ALLETE Inc (ALE) 2006 Q1 法說會逐字稿

Good day and welcome, everyone, to this conference call announcing ALLETE's first quarter 2006 financial results. [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 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 judgement 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 statement 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 files with the SEC. At this time, I would like to introduce the President and Chief Executive Officer, Mr. Don Shippar. Please go ahead, sir.

Good morning, everyone. Joining me today is Chief Financial Officer, Jim Vizanko. For the first quarter, ALLETE earned $0.68 per share, compared with $0.64 last year. Electric sales to our industrial customers exceeded last year's high levels, and our real estate business continues to post significant earnings. On the other hand, the very warm winter we experienced in northern Minnesota reduced electricity sales and margins to our residential, commercial and municipal customers. In total, the quarterly result was about what we anticipated and we are on track to meet our earnings growth expectation of 15 to 20% over last year's base of $2.26. As usual, Jim will give you the financial details in a few moments, but first I'd like to review of number of important recent accomplishments.

Our integrated resource plan was approved the Minnesota Public Utilities Commission. Among other things, this approval allows the redirection of the output from our 225 megawatt Taconite Harbor Energy Center from wholesale sales to retail sales to meet base load energy requirements. This allows us to use Taconite Harbor's generation for the near term increased demand of electricity of Minnesota Power System without requiring the construction of new assets. Minnesota Power projects load growth of about 150 megawatts by 2010, and another 200 megawatts of growth by 2015. In March and April, the MPUC approved new all requirements agreements with two of our four large power customers, the Stora Enso Paper Mill in Duluth through August 2013 and UPM Kymmene's Blandin Paper Mill through April 2010. In mid April, construction of a 50 megawatt wind farm in central North Dakota began. The facility will be owned and operated by FPL energy, and we will purchase the output under a long-term contract. In addition to providing power to meet our projected load growth, this project helps Minnesota Power meet its objective of building more a diverse generation portfolio and of expanding its renewable energy assets.

Yesterday, the Public Service Commission of Wisconsin authorized our plans to invest $60 million in the American Transmission Company. The Commission's approval took longer than we anticipated, but now we intend to make our initial investment by the end of May. With Wisconsin Public Service Corporation's strong support, we expect to have the entire $60 million invested by year-end, and at that time we will own about 9% of the American Transmission Company. At our real estate business, ALLETE properties, infrastructure construction continues at the Town Center at Palm Coast Project. Construction of buildings by developers who have purchased land from us has begun. As we mentioned in our last call, we have a planned orderly build out and sales strategy in place and therefore do not anticipate any contracts for additional land within the Town Center project until after this first phase is substantially built out. Regarding ALLETE Properties' Palm Coast Project, we just announced a $52.5 million sales contract. This is the largest real estate transaction ever by ALLETE Properties and it considerably increases the dollar amount of real estate contracts that will close over the next several years. This contract will close in four phases from 2007 to 2009.

A subsidiary of Lowe Enterprises plans to build an upscale residential community on the property, with approximately 1500 residential units and 50,000 square feet of commercial property. Lowe Enterprises has a strong reputation as a leader in resort community development, and will be an excellent addition to the Palm Coast Park project. And by the way, the U.S. Census Bureau recently released data that showed Flagler County, where much of our property is located, was the fastest growing county in terms of population growth for the second consecutive year. At this time, Jim will provide the financial details for the quarter. Jim?

Good morning. Before I go through the quarterly results, I want to mention some segment changes for this year. Don mentioned approval of the integrated resource plan and the redirection of the Taconite Harbor's plant output from wholesale to retail sales. As a result, beginning in 2006, we record the financial results of this generation facility within the Regulated Utilities segment. We will not reclass Taconite Harbor's 2005 results, and they will remain recorded in a Nonregulated Energy operations segment. This will cause year over year deviations for those two segments during 2006. As we go forward, the financial results for BNI Coal, our small non regulated generation facilities and Minnesota Power land sales remain in the Nonregulated Energy operations segment. Beginning with the second quarter, we will record the earnings from our investment in the American Transmission Company in its own segment. Now I'll turn to the results for the first quarter.

