ALLETE Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the ALLETE Third Quarter of 2023 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 defined 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 Cost 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.

Operator

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. 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, Welcome to ALLETE's Conference Call Announcing Third Quarter 2023 Financial Results. And at this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer As a reminder, this call is being recorded.

Operator

I would now like to turn the call over to Bethany Owen, Chair, President and CEO. You may begin.

Speaker 1

Thank you, and good morning, everyone, and thanks for joining us. With me today are ALLETE's Senior Vice President and Chief Financial Officer, Steve Morris Jeff Sissons, ALLETE Corporate Development and ALLETE Clean Energy Strategy Officer and Frank Frederiksen, Minnesota Power's Vice President of Customer Experience and Engineering Services. Corresponding slides for this morning's call are available on our website at elite.com in the Investors section and we'll call out each page number as we go through today's presentation. This morning, we are pleased to report ALLETE's 3rd quarter 2023 earnings of $1.49 per share on net income of $85,900,000 Last year's Q3 results were $0.59 per share on net income of $33,700,000 Steve will be providing additional details on our financial performance during the quarter and our revised full year 2023 guidance in a moment. I'll begin with brief updates on just a few of our key strategic projects.

Speaker 1

Starting with our largest business, our Minnesota Power team continues to make significant progress on projects that are foundational to Elite's Sustainability in Action strategy, including the more than $3,000,000,000 Capital expenditure plan to advance our carbon free energy vision. Slide 3 shows an important part of that plan, our HVDC modernization This project will replace aging infrastructure and modernize the terminal stations for our 4 65 mile DC to some of the best wind resources in the country and will also enhance the reliability and resiliency of the grid across the upper Midwest. Our team has worked hard to advance this important project and to secure government grants to help reduce the project's cost for customers. In May, Minnesota Power was awarded a $15,000,000 grant toward the project as part of the energy bill passed by the Minnesota legislature. And just a couple of weeks ago, we were very pleased to learn that the U.

Speaker 1

S. Department of Energy awarded Minnesota Power a $50,000,000 grant for the project, following a competitive process among hundreds of applicants nationwide. We're grateful for this meaningful support from the State of Minnesota and the Department of Energy helping to make this important project even more affordable for our customers. Construction could begin on this $800,000,000 to $900,000,000 project as early as next year pending regulatory approvals in North Dakota And Minnesota with an in service date expected later this decade. Our team is also making Great progress on the Northland Reliability Project, a 3 45 kV transmission line from the Iron Range in Northern Minnesota to Central Minnesota, which we'll jointly own with Great River Energy.

Speaker 1

This project was approved by MISO in the first of its long range transmission plan and is estimated to cost a combined total of $970,000,000 to $1,300,000,000 representing another important investment in the reliability and resiliency of the transmission system. In August, we filed a combined certificate of need Another project approved by MISO in the first tranche of its LRTP is the Big Stone South Transmission Project, A 150 mile, 345 kV transmission line jointly owned by 5 utilities, including Minnesota Power. A certificate of need was filed with the MPUC in September and the commission will determine the final route for the Minnesota portion of the project as well as cost recovery for our approximately $20,000,000 share. In addition to this exciting progress on the transmission We're making progress on our renewable RFPs. On October 2, Minnesota Power filed a notice with the MPUC of our plan to issue an RFP for up to 300 megawatts of solar later this month.

Speaker 1

We also plan to issue an RFP for up to 400 megawatts of wind by the end of the year. The Solar RFP will emphasize important attributes such as investment in our host communities, the use of local labor and a focus on increasing supplier and workforce diversity. All of this will help ensure these solar projects deliver the best overall value to As planned yesterday, Minnesota Power filed a rate proposal with the Minnesota Public Utilities Commission. This proposal will help ensure Minnesota Power Minnesota Power became the 1st utility in the state to deliver 50% renewable energy in 2020 and reached an all time high of nearly 60% renewable energy for customers in 2022. And I'm so proud of our Minnesota Power team and all that our company has done to lead our state's clean energy All while safeguarding reliable service providers to provide meaningful programs to support our low income customers As well as state leading energy conservation programs and time of day rates that provide options for customers to We will continue to make affordability for all of our customers a priority.

