Q2 2023 ALLETE Inc Earnings Call
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Good day and welcome to the ALLETE second quarter 'twenty to 'twenty three 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 such as terms.
As to find in 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 statements.
Factors that could cause results to differ materially from those expressed or implied by such forward. Looking statements include but are not limited to those discussed in filings made by the company with the Securities and Exchange Commission.
Many of the factors that will determine the company's future results are beyond the ability of management to control or predict.
Listeners should not put undue reliance on forward looking statements, which reflect management reviews only as of the date hereof.
Company undertakes no obligation to revise or update any forward looking statements or to make any other forward looking statements whether as a result of new information.
Future events or otherwise.
Welcome to the ALLETE conference, calling announcing second quarter 2023 financial results at this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you would need to press star one on your telephone you wouldn't hear an automated message advising your hands raised.
To withdraw your question. Please press star one one again.
As a reminder, this call is being recorded I would now like to turn the call over to Bethany Owen Chair President and C. E. O you may begin.
Thank you and good morning, everyone and thanks for joining US with me today are elite senior Vice President and Chief Financial Officer, Steve Morris, Jeff Citizens, ALLETE clean Energy's, Chief financial and strategy Officer, and Frank Frederickson, Minnesota powers, Vice President of customer experience and engineering services.
Corresponding slides for this morning's call are available on our website at <unk> Dot com in the investors section, we'll call out each page number as we go through todays presentation.
This morning, ALLETE reported second quarter 2023 earnings of 19 <unk> per share on net income of $51.5 million last year's second quarter results were <unk> 67 cents per share on net income of $37 $6 million.
The financial results for the quarter highlight strong results at new energy equity, which we acquired in April of last year. We remain on track and are reaffirming elite original full year earnings guidance range of $3 55 to $3 85 per share.
Dave will be providing additional details on our financial performance during the quarter in a moment.
We're very pleased with our progress through the first half of the year as we execute our sustainability in action strategy and I'm grateful to our entire team across all of our family of businesses for their dedication expertise and innovation and for all they do to serve our customers with excellence every single day.
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We're working closely with all of our diverse stakeholders as we advance the clean energy future and truly sustainable ways.
On slide three you can see some of the details of our strategy, which is designed to do all of this while providing value to our customers meaningful investment in our communities opportunities for our employees and long term earnings and dividend growth for our shareholders. All of that is what we mean when we say we are.
To lead our leading the way to a truly sustainable clean energy future.
Our outstanding Minnesota Power team continues working diligently to execute our more than $3 billion Capex plan, an important part of that plan is our HB DC modernization project. This project will improve reliability and resiliency of the transmission system by replacing aging infrastructure and <unk>.
Modernizing the terminal stations for the 465 mile DC transmission line running from center, North Dakota to Duluth, Minnesota construction.
Construction could begin on this $800 million to $900 million project as early as next year pending regulatory approvals in North Dakota, and Minnesota with an in service date expected later this decade.
The team is making great progress on this project. In addition to selecting the technology provider in securing key land rights earlier. This year on June one we filed a certificate of need and route permit application in Minnesota and we're pleased to report that on July 27th the Minnesota Public Utilities Commission approved the <unk>.
Application is complete accepted our request to jointly process the certificate of need and the route permit together and approved the use of an informal review process rather than a contested case.
We're grateful to our Minnesota Commissioners for these important decisions as they will allow Minnesota power to continue moving forward in the Minnesota regulatory process in an efficient and effective manner.
We plan to file a separate route permit application with the North Dakota Public Service Commission later this fall and look forward to working with all of our regulators to bring this important and exciting project to fruition.
Our team is also making great progress on the Northland reliability project, a 345 kv transmission line from the Iron range in northern Minnesota to Central Minnesota, which will jointly own with Great River energy.
This project, which is estimated to cost the combined total of $970 million to $1 $3 billion represents another important investment in the reliability and resiliency of the transmission system.
On August 4th we filed a combined certificate of need and route permit application with the Minnesota Commission and we'll continue to work through the next steps in the regulatory approval process.
In June Minnesota power celebrated its largest solar facility to date of $15 two megawatt project near our Sylvan Hydro station. This was one of three solar projects approved by the Minnesota Public Utilities Commission in 2021 to spur economic recovery in northeastern Minnesota.
Following the pandemic.
This project was also a unique partnership with wider tribal and community college, providing students with hands on learning as part of the colleges Solar training Certificate program.
We greatly appreciate the Minnesota Commission support of these solar projects, which represent meaningful reinvestments in our communities all constructed with local labor.
