EXECUTIVE
SUMMARY (Continued)
|
|
|
|
|
Quarter
Ended
|
Nine
Months Ended
|
|
|
|
|
|
September
30,
|
September
30,
|
|
Kilowatthours
Sold
|
2007
|
2006
|
2007
|
2006
|
|
Millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
Utility
|
|
|
|
|
|
|
Retail
and Municipals
|
|
|
|
|
|
|
|
Residential
|
258.8
|
263.0
|
832.1
|
800.1
|
|
|
|
Commercial
|
360.5
|
361.7
|
1,033.6
|
1,005.9
|
|
|
|
Municipals
|
255.7
|
248.6
|
751.3
|
684.0
|
|
|
|
Industrial
|
1,775.8
|
1,836.9
|
5,215.2
|
5,429.1
|
|
|
|
Other
|
21.5
|
20.8
|
62.8
|
59.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Retail and Municipals
|
2,672.3
|
2,731.0
|
7,895.0
|
7,978.5
|
|
|
Other
Power Suppliers
|
571.9
|
584.3
|
1,608.8
|
1,604.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Regulated Utility
|
3,244.2
|
3,315.3
|
9,503.8
|
9,583.4
|
|
Nonregulated
Energy Operations
|
60.7
|
60.4
|
184.2
|
181.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,304.9
|
3,375.7
|
9,688.0
|
9,764.7
|
|
|
Quarter
Ended
|
Nine
Months Ended
|
|
|
September
30,
|
September
30,
|
|
Real
Estate
|
2007
|
2006
|
2007
|
2006
|
|
Revenue
and Sales Activity
(a)
|
Qty
|
Amount
|
Qty
|
Amount
|
Qty
|
Amount
|
Qty
|
Amount
|
|
Dollars
in Millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Town
Center Sales
|
|
|
|
|
|
|
|
|
|
Commercial
Sq. Ft.
|
50,000
|
$1.8
|
114,300
|
$3.6
|
474,476
|
$14.5
|
364,995
|
$9.8
|
|
Residential
Units
|
–
|
–
|
356
|
3.8
|
130
|
1.6
|
542
|
9.4
|
|
|
|
|
|
|
|
|
|
|
|
Palm
Coast Park
|
|
|
|
|
|
|
|
|
|
Commercial
Sq. Ft.
|
–
|
–
|
–
|
–
|
40,000
|
2.0
|
–
|
–
|
|
Residential
Units
|
–
|
–
|
200
|
3.0
|
406
|
11.1
|
200
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
Other
Land Sales
|
|
|
|
|
|
|
|
|
|
Acres
(b)
|
83
|
3.0
|
242
|
4.9
|
450
|
8.9
|
708
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
Contract
Sales Price
(c)
|
|
4.8
|
|
15.3
|
|
38.1
|
|
42.6
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Recognized from Previously Deferred Sales
|
|
0.1
|
|
1.0
|
|
2.4
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Revenue
|
|
(1.1)
|
|
(2.9)
|
|
(4.2)
|
|
(6.8)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
(d)
|
|
–
|
|
0.6
|
|
–
|
|
(0.9)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
from Land Sales
|
|
3.8
|
|
14.0
|
|
36.3
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
Other
Revenue
|
|
1.0
|
|
1.1
|
|
4.7
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.8
|
|
$15.1
|
|
$41.0
|
|
$44.0
|
(a) Quantity
amounts are approximate until final build-out.
(b) Acreage
amounts are shown on a gross basis, including wetlands and minority
interest.
|
(c)
|
Reflected
total contract sales price on closed land
transactions.
|
|
(d)
|
Contributed
development dollars, which are credited to cost of real estate
sold.
|
ALLETE,
Inc. 2007 Third Quarter 10-Q
EXECUTIVE
SUMMARY (Continued)
NET
INCOME
The
following income discussion summarizes, by segment, a comparison of the nine
months ended September 30, 2007, to the nine months ended September 30,
2006.
Regulated
Utility
contributed income of $37.9 million in 2007 ($33.5 million in
2006). The increase in earnings for 2007 reflects:
|
|
·
|
increased
electric sales to residential, commercial and municipal customers,
as well
as increased gas sales at SWL&P due to colder weather in the first
quarter of 2007;
|
|
|
·
|
rate
increases, effective January 1, 2007, at
SWL&P;
|
|
|
·
|
commencement
of current revenue cost recovery on AREA project environmental
capital
expenditures; and
|
|
|
·
|
higher
AFUDC related to increased capital
expenditures.
|
These
increases were partially offset by higher operations and maintenance expenses
relating to the Boswell Unit 4 outage.
Nonregulated
Energy Operations
reported income of $3.4 million in 2007 ($2.9 million
in 2006), reflecting a $1.2 million after tax gain on land sold that was
part of
our purchase of Taconite Harbor.
Investment
in ATC
contributed income of $5.6 million in 2007 ($0.6 million in
2006). Our initial investment in ATC was in May 2006.
