ALLETE Inc (ALE) 2009 Q2 法說會逐字稿

Good day and welcome to this conference call announcing Allete's second quarter 2009 financial results. Today's call is being recorded. Your line will be muted for the presentation and then we will conduct a question-and-answer period. (Operator Instructions).

This conference may contain forward-looking statements within the meaning of the federal securities laws including statements concerning business strategies and their intended results and similar statements concerning anticipated future events and the 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 things are subject to numerous risks and uncertainties, which could cause actual results to differ materially from those expressed and/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 Chairman and Chief Executive Officer, Mr. Donald Shippar. Please go ahead, sir.

Thank you and good morning, and thanks for joining us today. With me are Allete's President Al Hodnik and Chief Financial Officer Mark Schober.

This morning we reported second quarter earnings of $0.29 per share. Our quarterly results were impacted by the reporting of an additional liability for a refund, which Mark will explain in a moment. Before we give you the financial details of the quarter, I'd like to highlight some recent events.

The Minnesota Public Utilities Commission recently held a hearing to address requests for reconsideration related to our retail rate increase request. At that hearing, the Commission voted to approve a final annual rate increase of $20.4 million, which is slightly less than the May 4th order amount.

In addition, the Commission reduced rates collected during the interim period which required us to record an additional refund liability amount this quarter. We are currently awaiting the formal written order from the Commission.

Assuming no parties appeal the decision, we expect final rates will go into effect during the fourth quarter. Mark will provide more details regarding our rate increase request in a few moments.

With respect to our taconite customers, we recently received their demand nominations for the September through December period. Total year demand nominations have increased slightly from what we were assuming when we last spoke to you in May; and nominations for the last four months of 2009 are significantly higher than what they were for the May through August periods.

We also note that some domestic blast furnaces which require taconite pellets for steelmaking have come back online and their capacity utilization rate has improved over the last three months. This indicates to us that the taconite industry is improving as we head towards 2010. Certainly, we are pleased with the higher demand nominations and are optimistic that this recovery will continue.

Moving to our North Dakota wind initiative, in early July the MPUC unanimously approved Minnesota's powers plant to construct the first 75 MW portion of our wind generation project. The project is now eligible for current cost recovery which we will petition for in the near future. The first two phases of the project to schedule -- the first of the two -- of the two phases of the project is scheduled for commercial operation in late 2010.

At this time, I will turn the call over to Mark Schober.

Thanks, Don. This morning, we filed our 10-Q and I encourage you to refer to it for more detailed information about our quarterly results and outlook.

Before I provide the details for the quarter, I'd like to take a few moments to recap the financial impact of our current retail rate increase request proceedings. On May 4, the MPUC issued its order, approving an overall rate increase of $21.1 million, a 10.74% return on common equity and a 54.79% equity to capital ratio.

In the first quarter, we booked a $5.3 million charge which on an after-tax basis is equivalent to $0.11 per share for the 2008 portion of interim rate refunds based on this MPUC order. Parties to the rate case file request for reconsideration and the MPUC addressed them in late June. The net effect of the Commission's reconsideration decision is to authorize a final rate increase of $20.4 million annually but reduce interim rates to approximately $15 million.

Stated another way, once final rates go into effect this fall, Minnesota Power will have a $5 million annualized rate increase over approved interim rates.

As a result of the reconsideration during the second quarter, we booked an additional $2.3 million charge equivalent to $0.05 per share after-tax, representing the 2008 portion of the interim rate refunds related to the reconsideration. Added to the first-quarter amount, this year we have booked $0.16 per share for 2008-related interim rate refund.

With that background information, I will now turn to the results for the quarter. Our reported quarterly earnings per share were $0.29 -- a net income of $9.4 million and total operating revenue of $164.7 million. Without the impact of the 2008 portion of interim rate refunds, we would have reported $0.34 per share for the quarter.

In the same period, we reported $0.37 per share last year which included $0.10 per share gain from the sale of a shopping center at ALLETE Properties.

Net income for our regulated operations segment was $10.7 million. Or $3.5 million higher than last year's second quarter. Last year's results were impacted by higher operation and maintenance expenses related to a planned outage at the Boswell [for a] generating station.

Revenue for this segment decreased $18.4 million compared to last year primarily due to lower fuel and purchased power recoveries. The impact of higher wholesale and retail rates was offset by the prior year rate refund amount and the increased interest and depreciation expense.

Total kilowatt hour sales were 6% lower than last year primarily due to lower industrial sales. The decrease in industrial margins, however, was mostly offset by sales to other power suppliers. We expect to offset about 85% of the reduced industrial margins with sales to other power suppliers this year.

