ALLETE, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good day and welcome to the ALLETE First Quarter 2015 Financial Results Call. Today's call is being recorded. Certain statements contained in this conference call that are not description of historical facts are forward-looking statements, such as 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 management's views only as the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any forward-looking statements whether as a result of new information, future [sic] events, or otherwise. For opening remarks and introduction, I would now like to turn the conference over to ALLETE's President and Chief Executive Officer, Al Hodnik. Please go ahead.

[Al Hodnik:]

Good morning everyone and thank you for joining us. With me on today's call is Steve DeVinck ALLETE's Chief Financial Officer. This morning we disclosed our first quarter financial results. We earned $0.85 per share on net income of $39.9 million compared with $0.80 per share on net income of $33.5 million during the first quarter of 2014. We recorded acquisition-related transaction cost in both periods. This year's results include $3 million after-tax or $0.06 per share of transaction fees related to our acquisition of U.S. Water. Well last year's results include $1.4 million after-tax or $0.03 per share of transaction fees for an ALLETE Clean Energy acquisition. I'm pleased with our first quarter financial performance and our 2015 full-year earnings guidance range of $3.00 per share to $3.20 per share excluding acquisition-related expense remains unchanged. Steve, will go through the financial details in a few moment. In March, we received demand nominations from our Taconite customers for the May through August time period. They nominated at full demand levels. Since that time, our largest customer United States Steel announced the temporary idling of its Keewatin taconite facility and also reduced power production at their Minntac facility. U.S. Steel took these actions in an effort to adjust inventory levels. Based on the March demand nominations, the temporary U.S. Steel production adjustments will have minimal financial impact to Minnesota Power through August. Demand nominations from our taconite customers for the last four months of the year are due on August 1, and as is our custom, we will issue an 8-K at that time. While we cannot predict at this time what those nominations will be, should there be any reductions in demand from these customers we are well-positioned as a result of our MISO engagement to market available power to other power suppliers in an effort to mitigate the potential earnings impact. Our Great Northern Transmission Line project, received a strong indication of support during the quarter. And Administrative Law Judge report recommended that the Minnesota Public Utilities Commission grant Minnesota Power A certificate of need for the project. The Administrative Law Judge found that Minnesota Power has satisfied all of the required certificated need criteria. Upon receipt of all applicable permits and approvals, we expect construction of the Great Northern Transmission Line to begin during 2016 and be completed in 2020. Total project cost on the United States portion of the line, including substation work, is estimated to be between $560 million and $710 million, depending on the final route of the line. Minnesota Power will have majority ownership of the line. ALLETE recently achieved several significant milestones with respect to its energy infrastructure and related services businesses. In February, we completed the acquisition of U.S. Water Services, an Integrated Water Management Company. ALLETE initially purchased 87% of U.S. Water Services for $167 million, and will purchase the remaining 13% in the future for a contingent amount based on U.S. Water's future earnings. In addition, ALLETE Clean Energy recently closed on an acquisition of a wind energy generating facility in close proximity to assets it already owns. It now owns and operates more than 400 megawatts of wind generation. Additionally ALLETE Clean Energy signed purchase agreements to acquire 100% of the Armenia Mountain facility in Pennsylvania, which is expected to close in the third quarter of this year. These acquisitions are consistent with ALLETE's stated strategy of investing in energy infrastructure and related services, to compliment its core regulated utilities, balance exposure to business cycles and changing demand, and provide long-term earnings growth. The benefits of our strategy are already playing out there in 2015. Future energy infrastructure and related services efforts will be focused on growth and operational improvement at U.S. Water, ALLETE Clean Energy, and BNI Coal. ALLETE does not plan to pursue any new platform businesses. I will have some additional comments after Steve takes you through the quarterly financial results. Steve?

[Steve DeVinck:]

