ALLETE Inc (ALE) 2010 Q1 法說會逐字稿

Good day, and welcome to the Allete first quarter 2010 financial results call. Today's call is being recorded.

Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can 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 the 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 reflects management's views only as 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 a result of new information, future events or otherwise.

For opening remarks and introductions, I would now like to turn the conference over to Allete Chairman and CEO, Donald Shippar. Please go ahead.

Good morning, and thanks for joining us today. With me are Allete President, Al Hodnik, and Chief Financial Officer, Mark Schober.

As you know, this morning we reported our first quarter earnings of $0.68 per share, compared to $0.55 per share a year ago. The year-over-year comparison was impacted by a couple of non-recurring items which we will explain in a few moments. During the quarter, we received higher nominations from our taconite customers, a rating agency raised its outlook on our corporate debt, and we made regulatory progress with regard to our North Dakota wind development initiative.

Last week, we rededicated our 380-megawatt Boswell 3 generating station, which just completed its start-up phase, following the completion of a $240 million environmental project. This very successful project has resulted in mercury reductions of 94%, SO2 reductions of 99%, and nitrous oxide reductions of 91%. More than two million man-hours were required to complete this project. It's a source of great pride for me to see what our organization can accomplish, while at the same time reflecting our commitment to our core values of environmental stewardship and safety.

Now, we would like to turn the call over to Al who will provide several updates. Al?

Thanks, Don, and good morning, everyone. I'd like to take a few moments to comment on some of Allete's significant events for the quarter.

To begin, in early March we received demand nominations from our industrial customers for the May to August time frame. Total nominations increased, as our taconite customers plan to return to near full capacity during the summer months, and were higher than original expectations. Industry observers now expect that domestic steel producers will operate at 70% capacity for 2010, which is up from our original forecast of 60% and up from about 45% for 2009. We will receive demand nominations for the September through December period on August 1.

Turning to our wind development initiative, we are continuing the site preparation for our Bison 1 wind energy project in North Dakota. Construction will begin this year and we expect to have about half of the 75-megawatt project in service by year-end, with the remaining completed in 2011. Last year, the Minnesota Public Utilities Commission approved our petition seeking current cost recovery related to this project, and this March, we filed a petition with the Minnesota Public Utilities Commission to establish the customer billing rates. In a related development, the North Dakota Public Service Commission recently authorized construction of a 22-mile transmission line that will connect Bison 1 to the DC transmission line we acquired at the end of 2009. Two weeks ago, we were informed by Standard & Poor's that they had affirmed their bond ratings, including the corporate credit rating of triple-B plus, and their advisor outlook from negative to stable. We are pleased that S&P acknowledged the improving outlook for our Company.

Finally, with regard to our current retail rate increase request before the Minnesota Public Utilities Commission, the public hearing phase has just been completed. The evidentiary, or hearing phase, with testimony will occur next month, and the administrative law judge's report and recommendation is scheduled for mid- August. We expect the Commission will deliberate in early October, with a written order due in November. Also for your information, yesterday we filed our rebuttal testimony. In it, we have lowered our increase requests from $81 million to about $72 million, due to adjustments for known and measurable events that have occurred since we originally filed. The largest of these adjustments is related to the increased sales to our industrial customers.

At this time, I will turn the call over to Mark, and then I will make some additional comments before we take your questions. Mark?

Good morning. Before I begin, I would like to remind you that we filed our 10-Q this morning, and I encourage you to refer to it for the quarterly details.

For the first quarter, Allete reported earnings per share of $0.68 on net income of $23 million. The quarterly results include a $4 million after-tax, or $0.12 per share, charge due to a provision in the Patient Protection and Affordable Care Act of 2010, and eliminated the tax deduction for expenses reimbursed under Medicare Part D. As we go forward, we will exclude this non-recurring charge from our 2010 earnings guidance. Last year's first quarter reported earnings per share was $0.55 on net income of $16.9 million. Included in those results was a $3.2 million after-tax, or $0.10 per share, accrual for the 2008 portion of interim rate refunds recorded in 2009.

Allete's regulated operations segment includes results from our regulated utilities, Minnesota Power, and Superior Water, Light and Power, and from our investment in the American Transmission Company. Net income for this segment was $24.9 million, compared with $17.7 million a year ago. Retail and municipal kilowatt hour sales were up 3.5%, due to the year-over-year increase in production levels for our taconite customers. Offsetting this increase were sales to other power suppliers, which were down 12.3% from last year. In total, kilowatt hour sales were 1% below the first quarter of 2009.

Total regulated operations revenue increased $35 million compared to last year, due to a number of factor, including approved wholesale rate increases, authorized inner retail rates, which are subject to refund pending the final order, the absence in 2010 of an accrual for interim rate refunds that occurred in 2009, higher fuel and purchase power recovery, increased sales to retail and municipal customers, and increased transmission revenue related to the DC line we purchased at the end of last year. Revenues from sales to other power supplies decreased in 2010 versus 2009. Regulated operating expenses increased $18.9 million year-over-year. In 2010 we incurred higher fuel and purchase power expense, and operating and maintenance expenses, including those for transmission and employee benefits. Depreciation expense also increased because of higher property, plant and equipment placed into service over the past year, as a result of our capital expenditure program. Income tax expense for the regulated operations segment rose by $8.9 million due to higher pretax income, as well as $3.6 million of the non-recurring charge as a result of the healthcare act I already mentioned.

