Q3 2021 ALLETE Inc Earnings Call
Good day.
To the elite third quarter financial results call.
Today's call is being recorded.
Your savings contained in this conference call, they're not descriptions of historical facts are forward looking.
Statement cause it's turtles on the private security is litigation with format 1995.
Because the statements can include missing uncertainty actual results, we differ materially does express or implied I suppose for linking statement.
Factors that could cost is also differ materially from those expressed one five that's it's forward looking statements include but are not limited to those who <unk> discussed in Parliament made by the company the Securities and Exchange Commission.
The factors that will determine that companies get your results are beyond the ability of management to control or predict listeners should not place undue reliance on forward looking statements, which looks like management reviews only as of the date hereof.
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 future events or otherwise.
Seven two elites conference call announcing third quarter of 2021 financial results.
At this time, all participants I listen only mode. After the speaker's presentation there'll be a question and answer session.
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Thank you and good morning, everyone and thanks for joining US today with me are elite senior Vice President and Chief Financial Officer, Bob Adam.
President and Chief Accounting officer seemed more it.
Also with US this morning, or al <unk>, President clean energy and Frank Fredericks in Minnesota, Power's Vice president of customer experience.
Corresponding slides for this morning's call can be found on their website at <unk> dot com and the investors section.
Hello, along will call out each side number as we go through today's presentation.
This morning Elite reported third quarter 2021 earnings at 53 cents per share on net income of $27.6 million.
These results were above our internal expectations for the current quarter at a line with our ability to achieve our 2021 full year earnings guidance range of $3 to $3.30 per share.
In a few minutes, Steve and Bob will provide additional information on the corner and insights into key financial drivers for the remainder of the year.
First I'd like to highlight elite sustainability, an accident strategy a strategy, we develop to address the effects of climate change.
As many of you know elite with an early mover to significantly decarbonize its energy sources and as a result, we have been recognized as a leader in our nation's transition to a carbon free energy future.
At a lead we're committed to answering our nation's call for clean energy with all of our stakeholders and mind, our customers our communities our employees and our shareholders.
We couldn't be more excited about the future as we successfully position in our business is to continue to thrive and grow.
We'll begin with an update on our largest business, Minnesota power, which has made significant progress on key initiatives foundational two elites sustainability inaction strategy.
Please refer to slide three.
In late October, Minnesota power filed its second ever integrated distribution plan. This I D. P details, Minnesota powers five year investment plan and tenure outlook for its distribution system.
The clean energy transition requires investment in infrastructure and related technology to ensure continued reliability of our central services.
Our plan focuses on creating a more resilient grid to ensure the safe and reliable delivery of energy to our customers.
And advances new technologies that will provide customers with even more control over their energy use that.
The comment period will begin in the coming weeks and we expect to receive final approval later next year.
Similar to the I D P, but with a broader scope, Minnesota power filed it's integrated resource plan with the Minnesota Public Utilities Commission in February of this year.
The I R. P outlines our plans to further transform Minnesota powers energy supply to 70% renewable by 2030 and to be cold free and 80 per cent lower carbon by 2035.
All of these plans laid a strong foundation for our vision to provide 100 per cent carbon free energy to customers by 2050.
Just last week, the Minnesota Department of Commerce requested a three month extension on initial I R. P comments and assuming the M. P. C. Approve comments will be due march 1st of next year.
Throughout this process, we will continue our clothes and transparent engagement with our many stakeholders and we anticipate the Commission's decision later in 2022.
These important milestones are a key part of Minnesota powers energy forward initiatives, a journey, a thoughtful positioning in a transforming energy landscape to ensure safe reliable and affordable service to our customers.
We know that this service comes at a cost and to achieve the best outcomes for all we've worked closely with our regulators and other stakeholders emphasizing that a constructive rate review environment is critical to our ability to continue our energy transformation.
Throughout its clean energy transition, Minnesota power has maintained residential electric rates that are among the lowest in the state of Minnesota.
Our Minnesota power team has worked thoughtfully with low income customer advocates to provide affordability discounts through our care program.
Energy efficiency support through our energy partners program and a special rate for qualified low income customers that will continue to support our most economically vulnerable customers with some of the lowest monthly bills and the state.
While we advance our vision of a carbon free energy supply by 2050, we will continue to make affordability a priority.
At the same time, a reasonable rate of return is essential to keeping our company financially healthy and ensuring value for our shareholders.
To that end on November 1st, Minnesota Power filed a general rate case supporting an increase in base retail electric rate.
This request is important in Minnesota powers financial health and ability to continue its clean energy transformation, while delivering the faith resilient and reliable service that powers People's lives and businesses throughout northern northeastern Minnesota.
Minnesota Power is completed only three right cases in the past 25 years with our last completed rate case back in 2016 five years ago.
The core of our current request is simple recovery, a prudent costs and investments that support our clean energy transition Ah more resilient grid and our customers desire to control their energy use.
I request also reflects the risk and volatility that come with our unique customer mix and allows the opportunity for our investors to earn a reasonable rate of return.
Steve will share more details on the right case filing in a moment.
And a creative effort to help customers, Minnesota power filed a petition with the Minnesota Public Utilities Commission for approval to sell land surrounding several reservoirs on it's hydro electric system.
Land is not required to maintain operations and has an estimated value of approximately $100 million.
So Minnesota power proposed to give the net proceeds from the land sales to our customers either through a credit in a future right K or through the renewable resources rider to help mitigate future rate increases.
At a hearing last month the M. P. O C approved methodology to allow the land sales to begin with certain conditions and required compliance filings.
We're pleased to offer this innovative and meaningful right mitigation for our customers and we appreciate the <unk> approval.
The M. P. O C. Also recently approved a new demand response product for Minnesota powers large industrial customers that facilitates those customers, making their capacity available in exchange for fair compensation.
The additional capacity these large customers make available can be critical to maximizing the efficient.
See and ensuring the resiliency of our overall system during extreme weather events, such as the polar vortex earlier this year.
Turning to our second largest business in the elite family elite clean energy with 100% renewable generation is making progress on it's multifaceted strategy focused on portfolio optimization, new projects and plans for expanding service offerings beyond wind.
