ALLETE Inc (ALE) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to this conference call announcing ALLETE's first quarter 2008 financial results conference call. Just as a reminder, today's call is being recorded. Your line will be muted for today's presentation, then we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) This conference may contain forward-looking statements within the meaning of Federal Securities laws including statements concerning business strategies and their attendant 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'd lake to introduce the Chairman, President and Chief Executive Officer Mr. Donald J. Shippar. Please go ahead, sir.

Thank you. Good morning, everyone. Earlier today we reported first quarter earnings per share of $0.82. She's results keep us on track to meet our total year earnings guidance of between $2.70 and $2.90 per share. Before we get to the details of the quarter, I'd like to take a moment to update you on a couple of new developments.

First, you may have noticed that this morning we filed a $45 million rate increase request with the Minnesota Public Utilities Commission. If approved, this increase in base rates would be the first for our retail customers in 14 years. Interim rates will go into effect on July 1, and we expect final rates will be in place in mid-2009. Also yesterday, ALLETE Properties closed on a sale of its Winter Haven shopping center for $20 million. We determined that the shopping center, which is the only shopping center we own, was not a strategic part of our real estate business. The expectation of a sale was included in our initial 2008 earnings guidance. We will record an after-tax gain of about $3 million with this transaction in our second quarter results. At this time, I'll turn the call over to Chief Financial Officer Mark Schober. Mark?

Good morning. Our quarterly results were in line with our expectations and I encourage to you refer to the 10-Q we filed this morning for complete details. However, I'd like to highlight a few items for you. Our regulated securities earned $700,000 after tax or $0.02 per share less than the first quarter a year ago. Primarily because of higher expenses. Operation and maintenance expenses were about 10% higher than a year ago. This year, we incurred increased costs for labor, benefits and materials. Some of these costs are related to our recent environmental retrofit projects which are recovered through riders. We also incurred higher depreciation and interest expense related to our capital investment program.

Operating revenue for the regulated utility was up about 7% from last year and reflected a number of factors. Cooler than normal weather helped drive a 3% increase in residential, commercial and municipal sales of most weather-sensitive customer classes. Fuel cost recoveries were higher than last year as was current cost recovery revenue related to our environmental projects.

Also, on March 1, higher wholesale electric rates went into effect. Revenue from gas sales at Superior water light and power were higher this year, another result of colder weather. These increases in revenue were partially offset by a decrease in revenue from sales to other power suppliers due to contract expirations at the end of 2007.

As Don mentioned, we have filed a retail rate increase with the Minnesota Public Utilities Commission. The filing requests an average rate increase of about 10% and seeks an overall return on equity of 11.15% and a capital structure consisting of about 55% equity and 45% depth. The filing addresses increases and operating and maintenance costs, increases in depreciation and interest expense related to our capital investment program, and the expiration of off system sale contracts. Additionally, we will incorporate into base rates some of the costs that are being collected through riders. The total requested annualized increase is $45 million, and we expect the final rate order from the commission in mid-2009. We requested an interim rate increase of $36 million to go into effect July 1, this year.

We estimate incremental revenue from both the wholesale rate increase and the expected interim retail rate increase to be about $20 million in 2008. Net income from the nonregulated energy segment was down about $2 million after tax or $0.07 per share. In 2007, we recorded a large sale of property in Minnesota and this year we incurred higher operating expenses and less revenue due to a planned outage at one of our nonregulated generating facilities. Income from our investment in the American Transmission Company grew slightly year-over-year due to our larger investment balance. Income from this investment will continue to grow as we participate in capital calls. At the end of the quarter, we had about $67 million invested in ATC and in 2008, we expect to invest an additional 5 million to $7 million. In April, we participated in the capital call of $2.8 million which will be reported in our second quarter financial statements.

Our real estate business recorded a $500,000 net loss or $0.02 per share during the quarter. Land sales were lower than the first quarter last year consistent with real estate market conditions across the country. I'd like to remind that you no matter what the conditions are, income from this business naturally varies from quarter to quarter due to the timing of contract closings and other factors. Even though we recorded a small loss during the quarter, we anticipate another profitable year for this business in 2008, but as we stated in our previous guidance, a lower earnings contribution than in 2007.

