Q4 2020 ALLETE Inc Earnings Call
Good day, and welcome to be ALLETE fourth quarter, 'twenty 'twenty financial results call.
Today's call is being reported.
Statements contained in this conference call that are.
Not descriptions of historical facts are forward looking statements such as terms defined in the private Securities Litigation Reform Act of 1995.
Such statements can include risks and uncertainties actual results may differ materially from those expressed or implied by such forward looking statements.
Factors that could cause results to differ materially from those expressed or implied by such forward. Looking statements include but are not limited to those discussed in filings made by the company with the Securities and Exchange Commission.
Many of the factors that will determine the company's future results are beyond the ability of management to control or predict.
Listeners should not place undue reliance on forward looking statements, which reflect management's views only as the day to here.
The company undertakes no obligation to revise or update any forward looking statements or to make any other forward looking statements whether as a result of new information future events or otherwise I will now hand, the call over to MS. Bethany Owen President.
And Chief Executive Officer. Please go ahead.
Thank you good morning, everyone and thanks for joining US today with me are ALLETE Senior Vice President and Chief Financial Officer, Bob Adams, and Vice President Controller, and Chief Accounting Officer, Steve Morris.
Also with US. This morning are al <unk>, President of ALLETE clean energy and Frank Frederickson, Minnesota powers, Vice president of customer experience.
Responding slides for this mornings call can be found on our website at ALLETE Dot com in the investors section to follow along we will call out each slide number as we go through todays presentation.
This past year with a time of great challenges as well as incredible accomplishments at ALLETE. This morning, ALLETE reported full year 2020 earnings of $3 35 per share a net income of $174 $2 million.
ALLETE not only weathered the global pandemic through a tremendous amount of hard work by our team. We also delivered solid financial and operational results, which Steve Morris will describe later in the call and.
And we did so while keeping the safety and health of our coworkers our families our customers and our communities our highest priority.
I'm, so grateful to our employees across our family of businesses in many different states all of whom demonstrated their incredible resilience and steadfast commitment to our customers our communities and each other during this most challenging time we.
We certainly saw this past year that we truly are stronger together.
As I shared with you last quarter, we know that especially during trying times like these our commitment to transparency is even more important to all of our stakeholders last quarter, we reiterated our commitment to ALLETE long term five year objective of achieving consolidated average annual earnings per share growth.
It's a 5% to 7% well on that conference call. We were transparent regarding the challenges we were seeing with our October 2020 projections falling slightly below that range.
As Bob will discuss in more detail later in the call. We're very pleased to report that we are now projecting growth within our average annual 5% to 7% EPS objective range.
So as we move on from 2020, ALLETE is well positioned for the future we intend to build on our strong foundation of integrity. Our extensive track record of success and our long standing reputation as a company trusted by our many stakeholders.
Through our sustainability in action strategy, we will continue to deliver value to our customers our communities and our investors, while providing opportunities for our employees as together, we build a clean energy future.
A significant step forward in this commitment is Minnesota, Power's recently announced vision to deliver 100% carbon free energy to customers by 2050.
We're proud that Minnesota power is already the first Minnesota utility to provide 50% renewable energy, but as we said when we reach this exciting milestone in December we have more work to do.
We're taking concrete actions to address climate change, while working to ensure the reliable and affordable energy that our customers and our communities expect.
Please refer to slide two if I highlight just a few details from the integrated resource plan for ERP that Minnesota power filed on February 1st.
The I R. P was developed through a best in class process with strong engagement over the past year from a broad range of stakeholders from customers to consumer and environmental advocates to communities to regulators to employees and many others.
The IRB, we identified plans to increase Minnesota, Power's renewable energy supply to 70% by 2030 and to achieve a coal free energy supply and 80% less carbon by 2035.
These steps include adding an estimated 400 megawatts of additional wind and solar energy retiring Boswell Energy Center unit three by 2030, transforming Minnesota Power's Boswell unit four to be coal free by 2035 and investing in a modern flexible tree.
<unk> mission and distribution grid.
These are significant and meaningful changes to Minnesota Power's entire system and it's critically important to us that this transition truly be sustainable, meaning it goes above and beyond addressing climate change to care for our customers our communities and our employees throughout this transition.
This plan and our 2015 vision allow time for advances in technology and for our communities and our employees to transition to a secure and carbon free energy future.
Also making significant progress in ALLETE sustainability in action strategy is our second largest company in the ALLETE family.
With current operations in seven states ALLETE clean energy is well positioned to drive additional clean energy sector growth as al Rudolph will discuss in a moment.
As highlighted in our third quarter conference call ALLETE clean Energy's growth has exceeded our original expectations from when we founded the company just 10 years ago.