To include solar and storage solution.
In addition, the company is executing on plans to optimize existing P. P C safe Harbor turban inventory and enhancing the returns of its existing project.
The renewables industry continues to grow rapidly attracting significant capital an investor interest as well as strong bipartisan policy support in Congress.
Elite clean energy is well positioned to capitalize on customers desire to expand renewable energy as the economy Decarbonize is and the focus on sustainability accelerate.
The elite clean energy team is deep into the evaluation of avenues to add renewable <unk> capabilities beyond wind and we anticipate sharing more information on our expansion into solar and storage in the coming quarters.
Now I'll turn it over to Steve and Bob for additional details on our 2021 third quarter financial results 2021 rate case, and a leaf growth outlook fees.
Thanks, Bethany and good morning, everyone and we'd like to remind you that we filed or 10-Q. This morning, and I encourage you to refer to it for more details.
Please refer to slides for five for significant variances in other items for comparison considerations.
Today late reported third quarter of 2021 earnings were 53 cents per share on net income of $27.6 million, earning.
Earnings in 2020, or 78 cents per share and they didn't come a $47 million the.
The third quarter results for 2021 did exceed our internal expectations by approximately 25%.
The third quarter is typically the lowest quarter for consolidated earnings.
A few details from our business segment.
It's regulated operations segment, which includes Minnesota power superior water light and power in the company's investment and the American transmission company recorded net income of $32.9 million.
Impaired to $42.4 million in the third quarter of 2020.
Third quarter of 2021 earnings reflected lower net income at Minnesota power, primarily due to increased operating and maintenance.
Property tax expenses.
In addition to recording of income tax expense resulted in a negative impact of approximately $5 million or 10 cents per share for the quarter.
As compared to 2020.
The accounting for income taxes, various quarter to quarter based on an estimated annual effective tax rate.
Results in 2021 reflected higher kilowatt hours sales to residential commercial and municipal customers and.
And higher industrial sales, partially offset by lower sales to the idol Bruce old paper facility.
Elite clean energy recorded a net loss of $800000 in the third quarter of 2021.
Appeared to note income of $1.1 million in 2020.
They they come in 2021 reflected lower wind resources and availability that our internal expectations.
As for shadowed in the second quarter disclosures elite clean Energy's when facilities continued to be impacted by lower when resources unexpected and where 7% below expectations for the quarter.
The impact of lower wind resources was partially offset by lower operating costs, resulting from a week clean energies expense management efforts.
Keep in mind that although seasonal wind patterns can vary throughout the year. When production is typically the lowest in the third quarter and at the highest in the first and fourth quarters of the year.
Our carpet other businesses, which includes.
Energy and a late properties recorded a third quarter net loss of $4.5 million in 2021 compared to a net loss of $2.8 million in 2020.
The increase in that losses, primarily due to higher expenses.
I will now turn to our 2021 earnings guidance, which remains unchanged from our original range of $3 to $3.30 per share.
Consistent with our disclosures in the second quarter, we anticipate our regulated operations segment will be at the higher end of our guidance range of $2.30 to $2.50 per share.
This is primarily driven by Minnesota powers taconite customers operating at higher levels that are original projections and is expected to remain at near full production levels throughout the fourth quarter.
We continue to expect that elite clean energy and Ah corporate and other businesses.
To be at the lower end of our guidance range of 70 to 80 cents per share. This is primarily due to the negative impacts of the extreme winter weather event in the first quarter of 2021, but the Diamond spring wind energy energy facility of approximately 10 cents per share.
Lower than expected when resources and availability throughout 2021.
These negative impacts are partially offset by 16% after tax game recorded in the fourth quarter of 2021 for the sale of a portion of the Magic Trail Energy Center by so sure energy.
<unk> non rate regulated Wisconsin subsidiary.
The sale, which closed on October 1st 2021 was reflected in our second quarter guidance as we had anticipated the closing of the transaction transaction and the second half of the year.
As noted in previous quarters, the timing of income tax expense is negatively impacted year did it results compared to internal expectations.
We estimate that approximately three meal $3 million or six cents per share is expected to reverse in the fourth quarter.
Yeah.
Turning to the Minnesota power right case filing please refer to slides six and seven.
On November 1st, Minnesota Power filed a retail rate increase request with the <unk> seeking an increase of $108 million in total additional annual revenue.
The filing seeks a return on equity of 10.25% in a 50, 381% equity ratio.
Interim rates of $87 million would begin January 1st 2022 with approval by the <unk> inner rates are subject to refund.
At this time, we anticipate final rates would be implemented sometime in late 2023.
The rate case assumes taconite production of approximately 34 million tonnes, which is in alignment with the long term average production levels for taconite.
In addition, Minnesota power has included a proposal to address and mitigate the financial impacts related to operational volatility of it's large power customers.
This proposal proposal includes a sales trip mechanism offering a simple and balance method to align risks and benefits of large power load volatility that can occur between rate cases.
We will share procedural updates as a filing progresses and future quarterly updates.
Well now I'll turn it over to Bob for comments on a longer term growth outlook Bob.
Thanks, Steve and good morning, everyone.
I am pleased to report that our trajectory for improved EPS growth remains on track and I'm confident in our ability to achieve our longterm annual average earnings per share growth objective of within a range of 5% to 7%.
This growth will come from a continued disciplined focus on efficient operations and high quality clean energy investments with strong operating cash flow characteristics further supporting our strong credit ratings and future dividends.
As we have consistently characterized throughout the year 2021 has been a transitional year and I am, particularly pleased about the progress we have made around initiatives that are aimed at improving our business unit returned at both are right regulated and unregulated business segments, while ensuring we.
<unk> and the excellent value proposition for our customers.
In terms of new investments, we have been busy planning and planting seeds for advancing are clean energy sustainability inaction strategy.
Which will translate into some exciting new opportunities as we go forward.
Indeed in our year end conference call in February we will be providing are 2022 of guidance along with enhanced visibility into investment opportunities across our business platforms.
These updates will reflect our latest views on the I R. P.
The IDP.
