Q1 2021 ALLETE Inc Earnings Call
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Good day, and what each of the ALLETE first quarter 2020 one financial results call today's call is being recorded.
The statements contained in this conference call on debt are not descriptions of historical facts are forward looking statements such as terms of finding of the private Securities Litigation Reform Act of 1995, because such statements can include risks and uncertainties actual results may differ materially from those expressed or implied by such forward looking.
The statements.
That could cause results to differ materially from those expressed on.
Or implied by such forward looking statements include but are not limited to discuss and filings made by the company with the Securities and Exchange Commission and.
The factors that will determine the company's future results are beyond the ability of management to control or predict the.
And you should not place undue reliance on forward looking statements, which reflect management's views only as of day here of 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 for each.
And the events or otherwise for opening remarks, and introductions on I'd like to turn the conference over to ALLETE, President and Chief Executive Officer Bethany Owen. 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 Moore and also with US. This morning are al Ruta, Vice President of ALLETE clean energy and Frank Frederickson, Minnesota powers, Vice President of cuts.
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Corresponding slides for this mornings call can be found on our website at ALLETE dotcom and the investors section.
Hello Law, and we'll call out each slide number as we go through today's presentation.
This morning, ALLETE reported first quarter 2021 earnings of 99 cents per share on net income of $51 $8 million.
Last year's results for $1 28 per share on net income of $66 $3 million.
Although these results were below our internal expectations for the quarter due to the impact of extreme weather and timing, we remain confident and our ability to achieve our original guidance range of $3 to $3 30 per share.
And a few minutes, Steve and Bob will provide additional insights and the key financial and drivers for the remainder of the year.
At the highest level I'd like to share a few thoughts on the extreme weather events that took place during the quarter and provide a progress update on our clean energy strategy.
As you know in February of this year of polar vortex brought extreme cold and I think condition to much of our nation with areas, especially in the south and southwest experiencing some of the coldest temperatures and decade.
These temperature extremes caused major disruption and the power and gas markets, resulting in significant operational challenges and power price volatility and a very short period of time.
Although ALLETE was affected by the extreme weather during the quarter the effects of varied greatly depending on location and the nature of our operation.
For example, our regulated operations performed well and customers at Minnesota power and superior water light and power were largely unaffected, while extreme weather and the southwest and lower wind availability and the Midwest negatively affected our ALLETE clean energy operations and related earnings.
ALLETE strategic geographic diversity, and our diverse business mix, where certainly major factors and our ability to successfully navigate this extreme event and we believe they will continue to differentiate and lead with our ability to remain resilient and manage adverse economic risks.
There are many differing views on the preferred speed and means of the global clean energy transformation needed to address climate change and we execute ALLETE sustainability strategy. It's critically important to us that this transition truly be sustainable for ALLETE businesses.
And we're committed to addressing climate change with all of our stakeholders and mine our customers our communities our employees and our shareholders throughout this critical transition.
And we're talking about of leaps regulated or nonregulated businesses, our sustainability and action strategy provides optionality and allows time for advances in technology as well as time for our communities and our employees to transition to a secure and carbon free energy economy.
Turning to slide three as we highlighted earlier this year of significant step forward and our commitment to sustainability of Minnesota, Power's recently announced the vision to deliver 100% carbon free energy for customers by 2050.
This bold vision and its timing reflect how seriously we take our responsibilities to the climate and our customers and our communities.
Minnesota Power is the first Minnesota utility to provide 50% renewable energy to our customers. We reached the milestone last December and we are continuing to move forward to reduce carbon.
It's important to note that the renewable energy provided by of Minnesota power consists of a diverse mix of wind and hydro solar and biomass and that diversity helps ensure resiliency and the reliable and affordable energy that our customers and our communities expect.
And as detailed on our last conference call of Minnesota Power filed its integrated resource plan with the Minnesota Public Utilities Commission in February.