Building on ALLETE clean Energy's reputation and its strong track record of success. We believe it is the optimal time to expand its focus beyond wind two additional opportunities within the clean energy space.
Obviously for competitive reasons, we can't share too many details right now, but we're confident that our strategy to expand and diversify the business through new geographic regions customers and clean energy technologies will extend and grow our earnings as part of ALLETE value proposition for investors.
The combination of our regulated businesses significant initiatives and those already completed and underway at ALLETE clean energy will further advance ALLETE as a leader in sustainability.
We've been an early mover in this transition and we are well positioned for the clean energy future.
Now I'll turn it over to Steve and Bob for further details on our 2020 financial result, 'twenty 'twenty, one guidance and additional details on our growth outlook Steve.
Thanks, Bethany and good morning, everyone.
To remind you that we filed our 10-K. This morning, along with an 8-K that provides details on our 2021 earnings guidance and I encourage you to refer to them for more details.
Please refer to slides three through six per significant year over year variances and other items for comparison considerations.
Today ALLETE reported in 2020 earnings of $3 35 per share on net income of $174 $2 million.
Earnings for 2019 for $3 59 per share on net income of $185 $6 million.
<unk> for the year ended 2020 were negatively impacted by lower sales due to the ongoing COVID-19 pandemic and related disruptions.
Net income in 2020 also included reserves for interim rates of $8 $3 million from <unk> 16 per share.
The resolution of Minnesota Power 2020 general rate case.
Net income in 2019 included 20 per cent per share for the gain on the sale of U S water services.
A few details from our business segments.
ALLETE is regulated operations segment, which includes Minnesota power superior water light and power and the company's investment in the American transmission company recorded net income of $136 3 million compared to $154 $4 million in 2019.
Earnings reflected lower net income at Minnesota power, primarily due to lower megawatt hour sales to retail customers due to the COVID-19 pandemic.
Lower revenue, resulting from the expiration of certain municipal and power sales contracts and higher depreciation expense.
And lower fuel adjustment clause recoveries with the adoption of a new fuel adjustment clause methodology in 2020.
Overall, we estimate that the COVID-19 pandemic negatively affected revenues by approximately 25 per share for the year ended 2020 from our expectations.
Decreases were partially offset by eight months of higher retail rates, resulting from Minnesota Power's 2020 rate case settlement.
ALLETE clean energy recorded 2020, net income of $29 9 million compared to $12 4 million in 2019.
Net income in 2020 reflected additional production tax credits increased earnings from Glen Ellen South peak and Diamond Spring wind energy facilities.
And higher megawatt hour sales due to higher wind resources as compared to 2019.
Our corporate and other businesses, which includes <unk> energy our investment in almost two and ALLETE properties recorded net income of $8 million in 2020 compared to net income of $19 9 million in.
In 2019.
Net income in 2020 included earnings from the company's investment in the nobles two wind energy facility, which commenced operations in December of 2020.
Net income in 2019 included the gain on the sale of U S water services of $13 $2 million.
I'll now turn to our 2021 earnings guidance I would ask that you refer to slide seven titled 2021 guidance highlights for further reference.
And our full 2021 earnings Skyline guidance in our 8-K filed with the SEC. This morning.
Today, we initiated 2021 earnings guidance of $3 to $3 30 per share on net income of $160 million to $175 million.
This guidance range.
It is comprised of our regulated operations within a range of $2 30 to $2 50 per share.
And ALLETE clean energy and corporate and other businesses within a range of $72 80 per share.
A few comments on our regulated operations outlook for 2021.
Our 2021 guidance reflects a full year of the Minnesota power retail rate increase from last year's rate case settlement.
Compared to eight months in 2020.
Minnesota Power's 2021, industrial sales are expected to range between $6 million.
$6 5 million megawatt hours, which reflects anticipated production from our taconite customers of approximately 35 million tonnes.
Our estimated industrial sales to reflect a partial recovery of the domestic steel industry, which has rebounded from the 2020 impacts of various industry shutdowns and idling due to the ongoing COVID-19, pandemic. However, steel production rates remain nearly 10% below pre pandemic levels.
We are pleased to begin the year with full production nominations through April for all of our large power industrial customers with the exception of versus Duluth paper mill, which we expect to remain idled all year.
Our 2021 guidance reflects continued impacts from the ongoing COVID-19 pandemic affecting commercial.
Other industrial and municipal sales.
Minnesota Power will also realized lower revenue due to a power sales agreement that expired in April of 2020.
We expect slightly higher operating and maintenance expense of approximately 3% as compared to 2020 and higher depreciation and property tax expenses due to additional plant in service.
