ALLETE Inc (ALE) 2011 Q4 法說會逐字稿

Good day, and welcome to the ALLETE fourth quarter and 2011 financial results call. Today's call is being recorded. Certain statements contained in this conference call that are a not a description 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 reflect Management's view only as of the date hereof. The Company undertakes no obligation to revise or update any forward-looking statement or to make any other forward-looking statement, whether as the result of new information, future events or otherwise. For opening remarks and introductions, I would now like to turn the conference over to your host for today, ALLETE Chairman, President and CEO, Mr. Al Hodnik. Sir, you may begin.

Good morning, and thanks for joining our call today. With me is ALLETE's Chief Financial Officer, Mark Schober. This morning, we released our year end earning results. ALLETE's reported diluted earnings per share is $2.65. Excluding an $0.08 non-recurring item -- and Mark will get into all the details in a few moments -- our pro forma earnings are $2.57 per share. These results were consistent with our full year guidance which put 2011 earnings in the upper end of a range between $2.40 and $2.60 per share.

This past year was a busy one for us and included an achievement of a number of important strategic milestones as we execute our multi-year, multifaceted growth strategy. During 2011, we signed a long-term power purchase agreement with Manitoba Hydro, announced accelerated plans to build the Bison 3 wind energy project, signed new wholesale electric service contracts with municipal customers to at least 2019, participated in negotiations that resulted in a long-term electric service contract with the city of Nashwauk and its retail customer, SRCO Minnesota, and we launched a new business called ALLETE Clean Energy. In addition, we essentially completed the construction of our Bison 1 wind energy project, participated in active construction of three CapEx 2020 transmission projects, signed new electric service agreements with Magnitation and Mining Resources, and Minnesota Power instituted new retail electric rates in June. ALLETE had a very solid 2011 financially, strategically and operationally.

I am now going to turn the call over to Mark who will go through the financial details. Later in the call, I would like to turn your attention to our outlook for 2012 and beyond, after which we will take your questions. Mark?

Thank you, Al, and good morning, everyone. Before I begin, I encourage you to refer to the 10-K we filed this morning for complete details of our 2011 financial results. For the year, ALLETE earned $2.65 per share on net income of $93.8 million compared to $2.19 per share on net income of $75.3 million in 2010. Total operating revenue for 2011 was $928.2 million compared to $907 million in 2010. Excluding an $0.08 per share benefit in 2011 and a $0.12 per share charge in 2010, both related to new federal health-care legislation, ALLETE's pro forma earnings were $2.50 per share in 2011 versus $2.31 per share in 2010, an increase of 11%. These results were at the upper end of the Company's earnings guidance range for 2011.

Income from ALLETE's Regulated Operations segment, which includes Minnesota Power, Superior Water, Light and Power and our investment in the American Transmission Company was $100.4 million in 2011 compared with $79.8 million in 2010. Net income for 2011 included the reversal of a $6.2 million deferred tax liability resulting from a 2010 rate case stipulation and settlement agreement and the recognition of $2.9 million income tax benefit related to new federal health-care legislation I mentioned previously.

Total Regulated Operations revenue increased $16.4 million over 2010 for several reasons. First, increased sales and higher rates to retail and municipal customers raised revenue by $27.1 million. This increase was offset by a $30.5 million decrease from lower sales to other power suppliers. Fuel adjustment cost recoveries were $6.3 million higher in 2011. Current cost recovery revenue increased $12.2 million from last year, primarily from our Bison 1 and CapEx 2020 projects. In addition, financial incentives under the Minnesota Conservation Improvement Program were $5.9 million higher in 2011 than in 2010. Fuel and purchased power expense decreased $18.5 million, or 6%, due to a 23% reduction in megawatt hours purchased and lower purchased power prices.

In 2010, additional purchase power was required to meet planned major outages at Boswell and Square Butte. Also included in 2010 was a $5.4 million charge for the write-off of a deferred fuel clause regulatory asset related to the 2008 rate case. Regulated operating and maintenance expense increased $9.2 million, or 3%, from 2010, primarily reflecting increased property tax and benefit expense. Property taxes increased $5.5 million with higher taxable plant balances and higher rates over 2010. Benefit expenses increased $4 million, primarily due to increased pension costs. Depreciation expense increased $9.3 million and interest expense was up $3.5 million, both directly attributable to our Regulated Operations capital investment program. Income tax expense decreased $8.4 million, or 16% from 2010, primarily due to the reversal of a $6.2 million deferred tax liability resulting from a 2010 rate case stipulation and settlement agreement, and recognition of a $2.9 million income tax benefit from a regulatory outcome related to the new federal health-care legislation.

