ALLETE Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 8 speakers on the call.

Operator

Good day, and welcome to the Elite Second Quarter 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 cause results to differ materially from those expressed or implied 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 or 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, Future events or otherwise. So welcome to the LEAP's conference call announcing Q2 2023 Financial Results. At this time, all participants are in a listen only mode.

Operator

After the speakers' presentation, there will be a question and answer As a reminder, this call is being recorded. 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 Senior Vice President and Chief Financial Officer, Steve Morris Jeff Sissons, ALLETE Clean Energy's Chief Financial and 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. We'll call out each This morning, ALLETE reported Q2 2023 earnings of $0.90 Per share on net income of $51,500,000 Last year's 2nd quarter results were $0.67 per share on net income of $37,600,000 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 ALLETE's original full year earnings guidance range of $3.55 to 3 $0.85 per share.

Speaker 1

Steve will be providing additional We're very pleased with our progress through the first half of the year as we execute our sustainability in 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. We're working closely with all of our diverse stakeholders as we advance the clean energy future in truly sustainable ways. On slide 3, 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 All of that is what we mean when we say we at ALLETE are leading the way to a truly sustainable clean energy future. Our outstanding Minnesota Power team continues working diligently to execute our more than $3,000,000,000 CapEx plan. An important part of that plan is our HVDC modernization project.

Speaker 1

This project will improve reliability and resiliency The transmission system by replacing aging infrastructure and modernizing the terminal stations for the 465 mile transmission line running from Center North Dakota to Duluth Minnesota. 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. The team is making great progress on this project. In addition to selecting the technology provider and securing key land rights earlier this year, On June 1, we filed the 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 application as complete, accepted our request To jointly process the Certificate of Need and the Route permit together and approve the use of an informal review process rather than a contested case.

Speaker 1

We're grateful to our Minnesota commissioners for these important decisions as they will allow Minnesota Power We plan to file a separate route permit application with the North Dakota 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 we'll jointly own with Great River Energy. This project, which is estimated to cost a combined total of $970,000,000 to $1,300,000,000 Represents another important investment in the reliability and resiliency of the transmission system. On August 4, we filed a combined certificate of need and route permit application with the Minnesota Commission and will continue to work through the next steps In June, Minnesota Power celebrated its largest solar facility to date, A 15.2 Megawatt Project Near Our Sylvan Hydro Station. This was one of 3 solar projects approved by the The Minnesota Public Utilities Commission in 2021 to spur economic recovery in Northeastern Minnesota following the pandemic.

Speaker 1

This project was also a unique partnership with White Earth Tribal and Community College, providing students with hands on learning as part of the college's solar training certificate program. We greatly appreciate the Minnesota Commission's 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 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, The use of local labor and a focus on increasing supplier and workforce diversity. All of this will help We're looking forward to sharing additional information as these important projects progress.

Speaker 1

Turning to ALLETE Clean Energy. As we previously announced, That talented and dedicated team successfully completed 2 build transfer projects with the sale of its northern wind project in Minnesota in January And in early April, the sale of its Redbarn Wind facility in Wisconsin to Wisconsin Public Service Corporation and Madison Gas and Electric. And the team is making progress on other fronts as well. Just 2 weeks ago, we announced that ALLETE Clean Energy entered into a 5 year power purchase agreement to sell wind power to Seattle City Light, the company's 1st municipal customer. 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.

Speaker 1

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 4, you can see a snap of New Energy Equity and just some of why we are 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 Steve?

Speaker 2

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 56 for significant variances and other items for comparison consideration. Today, ALLETE reported Q2 2023 earnings of $0.90 per share on net income of $51,500,000 Earnings in 2022 were $0.67 per share on net income of $37,600,000 Net income in the Q2 of 2023 included Strong earnings of $7,400,000 from New Energy, also benefiting 2023 second quarter net income Higher retail sales at a regulated operations, partially 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 as low wind persisted across much of the nation.

Speaker 2

A few details from our business segments. ALLETE's regulated operations segment recorded 2nd quarter 20 23 net income of $37,800,000 compared to $29,600,000 in 2022. Earnings were higher in the Q2 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, the entire 2022 interim rate refund reserve was recorded in the Q4 of 2022.