We expect slightly lower net income at superior water light and power due to the additional operating and maintenance expense.
As well as slightly lower earnings from our investment in the American transmission company.
As 2020 earnings included a favorable MISO Roe outcome and related true ups.
Our guidance per our regulated operations as soon as we will achieve reasonable outcomes in regulatory proceedings.
A few highlights from our 2021 guidance regarding ALLETE clean energy.
ALLETE clean energy expects approximately $3 2 million megawatt hours in total wind generation in 2021 with the expectation of normal wind resources compared to $2 1 million megawatt hours in 2020 are.
Our guidance includes South peak and Diamond spring in service per full year. These facilities are in service in April and December of 2020, respectively.
We anticipate the Caddo wind project to be completed by the end of 2021 with no impact to earnings this year.
Our 2021 guidance does not include the impact if any of possible acquisitions of renewable energy facilities additional construction and sell projects.
Or additional re qualification projects.
At a high level, we view 2021 is a transition year with lingering economic impacts from the ongoing COVID-19 pandemic.
Having the most notable effect on our regulated operations.
Looking forward to 2022.
<unk> also provided is preliminary 2022 estimated earnings guidance range of $3 70 to $4 per share, which ALLETE anticipate formally formulae initiating in early 2022.
We expect Minnesota power will file a general rate case in November of 2021.
Just on a 2022 test year with interim rates expected in the beginning of 2022.
I'll now turn it over to Bob to discuss further details on our year end in 2020, and our longer term growth outlook Bob.
Thanks, Steve and good morning, everyone.
2020 was without question, a very challenging year rooted in the impacts of the global pandemic.
Our successful track record and ability and managing severe economic downturns was directly evidenced again by the strong results that Steve just shared with you and I'm very proud of our team.
Although we are all not out of the woods, yet and we'll remain diligent in 2021, we are very optimistic about the future and believe ALLETE is very well positioned to execute and deliver a solid value proposition for our customers and investors alike over the long run.
I am, particularly proud of our employees, who worked hard to ensure our essential services were provided in a reliable and safe manner across our eight state footprint.
We achieved in spades.
At the same time, we did not lose focus on our momentum in a day.
<unk>, our clean energy growth strategy and associate investments.
Indeed, 2020, representing one of the largest capital programs in our history with more than $650 million being invested including the completion of approximately 500 megawatts of new wind farms and the great Northern transmission line.
Overall, our execution and discipline was outstanding, especially when considering the challenges created by the pound zone.
We entered 2021 with a strong balance sheet conservative capital structure at approximately 39% total debt and now generates in excess of $300 million in total operating cash flow.
Physicians as well as we continue to advance our sustainable clean energy strategy.
A notable achievement on the financing side with our ability to secure approximately $400 million from tax equity financing under very competitive terms.
These connect key financings were related to the South peak nobles two in Diamond spring wind projects, which came online at the end of the year.
Now I would like to turn to 2021 and beyond.
ALLETE is highly focused on providing reliable and competitive services to our customers and we work hard every day to ensure our operations are efficient and safe.
At the same time, we are also keenly aware of the need to provide an attractive value proposition for our investors to ensure the company has continued access to low cost capital to fund its operations.
Towards that end several years ago, we established an average annual long term EPS growth objective.
5% to 7%.
Which when combined with a competitive dividend would provide an attractive total return proposition to investors.
I want to be clear upfront that we remain committed to that objective.
Consistent with last year. This growth target is comprised of 4% to 5% from the regulated utility businesses.
And at least 15% for the nonregulated businesses.
And third quarter of last year, However, I caution that meeting our growth objectives may be challenged in the short term given the significant impact COVID-19 was having on our regulated utility business.
And competitive pressures, we were beginning to see.
The wind segment of our renewable business.
And full transparency I indicated that the five year average annual EPS growth outlook for our consolidate David operations using 2019 as a base year was currently below the 5% to 7% range at approximately 4%.
With the regulated utility growth closer to approximately 3% versus the 4% to 5% targeted rate.
On a positive note I also indicated at that time that our nonregulated business segment, which is comprised primarily of ALLETE clean energy was expected to continue to significantly exceed our 15% growth objective.
And that even despite some potential challenges in the wind segment longer term.
We're confident that this highly successful platform would be able to leverage its reputation scale and strong capabilities into new complementary and higher returning segments of the clean energy market.
And we committed to you.
Abiding investors an update in early 2021 upon conclusion of our strategy development work.
With this anchoring in mind I will now provide an update on our financial outlook for each of the major business segments.