Our Investments and Other segment reported a net loss of $6.6 million compared to a net loss of $4.5 million in 2010. The increase in net loss was primarily due to higher business development, state income tax and investment-related expenses. The net loss in 2010 included an income tax benefit of $1.1 million resulting from the completion of the state income tax audit. No significant land sales were made at ALLETE Properties during either 2010 or 2011. We did, however, take a $1.7 million pre-tax charge to reflect the value of some properties not strategic to our three major development projects at Palm Coast. Results at BNI Coal were similar to last year.

Our effective tax rate for 2011 was 27.6%. Excluding the impact of the two items just mentioned, the 2011 effective tax rate was 32.7%. We expect the effective tax rate for 2012 to be approximately 30%. The shares used for calculating earnings per share increased by approximately $1 million in 2011, as we continued to fund our capital investment program. The larger share balance had a dilutive impact of $0.08 per share in 2011. In summary, we are pleased with the results for 2011, coming in at the high end of our earnings guidance range. We continue to carry a strong balance sheet, we are generating significant cash flow from operations and we have ample liquidity to support our ongoing energy investments.

Turning to 2012, we expect earnings per share to fall on the race between $2.45 and $2.65. We anticipate that our industrial customers will continue to have strong electricity usage. In December, our taconite customers demand nomination indicated full production levels for the first four months of 2012. We also anticipate an increase in current cost recovery revenue related to our Bison wind generation project and Minnesota Power's ongoing investment in transmission assets that Al will talk about in a few moments.

On the expense side, we expect higher pension and other post retirement expenses, and we will see depreciation and interest expense increasing in 2012 due to our ongoing capital investments. Income from our investment in ATC should again rise slightly due to our increasing investment balance. We also project similar production and earnings from BNI Coal and a similar net loss at ALLETE Properties in 2012. Now, I will turn the call back over to Al.

Thanks, Mark. ALLETE is an energy company with a strong platform and multi-year earnings growth opportunities. We are committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses and sustains growth. A key goal of the ALLETE is to achieve average earnings per share growth of at least 5% per year while maintaining a competitive dividend. Our multi-year earnings drivers are multi-faceted as well.

First, the organic customer growth within our electric utility businesses will translate into top line revenue increases which positions us differently than, perhaps, others. Also, we expect significant rate-based growth from capital investments in three primary areas -- Renewable energy generation, transmission infrastructure and further environmental upgrades. Longer-term, we expect to achieve profitable returns from our energy-centric development initiatives.

Permit me a few moments to update you on each of these, beginning with new customer growth opportunities. Last year, we signed a formula based wholesale electric service agreement to provide electric service for the city of Nashwauk, including any development within it, until April 2022. This includes Essar Steel Minnesota 70-megawatt to 110-megawatt taconite facility now being constructed. Essar Steel recently received the statement of adequacy from the Minnesota Department of Natural Resources which will boost planned production from an original 4 million tons to nearly 7 million tons of pellets annually. The Essar Steel construction, already underway, contemplates the expanded 7 million ton production capability. Essar has signaled that operations and pellet production will likely begin in early 2013, reaching full production levels in 2014. Under the terms of a facilities construction agreement, Minnesota Power has begun site preparation and construction of a 230-kilovolt transmission line at an expected cost of about $28 million. Essar is also considering a further expansion to include a direct reduced iron and steel making facility that could result in significant additional load in 2015.

Another new customer is Magnetation, a company which produces iron ore concentrate from natural ore tailings basins, already mined stockpile or newly mined iron formations. Construction is now well underway for Magnetation's new facility, for which we have signed a 5-megawatt to 7-megawatt contract. They expect to have this plant operational sometime during the first half of this year. Magnetation has also entered into a joint venture with Steel Dynamics of Indiana called Mining Resources. This past November, Minnesota Power entered into an electric service agreement with Mining Resources, which is building an additional 5-megawatt to 7-megawatt facility expected to begin operating by the end of this year. That agreement was filed with the Minnesota Public Utilities Commission in December.

Additionally, Magnetation entered into a another joint venture with AK Steel which could lead to the construction of two additional facilities with a combined electric load of 10-megawatts and 15-megawatts in the future. Magnetation and AK Steel are also considering the potential for a 3 million ton pellet plant. One of the sites they are considering is within Minnesota Power's service territory, which could result in another 15-megawatts to 25-megawatts of new load.

A few years ago, United States Steel announced its intent to restart an idled pellet line at its Keewatin taconite facility, a current customer of Minnesota Power's. If restarted, this line could produce 3.6 million tons of taconite pellets and result in over 60-megawatts of new load. Permits are in place, and if the United States Steel Board of Directors approves the project during the first half of this year, construction could commence with production expected to begin in 2015. Minnesota Power also has executed a long-term contract with Polymet Mining, which is planning to start a copper, nickel and precious metal mining operation on the eastern end of the of the Iron Range.

