ALLETE Inc (ALE) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to this conference call announcing Allete's Q2 2006 financial results. Today's call is being recorded. Your line will be muted for the presentation and then we will conduct a Q&A period. [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 President and CEO, Mr. Donald J. Shippar. Please go ahead, sir.

Good morning, everyone. Joining me today is our new CFO, Mark Schober. He is taking over the reins from Jim Vizanko, who announced his retirement in May. Mark has been with our Company for more than 28 years and has served in a number of financials roles, including Allete Controller, since 1993. He has been intimately involved in all of our businesses and transactions that have shaped him. Mark brings a deep financial background to his new role and I know he will be an excellent CFO.

Today, we reported our second quarter results. Diluted earnings per share from continuing operations were $0.49, compared to $0.38 during last year's second quarter, an increase of 29%. Remember that last year's $0.38 excludes $1.84 per share charge related to the assignment of the Kendall County Purchase Power Agreement. We remain on track to meet our previously stated projection of 15 to 20% earnings per share growth this year over last.

Mark will provide some details about our earnings, but before I turn the call over to him, I will summarize some of our highlights during the second quarter.

First of all, Allete began investing in the American Transmission Company and by the end of June we had invested a total of $11.5 million. By year-end, we intend to invest a total of $60 million, at which time we will own about 9% of ATC.

Second, we had a couple of developments in the area of environmental capital expenditures. In May, Minnesota Power announced an estimated $200 million emission control upgrade project at the Boswell 3 generating unit. This upgrade, which is planned to begin in 2007 and be completed by the end of 2009, would reduce mercury emissions by up to 90% and cut nitrogen oxide and sulfur dioxide emissions by more than 80%.

Recently enacted legislation in Minnesota allows cost recovery of this environmental upgrade outside of a rate case. This legislation allows for a cash return on construction work in progress. Recovery of capital costs, return on investment, and incremental operation and maintenance costs will commence when the project is in service. Minnesota Power will be making a filing with the Minnesota Public Utilities Commission for current cost recovery on the Boswell 3 project this year.

Also, this quarter, the Minnesota Public Utilities Commission approved Minnesota Power's Arrowhead Regional Emission Abatement Plan, or AREA, which is our effort to significantly reduce emissions from the Laskin and Ticonite Harbor energy centers. Minnesota Power will be able to recover approved costs for the area plan from customers outside of a rate case.

With respect to our real estate business, the Palm Coast Park Community Development District issued special assessment bonds totaling $31.8 million to fund all master infrastructure improvements at our Palm Coast Park project. This bond issue is another important step to our development of this property.

At this time, I will turn the call over to Mark, and then we will take your questions.

Mark?

Thanks, Don, and good morning, everyone.

For the quarter, we recorded income from continuing operations of $13.6 million, which is a $3 million increase over last year's second quarter, excluding the Kendall County charge Don mentioned. Most of this increase was attributable to results at Allete Properties. I will provide some information on the main events that influenced the quarter and refer you to our 10-Q that we filed this morning for additional detail regarding our second quarter results.

The real estate business had income of $5.6 million during the quarter, compared to $2.8 million during the same period last year. As you know, income from this business varies from quarter to quarter, based on the timing and mix of land sale transaction closings and from percentage of completion accounting for our development projects.

During the quarter, we closed sales for 186 residential units for $5.6 million, or an average of about $30,000 per unit. We also closed on 170,695 square feet of commercial property for $4.7 million, or an average of about $28 per square foot. All of these sales were at our Town Center project.

We also closed a sale of 10 non-project acres for $5.2 million, or an average of $520,000 per acre. As of June 30th, we had $128.9 million of pending land sales contracts - $53.2 million at the Town Center project; $64.3 million for the Palm Coast project; and $11.4 million of other non-project land.

Prices on these contracts range from $8,600 to $40,000 per residential unit; $20 to $50 per commercial square foot; and $8,700 to $126,000 per acre for all other properties. In addition, some of these pending contracts give Allete Properties the opportunity to receive participation revenue, which would be over and above the contract prices I just listed. We expect all of these contracts to close over the next several years.