Ace clean energy expansion into the solar storage segments.
Transmission development opportunities.
In addition, we expect that developments around federal spending and tax reform, including clean energy tax incentives will be better known.
In terms of current initiatives, perhaps one of the most important as a recently filed November one general rate case proceeding.
Bethany noted earlier this rate cases critical to ensure the company is able to recover costs.
Associated with our ongoing safe reliable operations.
Clean energy transition and to ensure we earn a reasonable rate of return required to maintain our credit ratings and attract investment capital.
In terms of our continued clean energy transition, perhaps one of the most exciting opportunities lies in the transmission and distribution areas.
As we have been highlighting for several years transmission and delivery needs are accelerating in the needed infrastructure to accommodate the clean energy buildout is greatly leg and across the entire country, especially in the upper Midwest.
Specifically are Mysore region includes key corridors that are not currently sufficient to handle the rapid expansion of renewable energy on the grip.
Our planned expansion of our 550 megawatt D. C transmission line participation in the grid North partners initiative and are increasing investment in the American transmission company are clearly a significant significant strategic value to elite.
An aggregate we believe this part of our business will be elite second fastest growing segment in the next decade.
In addition to strategic positioning initiatives, gaining traction at a regulated business elite clean energy is on the verge of completing its construction of a cat a wind project located in Oklahoma, which will serve additional fortune 500 customers under long term contracts and as comfortably on track to be online before.
The end of this year.
This is the second large scale wind facility built and placed in service by Lee Clean energy and just two years and.
In total, Oklahoma based Caddo and Diamond spring projects represent over $800 million of investment and we will provide it's large C&I customers with over 2.1 million megawatt hours of carbon free when generation.
Elite clean Energy's investment and Safe Harbor wind components remains a competitive advantage and the development of new wind projects, such as Canada, one dime of spring.
And and further optimization efforts of its existing wind portfolio.
Please refer to slide eight.
Regarding optimization initiatives underway, the 92 megawatt redburn build order transfer project with Wisconsin Public Service Corporation, and Madison gas and electric will utilize some of our safe Harbor turbines, while expanding our customer base and presence in another geographic region of the country.
Ah Lee clean energy is finalized and development and plans to begin the completed construction of this facility in 2022.
An extension of this project and a testimony to a strong relationships with optionality to serve the CNI and our utility space.
Approximately 68 megawatt white tailed development project is advancing whether it's advanced transmission Q position landowner relationships and for either a longterm PPA or build order transfer project.
Speaking of strengthening our development pipeline to leverage is safe Harbor turbines. We continue to advance the 200 megawatt Russo wind project in North Dakota, and are working with state regulators and the federal Aviation administration permitting exciting for this facility.
We are encouraged by North Dakota Governor <unk> call for the state to be carbon neutral by 2030 and this an additional clean energy projects are part of this ambitious vision.
Regarding the up to 100 121 megawatt northern wind project with Excel energy.
Construction will begin upon receiving permitting approval from the M. P O C.
This project involves repowerings expansion and planned sale of our Shana Ramsey Viking wind facility.
This project also remains on track to advance with completion expected in late 2022.
We were pleased that excel energy received M. P. U C approval to acquire the project from elite clean energy earlier this year.
Cash received from these optimization efforts will be deployed into new opportunities related to our solar and storage expansion strategy, reducing the potential for future equity needs.
In summary, elite sustainability inaction strategy remains on track and we anticipate sharing more successes in the near future as we execute our clean energy growth initiatives.
This multifaceted unique clean energy strategy is well on its way to providing a differentiated value proposition to investors.
While serving the needs of many other stakeholders with strong metrics on the environmental social corporate governance front.
Now hand, it back to Bethany.
Thanks for those updates Steven Bob as demonstrated by elite significant clean energy projects transformational D. Carbonization efforts and development and expansion of infrastructure that is critical to the transmission and delivery of carbon free energy, we are actively addressing climate change and.
All the rights spaces.
We are a company and a team that cares for our customers our communities our employees and our shareholders. We have a well earned reputation of being on the forefront with transforming clean energy investments and we anticipate significant investments in a leeds regulated and nonregulated businesses in the coming year.
Ours.
We believe we will be well aligned with still to be Finalised national and state clean energy goals are sustainability inaction strategy is a balanced approach that moves the needle, while allowing time for advances in technology, and an equitable transition to a secure and carbon free energy economy.
<unk>.
On five nine there are several links to important information about our company, especially the second link to document elite corporate sustainability report.
Guiding principle of elite sustainability inaction strategy is communication and transparency and we've updated our corporate sustainability report to include 2020 data that was unavailable at the time of the initial March publication as well as updates on climate policy and elite Board composition.
On that note, we're proud and excited to have welcomed Charlene Thomas Chief diversity equity and inclusion officer of UPN.
To the board of directors, a few weeks ago.
I encourage you to review our CSR in its entirety as it describes elite accomplishments and our strong commitment to sustainability and all its farms.
We'll continue to track industry political and regulatory trends to ensure our future reports consider any evolving climate related risks and opportunities.
We're focused on meeting our nation's accelerating needs for cleaner more efficient and more resilient energy our strategy sets elite apart and we're committed to continue on this journey as a strong steward of all of our stakeholders interests.
Doing the right things in the right way is nothing new here it'll lead and we are proud of the progress our companies making.
It is also important to note that elite sustainability commitments align with the commitments our customers are making for example, olive Minnesota powers. The largest customers have now committed to reduce carbon emissions in their products and their operations.
The fact that Minnesota power surge these customers with 50% renewable energy today directly contributes to the sustainability of their current operations.
And our carbon free energy vision for the future also supports these customers longer term goal.
As a result of this focus on sustainability, we've seen Minnesota powers largest mining customers invest in new ways of utilizing the abundant iron resource in our region to support continued sustainability improvements for what is already some of the cleanest steelmaking in the world.
In addition in the forest product sector. We are looking forward to a new customer that is investing and and idled paper plant to utilize recycled fibre for tissue production and another new customer that will leverage sustainably harvest, Minnesota timber to produce advanced building panel.