Real
Estate
contributed income of $15.2 million in 2007 ($15.7 million in
2006). Income was lower in 2007 than in 2006 due to the deterioration of
market
conditions. The mix of real estate sales also varies from period to period
which
can impact comparisons between years.
Other
reflected net income of $3.3 million
in 2007 ($1.6 million in 2006). The increase in 2007 included a state tax
audit
settlement for $1.5 million and the release from a loan guarantee for Northwest
Airlines Corporation of $0.6 million
after tax.
COMPARISON
OF THE QUARTERS ENDED SEPTEMBER 30, 2007 AND 2006
(See
Note
2. Business Segments for financial results by segment.)
Regulated
Utility
Operating
revenue
increased $10.9 million, or 6 percent, from 2006 primarily
due to increased fuel clause recoveries, and rate increases at
SWL&P.
Fuel
clause recoveries increased $13.0 million in 2007 primarily as a result of
increased purchased power expenses (see Fuel and Purchased Power Expense
discussion below).
Revenue
from other power suppliers decreased $2.3 million, or 8.4 percent, from 2006
primarily due to a 6 percent decrease in the price per
kilowatthour.
New
rates
at SWL&P, which became effective January 1, 2007, reflect a 2.8 percent
increase in electric rates, a 1.4 percent increase in gas rates and an
8.6 percent increase in water rates. These rate increases resulted in a
$0.4 million increase in operating revenue.
Revenue
from electric sales to taconite customers accounted for 26 percent of
consolidated operating revenue in 2007 (24 percent in 2006). Revenue from
electric sales to paper and pulp mills accounted for 10 percent of
consolidated operating revenue in 2007 (9 percent in 2006). Revenue from
electric sales to pipelines accounted for 7 percent of consolidated
operating revenue in 2007 (6 percent in 2006).
Overall
kilowatthour sales were down 2.1 percent compared to 2006. Combined residential,
commercial and municipal kilowatthour sales were flat compared to 2006, while
industrial kilowatthour sales decreased by 61.1 million, or 3.0 percent.
The
decrease in residential and commercial sales was primarily due to a warmer
than
average 2006 which was offset by higher municipal kilowatthour sales due
to two
existing municipal customers converting to full-energy requirements and
residential and commercial customer growth. The reduction in industrial
kilowatthour sales was primarily due to an idle production line at one of
our
taconite customers. In September 2007, the taconite customer resumed production
on the idle line. Minor fluctuations in industrial kilowatthour sales generally
do not have a large impact on revenue due to a fixed demand component of
revenue, which is less sensitive to changes in kilowatthours
sales.
ALLETE,
Inc. 2007 Third Quarter 10-Q
COMPARISON
OF THE QUARTERS ENDED SEPTEMBER 30, 2007 AND 2006
(Continued)
Regulated
Utility (Continued)
Operating
expenses
increased $15.1 million, or 11 percent, from
2006.
Fuel
and Purchased Power
Expense
increased $12.3 million from 2006
primarily due to a $9.7 million increase in purchased power expense because
of outages at our generating facilities and a major planned outage at the
Square
Butte generating facility. The replacement power costs are recovered through
the
regulated utility fuel adjustment clause in Minnesota.
Operating
and Maintenance Expense
increased $2.9 million, or 6 percent, from 2006 due
to a planned outage at Boswell Unit 2, higher labor, and storm restoration
expense.
Depreciation
decreased
$0.1 million from 2006 primarily due to the life extension of Boswell Unit
3.
Other
income
increased $0.9 million from 2006 primarily due to higher
earnings from the capitalization of AFUDC - Equity because of increased
construction activity.
Nonregulated
Energy Operations
Operating
revenue
increased $1.0 million, or 6 percent, from 2006 primarily
due to higher coal revenue realized under a cost-plus contract. This reflects
a
27.3 percent increase in the delivered price per ton due to higher coal
production expenses (see Operating expenses below).
Operating
expenses
increased $1.9 million, or 13 percent, from 2006
reflecting higher coal production expenses and higher property taxes. The
increase in property taxes is primarily due to higher assessed market values,
while the increase in coal operating expenses is due to higher fuel costs
and
dragline repairs.
Investment
in ATC
Equity
Earnings
reflected $3.2 million of income in 2007 resulting from
our pro-rata share of ATC’s earnings as discussed in Note 3. Our investment in
ATC began in May 2006.
Real
Estate
Operating
revenue
decreased $10.3 million, or 68 percent, from 2006 due to
the deterioration of market conditions in 2007. Revenue from land sales in
2007
was $3.8 million, which included $0.1 million in previously deferred
revenue. In 2006, revenue from land sales was $14.0 million, which included
$1.0
million in previously deferred revenue.
For
the
quarter ended September 30, 2007, 50,000 commercial square feet were sold
at
Town Center (114,300 at Town Center in 2006) and 83 acres of other land were
sold (242 acres in 2006). No residential units (356 at Town Center and 200
at
Palm Coast Park in 2006) were sold during the third quarter.
Operating
expenses
decreased $1.5 million, or 30 percent, from 2006
reflecting a decrease in the cost of real estate sold and decreased selling
expenses.