Equity earnings from the Company's investments in the American Transmission Co. increased by $700,000 over the same period last year due to the higher investment balance. At June 30th, we had a total equity investment of $82.1 million. On July 31st, we invested an additional $1.9 million in ATC.

The investments and other segment posted a $1.3 million net loss for the quarter, which is $4.8 million lower than last year. Last year's shopping center sale by ALLETE Properties accounted for $3 million of the difference.

Average shares outstanding increased by 3 million year over year resulting in a $0.03 per share diluted impact. The effective tax rate was 31.5% for the quarter compared to 36.5% a year ago due to a lower pretax income and a small state tax refund from an amended return. We anticipate the effective tax rate for the year will be 35%.

Our cash balance was $72 million at the end of the quarter and our debt to capital ratio was 42%. Don?

Thanks, Mark. We now look forward to the second half of this year with the benefit of having received demand nominations from our industrial customers and knowing the financial impact of the recent Minnesota Public Utilities Commission decision. We also expect to completely offset the loss of margins from the year-over-year decrease in sales to our taconite customers through a combination of sales to other power suppliers and expense reductions.

We now anticipate Allete's year end earnings per share will fall within a range of $2 to $2.15 excluding the refunds related to 2008. Our new guidance does reflect an additional $0.10 per share charge for refunds related to 2009 as a result of the MPUC reconsideration.

We plan to give 2010 earnings guidance during our third-quarter call in late October. Even though we don't have numbers to share with you yet, we can comment on a couple of items.

First we plan on filing a new retail rate request at the MPUC before year-end. The primary drivers for this case is our ongoing capital expenditure plan to meet state-mandated renewable energy standards, maintain our existing low-cost generation fleet, and enhance our region's transmission. Interim rates will go into effect 60 days after the filing.

Secondly, during 2010, we will have a full year impact of sales to a new industrial customer, Mesabi Nugget, which will begin operations during the second half of this year. Also, based on the latest demand nominations and our outlook for next year, we expect sales to our industrial customers will continue to improve. Longer term, our regulated utilities will continue to require significant capital investment. These continuing investments will necessitate additional rate and increase requests.

At this time I will ask the operator to open up the lines so that we can take your questions.

(Operator instructions). Eric Beaumont with Copia Capital.

Good morning. Quick clarification here. In the guidance now from $2 to $2.15 so it [excludes] the '08 -- the impact from '08 on the refunds, but you said it does include the impact from '09 from the refund?

That is correct.

And what are the numbers on for '08 and '09? Just so I make sure I have them right and (multiple speakers).

Yes, looking in total, if you like our EPS, Eric, for 2008 it's $0.16 that we recorded. And for 2009 again these are year-to-date numbers that were sitting at about seven -- $0.18.

Okay. As we look here obviously, giving more demand nominations as you say, the question is when I think about you've obviously locked in a lot of the sales going forward but -- as the offset.

I'm curious. With industrial demand being done in other areas, people that have taken the power, was it a take or pay? Are they taking as much as you expected given obviously power prices have been exceptionally soft even more so from when you signed? So is there any potential impact that people aren't taking what they had contracted for in the makeup payment or the makeup from --? I'm not explaining it well, but (multiple speakers) understand the question?

Yes, I understand where you're going. Looking at, again, just for 2009 we are still at that 85% number that I gave you. And the reason we are there is that we jumped on a lot of these sales earlier in the year so we locked in a lot of the prices before wholesale prices started to soften here.

So we are comfortable as we look forward to the end of the year that we will be able to replace, again, 85% of those margins and in the balance, we look at making up just the way we are running the business a little bit differently and as Don alluded to, we are looking real hard at our discretionary expenses and other items to make sure that we can cover 100% of those margins. At this point, we are confident we can do that.

And I guess looking at the discretionary expenses and others, obviously, good cost controls in the quarter and but going in for rate case while doing an exceptional job on cost control. Were there any concerns over how the level of O&M is going to get [pegged] in the upcoming filing?

No we don't believe so, if you look at O&M what happened this quarter, you can see we are down significantly. A lot of that has to do with purchase gas at our Superior Water Light and Power subsidiary.

The other cuts that we are looking at are certainly cuts that are discretionary in nature, but don't impact system safety, system reliability. So they are cuts that we can make. We've looked at some staffing levels. We've looked at management salaries, but other things that will not have a permanent impact on the business.

And again looking to the rate case, I guess you'll be filing later this year. When should we have an expectation of you implementing interim rates?

We don't have exact dates yet. We were probably have that information for you as we give guidance for 2010 at our late October call. But as Don mentioned interim rates come in effect 60 days after we file. So if we file in Q4 here, it will be sometime early in 2010.

And lastly on real estate, is there anything to comment on other than basically what we have been hearing most of the year from you?