We continue to project the year-end income from real estate will exceed last year's income of $17.5 million. Land prices in the markets where we are located have held steady and we have not experienced any deterioration of prices or any contract cancellations. We expect that all sales, which are scheduled to close during the second half of this year, will occur as planned.

Turning to our energy business, I'd like to remind you that the financial results for the Taconite Harbor Energy Center are included in the regulated utilities segment for 2006 and in the non-regulated energy operations segment in 2005. This reclassification will cause deviations when you separately look at the year-over-year results for these 2 segments.

Retail and municipal kilowatt hour sales were up 2% compared to second quarter of 2005, mainly from our industrial customers. The increase in sales was offset by higher operation and maintenance expenses, including $1.1 million of additional generating plat maintenance expense over the same period last year. Additionally, we had less excess energy available for sales to other power suppliers this quarter as a result of these generating plat maintenance outages.

Despite the higher operating and maintenance expenses and less energy available for sale, our energy businesses earned $7.7 million during the quarter, which is about the same as last year's second quarter, excluding the Kendall County charge. We expect our energy sales, especially to our large power customers, will remain strong through the end of the year.

Because we just began investing in ATC this quarter, its income contribution was small, under $100,000. As we make additional investments, ATC's income contribution will grow during the second half of this year and we plan on reporting the results as a separate segment in the future.

Year-to-date, our earnings per share from continuing operations are up 15% from last year, excluding the 2005 Kendall County charge. As Don mentioned earlier, we continue to expect that our earnings per share from continuing operations will grow by 15 to 20% over last year. This growth is expected to come from continued strong electric sales, increased real estate sales, and our investment in ATC. It also reflects the absence of operating losses from Kendall County and impairments related to our emerging technology investments, which impacted the Company's financial results in 2005.

Don?

Thanks, Mark.

Before we take your questions, I'd like to take a moment to express our sadness about the sudden passing of David Schanzer of Janney Montgomery Scott. David covered our Company for many years and a number of us at Allete had enjoyed the opportunity to work with him. He will be missed and our sympathies certainly go to David's family.

I'll now ask the operator to open the line so we can take your questions.

Thank you. [OPERATOR INSTRUCTIONS.] Todd Vencil, BB&T Capital Markets

Good quarter. Can you tell me on the land business specifically, with regard to the sales at Town Center, when you put those under contract?

Most of those were put under contract probably in a time period of I would say 8 months to 24 months previous to this date.

Okay. With regard to the average prices that you guys commented on, how does that compare to where you think the market is today?

Well, I think many of those contracts, again, were put in place, as we said, 8 months, 8 to 24 months ago. I think a lot of those contacts were put in place before some of the significant escalation we saw in the market, as perhaps about 6 months ago or 9 months ago or even a year ago. We've looked at those contracts and we've talked to all of the parties that are involved in those contracts and, as Mark mentioned in his comments, we expect that all of those contracts will close over the next several months, as planned. We've gotten no indication that any of those buyers don't intend to close on those contracts.

Okay. So it's fair to say beyond that, just going back to your comment about the price escalation, do you think if you sold -- if you put the same property under contract today, it would probably be at a somewhat higher price with regard to the ones that you closed during the quarter?

Well, I don't know if you could say it would be at a somewhat higher price, but we would expect it would be at the same price or very close to the same prices that we have it under contract on.

A good way to characterize it is we believe our prices are firm, certainly not increasing as they have in the past but not declining either.

Okay. With regard to Ormand Crossings, you said in the queue that -- you reiterated that you think you can receive the development order late in the year. Can you be maybe anymore specific as to when you would expect to get that? Do you know any more specifically?

No, we don't. I mean, we're still on track, as we said in the queue, that late in this year we expect we'll get that and that's the schedule we're working with right now.

Okay. And I appreciate your comments with regard to the fact that you haven't had any cancellations of contracts and that prices are holding steady. And I’m just wondering, just to drill down and get a little bit of additional color, I mean, have you talked to any of your contract holders about changes in perms or have they come to you about maybe lengthening out takedowns or anything like that?