And I are P outlines our plans to further transform Minnesota Power's energy supply to 70% renewable by 2030 and to be coal free and 80% lower carbon by 2035.
Throughout this process, we will continue our close and transparent engagement with our many stakeholders.
For him just 10 years ago ALLETE clean energy is now the second largest company in the ALLETE family with 100% renewable generation and serving many utilities as well as some of the largest commercial and industrial customers and the country.
Clean energy will drive additional clean energy sector growth building on its strong track record of success by expanding beyond wins and the additional clean energy spaces, such as solar and storage.
And we've made significant progress on optimizing ALLETE clean Energy's portfolio, and just yesterday, we announced exciting renewable energy projects and Wisconsin with two new utility customers, which Bob will discuss in a moment.
ALLETE family of businesses offer a differentiated value proposition and as we shared with you in February we're committed to achieving our 5% to 7% average annual EPS growth objective.
We believe our businesses will continue to grow and thrive and societies commitment to further de carbonization only increases.
Because of ALLETE as an early mover and this transition we're well positioned to continue as a leader and our nation's clean energy future, we arent the alone and our view and recent years more than one external publication has recognized the lead at the top tier of renewable energy company and we couldn't be more proud of that fact.
Now I'll turn it over to Steve and Bob for additional details on our 2021 first quarter financial results and ALLETE growth outlook Steve.
Thanks, Bethany and good morning, everyone and we'd like to remind you that we filed our 10-Q. This morning and I encourage you to refer to it for more details.
Please refer to slides four and five for significant variances and other items for comparison considerations for the first quarter.
Today, the ALLETE reported first quarter of 2000 and in 'twenty, one and earnings of 99 cents per share on net income of $51 $8 million earnings and 2020 for $1.28 per share on net income of $66 $3 million the <unk>.
Timing of income taxes, and operating and maintenance maintenance expense and the first quarter of 2021 negatively impacted results compared to internal expectations by approximately <unk> 15 per share, which is expected to reverse during the remainder of the year and in addition, net of income in 2021 and included an.
<unk> $5 million of <unk> 10 per share negative impact related to ALLETE clean Energy's Diamond spring wind energy facility due to extreme winter weather and the southwest United States and February 2021 the.
This winter weather event caused volatility and power prices and the regional power market, resulting in losses being incurred under one of the facilities power sales agreement.
A few details from our business segments.
ALLETE regulated operation segment, which includes Minnesota power superior water light and power and the company's investment and the American transmission company.
Reported net income of $45 million compared to $57 $5 million and the first quarter of 2020.
The earnings reflected lower net income at Minnesota power as compared to 2020, primarily due to lower margins, resulting from the expiration of the power sales contract in 2020, lower kilowatt hour sales to industrial customers, primarily due to the indefinite idling of the verso paper mill and Duluth, Minnesota.
Higher operating and maintenance property taxes and depreciation expense.
And the timing of income taxes the.
These decreases were partially offset by increased earnings related to the great Northern transmission line.
Net income at superior water light and power and our equity earnings and the American transmission company were similar to those reported in 2020.
ALLETE clean energy recorded first quarter of 2021, net income of $7 4 million compared to $11 $7 million and 2020.
Net income in 2021 included and approximately $5 million after tax negative impact at ALLETE clean Energy's Diamond spring wind energy facility.
Related to the extreme winter weather event and pricing volatility and the regional power markets.
<unk> clean energy and other wind facilities were negatively impacted by lower than expected wind resources.
And what our generation was approximately 15% below our expectations for the quarter, resulting in lower revenue and production tax credits.
Timing of income taxes of approximately $2 million negatively impacted earnings and the first quarter, which is expected to reverse during the year.
These decreases were partially offset the earnings from the South peak wind energy facility, which commenced operations in April 2020.
Our corporate and other businesses, which includes being on the energy and ALLETE properties recorded a net loss of $600000 and 2021.
Compared to a net loss of $2 $9 million and 2020.