Don mentioned the gain on the sale of the shopping center which would be recorded in the second quarter and as of March 31, we also have $2.7 million of pretax deferred profits on the books which we expect to recognize during 2008. Our other business segment earned $3.4 million or $0.12 per share more than in 2007. During the quarter, we recorded gains on available for sale securities that are held for employee benefits. These gains are triggered when securities were sold to reallocate investments to meet defined allocations based upon an improved investment strategy. Our effective tax rate was 36.6% for the quarter down slightly from the 37.9% during the same period a year ago.

So in summary, the quarter ended up where we had anticipated and we remain on course to achieve our earnings per share expectation of between $2.70 and $2.90 per share. Don?

Thanks, Mark. Before we go to your questions, I'd like to make a few comments about ALLETE as we look forward. Within our regulated utility business, Minnesota Power's in the midst of its most significant rate based growth ever as it anticipates making approximately $1.5 billion in capital investments by 2012. About half of these expenditures are needed to comply with renewable energy requirements and environmental mandates. In addition, Minnesota Power will be making significant investments in its low cost generation fleet. We will also look for transmission opportunities that strengthen and enhance the regional transmission grid and take advantage of our geographic location between sources of renewable energy and growing energy markets.

Our capital investments will be recovered through a combination of current cost recovery riders and anticipated increased electric rates. We expect growth in electric sales for our existing customers and may have additional load growth from potential new industrial customers in our service territory. Net income from our investment in ATC will grow as we increase our investment in that segment. In short, we are seeing growth and opportunity in this business that we haven't seen in decades. We believe our substantial capital investment program will benefit our customers and shareholders for years to come. This is truly an exciting time in the history of our Company. At this time, I'll ask the operator to open up the line for your questions. Thanks.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Larry Solow with CJS Securities.

Good morning.

Larry.

Can you just confirm on the rate case, you get the 8% interim and then once assuming the rates go through July '09 or potentially earlier than that, that would back pay the additional incremental difference?

Interim rates we anticipate interim rates going into effect July 1.

Right.

Both those rates we anticipate being as I mentioned just about $14 million on the retail side. Those are certainly subject to refund and based on what the final rate order will say that comes out sometime in mid-'09.

Okay. Then an update on I know you get cost recovery I guess as the actual programs are complete or actually as the plants are up and running. Is that how that works?

The big one, at Boswell 3, the environmental retrofit there we do get cash return in QIP because that's such a long-term project.

Right.

The other smaller ones and some of our renewables, those costs run through our customers as the project goes into service.

Okay. And then just turning to real estate, were there any cancellations in the quarter?

There haven't been any cancellations during the quarter but we have updated but we have updated the disclosure in our Q. I would encourage you to take a look at that but we are working with all of our customers that have pending contracts due to the slowdown in the market and working with them trying to move these contracts to closure. No guarantees that they will close. There haven't been any cancellations during -- were no cancellations during the quarter.

Then you said the shopping center was a $20 million net sale?

Yes. That sales price was $20 million and the after tax gain on the transaction that we will record in the second quarter is $3.3 million.

That was included in your 2008 guidance?

Yes. That was included in our guidance.

Okay. So it's like a $0.10 after tax gain or something per share. Great. Thank you.

Or next question would come from Todd Vencil with Davenport and Company.

Good morning. Just on that -- did you just say $3.3 million again?

On the Winter Haven shopping center, yes. That's what it was.

Can you tell me how much Winter Haven represented on your balance sheet. I'm looking at an other assets line there on real estate of $13.5 million.

Yes, that's it.

That's the whole thing?

There's some other finance receivables in there but that's pretty much it, right around $13 million. 13 million, $14 million.

Was there any debt associated in it?

Yes, there was, we paid off so the cash and the transaction is 5 million to $6 million. There was about an $11 million note on it I believe that we have to pay off.

And when you say you're working with all of the customers in your backlog there on the real estate to bring things to closing, are you going -- as you go through that process, are you delaying or changing, renegotiating the price.

Well, all of those are possible. That's why I encourage you to look at the queue. But there's going to be because of market conditions likely delays in some of those closings but there certainly could also be price adjustments or outright cancellations are possible, too, as we experience late in '07.

And/or extensions. We're obviously working to try to extend and work with the customers but again in this market, there's no guarantees of course that we'll be able to successfully do that in all cases.

Right. Does any of that essentially effect that $2.7 million of deferred profit or do you think you're pretty well locked into that this year?

That will come through our income statement as we complete some development obligations down in Florida, and we anticipate completing them during the year. So no, that should not impact that.