As I mentioned, over the past few months, we have talked to all of our contracted buyers about their closing schedules, takedown terms, etc., and we've gotten no indication from any of them that they have any anticipated changes in their plans.

Okay, good. And then last question, kind of on the same subject. I know you guys are constantly having conversations with potential buyers about new contracts. Is there anything that you can sort of give us in terms of color on how those are going, other than what you said already, which is you feel like prices are firm?

We haven't had a tremendous amount of conversations because we don't have a lot for sale right now. So we're not -- I don't want to say we're not actively involved in a lot of additional sales efforts at this point, since we -- because we're digesting what we have. We're continuing to build out at Town Center. And as you know, we're just beginning to start to put the infrastructure in at Palm Coast Park.

[Dick Tatfung], Zimmer Lucas Partners

First question for you. Out of the 100, I think it was $128 million of pending land sale contracts that you have, apparently. How much of those are due to be closed by the end of this year?

The $128.9 million close over the next several years - 5 to 7 years. So a small portion of those will be closing over the remainder of '06.

Is there any estimate for the remainder of '06?

No, there isn't.

Okay. Going over to I guess Palm Coast Park, are you in any kind of negotiations for any more sales, for any more contracts, through the rest of this year?

Well, we aren't, again, in current negotiations on any sales. We have the one sale, the significant sale that we announced last quarter, the $52.5 million, and as I mentioned to the previous caller, we're just beginning to do the infrastructure work on the site. We are talking again always to potential buyers, but that's where we're at with that project.

I see. I think previously you mentioned that there were 2 contracts that were in negotiations. [One of them has, obviously, occurred.] What about the other one?

Negotiations are ongoing. We haven't signed anything else at Palm Coast Park, but there will be more contracts coming in the future. The big one we signed is about a third of the real estate we have at Palm Coast Park. We have more coming.

When will sales on the commercial real estate start?

Those sales, probably not until starting until 2007, 2008.

Okay. As for the -- going over to the utility business, the $1.1 million of expense for [your plant], is that expected to recur or does that count as a one-time thing or is this something that happens once every few years?

It's a scheduled outage that we had planned for 2006 that was originally planned for later in the year that moved up. So it simply was a scheduled outage that occurred in the first half of the year relative to the second. So we don't have any additional scheduled outages, major scheduled outages, in the rest of this year.

I see. I believe that's all the questions I have for today.

[Brian Olson], Luminous

I guess this question has sort of been asked already, but I just wanted to ask it again in a slightly different way. For signed contracts on the real estate, is there a specific time period in which your counter parties have to close? And if not, what ability do they have to actually cancel contracts? Are there any penalties? And would counter parties simply wait to close if they just decide not to develop in the short-term and just wait for a couple of years to see if the market firms up or how does that process really shake out?

Well, the contracts have a closing schedule associated with them, where the buyers have a schedule where they are going to take down a certain percentage over a certain period of time. And they all vary, depending on the buyer and what the project, whether it's commercial or residential, etc.

Within a contract, there certainly is the ability if the buyer, through due diligence, etc., decides to walk away. I mean, there aren't large deposits or anything on these properties. However, I will say that many of these developers or buyers have put a significant amount of money into these projects, as they've been doing their due diligence and evaluating the builds and working with engineering and building organizations, environmental, etc. So there certainly is some loss, but again, as far as penalties, if you will, they don't forfeit large amount of monies to us if they were to walk away.

And if they were to decide to perhaps delay or want to change the schedule, they would, of course, have to come back to us and have that renegotiated. And, of course, we have the option, under those conditions, to decide whether or not we want to extend those contracts or we want to extend those to closings or we simply want to put the property back on the market.

Okay. So that's just a decision that you make based on market dynamics at that time?

That’s correct.

Okay. And then just secondly, we've seen some weakness in home builder stocks lately. I was just wondering if kind of a slowdown there is something we should expect to impact your business and how you plan to manage through any slowdown in the market?