The lower net loss in 2021 reflects the first full quarter of contributions from ALLETE nobles two wind energy facility.
And higher earnings from marketable equity securities and.
Compared to the first quarter in 2020.
I will now turn to our 2021 earnings guidance.
Despite the negative impact due to the extreme winter weather conditions and lower than expected wind resources impacting ALLETE clean energy during the quarter, we remain confident and achieving our 2021 earnings guidance of.
The $3 to $3 30 per share.
As I noted total timing impacts and the first quarter of approximately <unk> 15 per share are expected to reverse throughout the year.
And we now expect production for Minnesota, Power's taconite customers to be approximately 37 million to 38 million tonnes.
Our original 2000 and 'twenty one guidance included a projection of Minnesota, Power's industrial sales, which reflected a partial recovery from 2020.
And with anticipated production from of taconite customers of approximately 35 million tonnes.
Nominations from our industrial customers for production through this summer are above our original estimate supported by strong steel production and pricing of iron ore and steel.
Which has improved significantly since the depth of the pandemic and 2020 we.
We anticipate the strength to continue for the remainder of the year based on external market signals, both domestically and globally.
Primarily driven by this positive development, we now anticipate that of regulated operations for about the we'll be at the higher and of our guidance range of $2 30 to $2 50 per share.
And of ALLETE clean energy and our corporate and other businesses are expected to be at the lower end of our original guidance of 70 to 80 per share primarily due to the extreme winter weather event previously discussed.
I'll now turn it over to Bob for his views on our longer term growth outlook Bob.
Thanks, Steve and good morning, everyone as already highlighted financial results of the leads businesses were impacted varying degrees by the extreme weather during the quarter, but we remain steadfast and confident and our ability to achieve our original earnings guidance range for 2020 one.
At the highest level of this confidence comes from our ability to mitigate some of the losses realized at ALLETE clean energy through expense management.
And and improving 2021 of the outlook for the economy and our large power production levels of the Minnesota power.
And as I've expressed since the beginning of this year of achieving the leads growth objective of 5% to 7% over the long term remains a focus and we are continuing to advance and to execute upon the strategies to ensure that happens.
One of the most important initiatives is to ensure of Minnesota power.
Is able to achieve reasonable rates of return.
Given the challenges of COVID-19, and increasing investments and expenses incurred to support the clean energy transition the.
The company's return levels or some of it.
Or at some of the lowest levels and decades.
At approximately 2% to 3% below the currently authorized level.
It is imperative that the financial returns of the business, we improve so that we are able to sustain our business and attract the equity and debt capital needed as we go forward.
And our debt and in addition to our ongoing laser focus on business efficiency improvements.
The continued to advance our preparations for Minnesota power rate case, which will be filed in November of this year.
Beyond the equitable regulatory outcomes role and our regulated businesses will be driven predominantly by sustainable clean energy infrastructure investments.
Minnesota Power's energy of forward initiatives as outlined in our recent AARP filing would include and unprecedented transformation of our generation fleet as well as supporting transmission and distribution of investments.
We believe the AARP strikes and important balance of of balancing and achieving clean energy goals, while ensuring our system remains reliable and cost competitive to our customers.
We are also pursuing other regulated opportunities, particularly on the transmission area as the MISO region continues to be challenged with constraints on the grid as the renewable generation continues to expand.
Our planned expansion of our 550 megawatt DC transmission line, and our increasing investment and the American transmission company.
And I'm examples of our transmission strategy already and Moshe.
Also in the transmission of Arena, Minnesota power is on the active member of grid North partners for.
Normally known as Capex 2020, a group of 10, and northern cooperatives municipal power agencies, and Investor owned utilities, who on March nine 2021 announced a renewed name and focus to develop and expand on transmission capacity to maintain reliable energy delivery.
And across the northern region of the country.
And identify collaborative solutions to meet the region's evolving energy needs.
Minnesota Power is one of the three investor owned utilities involved on this powerful partnership focused on grid reliability.