Speaker 1

There is more work ahead We're confident that our regulators understand the importance of a constructive outcome to help ensure Minnesota Power's ability to continue our clean energy transformation, while delivering the safe, resilient and while delivering the safe, resilient and reliable service that powers people's lives and businesses throughout Northeastern Minnesota. Steve will share more details on the rate case filing in a moment. One other note on the regulated operations front, I'm pleased to report that Superior Water, Light and Power began generating renewable energy from its first community solar garden last month. Superior Solar is a 4 70 kilowatt project built by local labor and with regionally sourced materials. The Solar Garden is fully subscribed generating enough energy to power approximately 115 homes And it's the 1st energy generated locally by Superior Water, Light and Power in more than 40 years.

Speaker 1

Turning briefly to our non regulated businesses. It was great to receive the very positive arbitration outcome in favor of ALLETE Clean Energy recently. The ALLETE Clean Energy team has endured the historically low wind conditions that affected much of the nation this quarter and have worked hard to mitigate the effects, including increasing efficiencies and unit availability, implementing O and M reductions and many other initiatives. They're a strong team and I couldn't be more proud of their resilience and innovation throughout the year. And finally, as we close in on the 1st full calendar year with New Energy Equity as part of the ALLETE family of businesses, we're excited about the team's Positive momentum.

Speaker 1

New Energy Equity continues to grow its already strong pipeline of more than 2 gigawatts, all while executing on current projects and delivering solid financial results. As mentioned previously, we expect New Energy to We've made strong progress And I'm grateful to our entire team across our family of businesses for their dedication, expertise, resiliency, Innovation and always their integrity. Our team is committed to serving our customers with excellence every single day. Now I'll turn it to Steve for additional details on our Q3 financial results, full year earnings guidance and Minnesota Power's rate case filing. Steve?

Speaker 2

Thanks, Bethany, and good morning, everyone. I would like to remind you that we filed our 10 Q this morning and encourage you to refer to it for more details. Please refer to slides 6 through 8 for significant variances and other items for comparison consideration. Today, ALLETE reported 3rd quarter 2023 earnings of $1.49 per share on net income of $85,900,000 Earnings in 2020 2 were $0.59 per share and net income of $33,700,000 Net income this quarter included a $40,500,000 or $0.71 Per share after tax gain recognized for a favorable arbitration award involving a subsidiary of ALLETE Clean Energy. Also impacting this quarter was the timing of reserves for interim rates resulting from Minnesota Power's February rate case order.

Speaker 2

A few details from our business segments. ALLETE's regulated operations segment recorded Q3 2020 net income of $34,000,000 compared to $38,300,000 in 2022. Earnings were lower in the Q3 of 2023, reflecting the timing of interim rate reserves at Minnesota Power compared to 2022. As you may recall, the entire 2022 interim rate reserve was recorded in the Q4 of 2022, which has resulted in timing differences each quarter throughout 2023. The timing difference of these reserves will fully reverse in the Q4 of this year.

Speaker 2

Partially offsetting this impact was increased sales to industrial customers during the quarter. ALLETE Clean Energy recorded 3rd quarter 2023 net income of $54,800,000 compared to a net loss of $7,300,000 in 2022. Net income this quarter reflected the gain in interest income for the favorable arbitration award at The anticipated loss on the sale of the Northern Wind project. Our corporate and other businesses, which includes New Energy, BNI Energy and our investments in Renewable Energy Facilities recorded a net loss of $2,900,000 compared to net income of $700,000 in 20.22 Net income this quarter reflects higher consolidated income tax expense, Partially offset by earnings from Minnesota solar projects, which were placed into service late last year and in the Q2 of this year, New Energy's earnings in this quarter were slightly below 2022, primarily due to the timing of project closings now expected in the 4th quarter And higher operating and maintenance expense as compared to last year. ALLETE's financial position is supported by a strong balance sheet that includes Cash and cash equivalents of approximately $126,000,000 $370,000,000 in available consolidated lines of credit And a debt to capital ratio of 35% at the end of the quarter.

Speaker 2

The arbitration award had a positive impact on our liquidity position with approximately $60,000,000 reflected in cash and cash equivalents at the end of the 3rd quarter. Next, a few comments on our outlook and full year 2023 guidance. Please refer to Slide 9 for additional details. Considering a number of factors occurring during the year as well as our anticipated results for the Q4, We have revised Elite's 2023 full year earnings guidance to be in a range of $4.30 to $4.40 per share. Specific items affecting Elite's updated guidance includes the 3rd quarter arbitration award, A third party network outage expected to negatively impact the Cata Wind Energy Facility in the Q4 and historically low winds across much The nation affecting earnings at ALLETE Clean Energy's wind energy facilities throughout the year.

