ALLETE Inc (ALE) 2009 Q3 法說會逐字稿

Good day and welcome to the Allete's third quarter 2009 financial results call. Today's call is being recorded. Certain statements contained in this conference call that are not descriptions of historical facts or forward-looking statements such as terms defined by the Private Securities Litigation Reform Act of 1995. Because of such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the Company with Securities and Exchange Commission. Many of the factors that will determine the Company's future results are beyond the ability of management to control or predict. Listeners should not place undue reliance on forward-looking statements which reflect management's views only as of the date hereof.

The Company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as of result of new information, future events or otherwise. Important assumptions and important factors that could cause actual results to differ materially from those set forth in the forward looking information include obtaining certain growth goals, changes in the way products are introduced into the market, the recall of a significant product by the Company, seasonality, the impact of general economic trends on the Company's business, the timing and effectiveness of marketing programs offered by the Company, the timing of the introduction of the new products and services by the Company, and competition. These other factors include changes in rate of inflation, changes in the state federal legislation or regulation, and changes in the general economy.

For opening remarks and introductions I would like to turn the conference over to Donald Shippar. Please go ahead.

Thank you and good morning everyone. Thanks for joining us. With me are Allete President, Al Hodnik, and Chief Financial Officer, Mark Schober. This morning we released our third quarter earnings results and Mark will walk you through the details in a few moments. Before he does, I would like to update you on a few recent developments.

First, yesterday the Minnesota Public Utilities Commission approved implementation of final rates relating to the retail rate increase request we filed in 2008. Final rates which represent annual revenue increase of $20.4 million go into effect November 1st. Early next week, we plan to file a new retail rate increase request with the Minnesota Public Utilities Commission. We will not go into any details about that new rate request today, but we will issue a press release and an 8-K next week.

Turning to another topic , on October 5, Minnesota Power filed with the Minnesota Public Utilities Commission its 2010 integrated resource plan. While we do not anticipate the need for new base load generation within our service territory over the next 15 years, we will meet customer demand while increased system flexibility. Do do this, we plan on reshaping our energy portfolio by adding renewable energy to our generation mix, while exploring options to incorporate peaking or intermediate resources. Our North Dakota and Minnesota wind generation projects are examples. In addition, we recently purchased boilers and associated systems from the city of Duluth that had been retrofitted to increase the biomass energy generation to about 200 megawatt hours annually by approximately 2013. We do not plan to add new coal generations or enter into long-term power purchase agreements from coal based generation resources.

On another development this week, we entered into a 10 year agreement to sell Basin Electric Power Cooperative 100 megawatts of capacity and energy. The transaction is scheduled to begin in May of 2010. At this time, I will now turn the call over

Good morning. Before I go through the quarterly financial information, you probably noticed that we have not issued our 10-Q yet. As Don mentioned, we plan to file a new rate increase request early next weeks and since we want to capture that information in our 10-Q, we are waiting to file it until immediately after the request is filed with the MPUC.

For the third quarter of 2009, Allete reported net income of $16 million, compared to $24.7 million a year ago. Earnings per share were $0.49 compared to $0.85 last year. The difference can primarily be attributed to four items. Regulated operations were down $0.08 per share. Allete Properties was down $0.05 per share. $0.15 per share due to a nonrecurring item recorded last year. And $0.06 cents per share of dilution. I will explain each of these as I go through the details of the quarter.

Our regulated operations business reported net income of $16.6 million, on revenue of $160.1 million during the quarter, compared to net income of $19.2 million, on revenue of $179.1 million last year. On the revenue side, $11.2 million of the $19 million decrease was due to lower fuel cost recoveries resulting from a corresponding decrease in fuel and purchase power expenses and therefore has no impact on our margins. The remaining regulated operations revenue decrease is mostly due to the combination of a decline in kilowatt hour sales and changes in rates compared to the third quarter of 2008.

First, let me comment on the sales decrease. Retail and municipal kilowatt hour sales was down 33% from last year primarily due to reduced demand from our Taconite customers. We also saw a 5% decrease in sales to residential customers and a 8% decline in commercial customers sales. The economic environment was the primary factor for these sales decreases. But a cooler than normal summer also contributed. Partially offsetting these decreases, sales to other power suppliers were up significantly year-over-year as we marketed available power during the quarter. In total, the net decrease in total regulated kilowatt hours sales was 10% from last year.

