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| ALE > SEC Filings for ALE > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
Quarterly Report
The following discussion should be read in conjunction with our consolidated
financial statements, notes to those statements, Management's Discussion and
Analysis of Financial Condition and Results of Operations from the 2008 Form
10-K and the other financial information appearing elsewhere in this report. In
addition to historical information, the following discussion and other parts of
this Form 10-Q contain forward-looking information that involves risks and
uncertainties. Readers are cautioned that forward-looking statements should be
read in conjunction with our disclosures in this Form 10-Q under the heading:
"Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995" located on page 5 and "Risk Factors" located in Part I, Item 1A, page 20
of our 2008 Form 10-K. The risks and uncertainties described in this Form 10-Q
and our 2008 Form 10-K are not the only risks facing our Company. Additional
risks and uncertainties that we are not presently aware of, or that we currently
consider immaterial, may also affect our business operations. Our business,
financial condition or results of operations could suffer if the concerns set
forth are realized.
OVERVIEW
Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to 144,000 retail customers and wholesale electric service to 16 municipalities. SWL&P provides regulated electric service, natural gas and water service in northwestern Wisconsin to 15,000 electric customers, 12,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities.
Investments and Other is comprised primarily of BNI Coal, our coal mining operations in North Dakota, and ALLETE Properties, our Florida real estate business. This segment also includes Emerging Technology Investments ($4.8 million at September 30, 2009), a small amount of non-rate base generation, approximately 7,000 acres of land for sale in Minnesota, and earnings on cash and short-term investments.
ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of September 30, 2009, unless otherwise indicated. All subsidiaries are wholly owned unless otherwise specifically indicated. References in this report to "we," "us," and "our" are to ALLETE and its subsidiaries, collectively.
Financial Overview
(See Note 2. Business Segments for financial results by segment.)
The following net income discussion summarizes a comparison of the nine months ended September 30, 2009 to the nine months ended September 30, 2008.
Net income attributable to ALLETE for 2009 was $42.3 million, or $1.33 per diluted share compared to $59.0 million, or $2.04 per diluted share for 2008. Earnings per diluted share decreased approximately $0.13 compared to 2008 as a result of additional shares of common stock outstanding in 2009. (See Note 12. Earnings Per Share.)
Regulated Operations net income attributable to ALLETE was $45.0 million in 2009 ($46.5 million in 2008). The decrease is primarily attributable to lower net income at Minnesota Power due to a 5.2 percent decrease in kilowatt-hour sales, higher depreciation and interest expense and the accrual of retail rate refunds related to 2008; these decreases were partially offset by increased retail and FERC approved wholesale rates and additional current cost recovery revenue. In addition, 2009 reflected $1.1 million in additional after-tax earnings from our investment in ATC, as a result of additional investments we have made to fund our pro-rata share of ATC's capital expansion program.
OVERVIEW (Continued)
Investments and Other reflected a net loss attributable to ALLETE of $2.7 million in 2009 ($12.5 million of net income attributable to ALLETE in 2008). The decrease is primarily attributable to a reduction in earnings at ALLETE Properties and the absence of non-recurring items recorded in 2008. For the first nine months of 2009, ALLETE Properties recorded a net loss of $3.9 million versus net income of $2.2 million in 2008; a decline of $6.1 million. In 2008, we recorded a $3.8 million non-recurring gain on the sale of certain available-for-sale securities and $5.3 million in non-recurring tax benefits and related interest due to the closing of a tax year and the completion of an IRS review.
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2009 AND 2008
(See Note 2. Business Segments for financial results by segment.)
Regulated Operations
Operating revenue decreased $19.0 million, or 11 percent, from 2008 due to lower fuel and purchased power recoveries, lower retail and municipal kilowatt-hour sales, and lower authorized interim retail electric rates. These decreases were partially offset by higher sales to Other Power Suppliers and higher wholesale rates.
Lower fuel and purchased power recoveries along with a decrease in retail and municipal kilowatt-hour sales combined for a total revenue reduction of $41.5 million. Fuel and purchased power recoveries decreased due to an $11.2 million reduction in fuel and purchased power expense. (See Fuel and Purchased Power Expense.) Total kilowatt-hour sales to retail and municipal customers decreased 33.4 percent from 2008 primarily due to idle production lines and temporary plant closures at some of our taconite customers.
