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Executives

Donald Shippar - Chairman and CEO

Mark Schober - SVP and CFO

Al Hodnik - President

Analysts

Larry Solow - CJS Securities

James Bellessa - DA Davidson

Presentation

ALLETE Inc. (ALE) Q3 2009 Financial Results Call October 30, 2009 10:00 AM ET

Operator

Good day and welcome to the ALLETE third quarter 2009 financial results call. Today's call is being recorded. Certain statements conditioned in this conference call that are not descriptions of historical facts or forward-looking statements, such as terms defined in 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 on filings made by the company with the securities and exchange commission.

Many of the factors will determine the company’s future results of the only ability of management to control or project. Listeners should not place undue reliance on forward-looking statements, which reflect 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.

Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking information include attaining certain growth goals, changes in the way products are introduced to 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 the rate of inflation, changes in the state federal legislation or regulation and changes in the general economy.

For opening remarks and introduction I’d now like to turn the conference over to Mr. Donald Shippar, please go ahead.

Donald Shippar

Thank 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’d 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 an annual revenue increase of $20.4 million go in to effect November 1. Early next week we plan to file a new retail rate increase request with the Minnesota Public Utilities Commission. We will not go in to 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 5th, Minnesota Power filed with the Minnesota Public Utilities Commission as 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 estimated customer demand, while achieving increased system flexibility.

To 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 broilers and associated systems from a city of Duluth that had been retrofitted to burn wood base biomass fuel. We plan to upgrade these broilers to increase the biomass energy generation to about 200 Megawatt hours, annually by approximately 2013.

We do not plan to add new coal generation or enter in to long term power purchase agreements from coal-based generation resources.

On the other development this week, we entered in to 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 now, I’ll turn the call over to Mark.

Mark Schober

Good morning. Before I go through the quarterly financial information, you probably notice that we have not issued our 10-Q yet. As Don mentioned, we plan to file a new rate increase request early next week. 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 non-recurring item recorded last year. And $0.06 cents per share of dilution.

I will explain each as 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 field 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-hours sales, and changes in rates compared to the third quarter of 2008.

First, let me comment on the sales decrease. Retail and Municipal Kilowatt-hours sales were down 33% from last year, primarily due to reduced demand from our (Inaudible) customers. We also saw 5% decrease in sales to Residential customers, and a 8% decline in Commercial customer sales.

The Economic environment was the primary factor for these sales decreases, but the 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 quarter.

In total, the net decrease in total Regulated Kilowatt-hours sales was about 10% from last year.

Regarding rates, this year Minnesota Power had higher revenue from [lighters] and wholesale rates given 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 $35 million annual increase. In 2009, based on an MPUC order, those rates were reduced to $15 million annual increased amount.

On the Regulated Operation expense side, I have already mentioned the $11.2 million decrease in fuel and purchased 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 cost as superior [light] and power.

Depreciation and interest expense were higher this year than last due to asset additions. Income from our investment and ATC was up slightly from last year, due to a larger investment balance. At the end of the third quarter, we had an investment balance of $85.1 million.

ALLETE’s investments in other business segment recorded a net loss of $600,000 during the quarter, compared to net income of $5.5 million a year ago. $4.9million of the difference is due to the positive resolution of two outstanding tax issues in 2008. This non-recurring 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 a 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 affective tax rate for the quarter was 29%. 29%, due to the benefit of a non-recurring permanent item. We expect the affective tax rate for the full year to approximately 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 $2.05 per share. Excluding the 2008 portion of interim rate refunds that we recorded earlier this year. Don?

Donald Shippar

Thanks Mark. In addition to a 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, Mesabi Nugget. This customer has signed a 10-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 approved our purchase of the DC transmission line from the center in 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. And on a related note, site preparation has begun for the first 75 megawatt portion of our North Dakota wind generation project.

In our final node, our Boswell 3 environmental retrofit project is complete. This three year, $240 million project was completed on schedule, and will result in a substantial reduction of particulates SO2, NOx and mercury emissions. We began startup 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 had filed a new rate increase request and now plan to issue an 8-K containing our guidance immediately after the filing.