Before I dive into the details however, I am pleased to report that a consolidated company five year outlook using 2019 as a base year is projecting growth, which is now back but in the average annual 5% to 7% targeted branch.
Though our regulated operations are still projected to grow approximately 3% on average our ALLETE clean and corporate and other businesses are now projecting average annual growth in the 30% to 40% range well above the 15% target originally established.
The actual growth of our regulated operations will be impacted by three main drivers.
The first of these are the Minnesota Power's energy forward initiatives detailed by Bethany earlier.
Obviously, there are sensitive and confidential details to these plants yet to finalize but we anticipate sharing what we can regarding size scope and timing with these projects and keeping new page on our progress as the ERP moves forward.
Make no mistake, however that the transformation of our generation fleet and to cleaner forms of energy is truly historic and size and scope for our company and will require significant investment not only on the generation side, but in supporting transmission and distribution over the next decade or so.
Secondly, we will seek out other regulated opportunities, particularly in the transmission area.
The MISO region continues to be challenged with constraints on the grid as renewable generation continues to expand.
Our planned expansion of our 550 megawatt DC transmission line is a prime example of that type of investment.
Obviously, the ultimate timing of all such investments described.
Have a material impact on our growth in coming years, and we will continue to navigate this clean energy transition as we have in the past with customer rates and overall competitiveness and Mike.
A final major driver of our regulated utility performance is dependent on our ability to achieve acceptable rates of return.
Despite our best efforts to manage our costs and improve efficiencies COVID-19 has had a material impact on our business and our ability to earn our authorized nine 2% to 5% rate of return at Minnesota power.
With Covid impact and the health of our customers in mind, we decided to act quickly and settled in Minnesota, Power's 2020 rate case.
Provided an important relief from the form of an interim rate refund of approximately $12 million from 2020.
Given our expectation that COVID-19 impacts will continue to be material to our customers. In 2021. We have also decided to delay a much needed rate filing from March of 2021 to November of 2021.
We continue to believe those actions were Americas and will be key to helping our customers to regain a solid footing. It has had a very material impact on our 2021 earnings outlook with returns well below authorized levels.
As a result, we will be working closely with our state regulators on a fair and reasonable outcome in our next rate filing which will enable the company to achieve earnings outcomes more in line with authorized return levels.
On our nonregulated businesses, which is predominantly made up of ALLETE clean energy, we have made significant progress over the past few quarters assessing various strategic options for expanding the business and diversifying and clean energy.
Product offerings.
Indeed, we are very excited about the new chapter ahead, as we expand into utility scale solar storage optimize our current wind portfolio and pursue other potential service offerings.
This strategy work, which will be further described by Alberta kind of few moments was supported by outside advisors. It was ultimately approved by the ALLETE Board.
In early February.
The strategy is highly actionable complimentary to our existing offerings and leverages the unique capabilities of the business.
Moreover, we are confident it will result in even higher annual rates of growth beyond the 30% projection inherent in our wind only strategy.
Hence we are expanding our average annual EPS growth outlook towards highest 40% growth.
Over the next five years.
The nature of investments contemplated by the new strategy will provide for attractive rates of return.
By virtue of that recurring or contracted nature of the revenues plus strong cash flows will support our strong credit ratings.
Our execution of the new strategy is in full swing already as evidenced by yesterday's announcement of an agreement.
With a subsidiary of XL energy to sell a 120 megawatt wind energy facility for approximately $210 million.
This transaction will involve us repowering 100 megawatt shantaram being Viking wind projects as well as developing an additional 20 megawatts.
The project is expected to be completed in late 2022 subject to regulatory approval by the PUC and receipt of permits.
Cash received from the transaction will be reallocated to opportunities presented by the new strategy, thereby reducing the potential for future equity needs.
Another Classic example of ALLETE disciplined approach to capital allocation and action.
In closing we were pleased in our ability to increase our annual dividend.
To $2 52 per share from $2 47 per share even despite the challenges we see in 2021.
All based on strong confidence in our 2022 and beyond outlook.
We are very bullish about ALLETE strategic positioning and overall growth prospects and are particularly proud of all of this growth will continue to advance our sustainability objectives across our company.
I'll now hand, it off to Alan for.
For his update outlook ALLETE clean energy al.
Thanks, Scott Bob Good morning, everyone I would refer you to slide eight which illustrates how we at ALLETE clean energy are driving growth.
We're leveraging our strong platform and capabilities and a growing clean energy market to meet customer demands for more sustainable energy products and services IMAX.
Im excited to share our view of the market and specifically why we at ALLETE, We've the company, so well positioned for future future growth and to diversify its position as a leader in the clean energy landscape.
