Q2 2020 ALLETE Inc Earnings Call
Certain statements contained in this conference call that are not descriptions of historical facts are forward looking statements such as terms to find in the private security Litigation Reform Act of 1995, because such statements can include risk and uncertainties actual results may differ materially from those expressed or implied by such for.
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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 security in Exchange Commission.
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Listeners should not place undue reliance on forward looking statements, which reflect management's views only as the date here at the company undertakes no obligation to revise or update any forward looking statements or to make any other forward looking statements rather as a result of new information.
Future events or otherwise I would like to turn the conference over to one of your speakers today, Bethany I wouldn't president and Chief Executive Officer Ma'am. Please go ahead.
Thank you and good morning, everyone and thanks for joining US today with me are a leap senior Vice President and Chief Financial Officer, Bob Adam and Vice President Controller, and Chief Accounting Officer, Steve Morris.
Also with US this morning, as Frank Fredrickson, Minnesota powers, Vice president of customer experience.
Corresponding slides for this morning's call. It can be found on our website at ALLETE dotcom in the Investor section, we'll call out each slide number as we go through today's presentation.
This morning, ALLETE reported second quarter 2020 earnings of 39 cents per share on net income of $20.1 million I'd like to highlight that these results reflect a 16 cents per share or 8.3 million dollar after tax charge for the recent Minnesota power rate case resolution.
I believe the positive outcome at this rate case balance the interests of many stakeholders, including a much needed to be fine to customers, especially when considering the economic challenges caused by cobot 19.
I'm grateful for the Minnesota power teams close work with many diverse stakeholders to develop a proposal that was positive for our customers and our company and I appreciate the support of those stakeholders and the timely approval of the Minnesota Public Utilities Commission.
Before we get into additional details of the second quarter financial results and our positioning for the remainder of 2020 I want to update you on the state of elite as we continue to successfully navigate the current economic challenges.
Please see slide number two which we shared with you left corner summarizing the principles and priorities guiding our Kobin 19 strategy.
2020 has already been a year of challenges for so many with potentially more on the horizon as cobot 19 cases are increasing in many locations throughout our country I.
I first want to thank all of our incredibly talented resilient and dedicated employees who've worked safely and tirelessly in the field in our plant in our offices and remotely to provide essential energy services throughout this global pandemic.
Even more remarkable is that they've done all of this while caring for their own families and facing other personal challenges.
Although not without sacrifice and resolved we it'll lead have accomplished so much all to the credit of our employees, who demonstrate their adaptability commitment and indomitable spirit every single day.
Already in this challenging year. Our team has delivered the successful resolution of Minnesota Power's rate case Energization of the great Northern transmission line continued safe operation and progress on renewable energy construction projects without cobot 19 related interruption.
New renewable energy power sales agreement.
Secure and effective technology, enabling the transition of 50% of our employees into remote work spaces to help keep them and our other employees safe and our first virtual annual shareholders meeting.
These are just a few of our teams many accomplishments all while delivering safe and reliable services to our customers.
Our number one priority from the very beginning of Kobin 19 has been to protect the safety and health of our employees our families our customers and our communities throughout elites operation.
And to that end, we took actions early and often to help ensure safety across all of our businesses.
As in other uncertain economic times, we also took steps to ensure alletes financial help remain strong preserving our ability to execute our strategy over the long term.
Weve shored up liquidity and structured longer term financing to address potential capital market challenges, all while maintaining a leap long term value proposition for investors.
As part of our efforts to address the many impacts of the cobot 19 pandemic. We're pleased that just last week, the Minnesota Public Utilities Commission granted Minnesota power a filing extension for its integrated resource plan.
The additional four months will help ensure there is sufficient opportunity for us to safely engage with our customers our communities and other stakeholders. So that they can weigh in on the plan as its being developed.
This extension also gives our team much needed additional time for the thoughtful hard work that's required to propose a long term plan that is best for our customers our communities our employees and our company.
Now for an update on Minnesota, Power's industrial customer front.
At the time of our last conference call several of Minnesota, Power's largest industrial customers had announced the idling of production at their operation.
Cousin, Minnesota Power had previously received demand nominations approximating full production levels through August we did not experience a material financial impact from the idling of those customers operation.
Just a few days ago, we received power demand nominations from these customers for the last four months of this year and we're very pleased to report that the nominations reflect significant improvement in planned production levels extending to the end of 2020.
With the exception of Keewatin taconite plant and the verso paper, making facility the remain indefinitely idled the majority of large power customers, including Minnesota Power's three largest taconite customers have nominated full production levels for the remainder of this year.