These are just a few examples of how our elite companies and our customers are aligned in our commitment and are actively advancing sustainability in many ways building, an even better and brighter future for us all.
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.
As a reminder to ask a question. Please press started then one.
If your question asked and answered and you'd like to remove yourself from the queue press the pound key.
Our first question comes from Richard Samuel with J P. Morgan Your line is open.
Hi, good morning.
One of the circle back to the message on guidance.
And tech game.
16 Q.
That correctly was that game originally contemplated in the 21 range.
Yeah, Hi, Rez, Steve Morris It was in our it is 16.
We did have it in our.
Our update for the last quarter, but it was not reflected in our original guidance range of $3 to 330.
Understood.
And then circling to the rate case.
Could you remind us of the history with the sales chew up and when you saw that in the past and then just any sense on the receptivity to it now.
Yeah, So we haven't really.
Had this exact type of true up we had a more of an arrow type of true up in the past that was in the sixth.
16 rate case that didn't get a lot of traction, but I think we're going to get more receptive.
Audience to this I'll, let Frank talk about it a little bit too.
[noise] so.
Richard Frank Fredericks. It here so what we've proposed in this rate cases is a real simple and fair true based on large power revenue volatility.
And it's a pretty straightforward as Steve mentioned quite a bit different than what was proposed in the 2016 case and that we're looking at.
Just.
Addressing some of the volatility that we see in our large power customer operations with the real simple <unk>.
<unk> Avenue mechanism that plus or minus $10 million in terms of where the revenue comes in that we would.
To the extent that customers are operating above that we'd return that to customers in the form of great discount and to the extent that they are operating below that we would seek that for a revenue true up.
Understood and then finally on the a side.
Just curious about the experience some efforts what you're seeing your evaluations on the solar and storage side and how do you think about some of the <unk>.
Larger market concerns around so we're currently as you want to enter the space.
Okay. Great question. Richard This is <unk>. It is thank you for the question, we're serious about expanding into Salon storage, we're seeing a strong pull from customers. When you look at all your P plans around the country and you look at what commercial industrial and municipal customers are looking for so we're taking a very judicious approach to it kind of a multi pronged approach part of it will be.
We've already begun adding organically some solar and storage challenge into our existing development team as well we are looking at options for acquisitions over right sized companies are platforms to accelerate that portion of our strategy somewhere to common future quarters.
Very excited about it we are naturally watching very carefully the supply chain issues in the manufacturing.
Run up issues that are happening around the world and and we think broadly the way we're gonna play being a small player in a big market will be able to find success and be able to manage those risks because we get into it but certainly the industry has seen its ups and downs over the last 10 or 15 years of PDC policy. So.
Watching it very carefully and we will take that into account as we make our first moves into solar and storage.
Great. Thank you for the time today.
Our next question comes from Brian Russo, Let's Sidoti Your line is open.
Hi, good morning.
Good morning, Brian.
Hey, just to follow up on the comments regarding proposed landfill.
Surrounding some of your hydro plants.
What did you could you just.
Remind us what was the book value of the market values that you referenced earlier.
Brian It's Bethany $100 million is what we're estimating at this time the value of the line.
Okay. So that.
In theory could be a nice offset too.
80%.
Increase in this.
Pending refiling with $108 million revenue requirement is that one way to look at it.
It is a right mitigation effort on our part it will take some time to implement so obviously these.
There is some plaiting work that needs to be done in connection with these land and and the sales process needs to take place and then obviously, how it will actually be returned to customers will have a lot of oversight and approval at the commission as well, but we're committed we are really pleased with the approval at the methodology by the M. P U C and.
We're committed to moving forward with the process.
With their oversight as well.
Okay, great and what type of zoning is this land.
Available for.
It's surrounding your hydro facilities.
So it's it's currently leased to Leaseholders right now after the most part that actually many of them have cabins and homes already on the land. So it's it's already.
Able to be used for residential purposes.
Okay, Great and then just on the interim rate request, it's my understanding that.
The interim rates are always based on the existing.
Existing currently allowed or a week and and if so what is remind us what your current allowed erroneous.
Hi, Brian Steve more so it's 925.
That's the current allowed and that is as you said that is what the interim rates are based on.
Okay. So that delta of 108 million versus 87 million interim that's probably as the.
Delta on the <unk> the row request versus allowed.
That's that is the majority of it there's some other items in there, but just think about it that way you are very close.
Okay, and then on the I R. P. I think originally.
Does the timeline was to get M. P. U C approval by early next year.
Actually earlier comments now it's can be later in 22, but.
But if I recall you had some several hundred megawatts of solar investment proposals and the I R. P.
There are things just a timeline do you think of developing a lot of that assuming.
Fair treatment by regulators does the timing being pushed out now.
Yeah, Brian This is Bob Adams good morning.
The.
First and foremost as you will appreciate.
Bethany spoke to this the evolution of.
The renewables market and opportunities that are presenting themselves with technology inverse advancements cost decreasing costs.
Suggest a potential more rapid and.
Investment in some of those projects and so so.
The IOP had contemplated I believe about 400 megawatts in total between solar and storage in investments.
So that alliance very consistently with what we're looking at now, but the timing of that could be accelerated as we go forward and we'll be talking more about that in the early part of the year.
Okay, Great and then just on a potential future projects. So that you mentioned the 68 megawatt project and the 200 megawatt project two weeks should we kind of.
Use your recent ace asset optimization project announcements kind of as a.
As a as a good kind of comp.
What kind of value you could realize from from these future projects.
Yeah, Brian Good morning, I'll really care again, yeah, I think that's a fair way to think about it Brian.
You have not made a decision on whether those projects will be longterm ppas with ownership ias or whether there'll be billed transfers to to another entity. So you've seen us develop both kinds of projects and and so I'd think about them. Similarly yep.
Alright, great. Thank you very much very much.
Thanks, Brian.
Okay.
Thank you so the lemonade time I'd like to turn the call back over to best meal, that's a closing remark.
Thank you again for joining us this morning and for your investment and interest in elite. We look forward to speaking with many of you in a few days during the <unk> conference and at other investor venues throughout the remainder of the year enjoy the rest of your day.