We are now entering the next stage of America's energy transformation as our country continues to be fertile ground for additional clean energy innovation opportunity and investment.
ALLETE clean energy sizes of strength, because we are nimble and able to adapt to the markets and tailor our solutions to give customers what they want as importantly, a small percentage of the market share delivers meaningful growth for ALLETE.
The ability to establish and maintain relationships is a hallmark of hall ALLETE clean energy succeeds in the market as seen by our repeat transactions a consistent positive feedback from our community host.
And our partners.
Through these partnerships and our combined capabilities of project development construction long term operation and asset optimization, our differentiators enable us to secure high quality investments.
As introduced in the lease third quarter 2020 conference call, we've been crafting our strategy to deliver more comprehensive energy solutions for our customers.
I refer you to slide nine which outlines the core elements of our growth vision and strategy.
ALLETE clean Energy's, new strategy will expand our capabilities, our technologies and our market investments likely to include solar.
Storage solutions and related energy infrastructure investments and services, we believe that our customers and industry relationships diverse portfolio of assets located in some of the best wind resources in America, and a creative and adaptable team will provide a strong foundation for growth you'll see more from us in the coming quarters as these plans on bolt.
ALLETE clean energy will continue to optimize its existing wind portfolio and seek development firm are remaining safe harbor qualified equipment and explore other renewable energy opportunities to expand our service offerings to provide more solutions that customers demand and frankly deserve.
The northern wind Repowering expansion project with <unk> announced yesterday is a prime example of our strategy in action delivering sustainability on many levels going brown the environment to include supporting communities and the people where we do business. This project meets all of our sustainability goals. While also supporting our leads future investments in new clean energy projects.
<unk>.
Businesses and communities with ambitious climate action commitments are raising demand for renewable energy solutions and Lee clean energy strategy is designed to meet those growing needs. While also continuing to service, our traditional utility and cooperative and even federal power customers.
The 300 megawatt Diamond Spring project became operational in the fourth quarter of last year and is already serving three new fortune 500 customers, Walmart Starbucks and Smithfield foods and.
And represents the largest single renewables projects investment in leaf history successfully completed during the global pandemic.
Diamond spring is projected to generate more than 1 million megawatt hours of energy annually provide great diversity to our northern tier projects.
Currently operating expense coast to coast.
We found Oklahoma would it be a friendly business environment and welcoming two new investments. It represents a key part of our strategy to diversify ALLETE into the southwest power pool market and expand operations into the wind rich southern Great Plains region.
Similarly, as Steve mentioned, we are pleased with our ongoing progress of the 300 megawatt Caddo wind project located in Caddo County, Oklahoma.
Last week, we announced that Hormel and Oshkosh as our newest customers at Caddo. This project is on track to be online by the end of 2021.
We are excited and see renewable energy growth opportunities across multiple regions of the country and can be selective and strategic and when and where we invest today ALLETE clean Energy's portfolio is operates in five North American electric markets, and we're looking to either build or add new PTC qualified projects of Repower projects Andrew.
Require existing operating assets, while expanding products and services and solar storage and related clean energy services.
We are confident ALLETE clean energy will become a comprehensive national and clean energy solutions provider as our country is clearly an expedited path to advance a cleaner and more efficient energy farms. I. Appreciate you being here with you today and look forward to sharing more details on our strategy and on our success in the future and now I'll hand, it back to Bethany ethics.
Thank you for the update Steve Bob and Al We're pleased with all that our team has accomplished in 2020 and look forward to another year of strong execution of our sustainability in action strategy as Alan Bob stated, we're especially excited to share more with you as we execute ALLETE clean energy's growth strategy.
Beyond wind where.
We're confident that ALLETE clean energy will play an increasingly important role in ALLETE success well into the future.
Sustainability and all of its dimension has long been a foundation of ALLETE strategy, we recognize that if not addressed climate change poses physical and transitional risks we've.
And we will continue to take concrete actions not only to mitigate these risks but to build a clean energy future through just and meaningful change.
As society energy needs and expectations evolve ALLETE family of businesses is well positioned for the future.
Consistent with our commitment to transparency in the coming months, we plan to release, our corporate sustainability report that is aligned with the sustainability accounting standards board or SaaS, B and task force on climate related financial disclosures or Tc FTE reporting requirement.
This report will also contain additional information regarding our commitment to diversity equity and inclusion in our workforce, our supply chain and our communities Inc.
Will mark the first of many reports over the years as we work to effectuate what is personally important to us at ALLETE and to meet and exceed expectations for sustainability disclosures and increase transparency.