Speaker 2

These items in total Had a positive impact of approximately $0.30 per share included in our guidance update. Next, a few comments on the recently filed Minnesota Power rate case. Please refer back to Slides 45 for several highlights on the filing. Yesterday, Minnesota Power filed a retail rate increase request with the Minnesota Public Utilities Commission, seeking an increase of approximately $89,000,000 in total additional annual revenue, Net of rider revenue moving to base rate. The filing seeks a return on equity of 10.3% and a 53% equity ratio.

Speaker 2

Our request includes net interim rates of approximately $64,000,000 which is expected to begin in January 2024 With approval by the commission, interim rates are subject to refund. We anticipate final rates would be implemented sometime in late 2025. Our rate case request supports EnergyForward goals by transitioning to new supplies of renewable energy, Building more resiliency into the electric grid to ensure reliability, employing the workforce necessary to achieve a clean energy transition, Addressing inflation and supply chain issues and by providing a fair return on investment to attract capital for continued investment in the clean energy future. The rate case assumes taconite production of approximately 35,000,000 tons, which is in alignment with the long term average production levels for taconite. In addition, Minnesota Power has proposed a rate stabilization mechanism to address and mitigate the financial impacts related to operational volatility of its large power customers.

Speaker 2

This proposal offers a simple and balanced method to align risks and benefit of large power load volatility that can be applied between rate cases. The filing also accounts for approximately $39,000,000 previously approved for recovery through transmission and renewable riders the Minnesota Public Utilities Commission for capital costs of the Great Northern Transmission Line and production tax credits By moving rider billings into base electric rates, this change from rider billings to base rates will not alter We will share procedural updates on material developments as the filing progresses. I'll now turn it back to Bethany for additional comments. Bethany?

Speaker 1

Thanks for that update, Steve. As you can hear, we're very pleased with our progress advancing ALLETE's sustainability in action strategy and we expect even more in the coming years. Elite is a strong, growing and vibrant company with a talented team and a family of businesses that are well positioned to thrive now and long into the future. Together, these businesses provide sustainable long term earnings growth and many opportunities I'm equally proud that how we do business is always a differentiator of ALLETE and our team. We're committed to working closely with our many diverse stakeholders as we continue to execute our sustainability in action and we'll continue to update the CSR regularly as we execute our strategy.

Speaker 1

We look forward to sharing more energy transforming Progress in future quarters. We've set the stage for strategic, significant and sustainable growth at ALLETE with real projects that build on the strategic assets we already have and leverage the strength and experience of our amazing team. We're proud of ALLETE's track record and excited about the future as we provide cleaner energy to our customers, Meaningful jobs and significant investment in our communities, exciting opportunities for our employees and attractive value for our investors That is putting sustainability into action. Thank you for your interest and your investment in ALLETE. At this

Operator

Our first question comes from the line of Richard Sunderland of JPMorgan. Please proceed with your question.

Speaker 3

Hi, good morning. Thank you for the time today.

Speaker 1

Good morning.

Speaker 3

Starting on the capital side, With these 2 RFPs, the 300 megawatts of solar and the 400 megawatts of wind, when do you anticipate Having line of sight to those outcomes and would that line of sight also drive a capital plan revision As well, how are you thinking about the capital plan overall in light of the moving pieces on the transmission side as well? I guess just curious about the cadence of updates you might give into 2024 here.

Speaker 2

Yes. Good morning, Rich. Steve Morris. So I can take that. As Bethany mentioned, we do plan to issue the solar RFP later this month and the wind as well later this year.

Speaker 2

We would expect the RFP award selection midway through 2024 with the commission approval process later in 2024. So, if successful, we could have capital costs later in this year, Certainly, could slide into 2025 as well. We'll have a little bit more clarity, We think by our conference year end conference call in February, which will update our capital schedule at that point in time. Overall, though, we do not Expect our successful on these our capital to decrease.

Speaker 3

Certainly, certainly. Thanks for running through the timeline there. I guess the other side of the coin, there's been questions Over the past year since you raised the capital plan around financing, how are you thinking about Financing at this point is certainly topical in light of interest rates, move in sector valuations. I'm also curious how you think about the financing plan with the arbitration award. Is This is something that gives you even incremental flexibility on a sort of financing capital rotation, what have you standpoint?

Speaker 3

Any thoughts there would be helpful.