Regarding rates, this year Minnesota Power had higher revenue from riders and wholesale rates than in the third quarter of last year. However, Minnesota Power had lower retail interim rates in 2009 compared to 2008 related to its recent rate case. If you recall in 2008, interim rates were in-place that approximated a $35 million annual increase. In 2009, based on MPUC order, those rates were reduced to a $15 million annual increase amount.

On the regulated operation expense side, I have already mentioned the $11.2 million decrease in fuel and purchase power expenses. Operating and maintenance expenses were $3.6 million less than a year ago, mainly due to lower compensation expenses, and lower natural gas at Superior Light and Power. Depreciation and interest expenses were higher this year than last due to asset additions. Income from our investment in ATC was up slightly from last year, due to a larger investment balance.

At the end of the third quarter we had investment balance of $85.1 million. Allete investments in other business segment recorded net loss of $600,000 during the quarter compared to net income of $5.5 million a year ago. $4.9 million of the difference is due to the positive resolution of two outstanding tax issues in 2008. This nonrecurring item added $0.15 per share to last year's results. Allete Properties recorded a $1.5 million net loss during the quarter, compared to net income of $200,000 a year ago. Real estate sales that we had expected to make in the second half of this year, no longer appear likely. As a result, we now anticipate recording a net loss of about $5 million for Allete Properties at year-end 2009.

Regarding income taxes, the effective tax rate for the quarter was 29% due to the benefit of a nonrecurring permanent item. We expect the effective tax rate for the full-year approximate 34%. Over the past two years we have issued equity to fund a portion of our capital expenditures. The increase in our share balance resulted in $0.06 of dilution compared to the third quarter of last year. Because of our lower earnings outlook for Allete Properties, we now estimate our year-end earnings will fall within the range of $1.95 to to $2.05 per share excluding the 2008 portion of interim rate refunds that were recorded earlier this year. Don?

Thanks Mark. In addition to new retail rate request filing, there are a couple of additional events we anticipate to occur before year-end. One is the expected start up of the new industrial customer, Mosabi Nugget. This customer has signed a ten year, 15 megawatt contract with Minnesota Power, and has the potential to grow over time.

Secondly, on Tuesday the administrative law judge recommended the MPUC approve our purchase of the DC transmission line from Center, North Dakota, to Duluth. We are encouraged this transaction continues to move in a positive direction. This purchase represents the first step in a long-term initiative that includes a development of wind generation in North Dakota, to help us meet state mandated renewable energy requirements. On a related note, site preparation has begun for the first 75 megawatt portion of our North Dakota wind generation project.

On a final note, our Boswell 3 environmental retrofit project is complete. This 3 year, $240 million project was completed on schedule, and will result in a substantial reduction of particulates, SO2, NOx, and mercury admissions. We began start up procedures this week to get the plant back in service.

On our last earnings call we told you we would be initiating our 2010 earnings guidance today. We decided to wait until after we filed a new rate increase request and now plan toi issue an 8-K containing our guidance immediately after the filing. At this time, Al, Mark and I will take questions. [Begin Q-And-A]

(Operator Instructions) We will go first to Larry Solow of CJS Securities.

Hi. Good morning. Can you just run through timing logistically when you plan to file the rate case. I guess you said sometime next week, would the 8-K come out immediately? Just so we are not hung to dry. Do you have any idea when that will be?

Early next week, Larry, the process we will go through as soon as we get the rate case filed. Then we will issue, it will come out right subsequent to the filing. Then will be the details of rate case. We will file in an 8-K and then right subsequent to that we will release our guidance for 2010. It all should happen significantly.

In the same - - the guidance will be in a separate 8-K or will it be buried in a 10-Q?

It will be in a separate 8-K.

Got it. Other questions. Can you maybe talk a little bit more about your, without going into details, your outlook for 2010 in terms of your industrial customers. You got a better nomination for the last four months of this year. Any further update on that. How things are trending as we look out into 2010.

Well there really isn't further information. As you know, they will nominate again here for the first four months of the year in December. And again we don't have anymore information. You're right. We did get better nominations for this last part of the year. But again, we are not able to predict what their operating levels will be. So we don't have further information on that.