Not anything really new there. There has been some improvement if you will, in home sales, but it's still down significantly. So we are not looking for any significant changes in our real estate operations this year -- going into later this year from what they had been really pretty much throughout the year.

Okay. I appreciate the time, thanks.

Larry Solow with CJS Securities.

Good morning, gentlemen. Could you maybe just elaborate just on today's revision so the $6.3 million annualized number? It impacts $0.05 in 2008 an additional $0.05. For 2009 and I guess you quantified the total impact was $0.10, I guess assuming that's three quarters or so, right? Am I -- is that right so far -- with me on that so far?

Well, when you look at -- these are year-to-date numbers through June 30th, so the refund liability will grow until we implement our final rates. So sometime in Q4. But the incremental, want to do it in cents per share. The incremental reserve that we booked in Q2 is $0.05 related to 2008 and another $0.10 related to 2009.

Got you. So essentially it is about -- so that $0.10 essentially you are booking Q2 is also, really, you are also booking Q1 into Q2?

Yes. That's a catch-up to get those to the reconsideration orders. So it's a catch-up for Q1 and in Q2. Correct.

All right and then there would be another $0.05 or so in Q3 then? That's a (multiple speakers).

I don't have that number. Again it depends on when we implement our final rates, but it will grow slightly.

Right, just assuming that clearly run rate would be around that.

I don't think it would be that high.

But essentially so somewhere in the $0.12 number? So that basically your guidance excluding that reduction essentially is about the same. Is that a fair statement?

That is exactly what we did. So you look at our guidance. We took it down $0.10 and it's the dime related to this reconsideration.

$0.10 doe this quarter so essentially there is even a little more. Actually you can argue your estimates even be tweaked up a hair if anything, excluding that one adjustment.

Got to get it.

Just trying to put a positive spin on it. Okay. The share that went up 800,000 [squares] So I guess you have been using your share filing and selling some more shares out there?

Yes, we have.

And you expect us to -- I guess the average went up 800,000 so I imagine you sold more than 1 million in the quarter or --?

That detail's in the Q.

In the Q.

I didn't get a chance to look at the Q yet.

We -- during the quarter it's about 800,000 shares that we sold year-to-date for the six months. And we will continue to issue shares as we -- our capital extend program continues to move forward here in late '09; and then also as we look at what we need for early 2010.

Got it. And then the nominations clearly they were, sounds like they were better than Q2 other than the second, third of the year and sort of in line with where they were from the first third. Is that pretty much a fair statement?

Yes, I think it is.

The [reals saw] more in the second and rebound a little bit.

Then on real estate just by itself, do you happen to have what the number was? I guess real estate and other laws 1.3. Do you have -- just by itself real estate that may be in the Q2, but --.

That's in the Q, but that really is essentially all real estate.

Then last question on the rates filing, I know you haven't given out any numbers yet, but any approximate magnitude which are -- I mean would we expect it to be sort of in the ballpark of maybe half of what you borrowed for last year or any way to quantify that? I imagine it is going to be less of a filing than you had in 2008, but --?

No. We are not quantifying that yet. It is really driven by -- we are in that process right now as we finalize our budget for 2010 looking at our expense and our capital spend rate. So we will have that number for you in October.

Then, just assuming based on the pushback you got in the last rate case and I understand that you are always being observant, people pushing back when rates are increasing, don't want to see the prices go up, but would you expect -- how is this rate filing different or comparable to the last one? And is it more state-mandated stuff and stuff that appears maybe on the surface to be easier to get through to commission or is there any way to look at that?

As we said in the release and the scripture it's really related to our capital expenditure program to address the renewable requirements. To address the reductions and the CO2 -- or excuse me the [NOX, the SO2], mercury etc. at our facilities and also to address transmission investments we've made and are continuing to make.

So we think it is all obviously things that are appropriate and that we are investing in and need to invest in to maintain our reliability and meet the requirements and mandates that are running. So we are not anticipating any of those will be looked at as being something that shouldn't be included in our future rates.

Great. Excellent. Thanks a lot.

(Operator Instructions). Vedula Murti with CDP US.

Good morning. A couple of things. One you mentioned is this new customer that's coming on here in the second half of the year. Have you identified what type of anticipated gross margins this customer will be providing?

Well as far as the load itself, it is about -- we estimated to be about a 15 to 20 MW load and it will simply fall under our industrial margins if you will for a large power load.

Now if you could remind me, at least my recollection is that for a lot of the large loads it was very much a demand charge kind of place where you covered your -- where you realized gross margin on demand charge and then, the energy was pretty much take or pay. So the actual volumes in and of themselves were not the prime driver behind the gross margin associated with industrials.

Am I incorrect in that? Or how should I be thinking about this?