Also included in our regulated operations, earnings from our investment in ATC rose by $300,000 from the same period last year, as our investment balance grew to $90.3 million. Investment in other segments incurred a net loss of $1.9 million during the first quarter, compared to a net loss of $800,000 in 2009. Included in this year's results is a slightly larger net loss at Allete Properties, and $400,000 of the non-recurring healthcare act charge. Allete's quarterly earnings per share included $0.06 of dilution due to the increased number of shares outstanding, as we fund our capital expenditure program.

Looking ahead, we continue to expect our year-end earnings per share to be between $2.05 and $2.35, excluding the $0.12 per share impact on the healthcare act charge. Our guidance provides for a range of potential regulatory outcomes. We expect operating expenses to increase during the year, partially due to Boswell 3 returning to full service, and scheduled unit outages this fall. Our investment balance in ATC is on track to grow by about $5 million this year, and we continue to anticipate a $5 million net loss at Allete Properties. We also expect to invest $250 million in our ongoing capital investment program to support our regulated operations. About $160 million of this is for phased capital expenditures, and approximately $90 million is for current cost recovery eligible investments, a majority of which is for renewable energy projects.

Al?

Thank you, Mark.

Overall, I'm pleased with the start we have had for 2010. It was good news for northern Minnesota to have its major industry, taconite mining, return to higher production levels through the summer. Though prospects for the industry look encouraging, we won't receive our industrial customers' final four months nominations until August. Allete's strategy for Minnesota Power is to maintain its competitively priced production of energy, reduce customer concentration exposure, comply with environmental permit conditions, and meet renewable requirements, while earning our allowed rate of returns. We believe our regulators will treat us fairly when our rate increase request is ultimately considered and a decision is rendered.

As we go forward, we will continue our longer-term growth initiatives, establishing a renewable energy business focused initially on developing wind assets in North Dakota and the upper Midwest, investing in upper Midwest transmission opportunities that strengthen or enhance the regional transmission grid, and exploring the possibility of making additional energy-centric investments.

Before we take your questions, I would like to say a few words about Don Shippar, his legacy and leadership. As many of you already know, today is Don's last day on the job as he steps out of his CEO role. He will continue to serve Allete as Chairman of the Board, and I'd like to personally thank Don for leading Allete through a period of transition and fundamental changes since he became CEO in 2004. During his tenure, he guided the Company through a time of dramatic asset growth, a dreadful global economic downturn, assorted regulatory and legislative challenges, and considerable work force transition. His principled leadership style and steady hand were invaluable, as we have navigated through these events, and doing so without compromising our core values.

Allete is well positioned strategically, financially, and from a human resource and talent readiness perspective, as a result of Don's leadership. It is from that sound platform that we move forward from today, with our firm commitment to providing investors with the returns they expect. Thank you, Don, and best wishes to you and Pat in your new adventures ahead.

Thanks for the kind words, Al. I certainly have enjoyed my time with Allete and Minnesota Power over the past 33 years. I'm proud of how our Company has performed during my years as CEO, and the many successes we have accomplished through some economically difficult times.

It's gratifying to see the outlook brightening, as I hand over the reigns to Al. I'm definitely excited about Allete's prospects into the future. I'll miss the many associations I've made during my career with employees, customers and other stakeholders, including Allete investors, such as those of you whom I have had the pleasure to meet on many occasions. Thank you for your support of our Company.

At this time, Al, Mark and I will take your questions.

(Operator Instructions)

Our first question comes from Larry Solow from CJS Securities.

Hi. Good morning. First of all, Don, best of luck to you in your future endeavors. And obviously, you're still Chairman, so hopefully we'll still hear from you every now and then.

Thanks, Larry.

In terms of the first quarter, is it fair to assume that the customer's ultimately took -- used more electricity than they initially nominated for?

Larry, this is Mark. A couple of our industrial customers took a bit more than they nominated for. But for Q1, they were pretty close to what we expected.

I know you haven't adjusted guidance. Can you give us more color on the moving parts? Obviously you are not going to hear much regarding the rate case until the end of the year. Assuming -- can you say what is the midpoint of your range? Does that assume that you get what you're asking for, plus or minus is part of the difference in your range, or are there other variables? Can you give us more color on that?

Sure. As we talked before, we are reaffirming our guidance. That encompasses a range of potential rate case outcomes. That is obviously a big driver. Another big driver, Larry, that we need to be keeping an eye on is what the Q4 nominations are. They are running very strong over the summer, but we don't know yet where they will be in the final four months of the year. And then with Boswell 3 coming online, our O&M expenses will be increasing as we move through the rest of the year. Two of our major units are down this fall, at [Square View] and Boswell, and there will be a significant ramp in on O&M expenses because of that, and also the uncertainty that goes along with those outages. Those are the variables taht we are keeping our eye on, and that are pushing us to maintain our guidance, at this point, at the $2.05 to $2.35.