This concludes the conference you may now disconnect.
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Good day, and welcome to the ALLETE third quarter financial results call.
Today's call is being recorded.
Certain statements contained in this conference call that are not descriptions of historical facts are forward looking statements.
Those titles the fund in the private Securities Litigation Reform Act like 95.
Because 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 who cut discussed in filings made by the company the Securities and Exchange Commission.
You have the factors that will determine the company's future results are reality Adelphi of management to control or predict listeners should not place undue reliance on forward looking statements, which reflect management's views only.
As of the date hereof.
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.
Future events or otherwise.
Welcome to <unk> conference call announcing third quarter 2021 financial results at this time all participants are also the only mode.
After the Speakers' presentation there'll be a question answer session.
Ask a question during this session. We request Star then one.
Had some telephone.
If anyone should require assistance during the conference. Please press Star then he worked with an operator.
As a reminder, this call is being recorded.
I'd like to turn the call over to Bethany Owen Chair, President and CEO you may begin.
Thank you and good morning, everyone and thanks for joining US today with me are elite senior Vice President and Chief Financial Officer, Bob Adams, and Vice President 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.
Corresponding slides for this mornings call can be found on our website at Alere Dot com in the investors section to follow along we will call out each slide number as we go through todays presentation.
This morning, ALLETE reported third quarter 2021 earnings at <unk> 53 per share on net income of 27 $6 million.
As a result, we're above our internal expectations for the current quarter at align with our ability to achieve our 2021 full year earnings guidance range of $3 to $3.30 per share.
In a few minutes, Steve and Bob will provide additional information on the quarter and insights into key financial drivers for the remainder of the year.
First I'd like to highlight elite sustainability in action strategy a strategy, we developed to address the effects of climate change.
As many of you know elite was an early mover to significantly decarbonize its energy sources and as a result, we have been recognized as a leader in our nation's transition to a carbon free energy future.
At ALLETE, we're committed to answering our nations call for clean energy with all of our stakeholders in mind, our customers our communities our employees and our shareholders. We couldn't be more excited about the future as we successfully position our businesses to continue to thrive and grow.
We'll begin with an update on our largest business, Minnesota power, which has made significant progress on key initiatives foundational to elite sustainability in action strategy.
Please refer to slide three.
In late October, Minnesota power filed its second ever integrated distribution plan. This I D. P detailed Minnesota powers five year investment plan and 10 year outlook for its distribution system.
The clean energy transition requires investment in infrastructure and related technology to ensure continued reliability of our essential services. Our plan focuses on creating a more resilient grid to ensure the safe and reliable delivery of energy to our customers and advances new technology.
That will provide customers with even more control over their energy use.
The comment period will begin in the coming weeks and we expect to receive final approval later next year.
Similar to the IDP, but with a broader scope, Minnesota power filed its integrated resource plan with the Minnesota Public Utilities Commission in February of this year.
The IR P outlines our plans to further transform Minnesota Power's energy supply because 70% renewable by 2030 and to be coal free and 80% lower carbon by 2035.
All of these plans laid a strong foundation for our vision to provide 100% carbon free energy to customers by 2050.
Just last week, the Minnesota Department of Commerce requested a three month extension on initial IR P comments and assuming the M. P. C approved comments will be due march 1st of next year.
Throughout this process, we will continue our close and transparent engagement with our many stakeholders and we anticipate the Commission's decision later in 2022.
These important milestones are a key part of Minnesota Power's energy forward initiatives, a journey of thoughtful positioning in a transforming energy landscape to ensure safe reliable and affordable service to our customers.
We know that this service comes at a cost and to achieve the best outcomes for all we've worked closely with our regulators and other stakeholders emphasizing that a constructive rate review environment is critical to our ability to continue our energy transformation.
Throughout its clean energy transition, Minnesota power has maintained residential electric rates that are among the lowest in the state of Minnesota.
Minnesota Power team has worked thoughtfully with low income customer advocates to provide affordability discounts through our care program.
Energy efficiency support through our energy partners program and a special rate for qualified low income customers that will continue to support our most economically vulnerable customers with some of the lowest monthly bills in the state.
While we advance our vision of a carbon free energy supply by 2050, we will continue to make affordability a priority.
At the same time, a reasonable rate of return is essential to keeping our company financially healthy and ensuring value for our shareholders.
To that end on November 1st, Minnesota Power filed a general rate case supporting an increase in base retail electric rates.
This request is important 10, Minnesota Power's financial health and ability to continue its clean energy transformation, while delivering the safe resilient and reliable service that powers People's lives and businesses throughout northern northeastern Minnesota.
Minnesota Power has completed only three rate cases in the past 25 years with our last completed rate case back in 2016 five years ago.
The core of our current request is simple recovery of prudent cost and investments that support our clean energy transition a more resilient grid and our customers desire to control their energy use.
I request also reflects the risk and volatility that come with our unique customer mix and allows the opportunity for our investors to earn a reasonable rate of return.
Steve will share more details on the rate case filing in a moment.
In a creative effort to help customers, Minnesota power filed a petition with the Minnesota Public Utilities Commission for approval to sell land surrounding several reservoirs on its hydro electric system.
Land is not required to maintain operations and has an estimated value of approximately $100 million.
So, Minnesota Power's proposed to give the net proceeds from the land sale to our customers either through a credit in a future rate case or through the renewable resources rider to help mitigate future rate increases.
At a hearing last month the M. P O see approved the methodology to allow the land sales to begin with certain conditions and required compliance filing.
We're pleased to offer this innovative and meaningful rate mitigation for our customers and we appreciate the M. P O sees approval.
The N P. O C. Also recently approved a new demand response product for Minnesota, Power's large industrial customers that facilitates those customers, making their capacity available in exchange for fair compensation.
The additional capacity these large customers make available can be critical to maximizing the efficiency and ensuring the resiliency of our overall system during extreme weather events, such as the polar vortex earlier this year.
Turning to our second largest business in the ALLETE family ALLETE clean energy with 100% renewable generation is making progress on a multifaceted strategy focused on portfolio optimization, new projects and plans for expanding service offerings beyond wind.