As I've shared with you in previous quarters, we are committed to providing value to our customers and our investors and as part of that commitment. We have a responsibility to do what we can to make the regions, where we operate even better places to live and to work for everyone for all of us at ALLETE that is sustained.
Inability inaction.
Thank you for your interest and your investment in our lead at this time I will ask the operator to open the line for your questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your children.
Alan Keypad.
Again that is star one we'll pause for a moment to compile the Q&A roster.
Your first.
Comes from the line of Richard Sunderland with Jpmorgan.
Okay.
Hi, good morning, Thanks for the updates today volume.
To start on the a side.
Speaking about the growth rate.
Seems like it's a 2019 basis unchanged from the regulated outlook is unchanged. So it's primarily a driving the move back into the long term range is that a fair characterization.
Yes, Hi, good morning, Richard This is Bob Adams, Yes that is a fair characterization.
Great and so you're thinking about <unk> repositioning and.
Kind of an impact on growth I'm curious.
What discrete opportunities.
You'd have in the plan now.
Versus prior or if this is more about the larger opportunity set that you reviewed for ace today.
Yes, so Richard I would say that.
It's a combination actually evolve.
A function of the strategic work the landscape work that we looked at in terms of where we're currently located in the country.
Relationships, we have with customers there their interest and more products and services, which which al described.
And.
We haven't the 18 has not been doing that and sort of standard Joe Mara <unk> been working with other partners et cetera in terms of actually making proposals on projects that would involve indeed some of the combinations for example, a brand in storage and solar and storage. So so there is activity that's already.
Well along that enabled us to have some from insight if you will in terms of transactions.
We believe maybe on the horizon.
Okay, Great. That's very helpful color and then just two quick follow ups here.
The 30% to 40% <unk> growth, where does that puts you on 2024 business mix versus the current agency thresholds.
So.
In terms of 2024 by the by the time, we get to 2024, we're going to be in that 25% to 30% business mix range, assuming that we do.
We do not execute upon anything in addition on our regulated strategy, which is still a big part of our growth strategy. So we're certainly.
As we've outlined we're pursuing.
Opportunities.
Outside of our service Jerry on the regulated front that will provide growth and synergies as we go so we fully expect.
And that we will be able to manage the business mix credit headroom challenges as we go forward.
Given the growth that incur.
<unk> growth that we see with ALLETE clean energy.
Okay.
Got it and one final one from me.
The 2022 outlook too.
Incorporate the ex.
Zelle project announced this week.
Yes, Hi, Ross Morris no that is not in here, yet we're going to wait for a regulatory approval that has to come before we worked that into our forecast.
Great. Thanks for taking my questions.
Thank you.
Your next question comes from the line of Peter Gordon with Mizuho.
Thanks for taking my question can you hear me.
Yes.
Sure.
Okay.
Regard to the wind divestment announced yesterday just.
Would you be able to give us just a little more clarity on what drove specifically that asset sale and then.
Also should we be thinking of that as wind portfolio from.
That type of asset divestment is funding the future.
Ace growth.
<unk>.
Hi, Good morning. Thank you for the question. This is Rick yes, so I think at the highest level our strategy at <unk> has been and continues to be a truly customer focused and so the first thing is that that customer excel energy is our biggest customer and they really wanted to continue to add to rate base to their to their system. So they've been keenly interested in that project.
For quite some time it was a project that was built many many years ago 15, or 16 years ago, and it's a very good wind area running their transmission system. So that was that was part of it.
We have relationships to enable us to expand it in the safe Harbor turbines to allow us to get maximum value out of that site and when we looked at.
Continuing to contract that project, the alternative contracting either with excel or other customers versus expanding at repowering at selling into so the value proposition was stronger.
Go ahead and make that transaction sell it to excel as we know 1000 megawatts.
Buying and selling of assets is a common feature in the industry and we're going to see us continuing to evaluate our portfolio very strategically and we can leverage those investment proceeds back into the business and so we're very excited about working with excel in this way, it's a very good opportunity during this COVID-19.
Docket that the commission advance to really help spur economic development in the region and also provides more clean energy on the grid. So that's kind of kind of the thought there we've taken each project. That's the beauty of our platform being countrywide and being in five different energy markets, we get a nice view of a variety of different drivers considerations and so.
Each project has its own character in its own attributes that can be leveraged and so you've seen us repower and refurbished projects you've seen us now expand and are going to sell a project you've seen us buy and sell projects to MDU in the past you're going to see more of that that's part of our multi dimensional strategy to leverage our capabilities to bring value to the company. So.
That's kind of how we think about the portfolio and I think theres a lot of embedded optionality. That's my mind, often not value the way it could be and we're going to exploit those value propositions for our customers and per our investors.
