ALLETE, Inc.
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good day and welcome to the ALLETE Third Quarter 2013 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 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 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 events, or otherwise. For opening remarks and introductions, I’d now like to turn the conference over to ALLETE President and Chief Executive Officer, Alan R. Hodnik. Please go ahead sir.

[Alan R. Hodnik:]

Good morning and thank you for joining us today. Mark Schober, ALLETE's Chief Financial Officer, is with me on the call. Today we reported third quarter earnings of $0.63 per share compared to $0.78 per share a year-ago. Year-to-date we have earned $1.81 per share and we expect our year-end earnings will be within the lower half our previously stated earnings guidance range of $2.58 to $2.78 per share. Mark, will give you with the analysis of the financials and outlook for the reminder of the year in a few moments. The third quarter of 2013 was a very successful one in terms of achieving a number of important milestones with regards to ALLETE’s, multiyear, multifaceted growth strategy. For instance on September 25, the Minnesota Public Utilities Commission approved Minnesota Power’s Integrated Resource Plan or our Energy Forward strategic plan. We are very pleased about the commission’s endorsement of this plant, which is a balanced approach to energy transformation and one designed to assure reliability, protect affordability, while further improving environmental performance. In a separate action, the commission also approved Minnesota Power’s proposal to invest approximately $350 million in additional environmental control technology at our Boswell Unit 4 generating station. Work has begun on this project and we expect to complete the retrofit at Boswell Unit 4 by earlier 2016. Also on September 25, the North Dakota Public Service Commission approved the site permit for construction of the Bison 4, 205 megawatt wind project. As a result, construction has commenced and is expected to be completed by the end of 2014. Total project investment is estimated at $345 million. On September 27, Minnesota Power filed a petition with the Minnesota Public Utilities Commission seeking current cost recovery for the investments and expenditures related to Bison 4. Turing to the energy transmission infrastructure investments portion of our growth strategy, last week we announced that Minnesota Power has filed a Certificate of Need application with the Minnesota Public Utilities Commission for the approximately 240 mile, 500kV Great Northern Transmission Line. This line will be used to carry renewable hydroelectric power from Manitoba Hydro to Minnesota's Iron Range. Minnesota Power will own 51% while a subsidiary of Manitoba Hydro will own 49%. We expect the total cost of this project to be $400 million to $600 million, putting Minnesota Power’s investment in the $200 million to $300 million range. Construction is anticipated to begin in June of 2016 and we expect the line to be in service in June of 2020. With the Boswell 4 and Bison 4 projects now underway and the Certificate of Need application filed for the Great Northern Transmission Line, we have continued to make significant progress in moving forward with our multiyear multi-faceted growth strategy. And I firmly believe that these growth opportunities compare very favorably and set us apart in many ways from other companies within our industry. I will return in a few moments to make some additional comments, but at this time, I will turn the call over to Mark Schober. Mark?

[Mark A. Schober:]