In addition, this fall, Minnesota power plans to issue Rfps for nearly all of the 700 megawatts of wind and solar that were included in our recently approved integrated resource plan.
These rfps will also emphasize attributes such as reinvestment in our host communities.
Use of local labor and our focus on increasing supplier and workforce diversity.
All of this will help ensure these clean energy projects deliver the best overall value to customers while strengthening the communities. We are privileged to serve we're looking forward to sharing additional information as these important projects progress.
Turning to ALLETE clean energy as we previously announced that talented and dedicated team successfully completed to build transfer projects with the sale of its northern wind project in Minnesota in January and in early April the sale of its Red bar in wind facility in Wisconsin to Wisconsin Public Service Corporation, and Madison gas in <unk>.
Electric.
And the team is making progress on other fronts as well just two weeks ago, we announced that ALLETE clean energy entered into a five year power purchase agreement to sell wind power to Seattle City light the Companys first municipal customer sees.
Seattle City light is among the top 10 largest municipal utilities in the nation and will purchase power from our 50 megawatt Condon wind site in Oregon.
The power purchase agreement also includes an agreement to jointly explore adding solar and energy storage at the site.
We're excited about this new customer and new opportunity for ALLETE clean energy.
On slide four you can see a snapshot of new energy equity and just some of why we're so pleased they have joined the elite family of businesses. The new energy equity team had another excellent quarter of project closings and they continue to grow their already strong pipeline of future projects, including Greenfield.
Development and entering new markets in fact in the second quarter, the new energy team closed a highly successful project in a new market. The state of Virginia, now I'll turn it over to Steve for further details on our 2023 second quarter financial results 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 five and six for significant variances and other items for comparison consideration today ALLETE reported second quarter 2023 earnings of <unk> 90 per share on net income of $51 5 million.
Earnings in 2022 were <unk> 67 per share on net income of $37 6 million net.
Net income in the second quarter of 2023 included strong earnings of $7 4 million from New energy also benefiting 2023 second quarter net income were higher retail sales at our regulated operations.
We offset by reserves for interim rates, resulting from Minnesota Power's February rate case order.
ALLETE clean energy experienced lower wind resources for much of its fleet is low and persistent across much of the nation.
A few details from our business segments.
<unk> regulated operations segment recorded second quarter 2023, net income of $37 $8 million.
Compared to $29 6 million in 2022.
Earnings were higher in the second quarter of 2023, primarily due to increased sales to retail customers and lower property tax expense.
These increases were partially offset by the timing of interim rate refund reserves as you may recall from our year end earnings call in February .
Tier 2022 interim rate refund reserve was recorded in the fourth quarter of 2022.
You will see similar timing differences again in the third quarter and fully reversing in the fourth quarter. This year.
Also impacting 2023 was higher quarter over quarter operating and maintenance expense as we expected primarily due to inflationary cost pressures.
ALLETE clean energy recorded second quarter 2023, net income of $3 1 million compared.
Compared to $5 8 million in 2020 to low.
Low wind resources impacted wind energy facilities across the nation and ALLETE clean energy was no exception as a result second quarter results were below our expectations by approximately <unk> 15 per share due to the lower wind resources.
This negative impact was partially offset by the $160 million sale of the Red barn build transfer project in April which resulted in a larger gain than expected by <unk> <unk> per share.
Lower than expected operating and maintenance expense also positively impacted ALLETE clean energy's results by <unk> <unk> per share.
Our corporate and other businesses, which include new energy P&I energy and our investments in renewable energy facilities.
Net income of $10 6 million compared to net income of $2 2 million in 2022.
The second quarter of this year included $7 4 million of net income for new energy as a result of another outstanding quarter of project closings with attractive margins and in a new market.
We also realized increased earnings from Minnesota solar projects, which were placed into service in late 2022.
These increases were partially offset by timing of income tax expense in 2023 versus 2022.
Earnings per share dilution in the second quarter was approximately <unk> <unk> due to additional shares of common stock outstanding as of June 30.
Next a few comments on our outlook and 2023 guidance.
Year to date, we are on track with our original 2023 expectations and we remain confident in achieving our full year 2023 earnings guidance of $3 55 to $3 85 per share.
Regulated operations through the first half of the year were slightly higher than our expectations due to lower property tax expense and higher taconite margins at Minnesota power on.
On August one we receive demand nominations for the remainder of the year, indicating full year taconite production levels at approximately 37 million tons.
Four 4 million tons higher than our initial sales forecast and.