These solid nominations. In addition to the recent resolution of the Minnesota power rate case provide important visibility into the remainder of the year, enabling us to reinstate our 2020 earnings guidance.
Bob will provide additional details on this earnings guidance and our 2020 outlook in a few minutes.
In the meantime, our thoughts are with all of our customers and communities that are continuing to face challenges, including the employees and families of Keetac inverse. So we're hopeful that fees businesses that are so important to our region will be able to restart operations in the future and we'll continue to work closely with them.
And stand ready to provide services when they resume production.
Finally from our company's roots in renewable hydro electric energy to the significant strides we've made to advance other renewables such as wind and solar to our best practice governance elite sustainability journey is an important an integral part of who we are and we're excited to be sharing.
At journey in new and more transparent way.
In May of this year elite released its E.I.E.S.G. report highlighting many sustainability metrics at a lead.
As we look to the future. We're also exploring the use of other reporting frameworks, such as Tcf D. and savvy to more clearly share the progress, we're making to advance sustainability in all of its dimensions.
Now I'll turn it over to Steven Bob for details on our financial results in 2020 guidance Steve.
Thanks, Bethany and good morning, everyone I would like to remind you that we filed our 10-Q. This morning and encourage you to refer to it for more details.
Please refer to slides three and four for details regarding earnings per share on a quarterly and year over year basis for items impacting results, including in Minnesota power rate case resolution and the 2019 sale of U.S. water services.
ALLETE reported second quarter 2020 earnings of 39 cents per share a net income of $20.1 million last year's results were 66 cents per share on net income of $34.2 million results in the second quarter of 2020 included a 16 cents per share charge for the region.
Minnesota power rate case resolution.
Our reserves that were recorded for Interoil has collected through April Thirtyth 2020.
Results in the second quarter of 2019 included a two cents per share benefit for an adjustment on the gain on the sale of U.S. water services.
Excluding the Minnesota power rate case resolution impact year to date financial results were in line with our expectations.
A few details from our business segments Alletes regulated operation segment, which includes Minnesota power superior water light and power and the company's investment the American transmission company included net income of $11.1 million compared to $30.3 million in the second quarter of 2019.
Second quarter earnings reflected lower net income at Minnesota power, primarily due to the rate case settlement charge of $8.3 million after tax.
Much of which was for revenue collected in the first quarter lower kilowatt hour sales due to covert 19 related impacts lower sales to municipal customers than other power suppliers do the expiration of related contracts.
And timing of fuel adjustment clause recoveries due to a method change this year.
These decreases were partially offset by lower operating and maintenance expense higher sales to residential customer and higher equity earnings in the American transmission company.
As noted in the second quarter, we did experience some negative impacts on kilowatt hour sales to commercial other industrial and municipal customers related to covert 19, resulting in lower kilowatt hour sales of approximately 15% as compared to 2019.
Residential sales were higher by approximately 7% overall, we estimate that the cobot 19 pandemic negatively impacted earnings by approximately six to eight cents per share for the quarter.
Which was mostly offset by expense mitigation efforts.
Regarding the fuel adjustment clause method change the Minnesota Public Utilities Commission adopted a program to implement certain procedural reforms to Minnesota utilities automatic fuel adjustment clause for fuel and purchase power effective January Onest 2020, the method of accounting change to a month, we budgeted forward look.
I think fuel adjustment with an actual true up to actual allowed costs.
The prior recovery method was based on a three month average in which revenues leg fuel costs. As a result, there were revenue recovery timing differences of nine cents per share that negatively impacted the second quarter of this year as compared to last year's second quarter.
Back to quarterly results for the rest of our business segments ALLETE clean energy recorded second quarter 2020, net income of $4 million compared to $1.9 million in 2019.
Net income in 2020 reflects additional production tax credits and earnings from the new Glenn all in South peak wind energy facilities, partially offset by higher depreciation expense.
Our corporate other businesses, which includes being only energy and ALLETE properties recorded net income of $5 million in 2020.
Compared to net income of $2 million in 2019.
Net income in 2020 included higher earnings for marketable equity securities and additional income tax benefits, which varies quarter to quarter based on an estimated annual effective tax rate.
Net income in 2019 included a $1.2 million after tax benefit for an adjustment on the gain on the sale of U.S. water services.
Year to date results may not be indicative of results that can be expected for the remainder of the year as we know that keewatin taconite and versatile operations will continue to be indefinitely idled and estimate some ongoing negative impacts from our commercial other industrial and Miss with customers for the rest of the year.