Thank you Al 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 the details on the quarter. For the third quarter, ALLETE earned $0.63 per share, a net income of $25.2 million and operating revenue of $251 million compared to $0.78 per share, a net income of $29.4 million and operating revenue of $248.8 million in 2012. Income from ALLETE's regulated operation segment, which includes Minnesota Power, Superior Water, Light & Power, and our investment in the American Transmission Company was $24.6 million in 2013 compared to $29.3 million in 2012. Operating revenue for this segment was similar to 2012 with higher transmission revenue and cost recovery rider revenue offset by lower fuel adjustment costs recoveries and lower sales to residential, commercial and municipal customers. Transmission revenue increased $1.1 million from 2012, primarily due to recovery of our transmission system upgrade to support Essar's project and higher MISO revenue related to our investment and CapEx 2020. Cost recovery rider revenue increased $600,000 from 2012, as the Bison 2 and 3 wind generating facilities were completed in various phases through December 2012 and in service for the full third quarter of 2013. Fuel adjustment cost recoveries decreased $1.2 million from last year, primarily due to lower sales to our retail and municipal customers. Total kilowatt-hour sales were down slightly from the same quarter last year, resulting in $1.5 million decrease in revenue. Sales to our residential, commercial, and municipal customers were down 5%, largely due to milder temperatures during the third quarter of 2013 compared to the same period in 2012. The decrease was offset by a 14% increase in kilowatt-hour sales to other power suppliers over 2012. Sales to other power suppliers are sold at market base prices into the MISO market on a daily basis or through bilateral agreements of various durations. Our total kilowatt-hour sales were similar to last year, market prices for sales to other power suppliers were lower than residential and commercial rates and resulted in lower margin. Kilowatt-hour sales to industrial customers decreased about 1% from 2012, primarily due to a 66 million kilowatt-hour sold in the third quarter of 2012 through a short-term fixed price contract. Now a few details on the expense side of the business. Regulated Operations operating expense increased $7.6 million or 4% over the same quarter of 2012. Operating and maintenance expense was up $2.2 million or 3% from 2012 primarily due to higher property tax expenses as a result of higher taxable plant in rigs and higher operating and maintenance expenses related to our Bison Wind Energy Center, which has been in service all of 2013. Fuel and purchased power expense increased $1 million from 2012, primarily due to higher prices. Depreciation expense rose by $4.4 million for the quarter attributable to the significant capital investment program at our regulated operations. Earnings from our investment in ATC were similar to 2012. Income tax expense decreased $3.4 million from 2012, mainly due to lower pretax income and higher federal production tax credits in 2013 related to the Bison 2 and 3 wind generating facilities. ALLETE’s Investment and Other segment, which includes results from BNI Coal, ALLETE Properties, ALLETE Clean Energy and other corporate income and expenditures, reported $600,000 of net income, compared to $100,000 for the same quarter in 2012. Gains from the sales of securities during the quarter were partially offset by higher state income taxes. In 2012, we’ve recognized more North Dakota income tax credit than in 2013. Our effective tax rate in the third quarter of 2013 was 25.7%, similar to the same period last year. We anticipate the effective tax rate for 2013 will be approximately 22%. Year-to-date, we have generated $189 million in cash from operating activity. And at the end of the quarter, we carried cash and cash equivalents of $165 million and a 46% debt to capital ratio. Net income for the nine months ended September 30, 2013 was $71.7 million, compared to $68.2 million for the same period in 2012. ALLETE has earned $1.81 per share through September. For the most part our financial performance has been as we have anticipated, but there had been a few exceptions. For one, at the beginning of this year we have expected Essar Steel Minnesota project to be close to a startup phase during the second half of this year. Last quarter, we announced that we now expect Essar to begin startup during 2014. We originally expected a small financial impact on earnings from Essar in our original guidance and we now expect none for 2013. Additionally, we’ve seen an increase in property tax rates from original expectations. The timing of our capital investment has also had an effect on earnings and as the year has unfolded we now estimate that approximately half of our 2013 capital expenditures will be incurred in the fourth quarter. None of these exceptions individually are material to our financial results, but these and other relatively minor items have had a collective impact. In light of all these factors we now anticipate our year-end earnings will be in the lower half of our previously stated guidance range of $2.58 to $2.78 per share. Al?

[Alan R. Hodnik:]

Thank you, Mark. ALLETE is an energy company that has, in my opinion, above the average earnings growth opportunities that stretch to the end of this decade. Earlier I had talked about several significant capital investments that will provide the rate base growth through 2020. ALLETE is unique in that it also has organic growth opportunities within mineral-rich northeastern Minnesota. I would like to give you an update on two of these; PolyMet Mining and Essar Steel Minnesota. PolyMet is the first potential new nonferrous mining company that could begin operations in northeastern Minnesota, which contains one of the largest untapped reserves of copper, nickel and precious metals in the world. PolyMet’s long-awaited Supplemental Draft Environmental Impact Statement is expected to be out and available by year end. This will be a significant milestone for PolyMet and will hopefully result in PolyMet receiving their final permits some time in 2014. PolyMet was previously fined a 45 MW to 75 MW contract with Minnesota Power and upon receipt of the final permit could finalize their construction on facilities in 2015. Another new entity and one we have been discussing for sometime now is Essar Steel, Minnesota’s new taconite facility that is under construction on the western Mesabi Range. Essar is served by the City of Nashwauk, which is one of Minnesota Power’s municipal customers. Essar also has found a contracting place and they represent up to 110 megawatts of new load for Minnesota Power. Essar has invested to date over $860 million in their project that is expected to cost about $1.6 billion at completion. Essar anticipates the beginning of blasting, mining and commissioning of equipment in 2014. They expect to begin increasing their electric power requirements as they ramp up production in late 2014. Essar expects to achieve a 4 million ton production level by the first half of 2015, increasing towards a full production level of 7 million tons by the end of 2015. In addition to capital investment and organic growth opportunities, ALLETE remains focused and disciplined as we actively analyze potential new energy-centric investment prospects within the energy infrastructure or energy infrastructure services area. We anticipate issuing our 2014 earnings guidance sometime during December. At this point, we expect continued strong sales from our mineral and paper customers who by the way will be making their nominations from the January through April 2014 period on December 1. The outlook for taconite production appears to be favorable. I would like to point out to you that while their Northshore facility is not an industrial customer of ours; Cliffs Natural Resources plans to reopen two idle lines at its Northshore Mining facility in anticipation of additional taconite sales in 2014. Our guidance will also include earnings from the Bison 4 and Boswell 4 projects. Additionally, we expect expense increases due to asset additions and share issuances as we fund the largest year of capital expenditures ever at our company. I fully expect the lead to remain on track to meet our long-term 5% average annual earnings growth objective using 2010 as the base year. We look forward to continuing to execute our multiyear multi-faceted growth strategy. At this time, I will ask the operator to open up the lines for your questions.