Other
Interest
Expense
decreased $1.0 million, or 77 percent, from 2006 due to
the prior year including additional interest relating to taxes owed on the
gain
on the sale of our Florida Water assets.
Income
Taxes
For
the
quarter ended September 30, 2007, the effective tax rate on income from
continuing operations before minority interest was 32.7 percent
(34.5 percent for the quarter ended September 30, 2006). The effective rate
of 32.7 percent for the quarter ended September 30, 2007, deviated from the
statutory rate (approximately 40 percent) primarily due to revising the
projected annual effective tax rate down, and recording the effects in the
quarter ended September 30, 2007. The annual effective rate for 2007 is now
estimated to be between 35 percent and 36 percent, down from the estimated
37
percent at June 30, 2007. The reason for the decrease in the annual rate
is due
to higher expected tax exempt interest, a higher projected domestic
manufacturing deduction and tax planning initiatives.
ALLETE,
Inc. 2007 Third Quarter 10-Q
COMPARISON
OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
Regulated
Utility
Operating
revenue
increased $61.2 million, or 13 percent, from 2006
primarily due to increased fuel clause recoveries, increased kilowatthour
sales
to residential, commercial and municipal customers, increased power marketing
prices, and rate increases at SWL&P.
Fuel
clause recoveries increased $50.7 million in 2007 as a result of increased
purchased power expenses (see Fuel and Purchased Power Expense discussion
below).
Revenue
from other power suppliers increased $1.9 million, or 2.5 percent, from 2006
primarily due to a 2.7 percent increase in the price per
kilowatthour.
New
rates
at SWL&P, which became effective January 1, 2007, reflect a 2.8 percent
increase in electric rates, a 1.4 percent increase in gas rates and an
8.6 percent increase in water rates. These rate increases resulted in a
$1.2 million increase in operating revenue.
Revenue
from electric sales to taconite customers accounted for 24 percent of
consolidated operating revenue in each 2007 and 2006. Revenue from electric
sales to paper and pulp mills accounted for 9 percent of consolidated
operating revenue in each of 2007 and 2006. Revenue from electric sales to
pipelines accounted for 7 percent of consolidated operating revenue in 2007
(6 percent in 2006).
Overall,
kilowatthour sales were slightly lower in 2007. Combined residential, commercial
and municipal kilowatthour sales increased 127.0 million, or 5.1 percent,
from
2006, while industrial kilowatthour sales decreased by 213.9 million, or
3.9
percent. The increase in residential, commercial and municipal kilowatthour
sales was primarily because of two existing municipal customers converting
to
full-energy requirements and a 10 percent increase in Heating Degree Days
(primarily in February). The reduction in industrial kilowatthour sales was
primarily due to an idle production line and production delays at one of
our
taconite customers. In September 2007, the affected taconite customer resumed
production on the idle line. Minor fluctuations in industrial kilowatthour
sales
generally do not have a large impact on revenue due to a fixed demand component
of revenue that is less sensitive to changes in kilowatthours
sales.
Operating
expenses
increased $57.5 million, or 14 percent, from
2006.
Fuel
and Purchased Power Expense
increased $50.5 million from 2006 primarily due
to a $47.6 million increase in purchased power reflecting a 35 percent
increase in kilowatthours purchased and a 13.7 percent increase in the price
per
kilowatt purchased. The increase in purchased power was primarily due to
the
following outages at our generating facilities:
|
|
·
|
scheduled
outage at Boswell Unit 3;
|
|
|
·
|
scheduled
outages at Laskin Unit 1 and Taconite Harbor Unit 2 relating to
AREA plan
environmental upgrades; and
|
|
|
·
|
unplanned
outages at Boswell Unit 4.
|
Boswell
Unit 4 completed generator repairs and returned to service in May 2007, as
scheduled. Substantially all of the costs of the replacement coils were covered
under the original manufacturer’s warranty.
Additionally,
low hydro generation and a lower Square Butte entitlement contributed to
higher
purchased power expense. The replacement power costs are recovered through
the
fuel adjustment clause in Minnesota.
Operating
and Maintenance Expense
increased $8.0 million, or 5 percent, from 2006 due
to a $7.0 million increase in plant maintenance primarily due to planned
outages
at our generating facilities.
Depreciation
decreased $1.0 million from 2006 primarily due to the life extension
of
Boswell Unit 3.
Interest
Expense
decreased $0.7 million from 2006 primarily due to
capitalization of AFUDC-Debt because of increased construction
activity.
Other
income
increased $1.8 million from 2006 primarily due to higher
earnings from the capitalization of AFUDC-Equity because of increased
construction activity.
ALLETE,
Inc. 2007 Third Quarter 10-Q
COMPARISON
OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(Continued)
Nonregulated
Energy Operations
Operating
revenue
increased $1.2 million, or 2 percent, from 2006 primarily
due to higher coal revenue realized under a cost-plus contract. This reflects
a
5.8 percent increase in the delivered price per ton due to higher coal
production expenses (see Operating expenses below).