Okay. Thank you and then maybe one follow up just in terms of some of the regulated capital opportunities. You had mentioned can you just kind of speak to how that meshes with customer bill impact.
Oh, Thanks for the question this is Bethany.
Certainly that we absolutely.
<unk> are focused on competitiveness of Minnesota Power's rates in particular, so again as you look at and as I mentioned in connection with the integrated resource plan that was filed on February 1st kind of thoughtfully layering in both.
The investments that makes sense, both for our customers as we move forward in this transition, but also building in time to ensure that we can take advantage of them.
Technology advancement in order to ensure that we're providing reliable and competitive service. So certainly.
Great impact.
For most of our mind for our customers that compete globally as well as our residential customers that are most vulnerable to comp sales.
Certainly, we're navigating that and we believe the resource plan that we filed.
<unk> that opportunity to take advantage of technology to minimize rate impacts as we move forward in the transition.
Thank you.
And again, ladies and gentlemen, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star. One. Your next question comes from the line of Brian Russo with Sidoti.
Hi, good morning.
Good morning, Brian.
Hey, just.
It looks like Ace and <unk>.
Bob.
Sure.
In 2020.
It's like you're forecasting a range of 70 to 80 in 2021, and that's despite having a full year of the 300 megawatt diamond.
Spring project.
Im curious is that a kind of a room.
Pricing and margin on that project or are there offsets as you mentioned.
In the presentation like investments development expenses et cetera.
Hi, Brian Steve Morris, So I can take that question its really two factors.
That new project of course is subject to our favorite <unk> accounting in the early years. It ramps up correct. So the first year, we said probably 60% 70% of normal.
Net income we using the benchmark is probably closer to 50%. So if you were to do the math $15 million and 50% you can get that roughly what that number is and it ramps up over time as we've talked about in our IR presentation, and we do have some additional expenses as well and ALLETE clean energy for business development.
Okay that makes sense and then.
From the unregulated.
I think you mentioned.
25.
Packed from Covid interest revenues, so we back into the dollar amount of those that.
That will be loss revenues you will see in addition to other cost et cetera in this upcoming rate case.
Well I wouldn't say that that is.
It's really the outages that we've had during the year plus <unk>.
Commercial other industrials that we would expect much.
Much of that to rebound not necessarily in 'twenty, one by 'twenty two.
Rebound and that's from our expectations by the way so not normal.
Normal run rate, obviously, we wouldn't have that.
So look at that just from normal expectations.
Get a COVID-19 aside we wouldn't have that so I don't expect to have that all of that into our next rate case versus so aside.
We expect them to remain idled.
Okay understood and the 200 million that youre raising.
Project sales.
Net.
Eliminating the equity needs that I seek your prior forecast I think it was roughly $20 million a year.
Yes, Brian Good morning, this is Bob.
If you are familiar we have our drip program of about $20 million per year, so that will remain.
But the cash proceeds that we will be getting from that transaction.
Well.
Relieve some of the equity need that we believe we will have corporately.
Over the five year period of time and that again was back to Albert ex comment was very strategic and again in terms of our thought process around allocating cash.
Reallocating capital into higher returning areas as we do so well.
Okay, and then lastly, just from the IR team.
Can you talk a little bit moving about the near term action plan, which calls for about 22 megawatts of solar from then about.
200 megawatt wind bye bye.
By 2025, what are the next steps that we should look for in terms of commission.
Horsemen of the IOP or.
Approval of it.
What can we look to see because that certainly would be added investment at Minnesota power.
In the near term.
Thanks, Brian This is Bethany.
Certainly we are.
We filed the AARP on February 1st.
We're hoping for approval of the IRB by the end of this year, we've had good interactions with the Minnesota Public Utilities Commission and net at the time that we filed to that IRB right before.
We met with the commissioners and shared with them the kind of the plans for the AARP certainly born of a lengthy process developing it with lots of input from lots of stakeholders relatively positively received.
Full bar approval at the end of this year and then obviously individual projects would need to go forward on their own approval that the approval of the IRB and the resource plan itself is a really strong foundation for moving forward with adding the resources that we believe we need in addition to transmission and distribution.
Abuse and investments, which are part of the integrated distribution plan that we have in place and that will also be filing again in November.
Okay, and then one more follow up considering the unique mix of your sales and margins more than half industrial sales and your goal of being.
100% renewal book.
But by 2050, I think it is and the corresponding extremely high load factors of such electricity.
Like how can I.
I'm just curious bigger picture do you need.
<unk>.
You need just cost to come down on existing technology or do you need.
The emerging technologies.
To come about to kind of.
Manage the reliability.
And affordability for such a large.