The 70% capacity utilization assumption for taconite over the full year, does that assume that nominations tail back a little bit in the last third of the year?

What we've done to increase to 70% is bring them up to full capacity through the summer season and bring them back to our original expectations for the last quarter. Correct.

In terms of the rate case, it seems like the next key event or milestone to look for will be the ALJ's report in mid-August. Is that a good assessment?

That's correct. We have the evidenciary hearings will be happening in the middle of May here, and then the report out in August. That would be the next key date.

I know the Attorney General and the Office of Energy Security, they put out their reports in a more of protecting the people, election-type -- Obviously some ulterior motives there. I didn't actually see those reports. Were they in line with your expectations? Anything extraordinary, in either of the reports?

I don't think so. Larry, really, a typical challenging of the costs and revenues that we have in our rate case. Now the biggest issue, obviously, we need to deal with is our revenue levels, espcially as the taconites are starting to improve here. But no real surprises there. We continue to work this through with our regulators, and the process is pretty much going as we expected so far.

Last question. I was actually off the call for a little bit. Any update on the real estate? Obviously the environment may be improving a little bit. Are you seeing any more activity?

There's probably a bit more activity at our sites down in Florida. But we still don't anticipate any sales this year, and the activities that are taking place are typically at distressed prices. The market is certainly not back to normal and still has a ways to go. So, we're still anticipating about a $5 million loss for our real estate operations.

Okay. Great. Thanks a lot.

Our next question comes from the lineof Brendan (inaudible) from Levin Capital.

Hi. It's actually Neil Stein. Good morning.

Good morning, Neil.

I had a question about the share counts. In your 10-K it says that the year-end 2009 share count was 35.2 million shares, but the average share count for the first quarter, per your release, says 33.8 million? I'm kind of confused as to how the share count might have gone down from year-end.

You're probably looking at the unallocated ESOP shares, I think, Neil. So our outstanding shares, our diluted shares that we usefor the calculation, are not going down. We anticipate issuing about another million shares this year. By the end of the year, our total outstanding average share will be about 35 million. I think you're looking at an incorrect number.

It just -- it doesn't annotate it or give any caveat, it just says in the K, 35.2 million shares at year-end. You're saying there's a portion of that that doesn't get included in the EPS calculation?

If you look at the 10-Q and then the 10-K, our unallocated ESOP shares are not included in the EPS calculation, correct.

Okay. Got it. What about with respect to the status of the share repurchases you are doing for this year? I think the -- within your guidance, I think that reflected a 2.9 million increase in the diluted share count?

Yes. There are a couple things that are going on as you look at our share count. One is, we issued substantial amounts of shares late in 2009. Those are already issued shares that will be included in our average count as we go through the year. Actual new issue shares in 2010, probably around a million shares is what we're planning right now, and we'll continue to issue those internally through our periodic issuance program.

Are you planning on doing that as -- during the first half of the year or --

The best way to look at that would be [rateably] throughout the year.

Okay. Got it.

And we do give you details in the Q of what we issued in Q1.

With respect to real estate, I saw in the Q that there was a 22-acre land sale. Was that just opportunistic?

You must be looking at last year, Neil, because we did not --

Oh, was that last year?

We have not had any real estate sales this year.

Okay. And the loss, it's a little bit higher run rate than would be suggested by the $5 million net income target, I believe --

That would just be timing. We're comfortable that we'll be right around $5 million by the time we get to the end of the year, assuming that we have no sales transactions.

Okay. Thanks very much for your help.

Okay. Thanks, Neil.

Our next question comes from James Bellessa from D.A. Davidson.

Congratulations on a solid quarter.

The Boswell 3 start up and the scheduled unit outages, how much push up in the O&M might that cause?

Well, the Boswell 3 start-up, of course, is difficult to predict. Our re-agent costs and re-agent use, were learning to operate that unit, as Don signaled in his comments, we are seeing some favorable emission reductions. So we're still working through that. It is hard to place a number with that.

With regards to the fall outages and pushing up the expenses, it is hard to put a range on that as well -- you might encounter other things along the way. It's hard to place a number on that, Jim. And with regard to the fall outages and pushing up expenses, it's again hard to put a range on that as well, with -- in terms of when you have a planned outage, you expect certain expenses, but you might encounter other things along the way. So it's hard to place a firm dollar figure on what that will be.

The amount of depreciation for the regulated segment went up materially in the quarter. In the fourth quarter, you had a $17.9 million depreciation expense, and then a jump to $20 million. Can you explain what happened there, and is this going to be maintained at this level?

It'll continue to grow, Jim, as plants and service comes online. That is simply matching the growth in our capital expenditures. So,there's nothing unusual there. So it will be at that $20 million level, and will continue to grow through the year, matching our growth in our capital spend.

Thank you very much.

(Operator Instructions). And I'm showing no further questions.

All right. Well, thank you for your time and attention this morning. We look forward to speaking to you again this summer, after our second quarter results have been released. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.