ALLETE, Inc.
Q3 2014 Earnings Call Transcript

Published: 3 Nov 2014

[Operator:]

Good day, and welcome to the ALLETE Third Quarter 2014 Financial Results Conference 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, and the 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 the 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 would now like to turn the call over to the ALLETE President and Chief Executive Officer, Al Hodnik. Please go ahead.

[Al Hodnik:]

Good morning, everyone. Our Chief Financial Officer, Steve DeVinck and I are here this morning to go through our third quarter financial results with you and also give you an outlook for the remainder of 2014. As you probably read in our press release and 10-Q, we earned $0.97 per share for the quarter, a net income of $41.6 million a 65% increase over the third quarter of 2013. Cost recovery rider revenue from our continuing capital investments and the recording of the financial incentive from the state of Minnesota’s Conservation Improvement Program or CIP were the two primary drivers of the earnings increase for the period. Based on our earnings through the first three quarters of the year and our expectations for the fourth quarter we project that our full year earnings per share will be in the upper half of our stated guidance range of $2.75 to $2.95 per share. As we have previously indicated our guidance excludes $0.03 per share of ALLETE Clean Energy transaction cost that were recorded in the first quarter and also in second quarter non-recurring charge of $0.06 per share associated with a settlement agreement with the Environment Protection Agency. Steve of course will walk you through the financials in just a moment. Before he does I would like to update you on some recent development with the new large industrial projects in our region. The first regards Magnetation, who is the current customer of Minnesota Power and has operated two other facilities in our service territory for a couple of years now. Magnetation expects its newest and largest plant which is now in the final stages of construction to be operational during the first quarter of 2015. Minnesota Power has constructed a new electric substation and transmission lines to serve this new plant which will require up to 20 megawatts of loads. I’m pleased to report that this new system was energized just last week. Secondly, in October Essar Steel Minnesota announced that it completed project financing for its new taconite facility which is under construction. Essar is a customer of the Nashwauk Public Utilities Commission as you know. The city of Nashwauk is a wholesale of municipal customer of Minnesota Power through June of 2026. When it reaches full production of 7 million tons the Essar plant will result in approximately 110 megawatts of new load on our system. In Essar’s public announcements and also we’re hosting officials from the state of Minnesota including governor Dayton, Essar said it will no aggressively ramp up procurement and construction activities at the site and anticipates commencing the production of taconite towers during the second half of 2015. Thirdly is PolyMet, which has plans to start a new copper, nickel and precious metal mining operation in Northeastern Minnesota. In October the Minnesota Department of Natural Resources estimated the Supplemental Draft Environment Impact Statement or SDEIS process for the PolyMet project to be completed in early spring of 2015. Minnesota Power could begin the supply between 45 megawatts and 50 megawatts of load to a 10 year power supply contract that would begin upon startup of mining operation. And certainly last but not least considerable progress on our Great Northern Transmission line which reached a key milestone in July when the Minnesota Public Utilities Commission determined our route permit application to be complete. Equally noteworthy during the period was an outcome at MISO, where MISO’s Planning Advisory Committee recently voted to recommend approval of the projects by its Board of Directors. Upon receiving all applicable permits and approvals construction of the Great Northern is anticipated to begin 2016 and be completed in 2020. We continue to be enthusiastic about the organic growth prospects within our region, indeed we are enthusiastic about growth prospects across the upper Mid-Western Canada. I will make some additional comments regarding our future outlook before we take your questions. But at this time I will turn the call over to Steve.