In addition, synovus and superior, Wisconsin and Ft paper in Duluth, Minnesota have both commenced operations in the first half of 2023.
<unk> continues to ramp up operations into the second half of the year.
ALLETE clean energy was below our expectations for the first six months of the year as lower wind resources resulted in lower revenue and Ptc's.
We are anticipating below normal wind for the second half of the year for ALLETE clean Energy's fleet.
New energy continues to execute on its plan. Following another strong quarter of project closings is growing and robust pipeline of over two Gigawatts. Further provides confidence for continued strong project closings in the second half of the year as such new energy is firmly on track to achieve or slightly exceed full year earnings.
A 16 million to $17 million as reflected in our initial guidance.
Finally, while financial results at Minnesota power are slightly above expectations through the first half of the year, we do not expect to earn our allowed return on equity in 2023 in part due to increased inflationary cost pressures as well as adding employees needed to implement our clean energy transformation strategy.
It is critical to earn an appropriate return on equity and accordingly, Minnesota power remains on track to file a rate case in November this year.
I'll now turn it back to Bethany for additional comments Anthony Thanks for that update Steve We're pleased with our progress executing elite strategy through the first half of 2023, just a few additional comments before we open the line for your questions.
As we continue to transform Minnesota Power's generation fleet and important part of our strategy includes significant but prudent investments in transmission and distribution, which we believe will enable us to meet clean energy goals, while maintaining and strengthening the reliability and resiliency of our system and the regional grid.
As we make these investments we're always focused on our customers and our teams are working hard to ensure we are providing the best value from state and federal grants to low cost federal financing, we are pursuing many opportunities to help reduce costs for our customers. We know our customers are counting on us to ensure.
Sure. This important transition is cost effective and we take that responsibility very seriously.
We also know that our nation's clean energy goals will require transmission on a larger scale not just within individual utility service territories are market, but interconnecting those markets. So leads engagement with grid. United also continues as progress is being made on the first of its kind North plains connector.
Project, which will enhance inter regional reliability and transfer capacity between the middle of the country and energy markets to the West we look forward to sharing more on this exciting project in the coming quarters.
This morning, we've mentioned just a few examples of the progress we're making in executing our strategy and as always we are committed to doing everything in the absolutely right way slide seven contains links to information on this important work, including our recently updated corporate sustainability report.
As you can hear from Steve in my comments, we're pleased with our execution and positioning here in the first half of 2023, and we're excited about the future. We're setting the stage for strategic significant and sustainable growth of elite with real projects already moving forward to support the clean energy transition.
Projects that will provide value to our customers meaningful investment in our communities opportunities for our employees and long term earnings and dividend growth for our investors. Thank.
Thank you for your interest and your investment in ALLETE and 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 one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again, please standby, while we compile the Q&A roster.
The first question comes from Richard Sunderland with Jpmorgan. Your line is open.
Hi, Good morning can you hear me.
Good morning, Rich we can.
Great. Thank you.
At the segment level detail on kind of one <unk> versus two <unk> in the 'twenty three outlook, but just curious on sort of an aggregate basis, how you see those different segments stacking up for the consolidated results any sense on trending in the upper half for lower half of the range at this point.
Yeah, Hi, Rich Steve Morris.
We're on track with our original guidance of $3 55 to $3 85.
We look at the midpoint right now, but no more no more clarity given by the segments.
Understood. Thank you.
Then turning to the upcoming renewables rfps.
Any thoughts on competitive positioning for opportunities to lead I know you've discussed this in the past, but just curious have you refined your thinking at all or seeing any changes in sort of a market outlook as we prepare to file them.
Yes, well, we believe rich this is Bethany, we believe that we will be.
Competitive these projects will provide great value I laid out kind of the criteria that we anticipate having as part of the rfps.
And providing greater overall value to our customers, we have mentioned that the solar.
<unk>, our regional solar projects that was what was approved in our integrated resource plan.
We believe Minnesota power will be very competitive in the RFP process.
Understood very clear and then just one last one.
I am confident solar energy storage potential are you able to size that at all or just what timeframe over which you expect to evaluate the opportunity there.
Good morning, Rich this is Jeff systems, a little early on that one rich, but what the goal is really to optimize the interconnection that we've got we've talked about in the past at some of our other sites as well so excited for the new customer and excited to work together to see if we can solve some some clean energy transition solutions.
Got it great. Thank you for the time today.
Please standby for the next question.
Yeah.
The next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, guys. Good morning. This is various on for Julien.
Wanted to.