Okay. Did you say this new agreement with Basin was 10 years, 100 megawatts per year or 10 megawatts per year?

100 megawatts for ten years.

Ten per year?

No, no.

That's actually a pretty large deal, then.

Yes, it is. It is a substantial power purchase agreement.

That's good. Two more questions. On Allete Properties, if I'm not mistaken, didn't you already expect to lose close to $5 million net income this year or was it a little bit less?

No, we expect the do better than that. As we talked about that $5 million before Larry, that's really the - -

Worst case scenario.

Yes. It assumes pretty much no sales. That's what the run rate is for our expense stream on Allete Properties realizing that's that primarily property taxes and assessment.

Got it. Then without pinning it down, do you think some of the sales could be pushed in to 2010 or do you see any signs of increased traffic or anything that may show improvement as we look out over the next 12 months?

Well, we will talk about 2010 next week. No, we have not seen increase in traffic at Florida.

Last question on the rising shares. I know your plan was front-end loaded to front-end your capital expenditure plan. I guess with the stock price now rebounding somewhat, did that come into play and accelerate or reaccelerate our reissuance of shares.

It didn't really change the timing of our issuance. We always like to prefund our CapEx. We do that conservatively. So no, we are issuing shares pretty much according to the plan we had in place at the beginning of the year.

Would that - I guess would that assume that would continue with higher share base in 2010, more shift in share issuance.

We will continue to issue shares in to 2010. But not to the extent that we have this year.

Looking beyond that, is that something that could continue going or should it slow down as you because I believe your five year plan was do it mostly in front -nd and -- is that correct?

We will revise all that information in our 10-K, Larry. As you see our five year capital spend we will revise on the information we have and how we plan on financing that.

Excellent, thanks a lot.

(Operator Instructions) We will turn next to James Bellessa of D.A. Davidson.

Good morning. The ALJ's approval or perhaps recommendation that the transmission line can be purchased, what does that mean about the timing of the closure of that transaction?

The ALJ's recommendation will now go to the Commission and the Commission will consider that along with all the other information and make a final decision here. We are hoping by the end of this year.

Then regarding this Basin Electric contract, This last year I think your Taconite customers were down about 40% in their demand for electricity. Is that about right? And how much can you put this perspective with how much that was a decline and how much this will sop up?

I think the way to look at this is we had a 175 megawatt contract that will be expiring here in May of 2010. So that was a long-term sale coming to an end. This will, in essence, take that contract that expired and 100 megawatt sale for another ten years.

Okay. Then 75, that's coming off where do you expect to go with that?

The combination of retail customers and other wholesale transactions.

Do you see that in native load or will you have to be finding wholesale buyers for a while for a while on this amount of 75 that's coming off.

We expect certainly in the short-term we will be looking to the wholesale market for a significant portion of that.

What is the shape or the - - what is the nature of the wholesale market in your area right now?

The short-term market, the daily market, et cetera, is soft.

What does that bode for the Taconite production that you would have normally been delivering and you have to resell in open market. What's your timing of thinking about when you might have to enter into additional sales?

We have been regularly entering into transactions and just in anticipation of the Taconite loads being down. They clearly have improved over what we saw certainly over the summer in the last quarter. Still anticipating they will be down next year. We have been entering into other transactions also with other power providers and other utilities within our area and our region and in through the MISO market.

Last spring you were telling us that you mitigated about 85% of the potential earnings risk that can you were at with the reduced Taconite load. That was due to the prices then. They've since softened. What kind of prices are you getting now and likely get in the near future relative to what you were contracting out to mitigate most of the risk?

Look at 2009, Jim, we are still at 85% level or - - And then as we look forward in to 2010, as I mentioned earlier in the call we will be releasing that information next week. And we certainly will be talking abut the amount of energy we have available and what we are doing with it. We will have that for you next week.

Thank you very much.

(Operator Instructions). If it appears you have no further questions at this time. I will turn it back over to Mr. Shippar for any closing comments or remarks.

Thank you for joining us today. We look forward to speaking with you again when we report our year-end results in February. And as we mentioned, we will be issuing additional information next week on our rate filing and guidance for 2010. Thank you.

That concludes today's conference, we thank you for your participation