Operating
expenses
increased $3.1 million, or 7 percent, from 2006
reflecting higher coal production expense and higher property taxes. The
increase in property taxes is primarily due to higher assessed market values,
while the increase in coal operating expenses is due to higher fuel costs,
dragline repairs and tires.
Other
income
increased $2.0 million from 2006 reflecting a $1.9 million
gain on land sold which was part of our Taconite Harbor purchase.
Investment
in ATC
Equity
Earnings
reflected $9.3 million of income in 2007 resulting from
our pro-rata share of ATC’s earnings as discussed in Note 3. Our investment in
ATC began in May 2006.
Real
Estate
Operating
revenue
decreased $3.0 million, or 7 percent, from 2006 due to the
deterioration of market conditions in 2007. Revenue from land sales in 2007
was
$36.3 million, which included $2.4 million in previously deferred revenue.
In 2006, revenue from land sales was $40.2 million which included $5.3 million
in previously deferred revenue.
Through
September 30, 2007, 474,476 commercial square feet were sold at Town Center
(364,995 square feet in 2006), and 40,000 commercial square feet were sold
at
Palm Coast Park (none in 2006). Town Center has sold 130 residential units
(542
units in 2006) and Palm Coast Park has sold 406 residential units (200 units
in
2006). During the first nine months of 2007, 450 acres of other land were
sold
(708 acres in 2006).
Operating
expenses
increased $0.9 million, or 7 percent, from 2006
reflecting community development district property tax assessments previously
capitalized and increased selling expenses.
Other
Operating
expenses
decreased $0.5 million from 2006 reflecting lower general
and administrative expenses.
Interest
expense
decreased $1.8 million from 2006, primarily due to the
prior year including additional interest relating to taxes owed on the gain
on
the sale of our Florida Water assets.
Other
income
increased $0.3 million from 2006 primarily due to the
release from a loan guarantee for Northwest Airlines Corporation of $1.0
million, partially offset by less investment income.
Income
Taxes
For
the
nine months ended September 30, 2007, the effective tax rate on income from
continuing operations before minority interest was 34.6 percent
(36.2 percent for nine months ended September 30, 2006). The effective rate
of 34.6 percent for the nine months ended September 30, 2007, deviated from
the
statutory rate (approximately 40 percent) primarily due to a state income
tax
audit settlement ($1.5 million), deductions for Medicare health subsidies,
a
domestic manufacturing deduction, AFUDC and tax planning
initiatives.
ALLETE,
Inc. 2007 Third Quarter 10-Q
CRITICAL
ACCOUNTING ESTIMATES
Certain
accounting measurements under applicable 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: impairment
of
long-lived assets, pension and postretirement health and life actuarial
assumptions, regulatory accounting, valuation of investments and provisions
for
environmental remediation. These policies are reviewed with the Audit Committee
of our Board of Directors on a regular basis and summarized in Part II, Item
7
of our 2006 Form 10-K.
OUTLOOK
Earnings
Guidance.
ALLETE continues to expect that full-year 2007 earnings
performance will be between $3.00 and $3.05 per share in 2007. This guidance
assumes that difficult Florida real estate market conditions will continue
in
the fourth quarter. Some real estate sales originally anticipated to close
in
2007 are now being deferred or have been cancelled. As a result, total year
net
income from Real Estate is expected to be between $16 million and $18 million
in
2007.
Energy.
Rate
Cases
. Minnesota Power has and will continue to significantly
increase its rate base. As a result of this rate base growth and other cost
increases, Minnesota Power anticipates filing a wholesale rate
case with the FERC by the end of 2007 or early 2008, and anticipates
filing a retail rate case with the MPUC in 2008 or 2009. SWL&P also
anticipates filing a retail rate case with the PSCW in 2008.
Large
Power Customers
. Electric power is a key component in the mining, paper
production and pipeline industries. Sales to our Large Power Customers within
these industries represent more than half of Minnesota Power’s regulated utility
electric sales.
On
April
25, 2007, the MPUC approved our electric service agreement with PolyMet Mining,
Inc. (PolyMet). In 2006, a contract for approximately 70 MW was successfully
negotiated with PolyMet, a new industrial customer planning to start a copper,
nickel and precious metals (non-ferrous) mining operation in late 2008. If
PolyMet’s environmental permits are received and start-up is achieved, the
contract with PolyMet will run through at least 2018.
On
June
1, 2007 Minnesota Power and Mesabi Nugget executed an electric service
agreement, which will be filed for approval with the MPUC. Mesabi Nugget
will
produce pig iron, made from pulverized coal and iron ore fines from concentrate,
in the form of nuggets with 96-98 percent iron content using a rotary hearth
furnace fired by natural gas. Mesabi Nugget has received all
necessary permits to begin operations in 2008. If the electric
service agreement is approved Mesabi Nugget would be a 15 MW customer with
potential growth to approximately 50 MW.
AREA
and Boswell 3 Emission Reduction Plan.