Ill now turn it over to Bob to discuss more details on our 2020 guidance then outlook for the rest of the year, Bob Thanks, Dave and good morning, everyone.
I share about the news gratitude to the whole a lead team for their collective efforts on solid execution of preemptive cobot related measures, enabling us to continue to provide a central services to our customers, while maintaining the financial health of our business.
There has been a tremendous amount of accomplishments and positioning for what has not only played out so far this year, but also to safeguard in the event. The pandemic continues to have lasting impacts on the economy, our customers in the health welfare of our employees into 2021.
Despite the near term challenges, we remain highly confident that first alletes core strategy remains intact and right on target in terms of its focus on sustainability and clean energy across our business, leveraging our talents capabilities and spirit, while providing a attractive.
Long term value proposition for our investors.
Second Ace will continue to be a significant growth engine in coming years as the size diversity of operations reputation and overall demand for renewable energy and energy generation continued to expand.
Third, Minnesota Power's regulatory compact is as consumer directive as it has been in years as evidenced by the recent rate case settlement and finally ALLETE is well positioned to weather Cobot 19 and continues to plan for a multitude of scenarios going forward.
As Bethany and Steve highlighted the combination of our early mitigation actions taken to deal with the cobot 19 pandemic as well as large power nominations for the first eight months contributed to our performance being on track through Q2.
I will provide an update on 2020 guidance and outlook in a moment, but first I would like to share some details of Alletes finance finances and liquidity positioning please refer to slide five.
As you can see our finances remain well positioned with a strong balance sheet and sufficient liquidity bolstered by a decisive financing actions taken already this year.
As of June 30, we had approximately $540 million and cash credit facilities and other outstanding lending available.
Regarding the tax equity financing for our renewable projects. We are in the process of finalizing $350 million and tax equity arrangements for our investments in noble's too and ALLETE clean energy is diamond spring when project.
This represents a critical last piece of financing for these projects and as another indication of the quality of our renewable projects being recognized in the marketplace.
A few comments on our 2020 growth investments.
A number of our large renewable energy projects are well advance towards completion with over $600 million and total spend expected this year.
The novels to project and Energyforward initiative is currently under construction and on plan for completion later this year.
As you know and ALLETE subsidiary is partnering with to NASCAR and we will have an investment in this 250 megawatt wind facility located in southwestern Minnesota.
This facility will provide carbon free wind generation to Minnesota power.
Very long term power sales agreement.
The construction of ALLETE clean Energy's Diamond Spring project located in Oklahoma is advancing right on plan as well.
Along with the already completed substation during the quarter. The installation of all 112 turbines has also been completed.
The 300 megawatt wind generation project with a total cost of approximately $450 million is expected to be operational and Q4 of this year.
ALLETE clean energy continues to advance on the newest wind project. The 300 megawatt cattle facility, which is also located in Oklahoma.
This facility is targeted to serve large corporate customers and provide a significant additional expansion into the SPP market.
When completed and 2021 this wind project will be similar in size and scale to diamond spring with revenue secured by long term power sales agreements.
Despite the challenges Cobot 19 has created for the broader company corporate customers are focusing on their sustainability commitments and we continue to pursue and receive ongoing interest in new projects.
With its unique investment and PTC qualified wind turbines ALLETE clean energy has capacity to add approximately 600 megawatts in new PTC qualified projects utilizing a mix of 100%, 80% and 60% qualified turbos.
I would now I'll refer you to slide six regarding our 2020 guidance update.
Because of the broad economic uncertainties related to cover the 19 and the potential financial impact, especially on our regulated business segment at the time of our first quarter conference call. We were unable to provide a sufficient sufficiently reliable update to our 2020 earnings guidance as I.
Foreshadowed in a leads first quarter conference call. We indicated that was August nominations cycle and the Minnesota power for rate case settlement.
We anticipate in being better able to provide reliable 2020 earnings guidance.
And I'm very pleased to be able to deliver on this expectation.
As Bethany mentioned just this week, we received full demand nominations to support taconite production levels for the last four months of the here with the exception of GTECH burst, so customers, which remain indefinitely idled.
Lets constructive indications of improvement production from Minnesota, Power's industrial customers and the rate case behind us as noted on slide six.
Alletes Twentytwenty annual adjusted earnings guidance on a non-GAAP basis is now expected to be in the range of $3 on 25 cents to $3.45 per share.
Which excludes the 16 cents per share charge related to the Minnesota power rate case resolution that of tax.
This guidance reflects a year to date results along with several assumptions into the end of the year.