The decrease in kilowatt-hour sales to retail and municipal customers was partially offset by revenue from marketing the power to Other Power Suppliers which increased $21.9 million in 2009. Sales to Other Power Suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations.
Authorized interim retail electric rates for Minnesota Power were $2.3 million lower in the third quarter of 2009 from 2008 as a result of final rate orders received in 2009.
Kilowatt-hours Sold Quantity %
Quarter Ended September 30, 2009 2008 Variance Variance
Millions
Regulated Utility
Retail and Municipals
Residential 240 252 (12) (4.8) %
Commercial 352 381 (29) (7.6) %
Industrial 984 1,854 (870) (46.9) %
Municipals 243 243 - - %
Total Retail and Municipals 1,819 2,730 (911) (33.4) %
Other Power Suppliers 1,051 465 586 126.0 %
Total Regulated Utility Kilowatt-hours Sold 2,870 3,195 (325) (10.2) %
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Revenue from electric sales to taconite customers accounted for 13 percent of consolidated operating revenue in 2009 (28 percent in 2008). The decrease in revenue from our taconite customers was partially offset by revenue from electric sales to Other Power Suppliers which accounted for 24 percent of consolidated operating revenue in 2009 (10 percent in 2008). Revenue from electric sales to paper and pulp mills accounted for 10 percent of consolidated operating revenue in 2009 (10 percent in 2008). Revenue from electric sales to pipelines and other industrials accounted for 7 percent of consolidated operating revenue in 2009 (7 percent in 2008).
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2009 AND 2008 (Continued)
Operating expenses decreased $12.2 million, or 8 percent, from 2008.
Fuel and Purchased Power Expense decreased $11.2 million, or 14 percent, from 2008 due to decreased power generation attributable to lower kilowatt-hour sales, as well as a reduction in wholesale electricity prices. Minnesota Power's coal generating fleet produced fewer kilowatt-hours of electricity compared to the third quarter of 2008 due to planned outages to implement environmental retrofits and to respond to decreased demand from our taconite customers.
Operating and Maintenance Expense decreased $3.6 million from 2008 primarily due to lower natural gas costs due to a decline in the price and quantity of natural gas, and lower compensation expense of $2.2 million mainly from the termination of an incentive compensation program. Our retail rate order requires that the expense reduction attributable to the termination of the incentive compensation program must be refunded to our retail customers to the extent it was included in retail rates.
Depreciation Expense increased $2.6 million, or 21 percent, from 2008 reflecting higher property, plant, and equipment balances placed in service.
Interest expense increased $0.9 million, or 15 percent, from 2008 primarily due to additional long-term debt issued to fund new capital investments.
Investments and Other
Operating revenue decreased $3.9 million, or 17 percent, from 2008 primarily due to a $4.2 million reduction in sales revenue at ALLETE Properties. No sales were made during the third quarter of 2009 at ALLETE Properties, due to the continued lack of demand for our properties as a result of poor real estate market conditions in Florida. During the third quarter of 2008, ALLETE Properties sold one acre of property located in southwestern Florida for $0.7 million, as well as recognized $2.6 million in previously deferred revenue under percentage of completion accounting.
ALLETE Properties 2009 2008 Revenue and Sales Activity Quantity Amount Quantity Amount Dollars in Millions Revenue from Land Sales Acres (a) - - 1 $0.7 Contract Sales Price (b) - 0.7 Revenue Recognized for Previously Deferred Sales 2.6 Deferred Revenue - - Revenue from Land Sales - 3.3 Other Revenue $0.1 1.0 Total ALLETE Properties Revenue $0.1 $4.3 |
(a) Acreage amounts are shown on a gross basis, including wetlands and non-controlling interest.
(b) Reflects total contract sales price on closed land transactions. Land sales are recorded using a percentage-of-completion method.
BNI Coal, which operates under a cost-plus contract, recorded additional revenue of $0.9 million as a result of higher expenses in 2009. (See Operating Expenses.) Revenue from non-regulated generation was down $0.7 million primarily due to a reduction in kilowatt-hour sales.