[Steve DeVinck:]

Thanks Al and good morning everyone. I would like to remind you that we have filled our 10-Q morning and I encourage you to refer to it for more details on the quarter. Led by strong revenue growth ALLETE reported third quarter earnings of $0.97 shares per share, a net income of $41.6 million and operating revenue of $288.9 million compared to the $0.63 per share, a net income of $25.2 million and operating revenue of $250 million in 2013. Consolidated revenue increased $37.9 million or 15% compared to the same period last year and reflected the ninth consecutive quarter of year-over-year revenue growth. Earnings per share grew by about 54%, which includes dilution of $0.07 per share from common stock we’ve issued in support of our capital investments. Earnings from ALLETE’s regulated operation segment, which includes Minnesota Power, Superior Water Light & Power, and our investment in the American Transmission Company, were $41.2 million, compared to $24.6 million in 2013, an increase of $16.6 million. The majority of this increased came from Minnesota Power, higher cost recovery rider revenue related to the Bison 4 and Boswell 4 projects and $8.7 million conservation improvement program financial incentive which is approved by the MPUC and recognized in the third quarter. In 2013 our financial incentive of $7.1 million was recognized upon MPUC approval in the fourth quarter. Operating revenue from this segment rose $29.4 million or 13% from 2013. In addition to the $8.7 million conservation program financial incentive current cost recovery rider revenue increased $11.4 million. Kilowatt hour sales increased 4.7% resulting in higher revenue of $7.1 million. Kilowatt hour sales increased due to the commencement of our power sales agreement with Minnkota Power on June 01, 2014. Fuel and purchase power expense rose by $8.4 million or 10% commencement with the overall increase in kilowatt hour sales during the quarter. Operating and maintenance expense increased slightly or 1% from 2013 due primarily to higher MISO related transmission expense, a portion of which is recoverable in our transmission cost recovery rider. Depreciation expense increased $600,000 or 2% from 2013, directly attributable to the capital investment program. Interest expense rose by $1.4 million or 13% from 2013 primarily due to higher average long term debt balances. The investment in other segment which includes results from BNI coal, ALLETE Clean Energy and ALLETE Properties as well as Other Miscellaneous Corporate Income and Expenses reported $400,000 of net income for the quarter compared to $600,000 in 2013. ALLETE Clean Energy profited from its newly acquired Wind Energy facility in Minnesota, Iowa and Oregon and ALLETE Properties improved over the last year. BNI coal’s results were similar to last year. As you may recall 2013 including gains on the sales of securities. Revenue from this segment grew by $8.5 million or 35% compared to the same period last year, primarily due to a $6.8 million increase in revenue generated by ALLETE Clean Energy’s new Wind Energy facilities which were acquired earlier this year. Also contributing was $2.2 million increase in revenue at ALLETE Properties. Operating expenses rose $5.7 million or 22% from 2013 primarily due to higher operating and depreciation expenses of $4.4 million at ALLETE Clean Energy. ALLETE Properties recorded 1.1 million of higher sales related expenses. ALLETE’s effective tax rate in the third quarter of 2014 was 24.4% compared to 25.7% for the same period last year. We anticipate the effective tax rate for 2014 will be approximately 23%. ALLETE cash flow continues to be strong, year-to-date we generated $212.1 million of cash from operating activities and we carried a 47% debt-to-capital ratio at quarter end. Given our year-to-date results in our outlook for the remainder of 2014, we expect our full year earnings will be in the upper half of our guidance range of $2.75 to $2.95 per share, excluding the ALLETE Clean Energy transaction cost recorded in the first quarter and the non-recurring charge from the EPA settlement in the second quarter. Year-over-year comparisons for the fourth quarter will be impacted by the timing of the conservation program financial incentive, a planned maintenance project in this year’s fourth quarter at our Boswell Generating Station and addition of shares outstanding. Al?

[Al Hodnik:]

Thank you, Steve. I'm well pleased with our financial and operational performance for the year to date and looking ahead at the remainder of 2014, know that we will report results of our taconite customer nominations for the first four months of 2015 around December 1. Then as has been our custom, we will initiate our 2015 earnings guidance in mid-December. With this anticipated completion by the end of the year, our 2015 earnings guidance will include a full year’s impact from the Bison 4 project as well as earnings from continued investment in the Boswell 4 project. Magnetation new plant is scheduled to be operational as I've already expressed and we foresee some increased load from Enbridge as well as additional pumping and storage capacity comes online. We also expect some associated expense increases from our asset addition. Additionally we anticipate earnings growth and ALLETE Clean Energy and earnings improvement at ALLETE Properties. There will also be some dilution as a result of our equity issuances during 2014. ALLETE continues to execute its multi-faceted and multi-year growth strategy. The large industrial projects in Minnesota Power service territory are moving forward. Our capital investments are on track and associate year over year revenue increases. And our recent energy centric investments have resulted in a net income contribution from ALLETE Clean Energy. We believe our growth opportunities differentiate our company from others, and we look forward in reporting our progress as we continue to meet various execution milestones. Thanks for your investment in our company and your time to date, I will now ask the operator to open up the line for your questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from the line of Paul Ridzon from KeyBanc. Your line is now open.

