ALLETE Inc (ALE) 2008 Q4 法說會逐字稿

Good day, and welcome to this conference call announcing ALLETE's fourth 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, and then we will conduct a question-and-answer 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 earning release distributed this morning reflects 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 reports, and from time to time, in the Company's filings with the SEC.

At this time, I'd like to introduce the Chairman, President and Chief Executive Officer, Mr. Donald J. Shippar. Please go ahead, sir.

Thank you, and thanks for joining us this morning. With me is our Chief Financial Officer, Mark Schober.

Today, we reported our fourth quarter and year-end financial results. For the year, we earned $2.82 per share, which was within the guidance range we issued in December of 2007. I'm pleased that we were able to meet our financial expectations despite the difficult economic environment.

At this time I'll ask Mark to provide you with the financial details for the year. Then I'll make some comments about our outlook for 2009 before we take your questions. Mark?

Thanks, Don. Before I get to the financial results for the year, I want to review changes we have made to our business segments.

Effective with fourth quarter year-end 2008 reporting, we have combined the Regulated Utility and Investment in ATC segments into one, Regulated Operations. In addition, we combined the Non-Regulated Energy, Real Estate and Other segments into the Investments and Others segments. These changes are reflective of how we manage our businesses and also take into account the anticipated reduced relative earnings contribution from our real estate business going forward.

My comments today will reflect our new segment reporting structure, and I encourage you to refer to the 10-K we filed this morning for complete details.

As Don mentioned earlier, we reported earnings per share of $2.82 for 2008 versus $3.08 in 2007. Earnings per share decreased about $0.08 from 2007 as a result of additional common shares issued during 2008, as we pre-fund our capital expenditure program. Net income decreased $5.1 million in 2008 from 2007. Regulated Operations net income was up $5.5 million or $0.19 per share, while net income from Investments and Other declined $10.6 million or $0.37 per share year-over-year.

Let me give you some details for each segment. The increase in earnings from Regulated Operations is primarily the result of higher rates and also higher income from our investment in ATC. As you know, we received a wholesale rate increase on March 1 and a retail interim rate increase, which is subject to refund, went into effect on August 1.

In addition, we recorded current cost recovery revenue on our environmental retrofit projects. Total incremental revenue from rate increases and environmental current cost recovery was $40 million in 2008.

Retail in municipal kilowatt-hour sales increased 2% for the year, primarily due to an increase in sales to industrial customers. Overall kilowatt sales were down 2% from 2007 because of a decrease in sales to other power suppliers due to the expiration of two sales contracts. We also experienced increases in operating and maintenance expenses, depreciation, and interest expense during the year. Much of this increase is directly related to the increasing size of our asset base.

Within Regulated Operations, net income from our investment in ATC grew about $1.5 million or $0.05 per share over 2007. At the end of 2008, our investment balance in ATC was about $77 million. The 2008 decrease in net income from the Investments and Other segment was primarily due to a $15.9 million reduction in net income from ALLETE Properties. In spite of an extremely difficult market environment, ALLETE Properties was profitable in 2008, with net income of $1.8 million.

During the year, we recorded the recognition of deferred profit from prior-year sales and the sale of a shopping center. This decrease was partially offset by a $4 million after-tax gain on the sale of securities in the first quarter and the recognition of about $5 million in tax benefits in the third quarter. Our effective tax rate for 2008 was 34%, and we expect it will be about 36% in 2009.

Our balance sheet remains very healthy with $102 million of cash and cash equivalents at year-end and a 42% debt to capital ratio. We have had continued access to the capital markets and successfully issued equity and debt during 2008.

Between December 15 and January 15, we issued $80 million of first mortgage bonds in three series at coupon rates of 6.94% to 8.17%. Additionally, we have an unused $150 million committed-to-syndicated line of credit available. We are very well-positioned for our cash flow needs. Don?

Thanks, Mark. At this point, I'd like to make some comments regarding our prospects for 2009.

In early December, we initiated our 2009 earnings guidance of a range between $2.10 and $2.35 per share on net income between $67 million to $75 million. Our guidance range includes a number of assumptions for the year, which I'll summarize.

To begin, the current difficult economic climate has had its impact on ALLETE and its customers. Because of a slowdown in domestic steel-making, we expect a decline in taconite production in North Eastern Minnesota for 2009. As a result, demand nominations for power from our taconite customers are expected to be lower by at least 25% from 2008 levels.

In an effort to mitigate the earnings impact of these lower retail sales, we intend to re-market any available power to other power suppliers. In fact, this year we have already sold power at similar pricing levels, which will largely offset the effect of the taconite reductions to date. We do expect, however, that we will have additional power to sell in 2009 if our taconite customers further reduce their demand.