Okay. Last question, just more broadly what are the guys down there thinking about sort of the timing on these market conditions? Do you have any idea of, I'm assuming it's not '08, but what are their thoughts as to when we might see this market beginning to improve a little bit?

Well, I think there's a variety of opinions on that depending on who you talk to as you well know. We would tend to agree that we're not expecting any significant change this year. We're hoping there will be some improvements starting to show up next year probably later in the year and by 2010 see some significant improvement again, but again, that's pure speculation on our behalf and their behalf as you well know.

Well, I appreciate it anyway, thanks.

Or next question will come from Davenport and Company. We'll hear from Bob Chewning.

I don't want to appear confused. But with regards to the rate increase, the $45 million, is that inclusive or in addition to the increases that you will get via current cost recovery?

That $45 million, it includes some of the revenue that we're already collecting through our rev riders for our environmental projects. What happens as we go into a rate case, we're moving some of the completed construction from the revenue riders into our base rates. That's why when we look at 2008 as I discussed on the call a few minutes ago that the incremental revenue on both our FERC rate case and the Minnesota rate case incremental over and above what we're recovering through the riders is about $20 million of revenue. For 2008.

$20 million incremental above the riders.

Yes, sir.

That are currently in place.

Yes, sir.

Okay. And so if we were to look at the rate case. The test year that you are using reflects what period.

The test here is July 1, this year through 6/30 next year.

Okay. So are you using an average test year between those periods?

Yes.

Okay. All right. Outside of, could you just give us some sense outside of the current cost recovery CapEx, how much of the other CapEx is going to be included in that filing?

Maybe just they give you some numbers I like to look at it from a rate base standpoint. Looking at the test year which is July of '08 through June of '09. Our total rate base for that period for that period is right around $1 billion and the Minnesota jurisdictional piece of that is about $900 million.

Okay.

So that's what we're going in for. The next piece and it does get complicated, you also need to back out the rate base with some of these riders so that the net rate base for this rate case is about $714 million.

All right. So net 714 then plus the CapEx that relates to the current cost recovery?

Yes.

All right. Thank you very much.

(OPERATOR INSTRUCTIONS) Our next question will come from James Bellessa with D.A. Davidson and Company.

Good morning. The interim rate that goes in effect on July 1, is $20 million?

No. The interim rate that goes into effect -- this is what we're requesting so again it's up to the commission. The $20 million, has to do, Jim, with both, that's the total from both the Minnesota rate case and the FERC rate case. So the piece, the incremental revenue strictly into the retail or the Minnesota case is about $14 million.

So you're going to ask for an interim increase out of a total $45 million that you're asking for?

That's the incremental revenue that we expect, yes. Remember that $45 million also includes some that were already recovering through our riders.

When you gave the guidance, $2.70 to $2.90, did you have an anticipation that you were going to get this gain from the sale of investments in the first quarter?

Yes, we did. When you step back and look at the results for the quarter, it pretty much exactly in line with what we expected for the year. There is no surprises in the first quarter.

When you gave the guidance, did you expect to have a down utility quarter?

Yes, we did.

Why did you expect it, why did it come out as being down?

We knew it was going to be down and it did come out about $700,000 and there's a couple of primary drivers. One is the increase in our own O&M expense as we talked about. And we also had contracts in place that expired in 2007 and that energy now is being sold to our retail load so that we knew that those margins were going to be down on those wholesale contracts and that we make those up or replace them as we're selling to our retail load. That's one of the drivers for the retail rate increase here.

And of course, as we all know the timing of the real estate varies from quarter to quarter, but did you expect when you started the quarter that you'd have a loss of $500,000.

We really don't look at our real estate business quarter to quarter. Again, it varies so much. We look at it on an annual basis and it's in line with what we expected for the full year. That's the way we've run the real estate business since we've been involved since 1991. You really can't take a lot of these transactions that we're anticipating and peg them into a month or into a quarter.

Thank you very much.

You bet.

At this time, there appears to be no further questions in the queue. I'd like to turn the conference back over no Mr. Shippar for any closing remarks.

Thank you. Thanks for joining us this morning. We look forward to talking to you again at the end of the second quarter where we will be reporting our second quarter earnings. Thanks for participating and good morning.

That does conclude our teleconference for today. We'd like to thank everyone for your participation and have a wonderful day.