As of September 30, 2007, we have
spent $32.3 million of the expected $60 million on the AREA project. In
April 2007, Laskin Unit 1 was placed back in service and cost-recovery began
May
1, 2007. In June 2007, Taconite Harbor Unit 2 was placed back in service
and
cost-recovery began July 1, 2007. As of September 30, 2007, we have spent
$63.3
million of the expected $200 million on the Boswell Unit 3 emission reduction
plan. In late March 2007, the Boswell Unit 3 project received the necessary
construction permits. In April 2007, the MPCA issued its assessment of the
Boswell Unit 3 emission reduction plan under the Mercury Emissions Reduction
Act
of 2006. The MPCA found that Minnesota Power’s plan meets the statutory
requirements and found it cost effective. Groundbreaking for the Boswell
Unit 3
project occurred in May 2007. On October 4, 2007, the MPUC ruled in favor
of
Minnesota Power’s petition for current cost recovery for the Boswell Unit 3
emission reduction plan. The written order is expected by the end of October
2007.
ALLETE,
Inc. 2007 Third Quarter 10-Q
OUTLOOK
(Continued)
Energy
(Continued)
Integrated
Resource Plan.
In November 2007, we will file our Integrated Resource Plan
with the MPUC detailing our retail energy demand and our energy sourcing
options
to meet the projected demand over the next 15 years.
Minnesota
Fuel Clause.
In June 2003, the MPUC initiated an investigation into the
continuing usefulness of the fuel clause as a regulatory tool for electric
utilities. Minnesota Power’s initial comments on the proposed scope and
procedure of the investigation were filed in July 2003. In November 2003,
the
MPUC approved the initial scope and procedure of the investigation. The
investigation’s purpose was to focus on whether the fuel clause continues to be
an appropriate regulatory tool. Subsequent comments were filed during 2004.
The
fuel clause docket then became dormant while the MISO Day 2 docket, which
held
many fuel clause considerations, became very active. In March 2007, the MPUC
solicited comments on whether the original fuel clause investigation should
continue and, if so, what issues should be pursued. Minnesota Power filed
comments in April 2007, suggesting that if the investigation continued, it
should focus on remaining key elements of the fuel clause, beyond the purchased
power transactions examined in the MISO Day 2 proceeding, such as fuel purchases
and outages. Additionally, Minnesota Power’s comments suggested that more
specialized fuel clause issues be addressed in separate dockets on an as
needed
basis. The DOC filed a letter requesting that the parties to the docket update
the record in this proceeding by September 28, 2007. Minnesota Power complied
by
filing additional comments, updating Minnesota Power’s previous filings in the
fuel clause investigation docket to account for changes occurring since the
investigation began in July 2003. The fuel clause investigation docket is
awaiting further action by the MPUC.
Renewable
Energy.
In February 2007, the Minnesota Legislature enacted a law requiring
most electric utilities to generate 25 percent of their energy through renewable
energy sources by 2025. Minnesota Power worked with other stakeholders to
ensure
the legislation included provisions for allowing regulatory assessment of
the
ratepayer cost for and technical feasibility of individual utilities meeting
the
25 percent standard. Minnesota Power was developing and making renewable
supply
additions as part of its generation planning strategy prior to this legislation
and this activity continues.
In
December 2006, we began purchasing the output from a 50-MW wind facility,
Oliver
Wind I, located in North Dakota, under a 25-year power purchase agreement
with
an affiliate of FPL Energy, LLC.
In
May
2007, the MPUC approved a second 25-year wind power purchase agreement to
purchase an additional 48-MW of wind energy from Oliver Wind II, an expansion
of
Oliver Wind I located in North Dakota. The MPUC also allowed immediate recovery
of the costs for associated transmission upgrades. The project is expected
to be
operational by the end of 2007.
In
May
2007, the MPUC approved two 20-year Community-Based Energy Development Project
power purchase agreements. The 2.5-MW Wing River Wind project, with Wing
River
Wind, LLC, became operational on July 6, 2007. The 30-MW Bear Creek Wind
Partners project, with Bear Creek Wind Partners, LLC, is expected to be
operational by the end of 2008.
In
September 2007, we began construction of the $50 million, 25-MW Taconite
Ridge
Wind I Facility, located in northeastern Minnesota. On August 6, 2007,
Minnesota Power filed a petition for cost recovery on the Taconite Ridge
Wind I
Facility with the MPUC. On September 6, 2007, the site permit application
filed
for the Taconite Ridge Wind I Facility was approved by the MPUC. On October
9,
2007 the DOC recommended approval of Minnesota Power’s cost recovery
filing. The Taconite Ridge Wind I Facility is expected to become
operational in mid-2008.
Minnesota
Power continues to investigate additional renewable energy resources including
biomass, hydroelectric and wind generation that will help it meet the Minnesota
25 percent renewable energy standard. In particular, Minnesota Power is
conducting a feasibility study for construction of a 25-MW biomass generating
unit at its Laskin Energy Center, as well as looking at opportunities to
expand
biomass energy production at existing facilities. Additionally, Minnesota
Power
is pursuing a potential 10-MW expansion of its Fond du Lac hydroelectric
station. The Company will submit plans regarding the additional renewable
energy
options currently under study as a part of its Resource Plan filing with
the
State of Minnesota in November 2007. We will also make specific renewable
project filings for regulatory approval as needed.