Speaker 2

You will see similar timing differences again in the Q3 and fully reversing in the Q4 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 Q2 2023 net income of $3,100,000 Compared to $5,800,000 in 2022, low wind resources impacted wind energy facilities across the nation And ALLETE Clean Energy was no exception. As a result, 2nd quarter results were below our expectations by approximately $0.15 per share due to the lower wind resources. This negative impact was partially offset by the $160,000,000 sale of the Red Barn build transfer project in April, which resulted in a larger gain than expected by $0.03 per share.

Speaker 2

Lower than expected operating and maintenance expense Also positively impacted ALLETE Clean Energy's results by $0.03 per share. Our corporate and other businesses, Which include New Energy, B and I Energy and our investments in renewable energy facilities recorded net income of $10,600,000 compared to net income of $200,000 in 2022. The Q2 of this year included $7,400,000 of net income from 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 are partially offset by timing of income tax expense in 2023 versus 2022.

Speaker 2

Earnings per share dilution in the Q2 was approximately $0.02 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 20 patience 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 taconate margins at Minnesota Power. On August 1, we received demand nominations for the remainder of the year, Indicating full year taconite production levels at approximately 37,000,000 tons or 4,000,000 tons higher than our initial sales forecast.

Speaker 2

In addition, Cenovus in Superior, Wisconsin and ST Paper in Duluth, Minnesota have both commenced operations in the first half of twenty twenty three. Cenovus continues to ramp up operations into the second half of the year. ALLETE Clean Energy Was below our expectations for the 1st 6 months of the year as lower wind resources resulted in lower revenue and PTCs. 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.

Speaker 2

Its growing and robust pipeline of over 2 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 of $16,000,000 to $17,000,000 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 log 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.

Speaker 2

Bethany?

Speaker 1

Thanks for that update, Steve. We're pleased with our progress executing ALLETE's strategy through the first half of twenty twenty three. Just a few additional comments before we open the line for your questions. As we continue to transform Minnesota Power's generation fleet, An 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 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 this important transition is cost effective and we take that responsibility very seriously.

Speaker 1

In individual utility service territories or markets, but interconnecting those markets. So Elite's engagement with GridUnited So continues as progress is being made on the first of its kind North Plains Connector project, which will enhance interregional 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 Slide 7 contains links to information on this important work, including our recently updated corporate sustainability report.

Speaker 1

As you can hear from Steve's and my comments, we're pleased with our execution and positioning here in the first half of twenty twenty three and we're excited about We're setting the stage for strategic, significant and sustainable growth of ALLETE 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 you for your interest and your investment in Elite. And at this time, I'll ask the operator to open the line for your questions.

Operator

The first question comes from Richard Sunderland with JPMorgan. Your line is open.

Speaker 3

Hi, good morning. Can you hear me?

Speaker 1

Good morning, Rich. We can.

Speaker 3

Great. Thank you. I appreciate the segment level detail on kind of 1H versus 2H in the 2023 outlook. But I'm 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 or lower half of the range at this point?

Speaker 2

Yes. Hi, Rich. Steve Morris. We're on track with our original guidance, 355 to 385. We look at the midpoint right now, but no more clarity given by the segments.

Speaker 3

Understood. Thank you. And then turning to the upcoming renewables RFPs, any updated thoughts on Competitive positioning for opportunities to lead. I know you've discussed this in the past, but just curious if you refine your thinking at all or Seeing any changes in sort of the market outlook as you prepare to file them?

Speaker 1

Yes. Well, we believe Rich, this is Bethany. We believe that we will be very 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.

Speaker 1

We have mentioned that the solar projects are regional solar projects that was what was approved in our integrated resource plan. So we believe Minnesota Power will be very competitive in the RFP process.

Speaker 3

Understood. Very clear. And then just one last one. The Condensed Solar Energy Storage potential, are you able to size that at all or just even what time frame over which you expect to evaluate the opportunity there?

Speaker 4

Good morning, Rich. This is Jeff Sissons. A little early on that one, Rich, but 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 Clean Energy Transition Solutions.

Speaker 3

Got it. Great. Thank you for the time today.

Speaker 1

Thank you.

Operator

Please stand by for the next question. The next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.