These assumptions include primarily lower power demands related to key tech and verso that remain indefinitely idled and lower kilowatt hour sales to commercial other industrial municipal customers for the second half of the year due to expected continued negative impacts of coal but.
These decreases will be partially offset by the early actions, we've taken including power marketing and sales and expense mitigation efforts that are more temporary in nature.
From a capex standpoint, we'll continue to monitor the economic trends impacted by coal bed and are evaluating possible deferrals, but expect any actions on this front to be immaterial at this time.
Now for some thoughts on our long term outlook as highlighted on slide seven.
Despite the cobot 19, pandemic, which may present challenges into early 2002, one beyond we believe the long term fundamentals of our business remain intact.
Its business model revenues are regulated are highly recurring in nature. The industries. We serve are critical to the economy into the country.
We continue to believe that will lead primary growth positioning in the renewables and cleaner energy markets, we'll see substantial demand.
Good trends continue beyond economic weakness.
Importantly, we remain committed to our growth initiatives and confidence in Alletes long term, 5% to 7% growth objective over a five year period.
Merrily driven by cleaner energy expansion and transformation I'll now hand, it back to Bethany Bethany.
Thank you, Steve and Bob throughout our long history, a lead has been a values based company integrity is the foundation of everything we do and we're focused on serving our customers with excellent all of that has served us very well during these unprecedented times.
We're proud of the result, resourcefulness demonstrated in the leads ability to provide essential services, while delivering a fair level of financial results even against the challenging backdrop of global pandemic.
Like so many we acknowledge that cobot 19 will likely continue to create challenges into the foreseeable future that being said I believe the actions we've taken to date and our careful positioning and thoughtful planning for an uncertain future will ensure elites continued success.
We remain confident in our ability to execute our strategy over the longer term and to fulfill our commitment to a cleaner energy future. We also believe we have a great responsibility to make the regions, we serve even better places to live and to work for everyone.
Thank you for your interest in your investment in elite at this time I'll ask the operator to open the line for your question.
Thank you, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one and you touched on telephone. If your question has been ancillary wish removed. So from the Q. Please press the pound to.
To prevent any background noise, we ask that you. Please. Please your line on mute once your question has been stated.
Our first question comes from the line of Brian Russo.
Please go ahead.
Hi, good morning.
Hi, Brian.
Hey, just.
Can you give us more insight how many.
Tons of Taconite does she tax.
To any given year.
Last Frank to take that question. Thanks, Brian Thanks, Brian for the question and good morning.
So keetac is.
One of the smaller taconite facility is on the range. They produce approximately 5 million ton capacity for taconite production annually.
Okay. So when we see full production for the remainder for the last four months, except keetac and versus.
Assuming 40 million to full production does keetac facility represents about 12%.
Of that full production.
Is that if the way to look at it.
That is correct that as a good way to look at it.
Okay and then on.
Verso paper mill shutdown, how many megawatts is that on an annual basis.
Thanks for that that side.
Paper overall as a smaller segment for us than our mining segment.
Adverse soas.
Little bit smaller than our Keetac operation you can think about about plus or minus in the 50 megawatt range.
Okay and versus is also.
They also got nominee.
Demands correct.
That is correct and then we have.
Contractual arrangements, which with each of these customers that specify what what base denominated at levels, whether they're operating or an idle status as well.
Okay. Thanks, and then just back on Keetac I know they quote unquote idled indefinitely.
The last time, we saw some steel industry issues I think it was during the time of the China's steel dumping how how long did it takes him to actually.
Move back up.
Into production.
Thanks, Thanks for that good question, so you're right to go back in 2015 16 period, when we had some Chinese steel dumping and since then.
The Federal administration has taken some actions to appropriately protect and make for a fair and level playing field for America's steel industries. So we're seeing.
Import levels now back off of that higher 30% down at the 20% range, which is a more healthy level.
On that end Dan in terms of the these customers coming back and starting up when when demand is there they're ready to start up and we've seen that this summer with does.
All of these customers that as Dave pace.
Demand for their end product as automotive production has restarted.
We've seen a number of customers.
Fine tune their restart plans and even accelerate.
So that in a matter weeks, they can cost out back and bring it back up online.
Got it because I guess, what I'm trying to try to get a sense of is it first show seems as if its shutting down indefinitely keetac may or may not come online I'm, just trying to get a picture of what.
2021 might look like versus what the.
Demands were for August August to December that you weren't technically disclosed.
Thanks, Brian ill, just kind of laid landscape and then Steve might have some follow ups on on 2021, but.
As we're looking at the landscape. We are pleased with how the steel industry has resumed as I mentioned, there's consumer demand for vehicles.