Polymet, which owns the former LTV Steel processing assets, expects the release of its Supplemental Draft Environmental Impact Statement in late 2012, to be followed by a public review and comment period. Assuming the successful completion of the SDEIS process and subsequent issuance of permits, Minnesota Power could begin to supply 45-megawatts to 70-megawatts of power in approximately 2014 for a 10-year period that commences upon startup. There truly is a lot of activity on Minnesota's mineral rich Iron Range. Minnesota Power, the region's premiere power provider, intends to serve this growth and meet its customer needs by providing reliable, cost competitive and environmentally compliant service.

Let me now turn to our capital investment program. In the 10-K we filed today, you can see our updated five-year capital expenditure plan totaling $1.4 billion. Based on these anticipated expenditures, we project our rate base to grow in total by about 40% through 2016. Approximately half of these expenditures, for renewable energy generation, transmission infrastructure and environmental upgrades, are eligible for current cost recovery treatment.

Our renewable energy expenditures of $284 million will primarily be for the Bison 2 and Bison 3 wind generation projects, which we expect to complete by year end and ahead of expected production tax credit expiration. Once completed, we will have met a significant portion of the state of Minnesota's mandate of 25% renewable generation by the year 2025.

The five-year capital expenditure table includes $113 million for transmission investments, of which $90 million is related to existing CapEx 2020 projects, but our transmission growth strategy is not limited only to these projects. As an example, the recently approved Manitoba Hydro contract provides for a significant transmission build opportunity. The agreement requires construction of additional transmission capacity between Manitoba and the Iron Range. We are exploring other regional grid enhancements that would allow for the movement of more renewable energy in the Upper Midwest, while at the same time, strengthening electric grid reliability. We also plan to maintain our 8% ownership position by investing in the American Transmission Company as it requires additional equity capital.

Transmission investment is a large part of our growth plan going forward. For the first time, we have included $325 million in our capital expenditure table for a Boswell 4 environmental upgrade project that will address compliance with both the Minnesota Mercury and recently issued EPA MATS rules. Compliance costs for this project are estimated to be between $300 million and $400 million, and for now we are reflecting the lower end of this range in our five-year plan. We expect to announce more about this environmental compliance project later this year.

ALLETE Clean Energy is an example of our energy-centric business development strategy. ALLETE Clean Energy, formed in 2011, intends to develop or acquire capital projects that bring about cleaner energy forms via wind, solar, biomass, hydro, shale gas and liquids, clean coal and other clean energy innovations. ALLETE Clean Energy will market this energy to electric utilities, cooperatives, municipalities, independent power marketers and large end users through long-term purchased power agreements. We will continue to explore in investing in other energy-centric businesses, primarily within the energy infrastructure and energy infrastructure services spaces with the objective of establishing longer-term earnings streams.

This is an exciting time for ALLETE with a number of multi-year, multi- faceted growth opportunities on our horizon that we believe will materialize over the next decade. I look forward to reporting on our continued progress in future calls or directly with you on our investor travels. At this time, I will ask the operator to open up the lines for your questions.

Thank you. (Operator Instructions ) Our first question comes from Larry Solow of CJS Securities, your line is open.

Hi, good morning, guys.

Good morning, Larry.

Can you just confirm just through quick housekeeping question, if I take out all the impacts of sort of one-time tax benefits and all for '11, wouldn't earnings been to $2.40 or $2.39, I guess? Is that the real clean number?

The way we look at it, we are at the $2.31. What we really -- as we issued our guidance, the only thing we did not include in our guidance was the MED D, or a $2.57 for 2011 is the clean number that we look at. I think the other number you are referring to that some folks back out of that $2.57 is the $0.18 with the deferred tax liability from the rate case.

Right. You're including that $0.18 in the number, so right, if I take that out, that won't recur in '12. So really the third -- right.

That's correct.

Okay, and then the, sort of the $2.45 and $2.65, what -- and I can probably answer this for you, but just to hear it in your words, what are sort of the factors that would put you closer to the lower end versus the higher end?

Is a look at our guidance, and you're right, it's pretty straightforward, what could push us toward the lower end of that guidance was that biggest for us would be where our industrial customers go for the last eight months of the year. We are anticipating strong production; if that does not happen, we are certainly be impacted by that.

Other items could be real estate, we are assuming on some small sales and being able to maintain some incremental expense discipline there. That could pull us to the lower end. On the higher side, it would be stronger industrial sales that we expect, better sales at real estate, those would be the primary drivers.

Right, and you don't have much, I guess a little bit of new customer growth, it's really a -- really 2014 and beyond. But certainly, '13 you'll start getting some, but I guess there's not much really in '12 right?