That's correct but realizing that the demand charges are set really based on the megawatt hour take. So it's based on that 15 to 20 MW that they are planning on taking and we have a take or pay for that demand charge [fee] for 10 years. But you're correct.

And obviously in your guidance you already have half of this already built in?

Yes, because we are assuming they are coming online later in Q3 here.

When you talk about the 85/15 have you quantified at all what that 15% on GAAP is that you are filling in through cost management, etc.?

We have target numbers that are said internally, but I don't have an exact number that I can share with you. Certainly we have something that we work with to ensure that we cover all of those margins.

Because isn't it true, I think Eric was talking about this earlier -- that with the be higher industrial nomination what you'll do is 85% that you manage to lock in before power prices declined you will simply re-allocate those back again to the industrial space on the higher nomination. So it is kind of a -- it seems like it is kind of a neutral to maybe slightly positive swap. But it's not entirely all new load coming on.

Yes. And that is correct because if you go back to the last time we chatted when we came out of Q1, these nominations are coming in pretty close to what we expected at that point in time. Significantly better than where they were in Q2, but really close to where we were coming out of Q1. And they were built into our guidance then when we came out of Q1.

So there really hasn't been a substantial change quarter to quarter.

Okay, so that -- so while we are shifting it back to internal load as opposed to external load, there is not -- at this point created a very large gross margin effect at this point that you are pointing to?

No. That is correct and again because of the strong nominations going into the end of the year and the contracts that we have in place, a lot of that risk has been taken off the table.

That risk being that the 85% that was contracted before pricing fell off would still remain out there at the market and would then be exposed to lower prices in 2010?

Correct. In 2009. Only talking 2009.

And what is the utility ROE that's embedded in your 2009 guidance right now?

Right now we're not at -- I don't have a specific number, but we are certainly not at or allowed ROE and the primary driver for that is really as we -- you see that significant increases in our depreciation expense, the dilution and the interest expense as we are starting to finance capital expansion here in late 2009 and also pre-funding some of our 2010 stuff.

Plus that regulatory lag is pulling us under our allowed 10 74.

I guess my last question is given that you will file a rate case in the fourth quarter here, I think I guess it's reasonably safe to say that the outcome of the most recent case was a little disappointing. Wondering what dynamic is going to be different such that when you go in for this next case that you'll be able to improve upon that?

I think as we answer the previous question, this is largely driven by ongoing capital investments and improvements to our assets. And we just think they are all appropriate and that that's the reason we are filing. And as Mark said we are under earning on our allowed ROE.

And so again we are going to strive to and certainly argue strongly that we expect to earn our ROE and expect to earn a return on these investments.

Perhaps I don't recall properly, were there some controversial items in the last case that would deviate from the types of items that you are discussing here for a [different] case?

I think in the last case when you look at the difference between our original request of about $40 million and where we ended up at right around $20 million, $21 million, some of it had to do with accounting policies and procedures. And we have changed those to match our regulators -- the regulatory quarter. Then a lot of the difference was on the revenue side. So those --.

Are you talking sales forecast?

Yes. Sales forecast and in large part, forecast -- which was certainly challenging for us in today's world. Those we pretty much have addressed and the primary drivers for this rate case and the primary issues are going to revolve around our rate base and the significant capital spend program. So the focus of the rate case will be a little bit different.

I apologize. I have one last thing. In terms of what you put in interim rates, is there -- are you capped at a certain percentage or are you allowed to put in the full request? Or how does that work?

It depends. It is based on the issues. If there are issues that the commission has dealt with before, you are allowed to put in the majority of your -- on rates in interim.

So if you look at this, our upcoming rate case, it is mostly CapEx. The majority of those total rate requests should -- we are anticipating today anyway, the majority of those total -- the total requests should be an interim right.

Yes and just to add to what's different from last time, I think too the the rate case we are just coming off of, but we hadn't filed since 1994. I think, as Mark said, some of the things that came out of that case as far as methodology, sales forecasting, those kinds of things -- we've changed to adopt or adapt to what the Commission would like us to do and how they would like us to display and that is what we will be using going forward.

So we certainly expect we won't have some of those challenges that we had in this most recent case.

Thank you very much.

(Operator Instructions). There are no further questions at this time. I will turn the call back to you, Mr. Shippar.

Thank you and thanks for joining us this morning. Certainly the economic climate during the first half of this year presented our customers and our Company with many challenges. And I am pleased at how we have navigated our way through this difficult period.

All of us at ALLETE are committed to maintaining our position as a leader and competitively price energy while providing a financial return that rewards our shareholders.

Thanks again for joining us today and we look forward to speaking with you in October when we report our third quarter results and provide our outlook for 2010.

And ladies and gentlemen, that will conclude today's presentation. Thank you so much for your attendance. Have a great day.