With a proven track record of identifying developing and implementing transmission solutions.
Our second largest business ALLETE clean energy is entering a new and exciting stage of growth as it expanded service offerings beyond wind to include solar and storage solutions.
At the same time the company continues to seek opportunities to optimize its existing PTC safe Harbor wind turbines and enhance returns of the existing portfolio.
As I stated last quarter, we are highly confident that with the expanded scale and suite of service offerings, we will be able to maintain very high levels of average annual earnings growth approaching 40% over the next five years.
A recent example of our strategy and action as evidenced by yesterday's announcement of the Red barn build own transfer project, what's the Wisconsin Public Service Corporation, and Madison gas and electric.
This 92 megawatt project not only provides an opportunity to utilize our 80% safe Harbor turbines.
But also expands our customer base and presence and yet another geographic region of the country.
Subject to customary company and the regulatory approvals ALLETE clean energy plans to begin and complete construction of the facility and 2022.
And exciting added feature of this investment includes the acquisition of the up to 67 megawatts White tail development project.
This asset is well positioned and development, whether it's advanced transmission and cute position landowner relationships and provides additional optionality on the region for either of long term PPA or build on transfer project.
In terms of and update on existing projects recall that we had announced the northern wind project for the Consol energy on February.
And this project entails the Repowering expansion and planned sale of our energy share them around the Viking wind power facility.
I am pleased to report of the regulatory approval and permitting process continues to advance as expected for those 2022 project.
As we highlighted cash received from the transaction is earmarked for deployment and to new opportunities related to our solar and storage expansion strategy, reducing the potential for future equity needs.
On another note our 303 megawatt Caddo project construction continues to advance on plan for a year and 2021 completion.
Please refer to slide six which provides a high level summary of new projects currently underway at ALLETE clean energy.
In summary, the demand for new clean energy solutions continues to accelerate and exceed our original expectations.
The proposed changes and federal policy from the bite and administration, such as direct pay of Ptc's.
10 year, PTC extension, Cleantech parity et cetera, but only in the accounts are prospects.
Our expanding capabilities strong reputation and widening and geographic footprint established over the past 10 years uniquely positions us to leverage these trends.
Helping solve customer needs and providing our investors with a reward and value proposition as we go.
All of the leads growth initiatives are well supported by a strong balance sheet conservative capital structure at approximately 41% total debt.
And a growing base of operating cash flow already over $300 million annually on no.
And it back to Bethany.
Thank you for the updates, Steve and Bob and we're pleased with our progress and our execution of ALLETE strategy made all of the more of a remarkable given the challenges of the past year and as the economy continues to strengthen and we're excited to share more in the coming quarters. We're proud of all of that we've accomplished and look forward to the future as we continue.
To answer the nation's call for cleaner and more sustainable energy.
And there is one more very important development and I'd like the highlight before we field. Your question on five seven and there are several links to important sustainability information about our company, but I would point you to the second link document ALLETE.
The first comprehensive corporate sustainability report this.
And this CSR aligns with the reporting requirements of the sustainability accounting standards, the board or SaaS B and the task force on climate related financial disclosures or Tc ft.
I'd encourage you to review this document as it describes in detail ALLETE strong commitment to sustainability and all of its forms including diversity equity and inclusion and our strong partnership with our communities as well as best practice governance.
We refer to our sustainability commitment as of commitment to people planet and prosperity where per.
Proud of the lease track record and our work on this report and we'll update the CSR regularly as we continue to execute our sustainability and action strategy.
We are a team and the company with a rich history of doing the right thing the right way and sustainability and all of its dimension and does not only of values shared by us at ALLETE. It's the very foundation of our strategy. Thank.
Thank you for your interest and your investment and ALLETE and at this time I'll ask the operator to open the line for your questions.
As a reminder, Jack's question do you need to press star one on your telephone and.
To withdraw your question press the pound key.
Once again, that's the one for questions.