Net income for our Energy business, which is comprised of the Regulated Utility and Nonregulated Energy operations segments, was down $600,000 compared to last year. Lower margin on sales to residential, commercial, and municipal customers due to a warm winter were partially offset by higher margins on sales to our industrial customers. Sales were down 2.9% for the residential, commercial and municipal classes, and up 2.5% for the industrial class. We expect our industrial customers, who make up about two thirds of our retail sales, to continue to operate at high production levels throughout the year. This quarter's results also reflect elimination of the Kendall County loss that occurred in the first quarter last year and lower plant maintenance expense. Partially offsetting those items were higher O&M expenses and lower power marketing margins than last year. These items were in line with our expectations for the quarter. At our Real Estate business, income was $5 million for the quarter, down $1.9 million from last year. Income at this business varies from quarter to quarter based on the timing and mix of land sale transaction closings and from deferred profit accounting. At year-end, we expect that net income from this business will exceed the $17.5 million recorded in 2005.

For the quarter, we sold the right to build 80,000 square feet of commercial property at the Town Center project for $1.5 million, an average of $19 a square foot, and 456 acres of non-project land for $10.3 million, or about $23,000 an acre. At the end of the quarter, we have $85.3 million of pending land sales under contract, $62 million of which derives from the Town Center project. Prices on these contracts range from $20 to $50 per commercial square foot, $15,000 to $40,000 per residential unit, and $8700 to $524,000 per acre for all other properties. In addition, the recently announced sale at Palm Coast Park, at $52.5 million to the penny number, and equals about $34,000 per residential unit and $50 per commercial square foot. ALLETE Properties will also have the opportunity to receive participation revenue as part of this sales agreement. In the other segment, income was up $3.9 million mainly due to the absence of a $3.3 million impairment charge in the emerging technology portfolio we recorded during the first quarter of last year. This year, earnings on our cash investments were higher because of larger cash balances and higher interest rates than the first quarter a year ago. Our effective tax rate for the quarter was 36.6% compared to 38.2% in 2005. This year's lower rate reflects the effect of our state tax planning initiatives. Our earnings for the quarter were about what we expected in total. As Don previously mentioned, we continue to expect that our earnings from continued operations will grow by 15 to 20% over last year. Don?

Thanks, Jim. Now I'd like to comment on a couple items before we open up for your questions. First, Minnesota Power Plans to reduce mercury emissions by up to 90% and cut nitrogen oxide and sulfur dioxide emissions by more than 80% at our Boswell 3 generating station through a $200 million [ARI] mission control upgrade. Construction will begin in 2007, and it will be operational by 2009. This capital expenditure is part of the total environmental upgrade expenditures that we disclosed in the capital requirement section of our 10-K. The Minnesota House of Representatives and Senate both have unanimously passed a bill that allows for current recovery of cost. The governor is expected to sign the bill soon. Secondly, I'd like to give you a quick update on the MISO Day 2 issue. In late February the MPUC granted rehearing of the MISO Day 2 docket, suspended the refund obligation, and is currently allowing these costs to be recovered in monthly bills. We and other parties are working with the Minnesota Department of Commerce to prepare a joint recommendation to the Commission for cost recovery treatment. The parties have until late June to complete this joint report and recommendation. At this time, I'll ask the operator to open up the line for your questions.

Thank you, Mr. Shippar. [OPERATOR INSTRUCTIONS] We'll go first with David Schanzer with Janney Montgomery Scott.

Yes, good morning.

Good morning.

A couple of questions. You keep indicating, or you have been indicating on a quarterly basis, your investment in the Transmission Company. I was wondering if you could give us a little color and maybe some idea of strategy and progress, you know, how that project is evolving?

Now David you're referring to the investment?

Yes. Your investment in the Transmission operation. Where does that stand at the moment?

Well we just received approval yesterday from the Wisconsin public service Commission to go ahead and make the investment, so we intend in May now to make our first investment in the American Transmission Company. And we do expect by the end of this year we will have the full $60 million that we said we were going to invest in there invested by the end of December.

I guess my question was more -- exactly what the project looks like and, you know, how you expect it to evolve.

Are you referring to the actual line?

Yes, the actual line.

Oh, okay. Well we're actually investing in the American Transmission Company.

Right.

Now the line, as you know, is under construction. The Minnesota portion of the line is complete and the construction has been underway for the past several months starting at the Wausau end of the line, and is in continuing with the expected end service date of late 2008. So it is under construction.

Oh, good. That's what I was after.

Yes.

Secondly, with regard to Town Center. You know there's been a lot of -- in recent weeks more so than recent months, there's been a lot of discussion about the real estate market kind of starting to tap out a little bit. There's been articles in the print media. You know we've seen a lot of the home builders report sequential quarters with kind of underperformance or a reduction of back logs and so fourth. My question is to what extent you're actually seeing that, if at all, in the Palm Coast area, and if you could comment on that I'd appreciate it.