[Operator:]

Thank you. (Operator Instructions) And our first question comes from Paul Ridzon from KeyBanc. Please go ahead.

[Paul T. Ridzon:]

Good morning.

[Alan R. Hodnik:]

Good morning, Paul.

[Paul T. Ridzon:]

Considering all your comments, but do you think still you get fully subscribed in the December 1 nominations?

[Alan R. Hodnik:]

We are not seeing any signals or signpost o the contrary, Paul. Certainly again we don’t serve the Northshore Mining facility at Silver Bay directly, but certainly, all what I see with regard to domestic steel production and consumption of ore would suggest that the mineral customers and paper customers are going to nominate at full house.

[Paul T. Ridzon:]

And how many lines is Northshore opened?

[Alan R. Hodnik:]

The Northshore facility up at Silver Bay has four processing lines, they have had idled for roughly the last year and half. So they are just restarting two lines of their multi-line operation up there.

[Paul T. Ridzon:]

And Mark, just any update on interest in Florida?

[Mark A. Schober:]

Yes, we continue to see more activity there, Paul. The good news is that we finally did close a transaction this week down in Florida. So you will see that in Q4 results that will providing a couple of cents of earnings here. So we continue to see activity and things are finally starting to close down there or continue to improve.

[Paul T. Ridzon:]

You’ve said a couple of cents?

[Mark A. Schober:]

Yes.

[Paul T. Ridzon:]

Okay, thank you very much.

[Mark A. Schober:]

You bet.

[Alan R. Hodnik:]

Thanks Paul.

[Operator:]

Thank you. And our next question comes from Brian Russo from Ladenburg Thalmann. Please go ahead.

[Brian J. Russo:]

Hi, good morning.

[Alan R. Hodnik:]

Good morning Brian.

[Brian J. Russo:]

Just to follow-up on the property sale, can you be a little bit more specific, which property, how many acres et cetera?

[Alan R. Hodnik:]

It’s not acres. It’s a smaller sale in the Town Center area, Brian. So we’ll get all the details to you as we close the quarter, but it’s not a huge sale, but again it’s an indicator of things that are starting to improve there.

[Brian J. Russo:]

Could you quantify the price?

[Alan R. Hodnik:]

Not today, no I can’t.

[Brian J. Russo:]

Okay. Is it in your third quarter queue or we‘ll have to wait for the fourth quarter?

[Alan R. Hodnik:]

It will be in the fourth quarter queue.

[Brian J. Russo:]

Okay. And then just on the guidance and guiding towards the lower half of previous range, there seems to be several moving parts, some of which are just timing and others which might be ongoing and I was wondering if you could just go through them like on weather, property taxes, BSR timing and then the shift in the CapEx on the peripheral basis?

[Alan R. Hodnik:]

Yes. As I look at where we are going towards the end of the year, there is several things going on, and as I mentioned none of them individually is a large item, but they are all coming together and going against us. Capital spending, as I mentioned the bulk of our capital spending for the year here is going to happen in the fourth quarter that’s primarily driven by what’s going on at Bison 4, and Boswell 4, a significant CapEx will slide into Q4 here. That’s in the range, probably impacting us $0.03 to $0.04. Property taxes have gone up like in many other jurisdictions. It has gone up for a couple of reasons; one we fully expected, increases of property taxes as our capital base is growing, but new rates have gone up to. That’s costing us several cents. Weather on a year-to-date basis, it’s not significant, but as you look on a quarter-to-quarter basis we were little bit ahead of the game when we came out in Q2, when we last ground here in Q3 as weather was milder than we expected, but on a full year basis it’s not going to be a significant driver. And then the last one that’s going against us is the Essar delay, and that’s a few cents the share too. So all of them are just a couple of cents each, Brian, but as you add them up they’re having an impact on our guidance. And we traditionally narrow our guidance at this time of the year, so that’s what we’re doing here. We are still within our guidance range that we originally issued, but certainly moving towards the lower half of that.