Speaker 2

Yes. Thanks. Good question, Rich. So yes, we have, as I mentioned on the call, an additional $60,000,000 in cash for the arbitration award They can be used for future CapEx projects to reduce equity needs as well as we've talked about this before, Renewable tax credit sales, so we're working on that. That could generate, potentially 40 $1,000,000 of sales for the 23 credits could be the same number for 24 as well.

Speaker 2

So that will help. I also mentioned on the call debt to equity at 35% at the end of the quarter, which we expect it to Continue, which gives us some headroom on additional leverage. We've also talked before about forming a HoldCo, which gives us financial Optionality. And as we've discussed before and as we always do, we consider maximizing the value of all our assets With opportunistic redeployment of capital into our regulated CapEx program. With that said, and

Speaker 3

Thank you. Very helpful. And one final one for me. Thanks for laying out all the details around the rate case. Curious if you could speak a little bit to the stakeholder engagement side in advance of this filing and around the filing itself.

Speaker 3

Obviously, a lot of telegraphing you've done out of the last rate case around the needs for this case in particular. Anything you could speak to on that side?

Speaker 1

Yes. I'll start and maybe Frank can speak to more specifically on the customer side. This is Bethany. Certainly, we view our Engagement with all of our many stakeholders as incredibly important precursors to any of our regulatory processes and certainly Engaged in that in advance of our 2019 IRP and have developed a really robust network and communication strategy around Ensuring that everyone understands kind of our strategy to move clean energy forward, while we continue to preserve reliability And affordability providing value to all of our customers. And I mentioned some of the really key strategic initiatives that we've Put into place to help support lower income customers, but all of our customers, That's a key priority.

Speaker 1

So certainly, many conversations happening, making sure that people understand The reason for the rate case and what we're planning to do and needing to do with those dollars. And so Frank, do you want to speak to Customers overall?

Speaker 4

Certainly. Thanks, Bethany, and thanks for the question, Richard. So yes, I mean, we work closely with our customers and trying to with our largest Customers working on helping them with estimates and they too have inflation in their operations like us. So I mean there is Level of understanding in that and we also pace with all of our customers and stakeholders on the clean energy legislation Minnesota Power's renewable energy leadership finishing off at nearly 60% renewables in 2022 for our retail Customers and sharing the progress that is continuing on that as some of the key drivers for this case.

Speaker 3

Understood. But just to be clear though, have you had conversations around the rate stabilization mechanism In advance of the case itself, I know it's a little bit of a different proposal this time than what you saw in the past. Just curious about the backdrop for that specifically.

Speaker 1

We have. Frank, do you want to speak to that?

Speaker 4

Yes. Thank you. So yes, I mean, we have had some of those conversations with that Around the stabilization mechanism as to do some more listening, but also sharing In terms of the sales volatility that Minnesota Power has, that's larger than some of the other peer utilities in the state And some of that's built out in our case and also built out in our taconate forecast We've been reaching out with all the different stakeholders that will be involved in this case and explaining it and explaining how this can

Operator

One moment please for our next question. Our next question comes from the line of Alex Mortimer of Mizuho Securities. Your line is now open.

Speaker 5

Hi, good morning team. Congratulations on the quarter.

Speaker 1

Good morning, Alex. Thank you.

Speaker 5

So within your stated 5% to 7 EPS growth rate, I'm just curious on the consolidated business, can you touch on where you expect the different businesses to be within that range, I. E. The utility maybe But the unregulated above or vice versa, obviously understanding it can fluctuate year over year given rate relief and other drivers.

Speaker 1

That's not the case, but Steve,

Speaker 2

do you want

Speaker 1

to speak to that?

Speaker 2

Yes. Good morning, Alex. Steve Morris here. If you look at our CapEx table, you can see it's really heavily regulated in fact with the Projects that we have and the renewable efforts going underway at Minnesota Power. So the 5% to 7% is more heavily Weighted towards the regulated business and what we say is complementary earnings from our non regulated business, primarily ALLETE Clean Energy and New Energy.

Speaker 5

Okay, understood. And then turning back to the rate case, can you touch on any items in the recent filing that you think might More work or more education with policymakers and interveners, given that I

Operator

know you just touched on

Speaker 5

some stakeholder engagement, but sort of any ongoing efforts As you work through the case.

Speaker 1

Yes. I think I would just say Alex that we've worked hard over the last few years to help our Regulators and other stakeholders understand the differentiated aspects of our company, our Customers, the region that we serve and I think they have a really strong appreciation and understanding for all of that and certainly why we're in for this rate

Speaker 5

Makes sense. All right. Thank you so much. Congrats again on the quarter and look forward to seeing you all soon.