We haven't seen any changes. We've had our contracts to date have all closed according to schedule. We expect that to continue to happen. We continue to have new sales, as this Palm Coast Park is evidence of that. We had a new contract as well in the first quarter, a much smaller one certainly than Palm Coast Park, but -- We certainly read what's happening as well, but we have not seen any real impacts on our sale of land as of yet. And we don't expect any either, David.

Oh, okay. And I guess, you know, a correlary to that would be -- I know you don't focus on it as much as you focus on the sale of your own land to the builders. But when the builders are actually pricing their units, whether they're commercial or residential, are prices still firm? Or is that something that you wouldn't want to comment on?

Well, as far as our properties -- You know our property's in a stage where they haven't built any homes.

I was referring to the general area around Palm Coast.

Well we've certainly seen some differences in the amount of housing activity. I mean, the county is still the fastest growing county in the country, but there's certainly not the same level level of building permits, and some of that certainly has slown down. There's certainly more houses, homes available for sale on the market. We've certainly seen those impacts. We haven't seen a direct connection to our land sales. People are still going through with projects. People are still certainly moving to Florida. I mean we're certainly very happy in the state that we're in. Again, relative to the country , Florida is one of the fastest growing states in the country. I mean -- I think over 1000 people move to Florida every day.

Yes.

But it's not like we're not concerned either. I don't want to paint a picture like we're sitting back here and we -- You know we certainly read the press like anyone else, but I think we're certainly more comfortable in the position that we are, at the locations we are and not owning buildings and not being in the construction business. I mean we certainly like our niche in this market right now.

Great. Thanks, Jim.

We'll take our next question from Eric Beaumont with Copia Capital.

Good morning, guys. I just want to -- One quick thing on ATC and then a few real estate questions. On ATC, is there any potential for additional investment? Or is 60 million kind of it? Or will you have a pro r ata investment opportunity?

There will be potential for additional investment in future years relative to our ownership in the ATC, but for this year based on our plans -- Again, we expect that by the end of the year we'll have the 60 million in, and then in future years have the opportunity to invest additional dollars based on their capital needs and growth, et cetera.

Okay.

So at the end of the year we'll be about a 9% investor in ATC, and participate in 9% of their capital calls going forward.

Okay, great. And on the announced land sale for Palm Coast Park, one thing wasn't really clear. When you were talking about it, you talked about 34,000 per residential unit and $50 per square foot. What I'm having trouble reconciling is you talked about the $52.5 million sale of residential land, but then you also talked about the golf course community and retail and office space, community park, school site. I was unclear. Is the $52.5 million just for that residential? Or is it for everything that's mentioned there?

It's for everything. There's a piece of commercial -- there's 1500 residential units and 50,000 square feet of commercial. So it's -- there's the two pieces that make up the total contract of 52 million.

Okay, and there wouldn't be any other considerations for additional land costs given the golf course going in, considering that was always a potential in the master plan. So it's not like there is additional acreage lost or costs that are included in there, that you'd be giving up other potential entitlements because of -- for sales based on the golf course?

No.

No. The golf course wouldn't impact entitlement at all. And also the 52 million -- that's without participation. We do have an opportunity to actually receive more than the $52 million in the future with participating in some of the revenues of Lowes.

And how exactly does the participation revenue work, to the extent that you can tell us?

As we share -- Depending on the contract, we either share a piece of profits or a piece of revenue. It's a part of what the purchaser of the land receives when they sell the lots or sell the buildings or sell the -- however far they take the project.

Okay. And so I'm assuming given that, you know, the golf course lots, these are all single family homes that were a part of this plan?

The majority of them are all single family residences. That's right. And, again, a small piece of commercial, but the commercial more or less supporting the residential.

Okay. And can you talk a little bit about how it's going to phase? You said there would be four phases. And will there be any competitive constraints on, you know, other large blocks to other developers during the time period?

Well, the contract provides for them to take down the properties in phases. As they complete parts of the golf course -- As they complete things, they will take land down over time which most of our contracts provide for. I mean, all of our contracts that we have -- pending contracts are all taken down over time. We keep, potentially, the land on our balance sheet versus the builder's. Competitors to them -- I mean, they're basically one of the first parties in Palm Coast Park. The other party is one contract that we have for $7.5 million that's already signed. But this is essentially really the second project in this area.

Okay. And I guess lastly on this. Should we expect with Palm Coast Park that there's potential for another big announcement like this? Or just given how the master development plan is set up, most of the additional pieces would be a little bit smaller in nature at least as far as geographic size?

Yes. I think that it will probably be smaller. This is the largest contract that our properties division has ever signed, and I think as we've done this through other projects -- We do some of the residential and then staging the commercial and staging -- building it out in pieces. So yes. I mean we certainly wouldn't expect every quarter to have this significant of sale.