Recreational vehicles and.
Thats restarted a lot to automotive production.
Number of blast furnaces come back online.
Five out of our six taconite facilities are now running at production.
And.
What will be watching eight on terms of steel industry is still low priced oil and gas segment right now so theres a lot of drilling rigs on the sidelines, which is suppressing steel demand.
And so we'll be watching a lot of those trends in terms of when the steel industry that is operating at about a 60% capacity utilization today, which is up from 50% at the bottom.
But but not up at that 70% to 80% level that that is.
As typical of a healthy industry in terms of.
Our forest products industry and looking at first so.
We are engaged with them and I know they're actively.
Pursuing.
Future utilization of that mill. The team there has done a wonderful job at converting partially already from shrinking advertising paper production market into a.
Growing packaging market and they have a pretty nice packaged together for that facility, which has seen several owners over its 30 or life.
And.
We will be pacing very closely with them and supportive them as they're looking for potential new owner.
Facility, Yes, Brian this probably items I the way I look at this and I think I would encourage you to maybe you think the same way is that obviously, there's a lot I think what Frank is describing as a market that.
We're pleased as coming back, but theres a lot that is going to play out I think here over the next couple of quarters, yes.
And the Keytech facility historically has been a swing facility.
And as Frank indicated theres been a lot of.
Fine tuning from these customers in terms of their ability to bring these facilities back quicker.
Than ever so so we're we're not I personally not ruling out that keetac could come back it, but but I think theres more to comments. So when we get together we talk about.
When we get but when we get together at the end of the year and we've got December nominations, obviously as we're getting into guidance, we'll have a lot more to share there.
As it relates to again, whereas KOVA going worth the consumption on the steel side and how might that affect keetac.
Okay, Great and then just on the utility.
Guidance of $2 and 65 since 2075 cents that compares to the.
The initial utility guidance prior to suspending it last quarter to 75 to 295, so thats a 15 cents reduction.
The original midpoint versus the current mid point.
Any any insight into the drivers there if I heard you correctly it looks like the kobin expenses are being offset by temporary.
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Cost management initiatives should we assume that that 15% Delta.
It is just related to sales both.
The decrease nominations from August to.
December but also obviously the decrease in commercial and other industrial sales, partially offset by higher residential sales.
Yes, Brian This is Steve Morris Good morning, I can chime in on that you're you're exactly right. So that 15 cents is lower sales.
Ms Keetac converse. So as you know we've had demand nominations through August.
And we do not expect those the rest of the year for that period of time.
As well as as you mentioned commercial other industrial and municipal.
Yes that all is probably 30 cents offset with our expense mitigation efforts as we've talked about in the past and power marketing sales.
Okay, great. Thanks.
Thats very helpful interest on just your general rate case strategy.
As it stands now I know you you're going to file.
In November for the Manitoba Hydro.
Contract approval, but it also seems data if you industrial sales profile stays the same drove you will also.
Have lost at least 50 megawatts.
Of demand.
Would you consider filing sooner or.
Are you trying to avoid back to back rate cases, and then would that lease if you don't filed should we assume.
Incremental Aro we lag.
In 2021 versus 2020.
Yes, Brian ill take Thats, the Morris Bob can chime in too later, but you know, it's we're still evaluating our 2021 budget and as Bob just mentioned Keetac, we don't have visibility into 21 on that so that's kind of a wildcard that we're watching as well as reversal.
We could file as early as March Onest as you know as the likely we're going to file November onest.
But we could file with Heatec and verso down on March Onest interim rates wouldn't go into effect on until May onest at the earliest and then we would have to do a back to back rate case as you just mentioned or a multiyear rate case, so more to play out on that right now it's too early to tell when we would file exam.
Finally, as we do our budget and we get more.
Clarity into Keetac inverse so on a 2021.
Yes, I would Brian this is Bob again, I would just add debt and I think Bethany said, this really well it but theyre introductory comments as you know we're balancing a variety of stakeholders here.
Measures of course, our investors.
Turning to appropriate rates of return, which we need to do.
But our customers as well and so to the extent that this covert pandemic continues to gain traction them.
Have significant impacts on these customers.
So that's going to affect the timing at our posture for this for sure just as it did with this settlement.
Okay, great. Thank you very much.
Thank you.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
I'm showing no further questions at this time and I would like to turn the conference back over to Miss Bethany Olin for any closing remarks.
Thank you, Steve Bob Frank and I. Thank you for being with US This morning and for your investment and interest in a lead take care and we wish you all the bat.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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