We will strive to continue to mitigate the earnings impact of this reduced demand, but we're unable to predict pricing levels on such sales at this time. In addition, we have begun to implement various expense reductions and will continue to do so, as the economic conditions dictate. We'll also closely manage our capital investment program and we do have flexibility with the timing of certain investments. We will not alter any capital expenditures that would result in a negative impact on our system reliability.

We expect to receive an order on a retail rate case now before the Minnesota Public Utility Commission in April. While we are unable to determine what the final rates will be, for the purpose of providing 2009 earnings guidance, we have assumed rates equivalent to the current interim rates of $36 million. Once the retail rate case has been completed, we will adjust our earnings outlook, if need be, based on the impact of final approved rates, which may be higher or lower than interim rates now being collected.

Our earnings guidance includes the impact of the January 1 Superior Water, Light and Power retail rate increase, and assumes the rate increase for Minnesota Power's wholesale customers, beginning in the first quarter. We expect Minnesota Power will begin selling electricity to a new industrial customer, Mesabi Nugget, in the second half of 2009. Mesabi Nugget has signed, and the Public Utility Commission has approved, a 15 megawatt contract with potential for growth.

ALLETE expects increased earnings from its investment in ATC due to a higher invested balance. We expect to invest another $5 million to $7 million in ATC during 2009.

Moving to our Real Estate business, ALLETE expects little or no earnings contribution from ALLETE Properties this year. Going forward, our strategy will be to complete and maintain key entitlements and infrastructure improvements, which enhance values without requiring significant additional investment. We'll manage the current property portfolio for maximization of value and cash flow.

Our capital expenditure plan calls for about $300 million of new investment this year, approximately $100 million of which will be for current cost recovery-eligible projects. We'll continue to finance these projects with a combination of internally generated cash, debt issuances, and our ongoing equity and issuance programs.

As Mark mentioned, our balance sheet and liquidity are in great shape, as we continue with our capital expenditure plan. By the end of this year, we will have received a final order from the MPUC for our retail rate case, Mesabi Nugget should be in operation, our investment in ATC will have grown, and we expect to have closed on the $80 million purchase of the DC line, which will enable us to transport wind-generated energy in North Dakota into our service territory.

Now with regards to this initiative, we recently signed a contract with Siemens to purchase turbines for the initial 75 megawatt phase of this project.

Beyond 2009 and longer-term, we see continued rate-based growth as a result of our capital expenditure program, including investments in renewable generation, such as our North Dakota wind initiative. We plan to make additional investments in ATC, and expect increased electricity and real estate sales when economic conditions improve over time. Minnesota Power also has the potential to serve additional industrial customers, which would result in significant load growth.

At this time, we'll ask the Operator to open up the line for your questions.

(Operator Instructions). Larry Solow, CJS Securities.

Just quickly, on the timeline for the current rate case on the retail side, I know you've mentioned you expect an order in mid-April? Excuse me?

Yes, that's correct.

Wasn't there some type of administrative lower judge report recommendation of some sort throughout sometime this month? Maybe it gave kind of an inkling of what was going to come out in April?

Yes, the administrative law judge will be making his recommendation to the Commission late in February. But again, that's only a recommendation, so.

Is that recommendation made public, though or --?

It will be public information, yes.

Okay. And that recommendation kind of goes -- could go either way from what the actual final outcome is or --?

Absolutely.

Yes. It's just a recommendation.

Okay. Got you. And then, Don, you mentioned there was actually another wholesale increase going into effect in January of this year. Was that on top of the one from last year?

Yes, that's correct. We filed with FERC to raise our wholesale rates, and that is currently in front of FERC and we expect a decision sometime in the next few weeks.

So it will go in effect, Larry, in Q1. It's not going to be effective -- likely not be effective January.

Got it. Got you. And then just looking out a bit, do you have any expectations for additional retail rate case filings?

That's something we continue to look at and prepare for, especially looking at where our capital spend programs. So, it is likely we'll be filing within the next couple of years, but the actual dates have not been locked in yet.

Got it. Okay, then just last question -- I know nominations, I guess, are coming out in March or April, in the next one-third of the year? Is that right?

Right. They have to notify us by March 1 for the period that will begin May through August.

Okay. And have you gotten any indications from them, anecdotally at least, where they might be coming -- if levels are going to be coming down? It sounds like taconite may be coming down a little more or at least there's a risk for that? But any more color to that? Or anything outside of taconite for your other industrial customers?

There's no more color to it. Again, we'll know by March 1. They have to obviously notify us by then and that will be their formal notification to us. As far as the other industrial customers, they continue to operate pretty much the same as they were last year. The papers, the pipelines are very similar to what we saw last year.

Okay. Great. Thanks, guys. I'll see you next week.

Adam Wiseman, Luminous.