Right.

And we have announced that we do plan and we're in negotiations for two at Palm Coast Park. This is obviously one of them, and there's another one that will be announced. I mean, I think as we're talking it's most likely going to be a lot less than this. But there is another one that we're in negotiations with at Palm Coast Park right now.

Okay, great. And just one last thing real quick. Could you run over the numbers you gave again for basically the range of prices you're getting for residential units, commercial square foot and the acreage at Town Center and Palm Coast? I kind of missed that when you went over it quickly earlier.

Sure. The prices on the commercial range from $20 to $50 per square foot. That's all at Town Center. $15,000 to $40,000 per residential unit. That includes Town Center and the one contract at Palm Coast Park. Palm Coast Park contract is at $15,000. And then in relationship to that , this new Palm Coast Park which isn't a part of this is at $34,000 and the other acreage is from $8700 an acre to $524,000 per acre for the non-project land.

We'll take our next question from Bob Chewning with BB&T Capital Markets.

Good morning.

Good morning.

How are you all doing? I may have missed this. You may have addressed it. But with regard to your investment in ATC, is that still planning to come in as you are spending the dollars on your leg of the project?

Again, we're investing directly into the ATC. So it's obviously linked to the construction of the project, but our investments are going right into the ATC Company. So as they make capital calls each month, you know, that's how our investment will go in.

Okay. Well can you give us any thought then in terms of the timing of that 60 million going in, and what any sort of earning guidance associated with that?

As Don mentioned, it's associated with the line. And the way that we're getting the 60 million was in the -- When we'd planned on starting earlier, we were taking -- we're going to have capital invested in ATC at a rate of about 70% of the capital requirements for the line. That we're changing now to 100%. So we'll be taking a bigger piece of each of those requirements for the line, even though as Don mentioned, we're buying ATC and not the line. But now we're going to be taking -- we're going to be putting in more money. That starts in May. And it works out, if you look at the schedule for the line going forward from May until the end of the year, it works out pretty close to if you spread it equally. I mean there's certainly some changes around that, but for modeling if you just took the 60 million divided over the months from May until December you'd be pretty close.

Okay, and that you're getting currently that for a return -- equity return on that?

Yes. We get a little bit less than that is what we realize, because of taxes -- that the composite tax rate for the owners of ATC is less than our rate. So we end up getting a little bit less. It's not a lot. Our return is in the 11's, 11 plus rate of return.

Okay. Great. Thank you.

We'll take our next question from Bryan Nicholls with DA Davidson.

My questions have been answered. Thanks.

We'll go next to Michael Gresens with Robert W. Baird.

Good morning.

Good morning.

Good morning.

I'm wondering if you could provide the deferred profit that's located on the balance sheet?

Sure. The deferred profit at the end of Dec -- end of March was $7.8 million.

And the comparative figures for either the first quarter of last year or year-end?

Year-end it was 8.6.

Okay. And the number on the Boswell environmental upgrades. What was the total investment that you are expecting?

About 200 million.

Okay. Thank you.

We'll take our next question from [Yictak Sung] with Zimmer Lucas Partners.

Good morning, gentlemen.

Good morning.

Good morning.

I would just like to clarify the revenues -- I mean the net income from the Real Estate operations. What percentage of that 5 million is from the contracts that were signed, and what percentage is from sales that occurred in the quarter?

It's all from contracts.

They're all from contracts?

Yes.

Okay. And I'm sorry to reiterate this again. I believe it was answered before, but the other land sales. The acres sold, what was the range for prices for that?

The range of prices?

For the acres sold and other land.

Other land was $23,000 an acre.

$23,000 an acre. Okay, and when was end of the greater resource plan for Taconite Harbor approved?

Let me see, about three weeks ago.

And just one last question. On the new contract sales at Palm Coast Park, what kind of value do you get for the golf course and how many acres was that?

There's no value to us for the golf course. We have an indirect value though because as they build the golf course, it makes the --

Value of the units go up?

Yes. So as a percentage of land, you know, you can obviously pay more for the land with that than if you were building something less upscale.

I see. All right. Thank you very much.

[OPERATOR INSTRUCTIONS] We'll go next to Steven Rountos with Talon Capital.

Hi, everyone. Good morning.

Good morning.

Good morning.

I want to follow up on Taconite Harbor. What were the numbers, again, for the amount that will be added to rate base? What was the book value, and how does that split out between I guess the current book value and what's going to be spent or what has been spent to date on the plant?