Our first question comes from the line of Brian Russo from Sidoti You may begin.
Yes, hi, good morning.
Hi, Brian.
Hey, could you just provide us and update on the verso paper mill and breeding and some local press and Minnesota that.
The.
The city or of the cash.
<unk> may be looking to Q.
Any potential on require <unk> and <unk>.
Tax breaks just wondering where that is.
What's the status of that.
Got it and thank you for that question, Brian The spring Frederickson here and.
We continue to see positive support as you mentioned from the state and local agencies in terms of putting packages together to help with the redevelopment of that site and.
And we're aware of that verso continues with.
With the process with the current.
A potential buyer of that that mill right now so we don't have anything further to the announcer or disclose about that at this time, but it's a very as you mentioned.
Positive movement and <unk>.
The public support.
Okay, and then just tying into that now now that you have the large.
Power customers and the taconite customers operating at full demand levels through the end of the year and when you file the rate case next year at the end of this year with a forward test year.
How do you account for what could be variability.
And those taconite customer demand.
Now the direct full production and it's the only downside for for Minnesota power as well as the.
Pending.
And game for reverse so just curious when that cash.
First year sales.
<unk>.
The forecast for the rate case and is and you adjusted.
Yeah.
Yes.
Frank here again, Brian and I'll, maybe start with a little bit of the landscape as we see it and then turn it to Steve in terms of how we're thinking about it from a rate case perspective and.
We're very pleased as as we mentioned today that we're seeing full production and and our taconite customers and and.
And as you've seen.
And if you pay attention to those customers.
It's a mix of.
Pretty good recovery of the domestic steel industry, it's still not quite at pre COVID-19 levels, but it's getting close to that 80%.
Capacity utilization as we are up at about 77% right. Now. We're also aware that there is a couple of the blast furnaces that have come down since the pre COVID-19 conditions of 2019, so there's a little change the landscape there and.
And we're also seeing some record high global prices for iron ore on the Io decks and and that's being very supportive of production levels as we see it today. So so we recognize that there is some variability and how that is we're very pleased with how it's coming this year and on maybe turning to Steve in terms of how we're thinking about it yes.
Hi, Brian and so we're working on our test your budget 2022 budget.
And we'll watch the markets closely and the.
Customers throughout the year, and it's going to depend on <unk>.
Pricing globally, and domestically and what we do with this with our budget and full production for next year is going to is really on our radar screen, we have to watch that closely but even with that it's very likely isn't this.
And our request and our rate case that we asked for some type of true up mechanism for large power. It was really evident during the pandemic when many of our large power customer shut down.
That we had no basis to collect that and we've tried that through the deferred accounting.
And for the lost revenue petition of course, you know that was denied.
And by the commission, which really signal the need for a some type of true up mechanism that we don't have other utilities and the state to have that so it's likely to be of requests that we have and.
And our next rate case, regardless of what tonnage we use.
Okay understood. That's helpful. Then on the IOP and.
Any progress there or key dates we should look out for and then some of those near term.
Those are projects that are debt or proposed I'm, just wondering if theres been any treatment there.
And Brian This is Bethany, so obviously and we knew that going in and that this would be on link the error process, it's a pretty significant filing on our part and strategic filing and then certainly the regulators have a lot on their docket right now so we.
And are expecting kind of later this year or early next year.
The results, but it is moving its way through the process of relatively positive overall reception to the plan that we file and so we're actually feeling very positive about it and as I mentioned, we're continuing very close engagement with stakeholders as we work our way through the process so as payments true for the solar.
The projects as well.
And so we're doing we're working our way through the process.
Okay and then just lastly on on the guidance you maintained the range and the midpoint.
But if I heard you correctly.
And the rate utilities or at the high and due.
Due to the improved taconite.
<unk> sales and <unk> is that the low end.
Diamond Springs.
The storm issue. So are you looking to mitigate that 10 cents of Diamond Springs at Ace or you're just maintaining your guidance because.