Talking a little bit more detail about the new energy business. It seems like it has very strong momentum and I noticed the up slight update in.
Framing up the guidance.
As potentially opening the door to exceeding that $16 million to $17 million and net income can you talk about the quarterly momentum that youre seeing obviously 11 million for Q2, it's pretty well ahead of Q1, how youre seeing that shaping up for the second half of the year your guidance range, which is unchanged implies.
A slowdown so just curious how you would frame that please.
Yes, good morning area, Steve Morris, we did expect here to have a <unk>.
<unk> project closing in the second quarter, which did happen.
Which gave rise to $11 5 million.
Out of our original budget $16 million to $17 million. So.
<unk> won't be proportionate and I did say that we will could excite slightly exceed we're thinking one at $2 million. So we won't have those those quarters that we had on the second quarter every single year every single quarter.
Okay. Thank you I appreciate the detail there.
If I could ask one on Minnesota power.
Just wanted to.
Ask about the.
Notice that you filed with the Minnesota Court of Appeals relative to the last rate case wanted to make sure. It doesn't sound like that's going to impact the timing or the process of the upcoming rate case that you guys have alluded to for the second half of the year, but maybe if you could talk about how those two processes are expected.
To take place in parallel if you could.
Yes.
Steve more serious.
So the court of Appeals is not expected to take up that.
That case until 2024, we still are on track to file a rate case in November for us This year.
So unlikely to impact our rate case at this point in time.
Please standby for the next question.
The next question comes from Alex Mortimer with Mizuho Securities. Your line is open.
Hi team good morning.
Good morning, Alex.
I was hoping you could expand a little bit on the thought process of continuing to increase can lean more on the unregulated businesses to drive growth given that many others in the industry have chosen to get back to more of a pure play regulated model should we look at the strategy is just kind of just for this year given the challenging setup from the regulated business.
From the earlier.
Rate case decision or is this more of the strategy going forward.
Yes, that's our strategy isn't to really increase the non rig our strategy.
Clearly is to have complementary non Reg earnings if you look at our Capex, it's clearly.
Around the regulated investment opportunities that we have an increase rate base of over 11% on a CAGR, so I wouldn't characterize it as increasing.
Non rig we look at it is exactly the opposite great opportunities with our regulated.
<unk> as well as the leap transmission investment with complementary earnings from our nonregulated businesses.
Okay understood and then given the strong results at new energy equity is there any further appetite for M&A to continue to drive growth.
Good morning, Alex This is Jeff systems, I think we continue to see positive momentum with that group and that talented team and so we will continue to aid them in their execution of the strategy. So not not ruling anything out Alex but it would have to be have to fit with the overall strategy as well.
Alright, thanks, so much.
Thank you.
As a reminder to ask a question. Please star one one on your telephone please standby for the next question.
The next question comes from Brian Russo with Sidoti Your line is open.
Hi, good morning.
Good morning, Brian we want.
Just to follow up on new energy, if I recall, one of the assumptions was about 100 megawatts project closings.
In 2023, and I'm just curious.
How many megawatts of closings have you done through the first half.
Yes.
Brian Steve Morris, Yeah, we didn't disclose that this quarter so megawatt margins on megawatts are really.
Different depending on.
Where and what state so we didn't disclose that but we have disclosed in the past <unk>.
Approximately 100 megawatts for 2023, we are on track for that this year.
Okay, and then on <unk>.
Do you see more build own transfer type.
Transactions like Redburn.
Or.
As the market.
Becoming more.
Optimal for re contracting under purchase power agreements like you did with content.
Good morning, Brian . This is this is Jeff we'll continue to kind of navigate through the market and we're not opposed to either there's benefits to the build own transfers as far as they benefit from our net income and some cash flow, but we do.
Deal with this.
City of Seattle, and <unk> those are good projects. So we'll do what's.
Economic and the right strategy for both ALLETE clean energy and ALLETE.
Okay, and then lastly on Minnesota power.
Youre going to issue Rfps. This fall when might we get an outcome so that.
You can maintain kind of the capex profile under the five year plan.
Yeah. Thanks, Brian Stephanie So yes, we are planning to issue. The Rfps. This fall and we would anticipate kind of responses back and kind of being in a position to make a decision by the end of this year and the beginning of next year.
Okay got it thank you very much.
Thank you.
I show no further questions at this time I would now like to turn the call back to Destiny Owen for closing remarks.
Thank you again for being with US this morning, and for your investment and interest in ALLETE and we're looking forward to speaking with many of you at other investor venues in the coming months. We hope you enjoy the rest of your day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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