The ATC, if you were to take say a three to five-year view of it, what kind of growth rate for EBIT or net would you see out of that business?

Well, the immediate '07 is the full-year impact, '06, as we invest the --

I know. I was talking three to five-years.

It is really driven a lot by the capital calls. And then as we invest in the capital calls, it is really where the growth comes from. So it is a matter of their capital needs, and our percentage of those capital needs. I think it's -- I think we estimate our capital probably grows about 5 million a year, I think.

I think that's right, David. I think their long term forecast for investments is a little over 3 billion I think, but that is over 10 years. We will have an opportunity to participate at, I think, about an 8 or 9%. Participation rate and that if we choose to. Of course, over that time period.

And there is one other piece of growth. There is a piece of growth for capital costs and there is a piece of growth that we receive, than is the reinvestment of their own equity. Because they were not paying out 100% of dividends, so their equity grows every year. Just from reinvesting earnings. So we get earnings off of that, too.

Okay. And then if we are going to look at -- we're looking at growth for '06, earnings growth, does that -- is there an assumption on that 15 to 20% that O&M will not be up quite as much on a full-year basis in '06 as it was in '05?

There are some -- as part of the O&M, there is certainly some things that are permanent. Pension is certainly being one. MISO costs being another. There are some things, like the SO2 credits, or Taconite Harbor that are not a permanent thing. With no Taconite Harbor being part of Regulated would utilize the total Regulated pool. So it won't be up as much. But there is certainly a lot of -- a good chunk of that is our permanent increases.

Were O&M associated with growth, I would think, right?

Yes, some with growth and some with, like MISO. MISO in '05 was certainly different in than '04. It added some cost and some revenue to us too. So some transition revenue but some additional costs as well. So some of those things will continue on.

Okay. Great. Thanks.

[OPERATOR INSTRUCTIONS] And we will go next to [Yictok Song] with Zimmer Lucas Partners.

Good morning. I just have a question regarding the percent increase in the fourth quarter for the net income of the Regulated Utilities. I was just wondering if you could go into more detail on that increase and what is driving it?

The largest part of that increase is increased consumption. Increased consumption across all customer class, industrial, residential, commercial, we have seen additional loads. Loads all year. We certainly saw that for the quarter. We certainly saw that for the year-to-date. A lot of the explanations for the quarter are very similar to the year-to-date.

Also, power marketing margin, we've -- because of outages, and other years, we have seen additional power of marketing margin in the quarter. It is basically load driven. I mean the vast majority of that increase is basic quarter-over-quarter and year-over- year load growth.

Okay. Thank you. Just one more question. In terms of the [indiscernible] to your gains for residential units at Town Center, could you just repeat --

Sure, the range in Town Center for residential units is 15 to $40,000 with an average of 21.

Thank you.

We will go next to Michael Grisham with Robert W. Baird.

Good morning, gentlemen.

Good morning.

I have two questions for you. First, could you repeat the FERC balances for your real estate business on the sales items?

8.6 million.

And that's the deferred profit?

That's the deferred profit before minority interest and before income taxes.

Okay. And then secondly, there was some restatement for discontinued operations during the -- for the first nine months. Is that all related to Enventis Telecom? Or is there anything else in there?

No, it was all Enventis.

Okay. Thank you.

Once again, ladies and gentlemen, that is star one for questions. We will go next to James Bellessa with D.A. Davidson & Company.

Good morning, and congratulations on a good year.

Thank you.

On the tax issues that you called out for the fourth quarter, you had two of them. Which segments did each one of those hit?

They were both in the other segment.

Okay. Nonregulateed Energy Operations in the fourth quarter had an operating loss or net income loss. Can you explain why?

In the Nonregulated segment, it was basically driven by an outage at Taconite Harbor. Taconite Harbor expenses were up, and they also had an outage in the fourth quarter which drove that.

And is that outage completed?

That particular outage is. We've got another scheduled outage coming up this year, but that particular outage was completed, yes.

You do not in this press release give revenues by segment. Can you give those out?

The revenues by segment will be in the K. In the K, we plan on releasing tomorrow.

And how about a share count, a year-end share count?

Year-end share count. I don't have year-end but I have a February count that went into the K. 30,153,000 shares. As of February 1.

Thank you very much.

And we will go now to Bob Clark with Turner Investment Partners.

Just one question. You mentioned coal supply disruptions in the industry. Any thoughts on BNI and outlooks for this year?

Well, the BNI is really, for us, ideal from a coal disruption point of view because BNI operates as a mine plant for Square Butte without any transportation issues and without really any coal delivery issues. For us, the only thing that really impacts BNI's sales is if there was an outage at Square Butte.

And of course, we only burn or use the BNI fuel or lignite at the Square Butte facility. Our facilities in Minnesota, we are dependent on rail delivery, the Burlington Northern Santa Fe and Powder River Basin Coal.

But have you a partner at Square Butte and you've had no discussions along those lines, right?

We've had discussions about building an additional power facility there.

Right. No advancement there?

In the planning and study stage.

Okay.

I think one of the real advantages of that is it doesn't have transportation issues. It doesn't have coal issues. BNI now operates with Square Butte currently under a cost-plus contract.

Okay. Thank you.

We are standing by with no further questions at this time. Gentlemen, I will turn the conference back over to you for any additional or closing comments.

Well, thank you all for joining us this morning. We certainly are excited and pleased with the performance we had in 2005. We look forward to a strong 2006. And as always, we're certainly committed to providing shareholder value and shareholder returns to our investors. Thanks again. And we look forward to talking to you at the end of the first quarter.

Thank you. Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation. You may disconnect at this time.