ALLETE Inc (ALE) 2007 Q1 法說會逐字稿

Good day, welcome, everyone, to this conference call announcing Allete's first quarter 2007 financial results. Today's call is being recorded. Your line will be muted for the presentation. Then we will conduct a question and answer period. (OPERATOR INSTRUCTIONS) This conference may contain forward-looking statements within the meeting of Federal Security 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 can 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. At this time, I would like to introduce the President and Chief Executive Officer, Mr. Donald J. Shippar. Please go ahead, sir.

Thank you, and thank you for joining us this morning. With me is Allete's Chief Financial Officer, Mark Schober. This morning we reported our first quarter financial results, which produced earnings per share of $0.93. A number of factors influenced the quarterly financial performance, and Mark will go through them with you in a few moments. I'm pleased with the strong start we have had and we're on pace to meet our earnings-per-share guidance between $2.95 and $3.05 for 2007. I would like to update you on some developments that have occurred since we last spoke to on you in February. In mid-April, the Minnesota Public Utilities Commission approved our electric service agreement with PolyMet Mining. PolyMet expects to begin mining copper, nickel, and precious metals in late 2008, pending completion of financing arrangements and receipt of regulatory approvals. The contract is for 70 megawatts and runs through 2018.

In late March, our $200 million Boswell Unit 3 emission reduction project received its necessary construction permit. In late April, the Minnesota Pollution Control Agency determined the project meets statutory requirements. This is a first step in the process to receive Minnesota Public Utility Commission approval for current cost recovery of this project. At Allete Properties, we closed on the sale of a 50-acre power center site in the town center at Palm Coast Development for $12.6 million plus $1 million contribution to pay a portion of the site preparation costs. This transaction occurred in April and will be recorded in our second quarter results. At is this time, I will turn the call over to Mark.

Good morning. Compared to last year's first quarter, earnings per share increased $0.25. Let me give you some of the details. As you know, our energy business is comprised of the regulated utility, non-regulated energy operations and investment in the American Transmission Company segment. Earnings per share for our energy business increased by $0.31. Net income at the regulated utility segment was $5.8 million, or $0.20 per share higher than last year's first quarter. About half of the increase or $0.10 came from increased margins from residential, commercial, and municipal customers due to the colder winder in 2007 compared to last year. Heating degree days were 10% higher this year than in 2006.

Decreased expenses due to the reduction in our entitlement of output from Square Butte, contributed $0.03 of the difference over last year. Electricity and gas sales were higher this year over last at Superior Water, Light & Power due to colder weather and higher rates that were in effect. This combination resulted in a $0.02 increase over the first quarter of 2006. The remaining $0.05 difference was due to a number of smaller items, including lower depreciation and interest expense and increased sales to other power suppliers. Net income from the non-regulated energy operations segment was up $1.3 million or about $0.05 per share from the first quarter of 2006. Most of this increase was due to a large Minnesota land sale gain. Net income from our investment in the American Transmission Company segment was $1.8 million during the quarter or about $0.06 per share. We had no earnings from ATC during the first quarter last year because we did not begin our investment until the second quarter of 2006.

Turning to our real estate segment, net income was $1.9 million or about $0.07 per share less than last year's first quarter. I would like to remind you that net income varies from quarter-to-quarter in this business due to the timing and mix of land sale closings. This variance impacts year-over-year quarterly comparisons. During the quarter, we record the sale of 367 acres of land for $6 million or an average of over $16,000 per acre. In addition, these transactions show a potential for future upside to the receipt of participation revenue. Our other segment was up $500,000 or about $0.01 per share this quarter, compared to the same period last year.

There were two primary contributors to the quarter. First, we recorded higher investment income and, secondly, we recorded a smaller loss from our emerging technology portfolio compared to last year. We continue to expect that our earnings per share for 2007 will be in the $2.95 to $3.05 range. Our guidance is based on the expectation of normal weather patterns for our regulated utility business for the remainder of the year. In 2006, we had warm weather and recorded higher-than-usual earnings in the third quarter. We also expect year-over-year operation and maintenance expense increases primarily for scheduled and unscheduled outages. We expect continued strong sales to our industrial customers for the balance of the year, we have higher rates in place at Superior Water, Light & Power than in 2006, and ATC earnings will be higher last year due to a higher investment balance. We continue to expect increased earnings this year over last at our real estate business. Again, I remind you that net income from this business varies from quarter-to-quarter which affects year-over-year quarterly comparisons. As of March 31, Allete property has had $111 million of sales under contract that are expected to close over the next several years. Don?