[Brian J. Russo:]

Okay, and I know pension expense was a headwind in 2012, and again in 2013, I was just wondering what your thought were when you looking into it till 2014, it looks like it could be a tailwind for you?

[Alan R. Hodnik:]

That will be – where you’re going obviously that’s going be driven by were discount rates sit at the end of year. Rates are up were they were in 2012 or 2013. But you are right, we do expect that to be a tailwind in 2014, but we’ll have more information for you on that as we issue guidance here in mid December.

[Brian J. Russo:]

Can you remind us what the headwind was in terms of EPS in 2013 over 2012?

[Alan R. Hodnik:]

EPS, it’s probably a nickel or so.

[Brian J. Russo:]

Okay, great. And just as to clarify your goal is to grow at least 5% on average each year right? Not 5% but at least 5%?

[Mark A. Schober:]

That is correct, at least 5%.

[Brian J. Russo:]

Okay. And then just lastly on the Essar ramp up, it seems like you’ve got a lot more visibility now in terms of the timing of the ramp up of the mine. Assuming it’s at full production, I think you said by the end of 2015, is that right, or the end of 2014?

[Mark A. Schober:]

We expected to be ramping up to the 7 million ton production level based on their public statements about it Brian, sometime by the end of 2015. But we do expect to see them in the 4 million production range sometime next year.

[Brian J. Russo:]

Right. So just from a modeling perspective, you say it’s 7 million ton, they are at 110 megawatts, Do we assume 4 million is for – 110 megawatts is that kind of the way to kind of model it our from a demand charge perspective?

[Alan R. Hodnik:]

Yes, we look at Essar. We look at it. When we look at the 70 megawatts to 110 megawatts, that 70 megawatts is pretty much what they’ll need to run at the 4 million ton rate and then as they ramp up the full production that will put them closer to the 110 megawatts.

[Brian J. Russo:]

Okay. And then lastly, just on the Clean Energy subsidiary. There have been no announcements to date, yet there is an awful lot of activity out there in the Bakken. Maybe you could just talk about your strategic footprint and your ability to leverage that and getting involved in some of this infrastructure investments.

[Alan R. Hodnik:]

Well, as you know Brian, we are very bullish on North Dakota. It’s a very energy-rich state and very policy-friendly state and so, our positioning there quite initially is BNI Coal, which we’ve operated there since 1988. We will by the end of next year a down stroke of nearly $1 billion in wind out of North Dakota, and so we have very strong business relationship with the state of North Dakota. Of course we’ve talked extensively in the last six weeks about a dialog we’re having with the state of North Dakota regarding our DC line corridor, we call the energy corridor. It effectively is a straight line corridor possibility if you will from the southern part of the Bakken all the way to the Lake Superior Basin here and doing [ph] within. So we’ve spent a fair amount of time with Governor Dalrymple and other leadership in the state of North Dakota on the energy front talking about those prospects. North Dakota of course is trying to do more with their flared gas issues, their waste of gas issues so on and so forth. And so we’re looking at a possible solution with partners if you will on, what I would call midstream side of energy-centric, which again we are focusing on energy infrastructure and energy infrastructure services. So we are very excited about those prospects. It’s kind of early at this point in time in terms of anything to announce on it, but certainly they’re getting the Governor’s support in North Dakota with enormous and empower North Dakota, which is a government agency that the state has created to, in a sense, work on these energy issues in North Dakota for the beneficial use not only North Dakota, but the nation is also supportive. And so we’re fairly excited about our positioning out there, more to tell, more to come, but at this point in time we like our positioning.

[Brian J. Russo:]

Okay, great. And one last question if you don’t mind. Then I’ll let others ask questions, but the property sale that’s in the fourth quarter, is there going to be a write-off associated with it or no?

[Mark A. Schober:]

No.

[Brian J. Russo:]

Okay, great. Thank you very much.

[Alan R. Hodnik:]

Thanks, Brian.

[Operator:]

Thank you. (Operator Instructions) And I’m not showing any further questions at this time. I would now like to turn the call back to Mr. Hodnik for any further remark.

[Alan R. Hodnik:]

Well, thank you again for joining us and thank you for your interest and investment in ALLETE and I know that we look forward to seeing many of you at the upcoming EEI Financial Conference in Orlando or at other stops that we make with you along the way. Thank you, and good morning.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.