Just wanted to talk a bit about the CapEx program. It seems like looking at the 8-K that you filed this morning, there's a pretty big push-out of the current cost recovery CapEx. And it seems like there's -- in the near-term, a slight increase in the base CapEx. So it would seem as if it's probably going to be less CapEx that you can earn on immediately. Can you guys just talk about that and what that push-out is about?

Sure. If you're looking at the 8-K, you can see our CapEx that we put in there for the next five years, versus where we were in '07, is down a couple hundred million dollars. And what we're doing there, Adam, is primarily pushing out some of our wind, our wind initiatives.

So we continue to move on acquiring the DC line. And that's what you see in the base. That's included in the base for 2009. But then the actual putting in of the wind farms, we have 75 megawatts that are scheduled in 2010, 2011. And that's about it. The rest of it, we've pushed out post-2013.

So we're still moving on it. The strategy is still in place, but based on where the economy is and where capital markets are, we're just being very conservative on our use of cash. And as we -- again, as Don alluded to, we're being very careful as we manage our capital spend program.

Is it not possible to push out some of the other base and still grow the wind, as the wind would be able to be recovered immediately?

Well, we are looking at some of our base, but we're in the midst of a fairly sizable conversion at one of our power plants, so we'll obviously be completing that. We're also involved in several duty cycle preservation projects.

I think the other issue with the wind is our load growth has obviously been throttled back a little bit with the economy. So, when we looked at this six, nine months ago, we saw load growth that was quite a bit higher, primarily from some industrial projects that now we think is probably going to be moved out farther also. So that ties into the wind development also -- is just not having that -- the kind of load growth that we saw, as I said, about six, nine months or a year ago.

Got you. And then, just lastly on the dribble program and the equity, how's that going? How much do you anticipate needing and how much is already done?

We continue to issue through our dribble program and we plan on renewing that here with the Board and continuing to issue through 2009. Overall -- so we'll be issuing similar levels to what we have this year. I think this year is about $60 million.

Last year.

Or last year, in 2008. Our overall cash needs, though, a significant chunk of them will be financed by internal cash flow, especially as we reduce our capital spend here.

Okay, great. Thanks and congrats on the good quarter.

Anything further, sir?

No, thank you.

Thank you. James Bellessa, D.A. Davidson & Co.

(multiple speakers) Excuse me. I had you on mute, I apologize. What is your best guess on the $80 million transmission line finalization? And when might it be going in the rate base?

We plan on filing for regulatory approval here in the next probably month or so. So then it's really up to our Commission when they approve that. We're assuming that we'll get the approval by the end of the year, and we'll be in rate base effective sometime early in 2010.

Are you glad that the actual consummation of the deal and the perhaps rate basing has been pushed out? Or would you have preferred it to go quicker?

Well, I mean the reason we're a little further out than we expected is, again, trying to get the final terms and all of the negotiations and issues completed with Minnkota. So, that's just taken a little bit longer than we expected, but we're there now, in essence. And so, that's really the issue that's pushed it out for us.

I believe you said your tax rate was going to be 36% estimated for 2009?

Right.

Is that down from [30] -- 2008? And why is it down?

It's going to be up a little bit from 2008.

Up a little, okay.

Yes, it's going to be up a little bit from 2008, Jim. And the primary reasons are those tax benefits that we recognized in Q3. We recognized about $5 million in tax benefits, and it will not be reoccurring in 2009. So that's why we're up a couple of percent.

And I see there has been a reclassification of last year's '07 results, I should say, between interest expense and O&M. Can you explain that?

Just a minor re-class, as we looked at our expenses in prior years; just a better presentation, we thought. So, yes, you're right. There's a couple of million dollar re-class from interest expense to O&M. And so now everything you see in the 8-K has been a -- reflects that re-class. So, 2008, 2009 are consistent.

Thank you very much.

Eric McCarthy, Praesidis Asset Management.

Sorry. My question's been answered. I tried to drop. Thanks.

(Operator Instructions). Bernard Horn, Polaris Capital.

Just a clarification on your guidance where you talked about the taconite producers. Your current estimates, it sounds like, is that they will use about 25% lower power. And that you said that you were able to re-market the power. Does that mean that you have already re-marketed your entire -- the entire 25% reduction that you're forecasting from them at the rates that you would have sold it to them at?

Well, yes, just to clarify that, they nominate on four-month blocks. So we know what denominations are for the period of January through April. And through that point, we have re-marketed that power at pricing similar to what we would have gotten from those customers.

Because we don't know what the nominations are yet for the last two four-month blocks in 2009, we're not able, at this point, re-market that power in the market until we get those nominations.

Okay, so that's -- that would be -- if assuming that they don't come back for the rest of the year, you'll still have another two-month blocks of 25% that you have to market. And then it will be just a question of -- do you have any read on the futures markets for power going from that month five to 12?