Speaker 1

Thanks, Alex.

Operator

Thank you. One moment please for the next question. Our next question comes from the line of Brian Russo of Sidoti. Your line is now open.

Speaker 6

Yes. Hi, good morning.

Speaker 1

Good morning, Brian.

Speaker 6

Just to follow-up on the RFP process, I assume Elite or Minnesota Power has submitted their own self build Options within these RFPs and I was just wondering if you could remind us of the competitive advantages That you have and have those advantages been even more enhanced given kind of the macro environment Issues facing a lot of 3rd party developers?

Speaker 2

Yes. Good morning, Brian. Steve Morris. So a couple Comments. So the RFPs have not been issued yet.

Speaker 2

So that is the Solar 1 mid November Wind in the 4th quarter as well. So Minnesota Power does in fact tend to With for both of these RFPs, we've talked about this on previous Conference calls where the solar is regional solar. So we really think that in and around the Basel area where the Minnesota Power has the infrastructure in place. So we feel good about that. Other than that, I'm not going to get into too much details on the call.

Speaker 6

Okay, understood. I suppose that most of these potential RFP investments Would be rider eligible and not really have to go through full general rate cases to get timely recovery?

Speaker 2

Yes, that's right. These would be Ryder projects, Brian.

Speaker 6

Okay, great. And then also any insight into taconite demands given what we've seen with the union strikes, So steel prices, I know you guys are the demands are set through year end, but I just thought maybe you could comment on that.

Speaker 4

Thanks, Brian. Frank Frederiksen here. So we have seen, as you mentioned, strong nominations This year since the restart of Northshore, mining and at a partial operation level in April. And we have seen our steel customers have made some commentary recently in terms of the impacts of the United Auto Workers strike. And Really, as we look to 2024, we were projecting and filed in our rate case that average level of production Right around 35,000,000 tons as just balancing out what we've seen for actuals in 2022 and Near final year projections here in 2023.

Speaker 6

Okay, great. And then on ALLETE Clean Energy, Could you just discuss any asset optimization opportunities you might have that could Enhance your cash or liquidity position, I think maybe Whitetail and maybe Russo were 2 kind of Ranking higher on the list for maybe build own transfer or sale etcetera.

Speaker 7

Good morning, Brian. This is Jeff. Yes, and thanks. You did highlight 2 of the projects in our development pipeline with Whitetail being Much further along, working on permitting and finding the right offtake. Also highlight that we do We call these our legacy assets and we do believe that they're prime for repower and redevelopment.

Speaker 7

So working on those as well.

Speaker 6

Okay, great. And just on New Energy, given what we've seen in the renewable Sector, through the macroeconomic headwinds, inflation, higher cost of capital, what are you seeing in what seems to be a rather unique Distributed solar market for new energy, what are you seeing in the competitive Landscape or just the operating environment?

Speaker 7

Yes. Brian, this is Jeff again. And you touched on some of the factors. There's Certainly been some headwinds, but there's been some tailwinds as well in that sector, including the Aira and the benefits that came from the Aira. So we continue to We're excited about the team.

Speaker 7

They're performing well. They're a talented group and excited to have them a part of Elite. And as you heard from Bethany earlier, They've executed on their plans and slightly ahead. So they continue to be bullish and optimistic in navigating and that's been their history That sector has had some ups and downs and they've managed well and expectations are still that they can continue.

Speaker 6

Okay, great. Thank you very much.

Speaker 1

Thanks, Brian.

Operator

One moment please for our next question. All right. Our final question comes from the line of Tanner James of Bank of America. Your line is now open.

Speaker 8

Hi, good morning.

Speaker 1

Good morning.

Speaker 8

Hi. All my other questions were asked and answered, but I did want to check-in on New Energy. You previously stated you were on track for about 100 megawatts of project closings for the year. There were some timing impacts here in the Q3. Looking into the current quarter, is there potential for some of these projects perhaps to slip into 2024?

Speaker 7

Good morning, Tanner. This is Jeff. And there's certainly fluid. The market is fluid and timing and close

Speaker 8

All right, great. Thank you very much.

Speaker 1

Thank you.

Operator

Thank you. At this point, I would now like to turn the conference back to CEO, Bethany Owen for closing remarks.

Speaker 1

Thank you again for being with us this morning and for your investment and interest in ALLETE. We're looking forward to speaking with many of you in just over a week during the EEI Financial

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

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