The utilities at the high and while the pieces at the low and just clarify.
Yeah.
Yeah. Good morning, Brian This is Alberta, and ALLETE clean energy, we intend to mitigate a portion of that and.
And as and then you know of portion of it across the lead so that's the best and he said at ALLETE family of companies are stronger together and that.
That mix of the entire business really helps us navigate these these ups and downs of happened and the market in and of extreme weather events are and weak or something that we're focused on and through expense management and other things, where we're going to mitigate a portion of that but it'll it'll be and the broader company. So as Steve said that the changing guidance or the main.
Containing guidance as is.
Very important to us so you'll you'll see us continuing to work our way through the year and ALLETE clean energy.
Okay, great. Thank you very much.
And once again that since the.
One final question instead of one one more for questions.
Yeah.
Yes.
Yeah.
Our next question will come from the line of Peter of Bourbon, Oh, sorry, the dawn from Mizuho.
Moving.
Hi, Thanks for taking my question just a quick one on the announced deal yesterday and.
In terms of the return expectations should we be expecting yes.
And it's something similar to what.
And what you've done in the past with the similar type transactions.
Yes, Peter Good morning. This is Alan again, thanks for the question Yeah, we don't disclose the the the net proceeds at this time, because we are in a regulatory proceeding with our customers, but yeah. I would say are similar we entered these transactions on a certain set of expectations and you know the <unk>.
Developer did a great job with this project, it's a very de risked and <unk>.
And any sort of really good spots and we're really expecting working with the WAC and MGE and really constructive regulatory process with the Wisconsin Commission. So.
I would say similar expectations through our most recent bill transfer projects generally.
Okay.
And then just maybe on the strategy side of it and do you see or foresee more of these type of of.
Deals.
On the pipeline enhancing ace earnings or would it be more cash.
On a going back to the traditional announcements you've had in terms of actually owning and are owning the wind farms.
Yeah, Great question, and we generally would would continue to want to own and operate these wind projects, but we think about bp's.
Portfolio was.
Myriad of of opportunities that we have on in front of us. So so what youll see a mix of these kind of projects and long term ownership of projects naturally we're positioning ourselves to provide that steady earnings to support the dividend.
But naturally when we worked with customers and hear what they need we want to tailor our solutions to meet the customer expectations and I don't know Bob any any further thoughts on that yes.
Yes. Thanks, Thanks for the question Peter So something to keep in mind here in terms of the benefits of these build order transfer of of course is the is the cash generation that they provide and net cash generation allows us to offset any equity that we may otherwise need to fund other projects. So it does have a <unk>.
You will of permanent earnings.
Earnings per share of contribution to the company as well.
But as al pointed out I mean, our strong preference we're building a portfolio.
Which will.
Recurring revenue is recurring cash flow will support the dividend that's the preference.
But certainly the work that he has joined withheld redex leadership around optimizing these PTC is that we have and all.
Set aside as a critical part of that as well because they do have some shelf life currently and finding the opportunity is to strategically placed the lease with these kinds of deals makes a lot of sense as well.
Okay, and then maybe just lastly, just to clarify so the.
Yeah. The announcement from yesterday is no impact to the previously stated 2022 guidance of I think $3 70 to $4.
It would be it would actually be incremental to that from the standpoint of the cash flow again that that contributes net what other what offset.
The needs that we may have modest equity needs that we might otherwise have.
So it would be and approve of no change.
That's right it would be and improvement to two of that outlook as we know it today.
Okay. Thank you.
Thank you Alan.
Internationally for the questions and the queue I'd like to turn the call back over to both the knee Owens for any closing remarks.
Steve Bob Al Frank and I. Thank you again for being with US This morning and for your investment and interest in Italy, We look forward to speaking with many of you virtually and the near future and at other investor venues throughout the year and joined the rest of your day.
This concludes today's conference call. Thank you for participating.
Disconnect.
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