Operating expenses decreased $2.9 million, or 14 percent, from 2008 reflecting decreased expenses at ALLETE Properties due to both lower cost of land sold and reductions in general and administrative expenses. Expenses incurred as a result of planned maintenance outage at a non-regulated generating facility in the third quarter of 2008 also contributed to the decrease in 2009. Partiality offsetting this decrease was an increase in expense at BNI Coal due to permitting costs relating to mining expansion; these costs were recovered through the cost-plus contract. (See Operating Revenue.)
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2009 AND 2008 (Continued)
Investments and Other (Continued)
Interest expense increased $0.5 million from 2008 primarily due to a decrease in the proportion of ALLETE interest expense assigned to Minnesota Power. Interest Expense reflected in our Investments and Other segment consists of ALLETE interest expense not provided for in the regulatory orders for Minnesota Power and SWL&P. We record interest expense for Minnesota Power based on Minnesota Power's most recently authorized capital structure. Effective August 1, 2008, the proportion of interest expense assigned to Minnesota Power decreased to reflect the authorized capital structure inherent in interim rates that commenced on that date. Interest expense was also higher in 2009 as 2008 included a $0.6 million reversal of interest expense previously accrued due to the closing of a tax year.
Other income decreased $3.0 million from 2008 primarily due to interest income recognized in the third quarter of 2008 related to tax benefits from prior years, losses in our Emerging Technology Investments, and lower interest income due to lower average cash balances.
Income Taxes - Consolidated
For the quarter ended September 30, 2009, the effective tax rate was 29.0 percent (25.2 percent for the quarter ended September 30, 2008). The effective tax rate in both years deviated from the statutory rate (approximately 41 percent for 2009) due to deductions for Medicare health subsidies, AFUDC-Equity, investment tax credits, wind production tax credits, and depletion. In addition, the effective tax rate for the third quarter of 2009 was impacted by lower pre-tax income and the benefit of a non-recurring permanent item. The effective tax rate for the third quarter of 2008 included recognition of $4.1 million in non-recurring tax benefits due to a closing of a tax year and the completion of an IRS review. We expect the effective tax rate for the full year 2009 to be approximately 34 percent.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
Regulated Operations
Operating revenue decreased $49.6 million, or 9 percent, from 2008 due to lower fuel and purchased power recoveries, lower retail and municipal kilowatt-hour sales, lower natural gas revenue at SWL&P, and the accrual of estimated prior year retail rate refunds related to our 2008 retail rate case. These decreases were partially offset by higher sales to Other Power Suppliers, higher rates and increased revenue from current cost recovery riders.
Lower fuel and purchased power recoveries along with a decrease in retail and municipal kilowatt-hour sales combined for a total revenue reduction of $106.8 million. Fuel and purchased power recoveries decreased due to a $42.9 million reduction in fuel and purchased power expense. (See Fuel and Purchased Power Expense.) Total kilowatt-hour sales to retail and municipal customers decreased 28.5 percent from 2008 primarily due to idled production lines and temporary plant closures at some of our taconite customers.
Estimated prior year retail rate refunds based on the MPUC May Order and the June 25, 2009, MPUC rate reconsideration decision total $7.6 million.
The decrease in kilowatt-hour sales to retail and municipal customers has been partially offset by revenue from marketing the power to Other Power Suppliers, which increased $57.9 million in 2009. Sales to Other Power Suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations.
Natural gas revenue at SWL&P was lower by $6.5 million due to a 54 percent decrease in the price of natural gas and a 14 percent decline in sales. Natural gas revenue is primarily a flow-through of the natural gas costs. (See Operating and Maintenance Expense.)
Higher rates resulting from the March 1, 2008, and February 1, 2009, FERC approved wholesale rate increases for our municipal customers increased revenue by $5.4 million. In addition, the August 1, 2008, interim rate increase for retail customers in Minnesota increased revenue by $3.6 million in 2009, net of estimated refunds.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (Continued)
Regulated Operations (Continued)
Current cost recovery rider revenue increased $5.8 million in 2009 from 2008
primarily due to increased capital expenditures related to our Boswell Unit 3
emission reduction plan.