Well, we've only got forecasts, again, of what that is. And I think the other issue is, we are selling some of that energy into the day-ahead real-time market. But the majority of what we've done so far is being sold to other utilities.

So they tend to be longer sales in the terms of months, for example, versus the next day or for a week. So it's a combination of those types of sales. So, some will be reflected of what the market prices are, obviously, and some will be subject to negotiations with other power suppliers.

Okay. And there have been some -- I know there have been some announcements that -- let's say some of the Midwestern utilities were experiencing some declines in their demand. Assuming that you cannot sell the rest of the power for the last eight months, what impact would that have in terms of your -- the amount of power that you'd be selling and the potential revenue affect?

Well, I think the issue is not so much that we couldn't sell it, because our cost basis is quite low, even relative to other utilities because of the nature of the generation. The real vulnerability is the pricing, and whether that pricing replicates what we would get from those retail customers or is somewhat less than that or could be substantially less than that.

We just don't know on that. But I think the market would have to really deteriorate before we wouldn't be able to sell power. Because, again, our cost basis for our particular generation is low.

Okay. But you don't have -- there's no current -- if we were to just say today we wanted to off-load that power, what price, based on any futures market or other contracts that you have, would you be able to sell it at relative to what the contracts dictate?

Well, today, we still feel it would be relatively close.

Okay. The other question I had is, on the -- you were talking about the CapEx program, where you're going to continue the DC line extensions. I'm assuming that you mean out to the potential wind farm locations? Is that the transmission line that you're talking about?

What that means is, that we're purchasing an existing transmission line. So we plan on purchasing that transmission line for about $80 million and that's -- we're planning on completing that acquisition in 2009.

Oh, okay. I thought you were talking about that as a direct -- in direct relation to the wind --?

And that's the transmission line we will use then to ship our new generation from the wind farms we plan on putting up in North Dakota into our service territory. So they are related.

And just as a capital budgeting question. When you decide to put a wind farm -- a particular -- either a whole farm up or a particular wind tower, are you assuming that you can sell that at whatever prices are required to give you the rate of return that you're getting on your regulated assets?

Yes, the 75 megawatts that we're moving on now, we're asking for regulatory approval for it. We'll move forward as we get regulatory approval, and that will become part of our rate base. So these are regulated assets that we're moving on today. And we'll get whatever our allowed rate of return is from our regulators on those assets.

And the margin on that relative to the actual cost of construction and amortized over some reasonable life?

Yes, it will be a whatever the allowed rate of return that we get from our regulators is.

Okay. So if it costs twice as much as it would to generate power from your other fossil fuel assets, you'd get double the -- the regulators would approve a double rate in order to allow you to get that rate of return?

As long as the costs are prudently incurred, they would approve the capital costs that we put in the ground, and then you have to take our capital structure and our load ROE against that to get what the incremental earnings would be.

Yes, we expect what they will do is they will compare the projected costs we have for the wind energy, compared to what they think is prudent and would be a substitute for that. Because, again, this is renewable that we're compelled to do under the Minnesota Renewable Mandate Program. So the comparison will really be against other renewable options or opportunities, whether they come from us or somebody else. And that will be their decision then, whether that project is appropriate.

Right. And if the cost -- and if the ultimate cost to the consumer is twice as much per kilowatt hour as it would be from all your other generation, so be it, then they'll let you charge that to get your required rate of return. Is that right?

Yes.

Okay. Because there have been some discussions about, like in Spain and so forth, where the government has promised those kinds of things, and now with the difficulties in budgets and so forth, they're backing off on those promises. And I'm just wondering, do you feel that that's a risk? And has that entered into your decision to defer the wind asset investments at this point?

Well, again, under this scenario, we won't go ahead with the project until we get approval.

Right.

So, it's all contingent on the Commission approving this project as being prudent and telling us that they've approved it to be put into our rate base, as it's built and completed.

Okay. Last question was just -- anything in the new stimulus programs in Washington that will help or hurt your business?

Well, we think there's, again, the production tax credit extension will be helpful for the wind projects. The ongoing accelerated depreciation for projects will be helpful. Beyond that, we haven't thoroughly looked at all the other issues, but we don't see anything specifically that would be of a great benefit to us beyond those two items.

All right. Thanks very much.

And at this time, there the appears to be no further questions in the queue. I'd like to turn the conference back over to our presenters for any closing remarks.

Well, thank you, and thanks, everyone, for joining us this morning. For those of you who are unable to join us at our Analysts Breakfast meeting next Thursday in New York, I invite you to listen to the webcast replay, which will be posted on our website -- www.allete.com. And we look forward to speaking to you again when we report our first quarter earnings results. Thanks.

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