ALLETE Inc (ALE) 2006 Q4 法說會逐字稿

Good morning, everyone, and welcome to this conference call announcing ALLETE's fourth-quarter 2006 financial results. Today's call is being recorded. (OPERATOR INSTRUCTIONS). This conference may contain forward-looking statements within the meaning of federal security laws, including statements including business strategies and their intended results, similar statements concerning anticipated future events, and expectations that are not historical facts. These forward-looking statements are made pursuant to the Safe Harbor provision 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 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 filings with the SEC.

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

Good morning. Joining me this morning is ALLETE's Chief Financial Officer, Mark Schober.

Earlier this morning, we reported our 2006 year-end financial results. Earnings per share from continuing operations were $2.77 compared to $2.26 last year -- excluding onetime events, a 23% increase. Both of ALLETE's core businesses, energy and real estate, had double-digit earnings increases during 2006.

The year was also highlighted by a number of important achievements. And let me mention a few of them. In May, we began investing in the American Transmission Company. We expect to have invested a total of $60 million by the end of this month.

Also in May, the Minnesota Public Utilities Commission approved Minnesota Power's $60 million Arrowhead Regional Emission Abatement plan, or AREA, which is our effort to significantly reduce emissions from the Laskin and Taconite Harbor Energy Centers. We announced plans to make $200 million of emission reduction investments at our Boswell 3 generating unit. State legislation allows for cost recovery on both of these investments outside of a rate case.

Last spring, we extended the contracts of two industrial customers, the Stora Enso paper mill and UPM-Kymmene Blandin paper mill. We announced a 70-megawatt electric service contract with PolyMet mining. PolyMet plans to begin mining copper, nickel and precious metals by late 2008.

During the year we substantially completed infrastructure construction at the Town Center development. Buyers of property there are beginning to develop their parcels.

At our Palm Coast Park development, we closed our first sale, and began infrastructure construction. And we received development order approval for our newest and largest project, Ormond Crossings.

All of these achievements helped set the stage for continuing earnings growth at ALLETE. At this time, Mark will provide some of the financial details for the year.

Thanks, Don, and good morning. As Don indicated, earnings per share increased by 23% in 2006 compared to 2005, excluding onetime events in 2005, which included the $50.4 million Kendall County charge and $6.2 million of tax benefits.

Income from continuing operations was $77.3 million in 2006, a 25% increase over 2005, again, excluding the onetime events of that year. For the detail of these onetime events, I direct you to the non-GAAP financial measures discussion in our 10-K, and also to today's earnings release.

Our energy business, which is comprised of the regulated utility, non-regulated energy operations, and investment in ATC segments, recorded income of $52.4 million during 2006, an increase of $4.8 million or 10% over 2005, excluding last year's Kendall County charge.

There were three primary factors for the energy business income improvement. First, we began investing in the American Transmission Company during 2006, and recorded $1.9 million of income from this investment.

Second, we incurred operating losses during the first quarter of 2005 related to the Kendall County power purchase agreement we had at that time. The absence of these operating losses in 2006 resulted in a 1.9 million income improvement.

And third, the regulated utility had $1.1 million income increase during 2006 largely due to strong industrial demand. Total kilowatt-hours sales were about the same as in 2005.

Income at our real estate business was up $5.3 million or 30% over 2005. In addition to scheduled contract closings we also recorded profit from prior sales that had been deferred due to percentage of completion accounting as infrastructure was completed.

During 2006, we closed sales on 973 residential units for $15.9 million, or an average of over $16,000 per unit. We also closed on almost 402,000 square feet of commercial property for $10.8 million, or $27 per square foot. And we sold 732 acres of other land for $24.4 million or over $33,000 per acre.

At year end, total pending land sales under contract were $113.8 million. A breakdown by project is in the 10-K.

Prices on these contracts range from $20 to $50 per commercial square foot, $8,000 to $34,000 per residential unit, and $11,000 to over $1.7 million per acre for all other properties. In addition to minimum base price contracts, certain contracts allow us to receive participation revenue from land sales to third parties if various formula-based criteria are achieved.