[Paul Ridzon:]

Good morning and congratulations on the solid quarter.

[Al Hodnik:]

Thanks Paul, good morning to you too.

[Paul Ridzon:]

Can you Al just latest thoughts about incremental opportunities at AES, are you seeing anything?

[Al Hodnik:]

For the AES, teams been out looking at opportunities both of those that had been driven by state policy around renewable and also prospects to acquire additional assets in all forms of renewable that we've talked about not only on the wind side but others as well. Their pipeline is reasonably full in terms of opportunities whether they come to fruition not, I'm not sure Paul but I'm pretty optimistic right now with respect to their pipeline and their ability to get things done, we'll have more to report of course early next year perhaps.

[Paul Ridzon:]

And Steve, what are you seeing as far as interest in Florida, you had some asset sales this quarter kind of what the outlook is there for the remainder of this year and '15?

[Steve DeVinck:]

Yes, we're seeing some renewed interest, we did have some smaller sales in the third quarter, we do expect some smaller sales in the fourth quarter, and we do expect some sales in 2015. So we are seeing a moderate amount of interest in our properties.

[Paul Ridzon:]

And then lastly, how much stock is left under the floor to go out?

[Steve DeVinck:]

We have 1.4 million shares to be issued there by next February.

[Operator:]

Thank you, our next question comes from the line of Chris Turner from JP Morgan. Your line is open.

[Chris Turner:]

Can you give us a little bit more color on the back of the last question about the forward pull down that expires I think March 1 of next year, but can you give us more color on timing there?

[Steve DeVinck:]

I can't give you specific date, we will take it before then. Whether it's in the last couple of months of this year, early next year I don't know exactly for sure.

[Chris Turner:]

Got you, and then on the potential filing of a full general rate case, how does SRs announcement from last month or I guess in September impact your decision making there, especially considering last quarter you guys did some forward power sales to firm up 2015 a little bit, did that push out your decision? Did that leave it unchanged? How do you think about that?

[Steve DeVinck:]

I think the best way to answer our Minnesota Power's rate case timing issue probably is like this, since our last rate case in 2010. We’ve benefited from the recovery tools available in Minnesota for renewable environmental and transmission investments. We have approved current cost recovery writers in place for our Bison 4 wind project, our Boswell 4 environmental upgrade and our CapEx 2020 transmission investments. In addition, we have two pending current cost recovery writers filed with the MPUC for our investment to restore and repair our hydroelectric system which was damaged in the 2012 flood as well as for our investment in transmission reliability. If both of the pending writer request are approved, we estimate Minnesota Powers return on equity could be approximately 9% in 2015. Assuming continued strong electric sales and no significant unexpected expenditures, this projection does not assume any sales to SR in 2015. Final MTEC decisions on the pending writer request will be important factor on the timing of Minnesota Power’s next rate case, as will new customer loads as well as our 2015 integrated resource plan which is to be filed in mid-2015. I think that’s the best answer to your question.

[Chris Turner:]

Okay. So it seems like the decision is not imminent, you have the couple things that you’re waiting on here and those you’re all going to fill into the decision. What’s the timing on those two regulatory issues -- recovery?

[Steve DeVinck:]

Yes, there is nothing schedule the agenda yet so that is something we can’t control, but I would think either for one of them later this year and for the other sometime in early next year.

[Chris Turner:]

Great. That’s helpful. Thanks guys.

[Operator:]

Thank you (Operator Instructions) Our next question comes from the line of Brian Russo from Ladenburg Thalmann. Your line is open.