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

Question-and-Answer Session

Operator

Thank you, the question-and-answer session will be conducted electronically. (Operator Instructions). We will go first to Larry Solow of CJS Securities.

Larry Solow - CJS Securities

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

Donald Shippar

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

Larry Solow - CJS Securities

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

Donald Shippar

It will be in a separate 8-K.

Larry Solow - CJS Securities

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

Donald Shippar

Well there really isn't any further information as you know they'll nominate again here for the first four months of the year in December. And again we don't have any more information. You are right, we did get better nominations for this last part of the year. But again we’re not able to predict what their operating levels will be, so no, we don't have further information on that.

Larry Solow - CJS Securities

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

Donald Shippar

100 mega watts for 10 years.

Larry Solow - CJS Securities

So its 10 per year?

Donald Shippar

No.

Larry Solow - CJS Securities

Okay. So that's a pretty large deal, then. Right?

Donald Shippar

It is. It is a substantial power purchase agreement.

Larry Solow - CJS Securities

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

Donald Shippar

No, we expect to do a little bit better than that, as we talked about that $5 million before Larry, that's really the…

Larry Solow - CJS Securities

Worst case scenario?

Donald Shippar

Yes. It assumes pretty much no sales and that's what the run rate is for our expense stream out of ALLETE Properties and [realizing] that primarily property taxes and assessment.

Larry Solow - CJS Securities

Got it and then without pinning it down, I mean do you think some of these sales could be pushed into 2010 or I mean do you see any signs of increased traffic anything that may show some improvement as we look out over the next 12 months?

Donald Shippar

We will talk about 2010 next week. But no, we have not seen any increase in traffic at Florida.

Larry Solow - CJS Securities

And then last question on the rising shares, I know your plan was sot of front-end loaded to front-end your capital expenditure plan and I guess with the stock price now rebounding somewhat, did that come in to play and sort of accelerate your or reaccelerate your issuance of shares?

Donald Shippar

It didn't really change the timing of our issuance. We always like to pre-fund 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.

Larry Solow - CJS Securities

Okay and with that I assume that would continue with higher share base in 2010, more shift their share issuance.

Donald Shippar

We will continue to issue shares into 2010, but not to the extent that we have this year.

Larry Solow - CJS Securities

And then looking beyond that is that something that you could continue going or should it slow down as you are just more because I believe your five year plan was to sort of do it mostly in front end and then is that correct?

Donald Shippar

Well Larry we will revise all that information in our 10-K Larry, so as you see our five year capital spend we'll revise on the information we have on that [K] and how we plan on financing that.

Operator

(Operator Instructions). We'll go next to James Bellessa of DA Davidson.

James Bellessa - DA Davidson

The ALJ is it approval or perhaps recommendation that the transmission line can be purchased, what does that mean about the timing of the closure of that transaction?

Mark Schober

Well the ALJ's recommendation will now go to the commission and then 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.

James Bellessa - DA Davidson

And 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. Can you put this in perspective with how much that was a decline and how much this will sop up?

Donald Shippar

Well 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 that is coming to an end and this will in essence take that contract that expired and sent the 100 megawatt sale for another 10 years. Of that 175.

James Bellessa - DA Davidson

And then the 75 that's coming off, where do you expect to go with that?

Mark Schober

Well the combination of retail customers and other wholesale transactions.

James Bellessa - DA Davidson

And do you see that in native load or will you have to be planning wholesale buyers for a while on this amount of 75 that's coming off?

Donald Shippar

Well we expect certainly in the short-term, we'll be looking to the wholesale market for a significant portion of that.

James Bellessa - DA Davidson

What is the nature of the wholesale market in your area right now?

Donald Shippar

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

James Bellessa - DA Davidson

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

Donald Shippar

Well we have been regularly entering into transactions and just in anticipation of the Taconite load being down. I mean they clearly have improved over what we saw certainly over the summer in the last quarter, but still anticipating they're going to 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.

James Bellessa - DA Davidson

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

Mark Schober

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

Operator

(Operator Instructions). And 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.

Donald Shippar

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

Operator

And that concludes today's conference. We thank you for your participation.

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