Income for our other segment in 2006 was up by $5.4 million excluding the $6.2 million of tax benefits recorded in 2005. In 2005, we recorded $3.3 million of impairments in our emerging technology portfolio, and recorded none in 2006. Also in 2006, we recorded higher earnings on a cash and short-term investment balances.

The balance sheet at year-end remains strong. We have about $150 million in cash and short-term investments, which is down from $206 million at year-end 2005. The reduction is mainly due to our investment in ATC and increased capital expenditures.

The debt to total capital ratio is at 37%. Don?

Thank you. We expect earnings per share from continuing operations will be in the range of $2.95 to $3.05 for 2007. This earnings guidance projection does not include income from any investment we may make in new growth opportunities.

Let me give you some details for both of our core businesses. For the energy business, income from our investment in ATC will ramp up significantly this year as we reach our $60 million total investment this month. We anticipate high demand for electricity will continue at our energy business throughout 2007. In addition, we will begin to see the income effect from cost recovery of capital expenditures for our environmental initiatives.

As of December 31, we have spent $11 million on the AREA project and $14 million on the Boswell 3 project. We expect to spend about $88 million on these two projects during 2007.

Higher electric rates went into effect as of January 1 at our subsidiary, Superior Water, Light and Power. Revenue for that company will increase around $1.7 million during 2007 due to the rate increases.

We expect to continue the year-over-year earnings growth at our real estate business. There will be less deferred profit recorded as income this year because the infrastructure at the Town Center project is substantially completed. However, the high demand over the past few years for residential properties has created increased demand for commercial properties today. And we expect to see an increase in commercial sales during 2007 over 2006.

At Town Center, the buyers of property have begun to develop their parcels. A Publix grocery store anchored retail center opened in December, and construction has started on an 84,000 square foot medical center. 20 projects within Town Center are in the permitting stage, with 11 of these expected to break ground during 2007. As these projects are completed, we will market additional property within this development.

At Palm Coast Park, infrastructure construction began last year and is expected to be completed in 2007. Commercial and industrial lots will be offered for sale in 2007, with closings anticipated to begin in 2008.

At our third development project, Ormond Crossings, we're working on an agreement with the Florida Department of Transportation concerning traffic mitigation cost. Once this agreement is finalized, we will determine the best economic buildout of the project and then proceed with detailed engineering, design, and permitting. We anticipate our first land sales closing at Ormond Crossings will occur in 2009.

ALLETE is committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses, and sustains our growth. At this time, I will ask the operator to open up the line for any questions you may have.

(OPERATOR INSTRUCTIONS). James Bellessa, D.A. Davidson.

Congratulations on a good year and nice dividend increase recently. The industrial usage during the most recent quarter was down slightly. Can you explain that?

It is down -- the primary reason, Jim, would be the outage we had at [UTac], one of our large power customers, had an explosion and had a line down for most of the quarter.

What is UTac?

United Taconite, a taconite mine on the range here.

Okay. Your other income in the most recent quarter was nicely up. Can you explain the variance there -- positive variance?

Well, the primary drivers are the -- in the other, we have -- the earnings on our cash and short-term investments is in there. And then quarter to quarter, we did not have any impairments on our emerging technology portfolio.

Is this kind of the run rate you would expect going forward?

Well, it will be down slightly as we run forward, because of the use of the cash for our ATC investments and our CapEx. But it will be fairly similar.

Earnings in the most recent quarter at the regulated utility were down on a per share basis $0.04. Can you explain besides -- lower industrial sales, what else might have impacted the quarter?

Most of it is due to the lower sales for our Taconites, our industrials, which I already talked about. And then our commercial sales were down too a couple of cents. That was primarily weather. And then we just had miscellaneous O&M expenses were up a bit too -- nothing in and of themselves large or significant.

And is this United Tac back up and running now?

Yes, it is.

And do you know when it returned back to usage? And has that occurred since 2007 started, or did that occur at the end of 2006?

It was I think around the 20th or so of December.

(indiscernible), Zimmer Lucas Partners.

Congratulations on an excellent year. I would just like to get an update of when the $200 million of environmental CapEx for Boswell 3 will be approved?

Well, we're expecting approval sometime late first quarter or early in the second quarter of the year.