Electricity demanding industrial customers.
Thanks, Brian just a correction, where our vision is for 100% carbon free energy by 2050, so not we're not paying 100% renewable by 2050. There is a difference we do believe that Boswell unit four that site in the infrastructure at that site are important and so we're.
Looking at in terms of reliability for these large industrial customers that really expect 24 seven reliability without question. So that definitely forefront of our mind, along with safety, obviously and competitiveness of our rates as we transitioned so it's really important to think about Boswell unit four.
And that.
When we retire Boswell unit three in the 2035 time period, we're looking at options to potentially refueling in different ways and certainly technology comes into play very well and we believe this plan provides that time to take advantage of the advancements in technology, whether it's storage.
Our other fuel potentially that would be carbon free out in that later time period.
Okay, Great clarification. Thank you.
Thank you.
Your next question comes from the line of Sarah Akers with Wells Fargo.
Hey, good morning.
Good morning, Sarah.
Just to follow up on Brian's question on ALLETE clean energy can you tell us what your annual spend is on development expenses tied to funding new growth projects that day.
Yes. Good morning, Sarah This is al <unk>.
Happy to take that question, it's relatively modest it's typically $2 million to $3 million a year is what we've been investing in recent years and again thats why the importance of those relationships and really focusing on the customers and meeting with day need as opposed to just having having a lot of spend out there is really important and developing projects on our own has been a key part of our <unk>.
SaaS finding ways to create value without a lot of expense. So it's pretty modest at this time, but it may mean to change in future years as our strategy evolves.
Got it and then just going back to the Q3 comments regarding return crushers at eight just wanted to clarify are you still seeing those same pressures on returns or are you less concerned.
Being here today versus a few months ago.
Yes, Sir good morning, Bob Adams here, yes.
Yes.
But it's our view that those return challenges by virtue of new entrants coming into the market and more financial players coming into the market that those changes in returns and the pressures on returns. We will continue its a structural it's a structural shift in that particular part of the business, which.
Happens as you know in these competitive industry, so and I want to be clear, although we expect those return pressures to be there that does not mean that we will not continue to see can I think be successful in placing dollars into the wind areas just to rely exclusively on wind or.
To have a strategy that's focused just on win in a market, where you see return pressures out into the future and we think those are going to continue as I said.
That's not wise and then similarly are not similarly in addition to that.
As Alan stated, we've got customers that are asking for other solutions as part of the portfolio that we would have available. So long answer to your question, but it's a structural thing.
And we're very disciplined as you know back to credit ratings and.
And how we invest capital to make sure we've got good contract length.
Good cash flows and returns and if we can achieve those hurdles, we're just not going to make those investments.
Got it thank you.
Your next question comes from the line of Jim Kennedy with Guggenheim Partners.
Hey, guys How's it going it's a chance for sure.
Morning.
Just had a quick question on the 'twenty One guide.
Why does it only assumed 35 million tons for taconite versus the full rate I guess, you've received full nominations through April correct.
Good morning, James Frank Frederickson here and I'll take that question.
Correct and that we did did receive full nominations through April, but I'd like to just share a little bit more about our guidance at that 35 million ton level.
We're watching as we emerge from Covid and how our economy emerges in total and there are certain sectors of the steel industry that they are performing quite well. However, we're still seeing overall domestic production rates, depending on the week, 5% to 10% below where they were at a pre pandemic level.
So as we look at that.
We're waiting for that part of the steel industry to come up to it.
That normal full production level north of 80% utilization rate.
They are in <unk>, where we're looking at.
As we look at a total year of 2021.
Appropriately budgeting out at about a 35 million ton level.
Okay Gotcha, and then just the preliminary 22 number assume a full resumption or can you tell us kind of what youre thinking there.
Yes.
That's correct as we look out to 2022, we see more of that full recovery as Steve highlighted in some of the comments in earlier questions.
Okay got you. Thanks, that's helpful and then I guess, Steve this one might be for you, but on the deferral application I guess.
Youre not including it in the 'twenty, one guidance, but how should we think about that going forward.
Just from where we're sitting any anything we should be thinking about as that works its way through the PUC.
Yes, we're hoping that they would take this up relatively soon and have a decision in the second quarter Salt rich no other updates other than that okay.
Got it that's helpful. Thanks, guys congrats.
Thank you.
At this time there are currently no further questions in queue I will now hand, the call over back to Ms. Bethany Owen.
Thank you again for being with US this morning and for your investment and interest in ALLETE. We look forward to speaking with many of you virtually at our annual Investor Day presentation on March 16, and at other investor venues throughout the year enjoy the rest of your day.
Yeah.
Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.
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