Thanks, Mark. At this time, we'll ask the operator to open up your lines for question.

(OPERATOR INSTRUCTIONS) We'll go for the to James Bellessa with D.A. Davidson. Davidson & Co.

Good morning, and congratulations on a good quarter.

Thank you.

Morning, Jim.

Your expenses at the utility were fairly flat. Would you go through why that is the case? Are you such good controllers of cost or was there something extraordinary in the last year's?

If you look at the operating and maintenance expense right on our income statement, they're flat, but there are a couple of things going on there, Jim. The utility expenses are up due to outage expenses we have had at some of our generating units and also due to our labor and various benefit costs are up. Offsetting that almost entirely is the decrease in O&M expenses at our real estate group because of the fewer real estate sales -- our costs-of-goods sold is down at the real estate group.

And for your utility, is it fairly flat expenses?

For the entire year, we anticipate our O&M expenses at the regulated utility will be up, and the primary drivers are outage expenses, both forced and unscheduled -- or unscheduled and scheduled outages and again, also our labor and benefits will be up year-over-year.

Have you had some unscheduled outages already then?

Yes, we have experienced an unscheduled outage in our Boswell 4 unit. We have had issues with some failed coils. It was a scheduled outage that began in March and reduced output. It began with the reduced output and then we took an outage here to actually do repairs in the generator.

And you had some narrative about Square Butte expenses being down. What was that?

Square Butte expenses are down for a couple of reasons. Square Butte had some outages, so there is less power coming in. But also our take from Square Butte is down. Out entitlement is down another 5% effective with the first of the year here, so our demand charges from Square Butte are down accordingly. So our Square Butte entitlement is coming down -- we're at 60%, we'll be at 50% in two years. So those expenses will continue to come down.

And would you go through the explanation of the sale of the 50 acres showing up ind second quarter.

I don't recall that we -- oh, you're talking about the power center. That was a transaction that closed in April. That has already been recorded, so that transaction is closed. You will see all the numbers on it when we disclose our second quarter results.

And what when you say a power center, what do you mean by that?

Well, it's anchored by large stores by Target, Super Target, et cetera, with the associated smaller retail operations that typically go with those large stores such as Target.

So you're not installing some substation there?

No, no, no.

It's a large retail site.

No, no, it's not an electrical.

Thank you very much.

Thanks, Jim.

Thanks, Jim.

(OPERATOR INSTRUCTIONS) We'll move next to [Pat Tsung] of Zimmer Lucas.

Good morning, gentlemen, congratulations on a strong quarter.

Good morning.

Thank you.

A question about a press release that Minnesota Power put out some time ago about the new wind facility, Taconite Ridge.

Yes.

The $50 million cost for this construction, is that already in your CapEx guidance or is this incremental?

This will be incremental expenditures.

Okay, great. And just a clarification, the 50 acres that were sold due to a closing in April -- how much is that for? What's the dollar amount?

$12.6 million plus a $1 million contribution that helped pay for some of the site prep costs.

I see. And I remember in your 10-K there is some disclosure about potentially acquiring either other real estate assets or getting into another basic industry. Has there been any update on that front?

We don't have any update per se specific efforts. We continue to look at both initiatives, look for additional real estate and also, we continue to research and examine and evaluate other businesses.

That's all my questions. Thank you again.

Thank you.

At this time, there are no further questions. I would like to turn it back over to Donald Shippar for any additional or closing remarks.

Thank you again for joining us this morning. Our first quarter results put us on track to meet the expectations we set for ourselves at the beginning of this year. We at Allete are confidence with the future prospects of our core businesses and we look forward to speaking to you in July. Again, thanks for your time and attention this morning.

That does conclude today's conference, you may now disconnect your lines, and thank you for participating.