What's being added to rate base and being transferred is about $60 million. That's the book value of Taconite Harbor.

Okay. What was the expectation that is actually you are going to spend to upgrade the plant?

Taconite Harbor is a part of our area project. Our area project is $60 million with current cost recovery for those pollution expenditures, and Tac harbor is part of that $60 million.

The numbers just happen to be the same.

Okay.

The rate base cost now and the addition are both 60 million.

But the 60 million includes more than Tac Harbor. Tac Harbor is a piece of the 60.

What were the earnings from Tac harbor in 05?

Earnings in '05 were around 2 million.

Okay. And then I hate to beat the dead horse on the Lowes agreement. What are the sharing percentages and how does that work mechanically?

The mechanics change from contract to contract, and our disclosure on those contracts hasn't been what each one has been other than generally a sharing of definition of profits , revenues, of some sort. Participating in what the prior of the land is realizing from the land essentially.

Is that on a top line or bottom line basis?

It depends on the contract. I mean some contracts -- The contracts that we have are different. I think that the real message is once we sell the land with some contracts, we do get to participate in some of the upside. And it's not like the 50 million -- we're going to get another 50. But it's at least participating in the success of the project.

Okay. I'm just trying to get the order of magnitude. So I guess you're saying that it's not as significant as the initial contract sale, but it is some level.

Yes. I think in the neighborhood for most of these contracts, we might expect to get an extra up to maybe $5 million or a couple million dollars from a contract. It's that kind of neighborhood. I mean it's not the neighborhood of 100,000 but it's certainly not going to turn 50 into 100.

Are you saying for the 50 million it's 5 million for that entire piece? Or it's 5 million per contract within that 50 million?

No. It's just for this piece. It could be different than other ones. I'm just saying that we have other contracts that we have participation with and we would expect, you know, in the magnitude of something less than 5 million for each of those contracts. 1 million, 2 million dollars. And that comes over time as they sell their properties or develop their properties.

Okay.

It's just a nice piece of upside. It's not to the point where it makes or breaks the sale, but it's another nice way for us to participate in the Florida markets going forward.

Great. Okay. That was it. Thank you.

We'll take our next question from Matt [Burke] with Highbridge Capital Management.

Hi, guys good morning.

Good morning.

Good morning.

Can you give an update on what's going on with Ormond Crossing and then just a little bit of color on the development in Town Center, where that is and the process?

At Ormond, we're in the process with the DRI. We're working with the government -- local government, state government in the impacts of that property and the traffic impacts, other things with the local governments. Working out, you know, something that's satisfactory to all of us certainly. We're still on track for year-end. We still expect to receive the DRI by year-end. Town Center is -- I think, as we said, we don't expect a lot of new contracts this year. We're closing contracts. We certainly expect to close more. We closed one in the first quarter and we certainly expect to close additional contracts as the year goes on.

The construction is pretty much on schedule on the roads, the drainage sewers, et cetera. And they expect to finish up maybe late summer, early fall. And actually the public's structure is currently under construction. So there's actually some buildings that are going up on the property as we speak.

And Palm Coast Park is -- We expect to, similar to Town Center, to price and sell some -- Not us, but a community development district similar to Town Center, to pricing some bonds later this year and begin construction of infrastructure for that project as well this year.

Great. And then the begin land sales and development in Ormond maybe the beginning of next year?

Maybe not the beginning of next year, but sometime in 2007.

Yes, I think 2007-08 kind of, you know, selling. There's certainly work to do after the DRI.

Yes. We have plots to create and get approved, et cetera. But as Jim said, we're expecting that the DRI will be approved by the end of this year.

I mean, to put it in perspective, with the DRI from Palm Coast Park was year or so ago. And you can see where we're at today. So really just starting into some significant sales, starting into construction, and certainly where Town Center is again relative to when those permits are received.

Okay that's great. And then given the lumpiness of the land sales, do you guys think it makes sense to give quarterly guidance? Or is that not the way you think about your business?

Yes. And we don't give quarterly guidance. I mean, I think what we're saying is that we certainly expect 15 to 20 to be there for the year. We don't give quarterly guidance, and really don't plan on doing that. Certainly because of real estate. I mean, that's certainly a huge piece of that because we don't want people focusing on just one quarter real estate. It's really over the year, and that we do expect to be more than the growth from last year.

Okay. Thanks. Thanks so much you guys.

Thank you.

And it appears you have no further question at this time. I'd like to turn the call back over to Mr. Shippar for any additional or closing remarks.

Thanks to all of you for joining us this morning. We look forward to speaking with you and talking with you at the end of the second quarter. Have a good day!

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