Speaker 5

Hey, guys. Good morning. This is Darius on for Julian. Wanted to talk in a little bit more detail about the new energy business. It seems like it has very strong momentum and I noticed the slight update in framing of the guidance as potentially opening the door to That $16,000,000 to $17,000,000 in net income.

Speaker 5

Can you talk about the quarterly momentum that you're seeing? Obviously $11,000,000 for Q2, it's Pretty well ahead of Q1. How you're seeing that shaping up for the second half of the year? Your guidance range, which is unchanged, It implies a slowdown. So just curious how you would frame that please?

Speaker 2

Yes. Good morning, Daria. It's Steve Morris. We did Expect here to have a significant project closing in the second quarter, which did happen, Which gave rise to $11,500,000 out of our original budget $16,000,000 to $17,000,000 So Quarters won't be proportionate. And I did say that we will could slightly exceed.

Speaker 2

We're thinking 1,000,000 to 2,000,000 So we won't have those quarters that we had on the 2nd quarter every single year, every single quarter.

Speaker 5

Okay. Thank you. Appreciate the detail there. If I could ask one on Minnesota Power, there's a Just wanted to ask about the notice that you filed with the Minnesota Court of Appeals Relative to the last rate case, I want 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 the how those two processes are expected to take place in parallel, if you could?

Speaker 2

Yes. That's Steve Morris, Darius. So the Court of Appeals is not expected to take up That case until 2024, we still are on track to file a rate case November 1st this year. So unlikely To impact our rate case at this point in time.

Operator

Please standby for the next Question? The next question comes from Alex Mortimer with Mizuho Securities. Your line is open.

Speaker 6

Hi, team. Good morning.

Speaker 1

Good morning, Alex.

Speaker 6

I was hoping you could expand a little bit on the thought process of continuing To increasingly 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 this strategy as 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 a strategy going forward?

Speaker 2

Yes. That's our strategy isn't to really increase The non reg, 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 increased rate base of over 11% on a CAGR. So Yes. I wouldn't characterize it as increasing non reg.

Speaker 2

We look at it as exactly the opposite. Great opportunities with our regulated Businesses as well as ALLETE Transmission Investment with complementary earnings from our non regulated businesses.

Speaker 6

Okay, understood. And then given the strong results at New Energy Equity, is there any further appetite for M and A to continue to drive growth?

Speaker 4

Good morning, Alex. This is Jeff Sissons. I think we continue to see positive momentum with that group and that talented team. And so we'll continue to aid them in their execution of the strategy. So not really anything out, Alex, but it would have to be it would have to fit with the overall lead strategy as well.

Operator

The next question comes from Brian Russo with Sidoti. Your line is open.

Speaker 7

Hi, good morning.

Speaker 1

Good morning, Brian.

Speaker 7

Just to follow-up on New Energy, if I recall, One of the assumptions was about 100 megawatts of project closings in 2023. And I'm just curious How many megawatts of closings have you done through the first half?

Speaker 2

Yes. Brian, it's Steve Morris. Yes, 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 Approximately 100 Megawatts for 2023, we are on track for that this year.

Speaker 7

Okay. And then on ACE, do you see more build own transfer type transactions like Redbarn Or is the market becoming more optimal for re contracting under Purchase power agreements like you did with Condon.

Speaker 4

Good morning, Brian. This is Jeff. We'll continue To kind of navigate through the market and we're not opposed to either, right? There's benefits to the build, don't transfers as far as They benefit from a net income and some cash flow. But we do the deal with the City of Seattle and at Condon, those are good projects.

Speaker 4

So we'll do what's Most economic and the right strategy for both ALLETE Clean Energy and ALLETE.

Speaker 7

Okay. And then lastly on Minnesota Power, You're going to issue RFPs this fall. When might we get an outcome so that You can maintain kind of the CapEx profile under the 5 year plan.

Speaker 1

Yes. Thanks, Brian. This is Bethany. So yes, we are planning to issue the RFPs this fall and we would anticipate kind of And kind of being in a position to make a decision by the end of this year and the beginning of next year.

Speaker 7

Okay, got it. Thank you very much.

Speaker 1

Thank you.

Operator

I show no further questions at this time. I would now like to turn the call back to Bethany Owen for closing remarks.

Speaker 1

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.

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Earnings Conference Call
ALLETE Q2 2023
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