ALLETE,
Inc. 2007 Third Quarter 10-Q
OUTLOOK
(Continued)
Investment
in ATC.
In February 2007, we completed our $60 million investment in
ATC. As of September 30, 2007, our equity investment was $65.0 million,
representing an 8.1 percent ownership interest. As opportunities arise, we
plan
to make additional investments in ATC through general capital calls based
upon
our pro-rata ownership interest in ATC. (See Note 3.)
Real
Estate.
In June 2005, we began selling property from our Town Center
development project. In August 2006, we began selling property from our Palm
Coast Park development project. Since land is being sold before completion
of
the project infrastructure, revenue and cost of real estate sold are recorded
using a percentage-of-completion method. As of September 30, 2007, we had
$5.3
million ($7.5 million revenue; $1.9 million cost of real estate sold;
$0.3 million selling expense) of deferred profit on sales of real estate,
before taxes and minority interest, on our consolidated balance sheet. The
majority of deferred profit relates to sales at Town Center.
|
Real
Estate
|
|
|
|
Pending
Contracts
(a,
b)
|
|
Contract
|
|
At
September 30, 2007
|
Quantity
(c)
|
Sales
Price
|
|
Dollars
in Millions
|
|
|
|
|
|
|
|
Town
Center
|
|
|
|
Commercial
Sq. Ft.
|
331,724
|
$10.1
|
|
Residential
Units
|
910
|
14.6
|
|
|
|
|
|
Palm
Coast Park
|
|
|
|
Commercial
Sq. Ft.
|
–
|
–
|
|
Residential
Units
|
1,981
|
39.1
|
|
|
|
|
|
Other
Land
|
|
|
|
Acres
|
183
|
9.4
|
|
|
|
$73.2
|
|
(a)
|
During
the first nine months of 2007, there were two contracts canceled
at Town
Center ($3.2 million) and three contracts canceled at Lehigh ($3.7
million) in the “Other Land” category
above.
|
|
(b)
|
Pending
contracts are contracts for which the due diligence period has
ended, and
the contract deposit is non-refundable subject to performance by
the
seller.
|
|
(c)
|
Acreage
amounts are approximate and shown on a gross basis, including wetlands
and
minority interest. Acreage amounts may vary due to platting or
surveying
activity. Wetland amounts vary by property and are often not formally
determined prior to sale. Commercial square feet and residential
units are
estimated and include minority interest. The actual property allocation
at
full build-out may be different than these
estimates.
|
ALLETE,
Inc. 2007 Third Quarter 10-Q
OUTLOOK
(Continued)
Real
Estate. (Continued)
At
September 30, 2007, total pending land sales under contract were $73.2 million
($113.8 million at December 31, 2006) and are anticipated to close at various
times through 2012. Pending land sales under contract for properties at Town
Center and Palm Coast Park totaled $24.7 million ($40.1 million at December
31,
2006) and $39.1 million ($62.8 million at December 31, 2006), respectively.
Prices on these contracts range from $20 to $42 per commercial square foot,
$8,000 to $30,000 per residential unit and $11,000 to $300,000 per acre for
all
other properties. Prices per acre are stated on a gross acreage basis and
are
dependent on the type and location of the properties sold. The majority of
the
other properties under contract are zoned commercial or mixed use. In addition
to minimum-base price contracts, certain contracts allow us to receive
participation revenue from land sales to third parties if various formula-based
criteria are achieved.
The
main
decrease in pending land sales under contract is due to two large sales that
closed during the second quarter of 2007 and five contract cancellations.
In
April 2007, Palm Coast Center, LLC and Target Corporation closed for $12.6
million at Town Center and in June 2007, LRCF Palm Coast, LLC (Lowe Enterprises)
closed on the first parcel of the Sawmill Creek project at Palm Coast Park
for
$13.1 million pursuant to revised contract terms. Under the amended contract,
the total purchase price under contract was reduced from $52.5 million to
$42.0
million. In addition to the base price, the amended contract allows us to
receive participation revenue from land sales to third parties if various
formula based criteria are achieved. Current contract terms with Lowe
Enterprises allow for extensions on the remaining three closings. The closings
are expected to occur through 2011. During the first nine months of 2007,
there
were two contracts canceled at Town Center ($3.2 million) and three contracts
canceled at Lehigh ($3.7 million). The three contract cancellations at Lehigh
are included in the “Other Land” category. These contracts were all signed in
the first half of 2007.
If
a
purchaser defaults under terms of a contract, our remedies generally include
retention of the purchaser’s deposit and the ability to remarket the property to
other prospective buyers. In many cases, the purchaser has also incurred
significant costs in planning, designing and marketing of the property under
contract before the contract closes.
Conditions
in the Florida real estate market may fluctuate over time and have been
difficult in 2007. The difficult market conditions for Florida real estate
have
not improved, and we saw further market deterioration in the third
quarter.