[Brian Russo:]

Would you happen to have what the year-to-date current cost recovery revenues were?

[Steve DeVinck:]

Yes, what I have -- I’m sorry what I have in front of me is the different from last year which is 11.4 million I don’t have it in total we can get back to you on that.

[Brian Russo:]

Yes, that would be helpful. Secondly, can you maybe just elaborate on an earlier question on AES? Are you seeing opportunities in the Bakken and the infrastructure build out there?

[Al Hodnik:]

We continue to dialog with the state of North Dakota and also was producers of oil and natural gas out there on our corridor concept. We have had dialog with the regulatory community in North Dakota as well about how it potentially could be a factor in terms of what is going on out there. We don’t have anything imminent to report today with regards to that, but I still remain personally bullish on North Dakota as you know on all forms of energy out there and then I believe at some point in time the corridor could play a role in further energy development solution finding in North Dakota.

[Brian Russo:]

Okay. And I think previously with ramp up in Essar and the issues that it faced and with the 2015 hedges you guys put in place we still would be assuming very little electricity demand from SR in ‘15 and if more ramps up in ‘16, ‘17?

[Steve DeVinck:]

That’s out expectation, as you may recall Essar has indicated they expect to begin making pellets at the end of 2015. Our current assumptions are minimal power demand in ‘15 ramping up in ‘16.

[Brian Russo:]

Okay. Minimal in ‘15 ramping up ‘16, ‘17 got it. Okay, and then give an average share count for 2014 included in your guidance?

[Steve DeVinck:]

We do not, for the whole year we do not.

[Brian Russo:]

Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line Mike Bates from Wunderlich Securities. Your line is now open.

[Mike Bates:]

Do you have cost assessment for the Barnwell outage in the fourth quarter?

[Steve DeVinck:]

We expect it to be approximately $2 million to $3 million.

[Mike Bates:]

All right. And is that already underway?

[Steve DeVinck:]

Yes, it is and it’s actually almost complete.

[Mike Bates:]

All right, great. And can you help us shape your thinking about sales to other power suppliers as we head into 2015 I know there are going to be a few puts and takes including the retirement of Taconite Harbor and the repowering of Laskin, will that have a substantial impact?

[Steve DeVinck:]

Well, both of those units are retail units, regulated units for our retail customers here in Northeastern Minnesota. So the conversion from coal to gas at Laskin is going well. We expect to have conversion to take place sometime during the summer months June, July and August in there, so there will be a short outage but otherwise that plant will then come back on line and be tested and operated on natural gas and be available to retain customers here in Northeastern Minnesota. Taconite Harbor unit three, of course we’ve elected ideal that unit under the Mercury and Air Toxics rule or MATS and so Taconite Harbor unit three will be ideal. So again that 75 megawatts in the central no long will be operating in/after the spring of 2015, as we’ve said right along. So it’s really not a power sales issue at all, it’s a retail customer load situation.

[Mike Bates:]

Okay. Any other puts and takes we got to be thinking about as we consider those sales or their power supplies.

[Steve DeVinck:]

No I don’t think there is anything that we haven’t reported or actually isn’t already underway this quarter.

[Mike Bates:]

All right, great. And I apologize if you mention this in your prepared remarks, but what is the expected timing as you look at Armenia Mountain, when do you expect to make a decision there?

[Steve DeVinck:]

As you know we have an option to acquire Armenia and we have to exercise that early next year for close in the middle of next year, so that would be kind of the timing. I would expect we’d have some announcement either way sometime earlier next year.

[Mike Bates:]

Excellent. All right, thanks guys. Congrats on the quarter.

[Operator:]

Thank you and at this time I’m not showing any further questions. I’d now like to turn the call back over to Al Hodnik for any closing remarks.

[Al Hodnik:]

Well, thanks everyone for your participation and of course for your investment in our company. I look forward to see many of you up at the EPI Financial Conference upcoming or out on the road as Steve and I and others from our team travel to meet and talk with you about our company. Thanks for your time again this morning and have a good day.

[Operator:]

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