Kilowatt-hours Sold Quantity %
Nine Months Ended September 30, 2009 2008 Variance Variance
Millions
Regulated Utility
Retail and Municipals
Residential 857 854 3 0.4 %
Commercial 1,061 1,090 (29) (2.7) %
Industrial 3,182 5,466 (2,284) (41.8) %
Municipals 729 742 (13) (1.8) %
Total Retail and Municipals 5,829 8,152 (2,323) (28.5) %
Other Power Suppliers 3,075 1,244 1,831 147.2 %
Total Regulated Utility Kilowatt-hours Sold 8,904 9,396 (492) (5.2) %
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Revenue from electric sales to taconite customers accounted for 15 percent of consolidated operating revenue in 2009 (27 percent in 2008). The decrease in revenue from our taconite customers was partially offset by revenue from electric sales to Other Power Suppliers, which accounted for 21 percent of consolidated operating revenue in 2009 (9 percent in 2008). Revenue from electric sales to paper and pulp mills accounted for 9 percent of consolidated operating revenue in 2009 (9 percent in 2008). Revenue from electric sales to pipelines and other industrials accounted for 7 percent of consolidated operating revenue in 2009 (7 percent in 2008).
Operating expenses decreased $45.0 million, or 10 percent, from 2008.
Fuel and Purchased Power Expense decreased $42.9 million, or 18 percent, from 2008 due to decreased power generation attributable to lower kilowatt-hour sales, as well as a reduction in wholesale electricity prices. Minnesota Power's coal generating fleet produced fewer kilowatt-hours of electricity due to planned outages to implement environmental retrofits and to respond to decreased demand from our taconite customers.
Operating and Maintenance Expense decreased $9.9 million from 2008 primarily due to $6.3 million in lower natural gas costs at SWL&P due to a decline in the price and quantity of natural gas purchased. In addition, lower maintenance and material costs at Minnesota Power generating facilities were partially offset by defined benefit pension and postretirement health expenses, which have increased primarily due to a decline in asset values.
Depreciation Expense increased $7.8 million, or 22 percent, from 2008 reflecting higher property, plant, and equipment balances placed in service.
Interest expense increased $3.4 million, or 19 percent, from 2008 primarily due to additional long-term debt issued to fund new capital investments and $0.5 million related to estimated retail rate refunds.
Investments and Other
Operating revenue decreased $12.2 million, or 18 percent, from 2008 primarily due to a $13.0 million reduction in sales revenue at ALLETE Properties. During the first nine months of 2009, ALLETE Properties sold approximately 19 acres of properties located outside of our three main development projects for $2.2 million; no other sales were made in 2009 due to the continued lack of demand for our properties as a result of poor real estate market conditions in Florida. During the first nine months of 2008, ALLETE Properties sold approximately 52 acres of property located outside of our three main development projects for $4.6 million and recognized $2.6 million of previously deferred revenue under percentage of completion accounting. Revenue at ALLETE Properties in 2008 also included a pre-tax gain of $4.5 million resulting from the sale of a retail shopping center in Winter Haven, Florida.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (Continued) Investments and Other (Continued) ALLETE Properties 2009 2008 Revenue and Sales Activity Quantity Amount Quantity Amount Dollars in Millions Revenue from Land Sales Acres (a) 19 $2.2 52 $4.6 Contract Sales Price (b) 2.2 4.6 Revenue Recognized from Previously Deferred Sales - 2.6 Deferred Revenue (0.6) - Revenue from Land Sales 1.6 7.2 Other Revenue (c) 0.3 7.7 Total ALLETE Properties Revenue $1.9 $14.9 |
(a) Acreage amounts are shown on a gross basis, including wetlands and non-controlling interest.
(b) Reflects total contract sales price on closed land transactions. Land sales are recorded using a percentage-of-completion method.
(c) Included a $4.5 million pre-tax gain from the sale of a shopping center in Winter Haven, Florida in 2008.
BNI Coal, which operates under a cost-plus contract, recorded additional revenue of $2.9 million as a result of higher expenses. (See Operating Expenses.)
Operating expenses decreased $7.0 million, or 11 percent, from 2008 reflecting decreased expenses at ALLETE Properties due to both lower cost of land sold and reductions in general and administrative expenses. Expenses incurred as a result of a planned maintenance outage at a non-regulated generating facility in the third quarter of 2008 also contributed to the decrease in 2009. Partially offsetting these decreases was an increase in expense at BNI Coal due to higher permitting costs relating to mining expansion, reclamation bonding, and dragline repairs in 2009.