Includes solar and storage solutions.
In addition, the company is executing on plans to optimize its existing PTC safe Harbor turbines inventory and enhancing the returns of its existing projects.
The renewables industry continues to grow rapidly attracting significant capital and investor interest as well as strong bipartisan policy support in Congress.
Clean energy is well positioned to capitalize on customers desire to expand renewable energy as the economy Decarbonize days and the focus on sustainability accelerates.
ALLETE clean energy team is deep into the evaluation of avenues to add renewable capabilities beyond wind and we anticipate sharing more information on our expansion into solar and storage in the coming quarters.
Now I'll turn it over to Steve and Bob for additional details on our 2021 third quarter financial results 2021 rate case, and a lease growth outlook Steve.
Thanks, Bethany and good morning, everyone I would 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.
Today ALLETE reported third quarter 2021 earnings of 53 per share on net income of $27 $6 million.
Earnings in 2020 were <unk> 78 per share on net income of $40 $7 million.
The third quarter results for 2021 did exceed our internal expectations by approximately 25%.
Third quarter is typically the lowest quarter for consolidated earnings.
A few details from our business segments.
<unk> 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 $32 $9 million.
Compared to $42 $4 million in the third quarter of 2020.
Third quarter 2021 earnings reflected lower net income at Minnesota power, primarily due to increased operating and maintenance.
And property tax expenses in.
In addition, a recording of income tax expense resulted in a negative impact of approximately $5 million or <unk> 10 per share for the quarter.
As compared to 2020.
The accounting for income taxes varies quarter to quarter based on an estimated annual effective tax rate.
In 2021 reflected higher kilowatt hour sales to residential commercial and municipal customers.
And higher industrial sales, partially offset by lower sales to the idle verso paper facility.
ALLETE clean energy recorded a net loss of $800000 in the third quarter of 2021 compared to net income of $1 $1 million in 2020.
Net income in 2021 reflected lower wind resources and availability than our internal expectations.
As foreshadowed in our second quarter disclosures ALLETE clean Energy's wind facilities continued to be impacted by lower wind resources unexpected and were 7% below expectations for the quarter.
The impact of lower wind resources was partially offset by lower operating costs, resulting from ALLETE clean Energy's expense management efforts.
Keep in mind that although seasonal wind patterns can vary throughout the year. When production is typically the lowest in the third quarter and at the highest in the first and fourth quarters of the year.
Our corporate and other businesses, which includes <unk>.
<unk> energy and ALLETE properties recorded a third quarter net loss of $4 $5 million in 2021 compared to a net loss of $2 $8 million in 2020.
The increased net loss is primarily due to higher expenses.
I'll now turn to our 2021 earnings guidance, which remains unchanged from our original range of $3 to $3 30 per share.
Consistent with our disclosures in the second quarter, we anticipate our regulated operation segment will be at the higher end of our guidance range of $2 30 to $2 50 per share.
This is primarily driven by Minnesota, Power's taconite customers operating at higher levels than our original projections and is expected to remain at near full production levels throughout the fourth quarter.
We continue to expect that ALLETE clean energy and our corporate and other businesses.
To be at the lower end of our guidance range of 70 to 80 per share. This is primarily due to the negative impacts of the extreme winter weather event in the first quarter of 2021 cut the Diamond spring wind energy facility of approximately <unk> 10 per share.
Lower than expected wind resources and availability throughout 2021.
These negative impacts are partially offset by a 16% after tax gain recorded in the fourth quarter of 2021 for the sale of a portion of the Magic Trail Energy Center.
South shore energy.
Elites non rate regulated Wisconsin subsidiary.
The sale, which closed on October one 2021 was reflected in our second quarter guidance, because we had anticipated the closing of the Transat transaction in the second half of the year.
As noted in previous quarters, the timing of income tax expense has negatively impacted year to date results compared to internal expectations.
We estimate that approximately three meal $3 million or.
<unk> per share is expected to reverse in the fourth quarter.
Turning to the Minnesota power rate case filing please refer to slides six and seven.
On November one, Minnesota power filed a retail rate increase request with the PUC seeking an increase of $108 million in total additional annual revenue.
<unk> seeks a return on equity of 10, 5% and a $53 eight 1% equity ratio inner.
Interim rates of $87 million would begin January one 2022 with approval by the PUC interim rates are subject to refund.
At this time, we anticipate final rates would be implemented sometime in late 2023.
The rate case assumes taconite production of approximately 34 million tons, which is in alignment with the long term average production levels for taconite.
In addition, Minnesota power has included a proposal to address and mitigate the financial impacts related to operational volatility of its large power customers.
This proposal proposal includes a sales true up mechanism.
Operating a simple and balanced method to align risks and benefits of large power load volatility that can occur between rate cases.
We will share procedural updates as the filing progresses and future quarterly updates.
I'll now turn it over to Bob for comments on our longer term growth outlook Bob.
Thanks, Steve and good morning, everyone. I am pleased to report that our trajectory for improved EPS growth remains on track and I'm confident in our ability to achieve our long term annual average earnings per share growth objective of within a range of 5% to 7%.
This growth will come from our continued disciplined focus on efficient operations and high quality clean energy investments with strong operating cash flow characteristics.
Supporting our strong credit ratings and future dividends.
As we have consistently characterize throughout the year 2021 has been a transitional year and im, particularly pleased about the progress we have made around initiatives that are aimed at improving our business unit returns at both our rate regulated and nonregulated business segments, while ensuring we provide.
<unk>, an excellent value proposition for our customers.
In terms of new investments, we have been busy planning and planting seeds for advancing our clean energy sustainability in action strategy, which will translate into some exciting new opportunities as we go forward.
Indeed in our year end conference call in February we will be providing our 2022 guidance along with enhanced visibility into investment opportunities across our business platforms.
These updates will reflect our latest views on the AARP.
IDP.
<unk> clean energy expansion into the solar storage segments and transmission development opportunities.
In addition, we expect that developments around federal spending and tax reform, including clean energy tax incentives will be better known.
In terms of current initiatives, perhaps one of the most important is our recently filed November one general rate case proceeding.