While
we
are unable to predict when the Florida real estate market will begin to improve,
we expect that our Real Estate business will continue to be not only profitable,
but a significant contributor to ALLETE’s on-going earnings stream. We believe
the Palm Coast area will continue to experience above average long-term
population growth, and our already entitled inventory of mixed-use land in
that
area will continue to be attractive to buyers in northeastern
Florida.
ALLETE,
Inc. 2007 Third Quarter 10-Q
OUTLOOK
(Continued)
Real
Estate. (Continued)
|
Summary
of Development Projects
|
|
For
the Nine Months Ended
|
|
Total
|
Residential
|
Commercial
|
|
September
30, 2007
|
Ownership
|
Acres
(a)
|
Units
(b)
|
Sq.
Ft.
(b, c)
|
|
Town
Center
|
80%
|
|
|
|
|
At
December 31, 2006
|
|
1,356
|
2,222
|
2,705,310
|
|
Property
Sold
|
|
(91)
|
(130)
|
(474,476)
|
|
Change
in Estimate
(a)
|
|
17
|
177
|
51,688
|
|
|
|
1,282
|
2,269
|
2,282,522
|
|
Palm
Coast Park
|
100%
|
|
|
|
|
At
December 31, 2006
|
|
4,337
|
3,760
|
3,156,800
|
|
Property
Sold
|
|
(863)
|
(406)
|
(40,000)
|
|
Change
in Estimate
(a)
|
|
112
|
–
|
–
|
|
|
|
3,586
|
3,354
|
3,116,800
|
|
Ormond
Crossings
|
100%
|
|
|
|
|
At
December 31, 2006
|
|
5,960
|
(d)
|
(d)
|
|
Change
in Estimate
(a)
|
|
8
|
|
|
|
|
|
5,968
|
|
|
|
(a)
|
Acreage
amounts are approximate and shown on a gross basis, including wetlands
and
minority interest. Acreage amounts may vary due to platting or
surveying
activity. Wetland amounts vary by property and are often not formally
determined prior to sale.
|
|
(b)
|
Estimated
and includes minority interest. The actual property breakdown at
full
build-out may be different than these
estimates.
|
|
(c)
|
Includes
industrial, office, institutional and retail square
footage.
|
|
(d)
|
A
development order approval from the City of Ormond Beach was received
in
December 2006, for up to 3,700 residential units and 5 million
commercial
square feet. A development order from Flagler County is currently
under
review, and if approved, Ormond Crossings will receive entitlements
for up
to 700 additional residential units
.
Actual build-out, however,
will consider market demand as well as infrastructure and mitigation
costs.
|
|
Summary
of Other Land Inventories
|
|
|
|
|
|
|
|
For
the Nine Months Ended
|
|
|
|
|
|
|
|
September
30, 2007
|
Ownership
|
Total
|
Mixed
Use
|
Residential
|
Commercial
|
Agricultural
|
|
Acres
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Palm
Coast Holdings
|
80%
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
2,136
|
1,404
|
346
|
247
|
139
|
|
|
Property
Sold
|
|
(78)
|
(59)
|
–
|
(19)
|
–
|
|
|
Change
in Estimate
(a)
|
|
(666)
|
(474)
|
(244)
|
101
|
(49)
|
|
|
|
|
1,392
|
871
|
102
|
329
|
90
|
|
Lehigh
|
80%
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
223
|
–
|
140
|
74
|
9
|
|
|
Change
in Estimate
(a)
|
|
–
|
–
|
–
|
–
|
–
|
|
|
|
|
223
|
–
|
140
|
74
|
9
|
|
Cape
Coral
|
100%
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
30
|
–
|
1
|
29
|
–
|
|
|
Property
Sold
|
|
(8)
|
–
|
–
|
(8)
|
–
|
|
|
|
|
22
|
–
|
1
|
21
|
–
|
|
Other
(b)
|
100%
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
934
|
–
|
–
|
–
|
934
|
|
|
Property
Sold
|
|
(364)
|
–
|
–
|
–
|
(364)
|
|
|
Change
in Estimate
(a)
|
|
(113)
|
–
|
–
|
–
|
(113)
|
|
|
|
|
457
|
–
|
–
|
–
|
457
|
|
(a)
|
Acreage
amounts are approximate and shown on a gross basis, including wetlands
and
minority interest. Acreage amounts may vary due to platting or
surveying
activity. Wetland amounts vary by property and are often not formally
determined prior to sale. The actual property allocation at full
build-out
may be different than these
estimates.
|
|
(b)
|
Includes
land located in Palm Coast, Florida not included in development
projects.
|
ALLETE,
Inc. 2007 Third Quarter 10-Q
OUTLOOK
(Continued)
Income
Taxes.
ALLETE’s aggregate federal and multi-state statutory tax rate is
approximately 40% for 2007. On an ongoing basis, ALLETE has tax credits and
other tax adjustments that reduce the statutory rate to the expected annual
effective tax rate. These tax credits and adjustments historically have included
items such as investment tax credits, AFUDC, domestic manufacturer’s deduction,
depletion allowances, as well as other items. The annual effective rate is
also
impacted by such items as changes in income from operations before minority
interest, state and federal tax law changes that become effective during
the
year, business combinations, tax planning initiatives and resolution of prior
years’ tax matters.