Interest expense increased $2.5 million from 2008 primarily due to a decrease in the proportion of ALLETE interest expense assigned to Minnesota Power. Interest Expense reflected in our Investments and Other segment consists of ALLETE interest expense not provided for in the regulatory orders for Minnesota Power and SWL&P. We record interest expense for Minnesota Power based on Minnesota Power's most recently authorized capital structure. Effective August 1, 2008, the proportion of interest expense assigned to Minnesota Power decreased to reflect the authorized capital structure inherent in interim rates that commenced on that date. Interest expense was also higher in 2009 as 2008 included a $0.6 million reversal of interest expense previously accrued due to the closing of a tax year.
Other income decreased $11.8 million from 2008 primarily due a $6.8 million gain realized from the sale of certain available-for-sale securities in the first quarter of 2008, increased losses in our Emerging Technology Investments in 2009 of $2.0 million, lower earnings on excess cash in 2009 of $1.6 million, and $1.4 million of interest income related to tax benefits recognized in the third quarter of 2008.
Income Taxes - Consolidated
For the nine months ended September 30, 2009, the effective tax rate was 33.8 percent (32.3 percent for the nine months ended September 30, 2008). The effective tax rate in each period deviated from the statutory rate (approximately 41 percent for 2009) due to deductions for Medicare health subsidies, AFUDC-Equity, investment tax credits, wind production tax credits, and depletion. In addition, the effective rate for 2009 was impacted by lower pre-tax income. The effective rate for 2008 was impacted by the recognition of a non-recurring benefit on a previously uncertain tax position for $1.7 million due to the closing of a tax year and the reversal of a state valuation allowance for $2.4 million due to the completion of an IRS review. We expect the effective tax rate for 2009 to be approximately 34 percent.
CRITICAL ACCOUNTING ESTIMATES
Certain accounting measurements under GAAP involve management's judgment about subjective factors and estimates, the effects of which are inherently uncertain. Accounting measurements that we believe are most critical to our reported results of operations and financial condition include: regulatory accounting, valuation of investments, pension and postretirement health and life actuarial assumptions, and taxation. These policies are reviewed with the Audit Committee of our Board of Directors on a regular basis and summarized in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2008 Form 10-K.
OUTLOOK
ALLETE is committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses and sustains growth. Minnesota Power's industrial customers are facing weak conditions in the markets for their products, and have and may continue to reduce the amount of energy they use; we will work to sell available energy in the wholesale markets. Our focus will be to maintain the competitively-priced production of energy, while meeting environmental requirements. Minnesota Power will also focus on maintaining competitive retail rates, as we believe this is important to the success of our customers.
Our strategy going forward is to focus on growth opportunities within our core business as we expect to continue making significant investments to comply with renewable and environmental requirements, maintain our existing competitively priced generation fleet, and strengthen and enhance the regional transmission grid. We will also look for additional transmission and renewable energy opportunities which take advantage of our geographical location between sources of renewable energy and growing energy markets. Earnings from our investment in ATC are expected to grow as we anticipate making additional investments to fund our pro-rata share of ATC's capital expansion program.
Regulated Operations. Minnesota Power expects significant rate base growth over the next several years as it continues its program to comply with renewable energy requirements and environmental mandates, as well as make significant investments in our existing generation fleet to provide for continued future operations. We anticipate our capital investments will be recovered through a combination of current cost recovery riders and anticipated increased base electric rates.
Rate Cases. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, the FERC or the PSCW.
2008 Rate Case. On May 2, 2008, Minnesota Power filed a retail rate increase request with the MPUC. On May 4, 2009, the MPUC issued its order (May Order) on the rate filing, and on June 25, 2009, the MPUC reconsidered the May Order. The reconsideration order was issued on August 10, 2009, resulting in an authorized rate increase of $20.4 million (slightly below the $21.1 million outcome in the May Order). The May Order allowing a 10.74 percent return on common equity and a capital structure consisting of 54.79 percent equity and 45.21 percent debt remains unchanged.
The reconsideration order reduced Minnesota Power's interim rates, which were in effect between August 2008 and October 31, 2009, by $6.3 million annually to . . .
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