Bethany noted earlier this rate case is critical to ensure the company is able to recover costs associated with our ongoing safe reliable operations.
Clean energy transition and to ensure we earn a reasonable rate of return required to maintain our credit ratings and attract investment capital.
In terms of our continued clean energy transition, perhaps one of the most exciting opportunities lies in the transmission and distribution areas.
As we have been highlighting for several years transmission and delivery needs are accelerating and the needed infrastructure to accommodate the clean energy build out is greatly leg and across the entire country, especially in the upper Midwest.
Specifically, our MISO region includes key corridors that are not currently sufficient to handle the rapid expansion of renewable energy on the grid.
Our planned expansion of our 550 megawatt DC transmission line.
Participation in the grid North partners initiative, and our increasing investment in the American transmission company are clearly a significant significant strategic value to elite.
In aggregate, we believe this part of our business will be ALLETE second fastest growing segment in the next decade.
In addition to strategic positioning initiatives, gaining traction at our regulated business ALLETE clean energy is on the verge of completing its construction of the Caddo Wind project located in Oklahoma, which will serve additional fortune 500 customers under long term contracts and is comfortably on track to be online before.
The end of this year.
This is the second large scale wind facility built and placed in service by ALLETE clean energy and just two years.
In total, Oklahoma based Caddo and Diamond spring projects represent over $800 million of investment and will provide its large C&I customers with over $2 1 million megawatt hours of carbon free wind generation.
ALLETE clean Energy's investment in Safe Harbor wind components remains a competitive advantage in the development of new wind projects, such as Canada, One Diamond spring.
And then further optimization efforts of its existing wind portfolio.
Please refer to slide eight.
Regarding optimization initiatives underway, the 92 megawatt Red barn build order transfer project with Wisconsin Public Service Corporation, and Madison gas and electric will utilize some of our safe Harbor turbines, while expanding our customer base and presence in another geographic region of the country.
ALLETE clean energy is finalizing development and plans to begin to complete construction of this facility in 2022.
An extension of this project and a testimony to our strong relationships with optionality to serve the C&I and our utility space.
Approximately 68 megawatt white tailed development project is advancing whether it's advanced transmission queue position landowner relationships and for either a long term PPA or build order transfer project.
Speaking of strengthening our development pipeline to leverage is <unk> safe Harbor turbines, we continue to advance the 200 megawatt Russo wind project in North Dakota, and are working with state regulators and the federal Aviation administration on permitting and sighting for this facility.
We are encouraged by North Dakota Governor <unk> call for the state to be carbon neutral by 2030, and this and additional clean energy projects are part of this ambitious vision.
Regarding the up to 121 megawatt northern wind project with Excel energy.
Construction will begin upon receiving permitting approval from the M PUC.
This project involves a repowering expansion and planned sale of our shantaram be Viking wind facility.
This project also remains on track to advance with completion expected in late 2022.
We were pleased that <unk> energy received <unk> approval to acquire the project from ALLETE clean energy earlier this year.
Cash received from these optimization efforts will be deployed into new opportunities related to our solar and storage expansion strategy, reducing the potential for future equity needs.
In summary elite sustainability in action strategy remains on track and we anticipate sharing more successes in the near future as we execute our clean energy growth initiatives.
Multifaceted unique clean energy strategy is well on its way to providing a differentiated value proposition to investors.
While serving the needs of many other stakeholders with strong metrics on the environmental social and corporate governance front.
I'll now hand, it back to Bethany.
Thanks for those updates, Steve and Bob as demonstrated by elite significant clean energy projects transformational de carbonization efforts and development and expansion of infrastructure, that's critical to the transmission and delivery of carbon free energy, we are actively addressing climate change.
All of the right spaces.
We are a company and a team that cares for our customers our communities our employees and our shareholders. We have a well earned reputation of being on the forefront with transforming clean energy investments and we anticipate significant investment in our leads are regulated and nonregulated businesses in the coming year.
Ours.
We believe we will be well aligned with still to be finalized national and state clean energy goals. Our sustainability in action strategy is a balanced approach that moves the needle, while allowing time for advances in technology, and an equitable transition to a secure and carbon free energy economy.
Me.
On slide nine there are several links to important information about our company, especially the second link to document ALLETE corporate sustainability report.
Our guiding principle of elite sustainability in action strategy is communication and transparency and we've updated our corporate sustainability report to include 2020 data that was unavailable at the time of the initial March publication as well as updates on climate policy and elite Board composition.
On that note, we're proud and excited to have welcomed Charlene Thomas Chief diversity equity and inclusion officer of UBS to the ALLETE Board of directors a few weeks ago.
I encourage you to review our CSR in its entirety as it describes elite accomplishments and our strong commitment to sustainability in all its farms.
We'll continue to track industry political and regulatory trends to ensure our future reports consider any evolving climate related risks and opportunities.
We're focused on meeting our nation's accelerating needs for cleaner more efficient and more resilient energy our strategy sets elite apart and we're committed to continue on this journey as a strong steward of all of our stakeholders interests.
Doing the right things in the right way is nothing new here at ALLETE and we are proud of the progress our company is making.
It's also important to note that elite sustainability commitments align with the commitments our customers are making for example, all of Minnesota Power's largest customers have now committed to reduce carbon emissions in their products and their operations.
Fact that Minnesota power serve these customers with 50% renewable energy today directly contributes to the sustainability of their current operations.
And our carbon free energy vision for the future also supports these customers longer term goals.
As a result of this focus on sustainability, we've seen Minnesota Power's largest mining customers invest in new ways of utilizing the abundant iron resource in our region to support continued sustainability improvements for what is already some of the cleanest steelmaking in the world.
In addition in the forest product sector. We are looking forward to a new customer that is investing in an idled paper plant to utilize recycled fiber for tissue production and another new customer that will leverage sustainably harvest, Minnesota timber to produce advanced building panels.
These are just a few examples of how our elite companies and our customers are aligned in our commitment and are actively advancing sustainability in many ways building, an even better and brighter future for us all.
Thank you for your interest and your investment in ALLETE at this time I'll ask the operator to open the line for your questions.