Yeah, I think we've also witnessed many headlines that have come up about home prices and inventory, etc. Again, as we mentioned in the call, we recently talked with all of our buyers and the people that we've got contracts with regarding their plans or closing schedules and all of those responses to us were that they're on track, their schedules are intact, and they plan to take down the properties based on the original contracts. I think the other factor in our developments perhaps is that all of these parties we're dealing with are long-term people that have been in the business. We're not selling to quote speculators. These are people, as far as we know, and have a reputation for taking a long-term view of the market and expect that they will continue to build out these properties and build out these developments, as planned.

And our long-term outlook for the State of Florida continues to be very positive too. We are very bullish on the state and see this as just a temporary issue in the state.

[OPERATOR INSTRUCTIONS.] [Doug DiSabler], [Viking Capital]

Just as a follow-up to the last question in the queue, and based on your comments there, you mentioned in the queue that one of the current pending contracts is subject to an unexpired due diligence period. Just based on the fact that it was the most recent announced, is it fair to assume that that's the $52 million transaction at Palm Coast Park?

Yes, that's true.

And when does that due diligence period expire?

It will be in 2007 and 2008. It's a series of takedowns that run out for a couple of years. I think there are 4 takedowns with that contract.

Okay. So anytime between now and that time, as you say, you don't expect it to happen, but the buyer has the option of a due -- until the due diligence period expires, to decide what to do there. Is that fair to say?

Until they take down that portion of the contract, that's correct.

James Bellessa, Davidson & Co.

Were there any impacts from the weather in the quarter on your utility sales?

No. I mean, we've had certainly a warmer than normal, perhaps, spring and in the May/June and now, of course, into July, but all of our units performed well. We saw fairly modest prices in the wholesale markets, certainly higher than they were last summer but not extraordinarily high. And we've done well, both on the wholesale sales and on the retail side, keeping up with the demand.

In the press release, you call out $1.1 million of additional after-tax operating expenses. Is that unusual, that [plan x] maintenance expense, or is that ongoing?

No, that's not unusual. That was a plan or scheduled outage that we had planned to have in the fall and we simply moved it up into the spring.

You've indicated earlier on previous calls or [occas] that you were interested in exiting MISO. Are you still interested in doing that and what is the status?

Well, the issue with MISO really was centered on the cost recovery issue with MISO expenses in Minnesota with the Commission. We continue to work with the Commission, as well as the other utilities, the other jurisdictional utilities in Minnesota, and we continue to work with the Commission to get those costs recovered, if you will. And that's really the whole basis for our MISO decision. We continue to explore our options, but it's all centered around the fact that it will depend on the outcome, if you will, of that ultimate decision. That will come through the Utilities Commission, we expect, later this year.

And the earnings out, the regulated business were down, you did call out the additional maintenance expense. Were there other items that caused the comparison to be down?

The only other item of significance, Jim, is because of the maintenance outage, we have less power available to sell. So our sales to other power suppliers was down quarter-over-quarter.

And you moved the maintenance period from the fall to the spring. Do you expect to recover some of this second quarter shortfall later on?

No, that's just a normal cost of doing business. So there is not a special recovery mechanism for these outages.

What I wanted to say is, do you think that some of the reduction in electric utility earnings in the second quarter might be recovered later in the year because your maintenance has been shifted to the second quarter from the fall?

Yes, we expect stronger third and fourth quarters because all of our generating units will be up and running. We have no other large maintenance outages scheduled for the year.

It appears that there are no further questions at this time. Mr. Shippar, I would like to turn the conference back over to you for any additional or closing remarks.

Okay. Thank you, and thank you all for joining us today. For those of you who are interested, keep September 26th open on your calendar, as we plan on having a tour of our Palm Coast area real estate on that day. We'll provide the details of that meeting in mid-August.

We're pleased with our performance for the first half of the year and we look forward to speaking with you again in October with our third quarter results. Good morning.

That does conclude today's conference. Thank you for your participation and have a great day.