Okay, and if I'm correct, the real estate results for this quarter were quite strong, one of the strongest quarters I think you have had in the past. Can you just kind of just elaborate on what factors helped out that segment this quarter?

The real estate closings during the quarter were as we expected. There was no real surprises there. They were a little bit higher then we anticipated because, again, getting into the percentage of completion accounting -- had good weather in Florida, got a lot of construction done at Town Center, and at other projects. So our percentage of completion went up during the quarter and we recognized that revenue.

Okay. And the last questions I have concerns the other land in your real estate portfolio. I think the acreage was down -- in terms of pending contracts for real estate, the acreage was down from 231 to 196. But then I think the value of the sales contract rose from 7.9 at the end of the third quarter to 10.9. How come the acreage is down, but the contract sales price is up?

Again, it depends on the acreage. What you're seeing there is we entered into a large contract in December to sell some acreage in Cape Coral -- waterfront acreage, high-value acreage. So even though we sold more during the year, we had one large contract that came in in December at a very high price. And that contract has since closed. You will see that coming through our income statement in the first quarter.

William Young, Longbow Capital.

My questions are regarding Taconite Harbor. First is with regards to depreciation. Last year -- I should say in 2005, you ran at around $48 million of depreciation. And that was around $40 million at the regulated utilities, and then $8 million at the non-regulated energy operations. I noticed this year that your depreciation is still $48 million. But now that Taconite Harbor is moved over to the regulated utility side, is that all basically at regulated utility now?

Yes, it is all at the regulated utility. And also, what you're seeing within the regulated utility is an uptick in depreciation expense as more capital projects are coming online during '06.

So going forward, we should look at depreciation based on this $48 million number now?

Yes, you should.

Okay. And then with respect to the Minnesota Power ratebase, do you have an estimate of what that was at the end of the year -- Taconite Harbor in there?

It's right around $600 million.

Vedula Murti, Tribeca Global.

I apologized if you have covered this, but you were referencing the weakness in utilities related to lower industrial sales, particularly to Taconites. Can you update me a little bit as to the status of various take-or-pay contracts that at least in the past you used to have, and any of those that may be coming up for renewals?

Yes, we still have -- several of our contracts have take-or-pay revenue in them. And those revenues generally have been lower than they were in the past. But all of those contracts are all requirements contracts -- in essence, the Taconite companies are required to take all their energy from us in those contracts going forward. So even though the demand or take-or-pay part has gone down, we still have those all requirements contracts.

All of those contracts have a roll-forward period where they are in effect unless either party cancels. And I think in our 10-K, we list all of the expiration dates for those contracts. And obviously we will be negotiating if you will extensions on those this year and in future years.

So is the portion of the Taconites that are not on take-or-pay that were responsible for the weakness?

As Mark mentioned, United Taconite had an explosion at their facility, and they were down for several weeks as they were able to repair that. I don't know specifically -- Mark, do you have that United Tac in front of you -- what the take-or-pay was there?

No, but the energy part is what is down. So that is really -- you see a slight drop-off in the earnings.

That is largely -- the impact is just simply based on the energy sales were down.

(OPERATOR INSTRUCTIONS). James Bellessa, D.A. Davidson.

On your guidance for the year of '07, that is about a 9%, 10% increase -- the midpoint would be 9 to 10% increase from what you reported in '06. Is this the kind of earnings growth that you would expect for the future?

Well, as you know, we only give guidance for this year. I mean, we're not going to speculate in years beyond 2007 at this point.

Well, what I'm asking is the last couple of years has been in the 20% range. And you're catching up and putting yourself in order from previous activities. So I'm just asking -- is it more reasonable to believe that your growth outlook is more in the 10% range than the 20% range?

I think that is a reasonable conclusion, yes.

(OPERATOR INSTRUCTIONS). At this time, we appear to have no further questions. Mr. Shippar, I will hand the conference back to you for any closing comments.

Okay, thank you, and thanks to all of you for joining us this morning. On one final note, I would like to remind you that you can still sign up for our New York analyst luncheon meeting which is next Tuesday. If you would like to attend and have not registered yet, please call us by the end of the day today. We would appreciate that. And again, thanks for joining us this morning. Good morning.

And that does conclude our conference. Again, thank you all for your participation. We do hope you enjoy the rest of your day.