As a reminder to ask a question. Please press Star then one.
If your question has been answered and you'd like to Lucas up NICU press the pound key.
Our first question comes from Richard Sunderland with Jpmorgan. Your line is open.
Hi, good morning.
Wanted to circle back to the message on guidance.
<unk>.
<unk>, thank you that correctly.
That game originally contemplated in the 'twenty one range.
Yes, Hi, Ray Steve Morris was in or it is 16.
We did have it in our.
Our update for the last quarter, but it was not reflected in our original guidance range of $3 to $3 30.
Understood.
And then circling to the rate case.
Could you remind us of the history with the sales true up when we thought that in the past and then just any sense on the receptivity to it now.
Yes, so we haven't really.
Had this exact type of true up we had a more of an ROE type of true up in the past that was in the <unk>.
<unk> rate case that didn't get a lot of traction, but I think we're going to get more receptive.
Audience to this I'll, let Frank talk about it a little bit too.
Great.
So.
Richard Frank Frederickson here. So what we've proposed in this rate case is a real simple and fair true up based on large power revenue volatility and.
Pretty straightforward as Steve mentioned quite a bit different than what was proposed in the 2016 case and that we're looking at.
Yeah.
Addressing some of the volatility that we see in our large power customer operations with the real simple.
Revenue mechanism that plus or minus $10 million in terms of where the revenue comes in that we would.
To the extent that customers are operating above that we would return that to customers in the form of a rate discount and to the extent that they are operating below that we would seek that for a revenue true up.
Understood and then finally on the <unk> side.
Just curious about the experienced some efforts.
Are you seeing your evaluations on the solar and storage side and how you think about some of the.
Larger market concerns around solar currently as you look to enter the space.
Yes, Great question. Richard This is al Rudich. It is thank you for the question, yes, we're serious about expanding into solar and storage. We are seeing a strong pull from customers. When you look at IBP plans around the country and you look at what commercial and industrial and municipal customers were looking for so we're taking a very judicious approach to a kind of a multi pronged approach part of it will be.
We've already begun adding organically, some solar and storage talent into our existing development team as well we are looking at options for acquisitions over right sized companies or platforms to accelerate that portion of our strategy. So more to come in future quarters. We're very excited about it we are naturally watching very carefully the supply chain issues and the manufacturing.
<unk>.
Run up issues that are happening around the world and we think broadly the way we're going to play of being a small player in a big market, we will be able to find success and build to manage those risks as we get into it but certainly the industry has seen its ups and downs over the last 10 or 15 years at PTC policy. So we're watching that very carefully and we will take that into account as we can.
Our first moves into solar and storage.
Okay.
Great. Thank you for your time today.
Our next question comes from Brian Russo with Sidoti Your line is open.
Hi, good morning.
Good morning, Brian.
Hey.
Just to follow up on the comments regarding.
The proposed landfill.
Surrounding some of your hydro plants.
What did you could you just.
Remind us what was the book value of the market values that you referenced earlier.
Brian It's Bethany $100 million is what we're estimating at this time the value of the land.
Okay. So that.
In theory could be a nice offset to what is the 2%.
The rate increase in this.
Pending re filing of the $108 million revenue requirement is that one way to look at it.
It is a rate mitigation effort on our part it will take some time to implement so obviously these.
There's some planning work that needs to be done in connection with these plans and the sales process needs to take place and then obviously, how it will actually be returned to customers. We will have a lot of oversight and approval of the commission as well, but we're committed we are really pleased with the approval of the methodology by the MPC.
And we're committed to moving forward with the process.
With their oversight as well.
Okay great.
What type of zoning is this land.
Available for <unk>.
Surrounding.
Hydro facilities.
It's currently leased to lease holder's right now after the most part that actually many of them have cabins at homes already on the land. So it's it's already.
To be used for residential purposes.
Okay, Great and then just on the interim rate request.
My understanding that.
Interim rates are always based on the.
Existing currently allowed ROE.
And if so what is remind us what your current allowed Roe.
Yeah, Hi, Brian Steve Morris, So its 92 five.
That's the current allowed and that is as you said that is what the interim rates are based on.
Okay, so that delta of $108 million versus the $87 million interim that's probably is the.
The delta on the.
The ROE request versus.
Aloud.
That's that is the majority of it there's some other items in there, but just think about it that way youre very close.
Okay, and then on the ERP I think originally.
Does the timeline was to get FTC approval by early next year.
I think earlier comments now can be later in 'twenty two.
I recall you had some several hundred megawatts of solar.
Investment proposals in the ERP.
There are things is the timeline do you think of developing a lot of that assuming.
Fair treatment by regulators.
Timing being pushed out now.
Yes, Brian This is Bob Adams good morning.
The.
First and foremost as you'll appreciate.
Bethany you spoke to this the evolution of <unk>.
The renewables market and opportunities that are presenting themselves with technology inverse advancements cost decreasing costs.
Suggests a potential more rapid.
Investment in some of those projects and so so we're the AARP had contemplated I believe about 400 megawatts in total between solar and storage investments.
So that aligns very consistently with what we're looking at now but the timing of that could be accelerated as we go forward and we'll be talking more about it in the early part of the year.
Okay, Great and then just on the potential future projects that you mentioned the 68 megawatt.
And the 200 megawatt project can we should we kind of.
Use your recent ace asset optimization project announcements kind of as a.
Yes.
As a good kind of comp.
What kind of value you could realize from these future projects.
Yes, Brian Good morning, Alberto here again, yes, I think Thats, a fair way to think about it Brian we have not made a decision on whether those projects will be long term ppas with ownership by aes or whether there'll be billed transfers to to another entity. So you've seen us develop both kinds of projects and so I would think about them. Similarly yep.
Yeah.
Alright, great. Thank you very much very much.
Thanks, Brian.
Okay.
Thank you Sue the limited time, I would like to turn the call back over to Bethany Owen for closing remarks.
Thank you again for joining us this morning and for your investment and interest in ALLETE. We look forward to speaking with many of you in a few days during the EI conference and at other investor venues throughout the remainder of the year enjoy the rest of your day.
This concludes the conference you may now disconnect.