Correct. That growth in '12 is really coming up from the Bison project, as we continue to move forward on them in CapEx 2020. And then the new customers are -- is SR, and that is just the start up in 2013, and then you will see some incremental load from Magnetation this year, too.

Right, and the cost recovery, you mentioned the -- it was, I think you had $12 million additional revenue from that. And you, I guess looking to this year, is there any way you could -- you have an approximate of what it will be, the incremental will be this year, or can you -- or the other question I have, which I could probably look up, what as the cost recovery number or the CapEx total spend in '11 that was cost recoverable?

Yes, I'd have to look back in the CapEx table. So, it's in the K, you can (multiple speakers). I don't have the number right in front of me. But the incremental is the $12 million, and that is driven by the Bison projects.

Right, and then this year, do you think -- any way of sort of ballpark what it might be in '12? Or, you know, based on --

That is the number for '12.

Oh, that is the number for '12, you don't -- okay. And the cost recovery number for '11, that -- I know what the cost recovery spend is in the table, but not the actual recovered number, right?

Yes, you could do the math on it. It will be incrementally higher than the $12 million. But you can do the math on it and apply our cap structure to it and see what -- I'd normalize it for the year.

Got you. Last question. Just any way to quantify the impact of the higher, the lower discount rates? Your -- it increased pension expense this year, I guess that's because of the shares you put in. I guess that's what the -- the offset there. What was sort of the impact on the P&L? Any way to quantify that a little better?

Yes, it is up several million this year, we anticipate there will be similar increases in 2012. And the best way to look at it would -- we give you the information in the pension note that if there's a change in the discount rate, what it means our pension expense. So, the detail is there if you wanted to run some various scenarios.

Okay. Great. Thanks, Mark, I appreciate it.

Thanks, Larry.

(Operator Instructions) Our next question comes from James Bellessa at D.A. Davidson & Company, your line is open.

Good morning.

Good morning, Jim.

On the capital expenditure table in your 10-K, you have a line item called current cost recovery environmental. Is that environmental all exclusively for the Boswell unit 4?

Yes it is, Jim.

And it doesn't look like if you have exactly tacked down the total cost of that retrofit. You are giving a range of $300 million to $400 million, but you're -- in the table you're saying it is going to be $325 million. Why haven't you been able to tack it down more closely?

Well, Jim, as you can well imagine, the Mercury Air Toxics Rule from the EPA just came out in December, about the 16th of December of 2011. So, we've only had a chance to look at the final rule for about the last, oh, 60 days or so. So, it really is a function of taking now a look at that rule and what is really required from it, applying some additional engineering to it and then narrowing the number sometime later this year. So, we think that is a reasonable range, between $300 million and $400 million, but given the late issuance of the rule, you can imagine our engineers are continuing to refine the number.

And the Boswell 4, you own 80% of that facility, is that right?

Right, and the WPPI owns the other portion.

Okay. Now, zeroing in on your investments in other segment results, I am not certain exactly where the 1-point -- was it $1.7 million pretax write-down of real estate was found -- what line item might that have gotten onto?

That would be in the expense line, Jim.

Yes, which expense one? Other income, or other income expense?

Yes.

Or does it get into operating and other expense?

I think in is in the other income and expense.

Okay. And -- but the -- there's a positive number in that field. 1.3. There must have -- something -- you must have had some positive things happen to offset the minus $1.7 million.

Yes, Jim, I don't have that, the detail in front of me.

Maybe I need to work through making sure that this is right, but it looks like you had a very high income tax rate in that quarter -- in the most recent quarter. So --

There's a lot going in the quarter when you look at the income tax, because some of the -- when you look at it year to date, what we have in there is the stipulation agreement in there, the MED D, the positive is in there this year versus last year, we took that charge. So, there's a lot of in and outs that are going through on income tax expense. And then this year on income tax expense is down because of the higher production tax credits that we realized, too.

The tax rate for the year was quite high, over 50% in this segment. Do you expect that kind of tax rate to continue? I mean, that's -- it's coming -- it is a high tax rate because you're having losses.

Yes, it is a high tax rate, we also had some tax strategies there in North Dakota that pulled that tax expenses up for this year, and we will see some reductions later in the future years. So no, that will not be an ongoing rate, we will see that coming down then in the future years.

And if I heard correctly earlier, you thought the overall tax rate was going to be 2012 in the order of magnitude of 30%?

Correct.

Okay, thank you very much.

Thank you, Jim.

Thank you. (Operator Instructions). I am showing no further questions in the queue at this time, I will hand the call back to the speakers for closing remarks.

Thank you again, everyone, for your time today and your questions. We look forward to seeing you all very soon in our investor travels, and we hope you enjoy your day. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.