The
annual effective tax rate is currently estimated to be between 35% and 36%
for
2007. At June 30, 2007, the annual effective tax rate was estimated
to be 37%. The decrease in the projected annual effective tax rate is
due to an estimated increase in the benefit of the domestic manufacturer’s
deduction and tax planning initiatives.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flow Activities
We
believe our financial condition is strong, as evidenced by cash and cash
equivalents and short-term investments of $131.8 million, and a debt to total
capital ratio of 38 percent at September 30, 2007.
Operating
Activities.
Cash flow from operating activities was $98.4 million for
the nine months ended September 30, 2007 ($90.5 million for the nine months
ended September 30, 2006). Cash flow from operating activities was higher
in
2007, primarily due to increased earnings from continuing operations compared
to
2006 and no cash used for discontinued operations in 2007. Cash used for
discontinued operations was higher in 2006 due to the payment of $13.1 million
of accrued liabilities from 2005. Deferred income taxes was higher in 2006
due
to the $24.3 million deferred federal tax refund received related to the
Kendall County charge.
Investing
Activities.
Cash flow used in investing activities was $116.2 million
for the nine months ended September 30, 2007 ($101.6 million for the nine
months
ended September 30, 2006). Cash used in investing activities was higher in
2007
due to additions to property, plant and equipment and was offset by activity
within our short-term investment portfolio. Additions to property, plant
and
equipment were higher in 2007 than 2006 by $83.4 million primarily due to
major
environmental construction projects. Activity within our short-term investment
portfolio reflected increased net sales of short-term investments of $34.1
million in 2007, while 2006 included $4.7 million of net purchases.
Financing
Activities.
Cash flow from financing activities was $34.4 million for
the nine months ended September 30, 2007 (used for financing activities was
$27.1 million for the nine months ended September 30, 2006). The increase
in
cash flows from financing activities is due to $50 million of unsecured notes
issued in the private placement market in June 2007. (See Securities below
and
Note 4.)
Working
Capital.
Additional working capital, if and when needed, generally is
provided by the sale of commercial paper. We have 0.2 million original issue
shares of our common stock available for issuance through
Invest
Direct
, our direct stock purchase and dividend reinvestment plan. We have
bank lines of credit aggregating $170.0 million, the majority of which expire
in
January 2012. The amount and timing of future sales of our securities will
depend upon market conditions and our specific needs. We may sell securities
to
meet capital requirements, to provide for the retirement or early redemption
of
issues of long-term debt, to reduce short-term debt and for other corporate
purposes.
Securities
On
June
8, 2007, we issued $50 million of senior unsecured notes (Notes) in the private
placement market. The Notes bear an interest rate of 5.99 percent and will
mature on June 1, 2017. The Company has the option to prepay all or a portion
of
the Notes at its discretion, subject to a make-whole provision. The Company
intends to use the proceeds from the sale of the Notes to fund utility capital
projects and for general corporate purposes.
On
behalf
of SWL&P, the City of Superior, Wisconsin, issued $6.4 million in principal
amount of Collateralized Utility Revenue Refunding Bonds (Series A Bonds)
and
$6.1 million of Collateralized Utility Revenue Bonds (Series B Bonds) on
October
3, 2007. The Series A Bonds bear an interest rate of 5.375% and will mature
on
November 1, 2021. The proceeds, together with other funds, were used to redeem
$6.5 million of existing 6.125% bonds. The Series B Bonds bear an interest
rate
of 5.75% and will mature on November 1, 2037. The proceeds will be used to
fund
qualifying electric and gas projects.
ALLETE,
Inc. 2007 Third Quarter 10-Q
LIQUIDITY
AND CAPITAL RESOURCES (Continued)
Off-Balance
Sheet Arrangements
Off-balance
sheet arrangements are summarized in our 2006 Form 10-K, with additional
disclosure discussed in Note 11 of this Form 10-Q.
Capital
Requirements
For
the
nine months ended September 30, 2007, additions to property, plant and equipment
for continuing operations totaled $136.7 million ($53.3 million in
2006), which were spent in the Regulated Utility segment using a combination
of
internally generated funds and debt issuances.
Real
estate development expenditures are and will be funded with a revolving
development loan, tax-exempt bonds issued by community development districts
and
internally generated funds. Additional disclosure regarding the Town Center
and
Palm Coast Park district tax-exempt bonds is included in Note 11 of this
Form
10-Q.
ENVIRONMENTAL
MATTERS AND OTHER
As
previously discussed in our Critical Accounting Policies section, our businesses
are subject to regulation of environmental matters by various federal, state
and
local authorities. Due to restrictive environmental requirements through
legislation and/or rulemaking in the future, we anticipate that potential
expenditures for environmental matters will be material and will require
significant capital investments. We are unable to predict the outcome of
the
matters discussed in Note 11 of this Form 10-Q.
NEW
ACCOUNTING STANDARDS
New
accounting standards are discussed in Note 1.