Thanks, 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 more details on the quarter. For the first quarter ALLETE earned $0.85 per share on net income of $39.9 million and operating revenue of $320 million versus $0.80 per share on net income of $33.5 million and operating revenue of $296.5 million in 2014. This marks the 11th consecutive quarter of consolidated revenue growth. Included in this year's quarter were transaction fees of $3 million after-tax or $0.06 per share related to the acquisition of U.S. Water Services. The first quarter of 2014 included of $1.4 million after-tax or $0.03 per share of transaction fees related to ALLETE Clean Energy's wind energy facilities acquisition. In addition, earnings per share for the first quarter of 2015 were diluted by $0.11 due to an increase in the number of shares outstanding. Earnings from ALLETE's Regulated Operations segment which includes Minnesota Power, Superior Water Light and Power, and our investment in the American Transmission Company, were $41.4 million compared to $33.9 million in 2014, an increase of $7.5 million or 22%. Operating revenue from this segment was similar to 2014 as higher cost recovery rider revenues, transmission revenues, and kilowatt-hour sales were offset by lower fuel adjustment cost recoveries and gas pass-through. Revenue from regulated operations rose by $2.2 million due to a 7.4% increase in kilowatt-hour sales. Although total kilowatt-hour sales for the quarter were higher than in 2014, market prices for sales to other power suppliers were lower than residential and commercial rates resulting in lower proportionate revenue. Sales to our residential, commercial, and municipal customers, decreased primarily due to unseasonably cold temperatures during the first quarter of 2014 compared to the same quarter this year. Industrial sales were strong during the quarter reflecting increased sales to taconite, paper, and pipeline customers. Fuel cost recoveries were down $10 million due to lower fuel and purchase power cost attributable to our retail and municipal customers. Cost recovery rider revenue increased $8.2 million primarily due to higher capital expenditures at our Bison Wind Energy center and the Boswell Unit 4 environmental upgrade. On the expense side, and consistent with the revenue decrease mentioned earlier, fuel and purchase power expense decreased $10.2 million or 11% due to lower purchase power prices, partially offset by higher kilowatt-hour sales. Transmission expense increased $4.1 million or 38% from 2014 primarily due to higher MISO related expenses. Cost of sales fell $4.2 million or 48% compared to 2014 as a result of lower purchase gas at Superior Water Light and Power. This also is consistent with the revenue decrease mentioned earlier. Depreciation and amortization expense increased $3.3 million or 11% from 2014 reflecting additional property, plant and equipment in service. Taxes other than income taxes were $1.4 million or 14% higher than in 2014. Increases in taxable plant and rates resulted in higher property tax expenses in 2015. Interest expense rose by $1.5 million or 13% over last year primarily due to higher average long-term debt balances. Equity earnings in ATC were $1.2 million lower than in 2014 primarily due to the reserves related to return on equity complaints filed with the FERC. Income tax expense declined by $5.1 million in the first quarter of 2015 compared to the same period last year mostly due to higher federal production tax credits with the completion of the Bison 4 Wind Energy center in December of 2014. Our investment in other segment is comprised primarily of our energy infrastructure and related services companies ALLETE Clean Energy, U.S. Water Services, and BNI Coal. It also includes other miscellaneous corporate income and expenses, as well as ALLETE properties. This segment reported a net loss of $1.5 million, compared to a net loss of $400,000 for the same quarter last year. The net loss for 2015 reflected a $3 million after-tax expense for acquisition cost related to the U.S. Water Services acquisition. Likewise, the net loss in 2014 reflected a $1.4 million after-tax expense for acquisition cost related to ALLETE Clean Energy's wind facilities acquisition in January of 2014. Revenue from this segment increased $24.9 million or 77% compared to the same period last year, primarily due to U.S. Water Services, which was acquired on February 10. ALLETE Clean Energy also contributed to the increase, reflecting revenues from facilities acquired in 2014. Cost of sales rose by $11.9 million or 80% and operating and maintenance expense increased by $7.2 million or 52% from 2014, primarily due to the acquisition of U.S. Water Services. Depreciation and amortization expense increased $3.5 million over 2014, reflecting additional property, plant, and equipment, as well as amortization of intangible assets due to the recent acquisition. Our consolidated effective tax rate for the first quarter was 13.4% compared to 20.7% in 2014. ALLETE's cash flow from operating activities was $71.8 million and we carried a 44% debt-to-capital ratio at quarter-end. Al?

[Al Hodnik:]

Thank you, Steve. Let me provide you with a few additional updates and observations before Steve and I take your questions. Regarding new industrial activity in Northern Minnesota, construction at the Essar Steel Minnesota's site continues with about 350 contract employees on the site presently, and approximately 800 contract employees expected this summer. In a recent newspaper Editor's Tour, Essar stated that it has spent $1.3 billion to-date on the expected $1.9 billion project. Essar has a made a lot of construction progress during the winter, completing work on its mobile equipment building, and continuing construction on a secondary crusher, concentrator, palate load-out, and other buildings. Essar is expected to achieve full production capability in 2016. The new Essar facility will result in 110 megawatts of new load once initial shakeout occurs and the facility reaches full production. Another new project, PolyMet's proposed copper-nickel and precious metal mining operation, is awaiting the issuance of the Minnesota Department of Natural Resources Final Draft Environmental Impact Statement or FEIS. The DNR has indicated they would likely have the PolyMet FEIS out this spring. PolyMet management has expressed that upon receipt of the applicable permits, construction could commence at the site late this year. Minnesota Power has a contract with PolyMet, as you know, and they could begin to supply between 45 megawatts to 50 megawatts of new load, beginning upon startup of the mining operations as early as 2017. Our 2015 earnings guidance remains unchanged and is based on the expectations and assumptions we made in mid-December when we initiated it. We are closely following conditions in the domestic steel industry and its impact on iron ore production. While domestic steel consumption is expected to grow over 2014 levels, the industry is currently facing pressure from a range of economic factors, including foreign dumping of low-priced steel, a strong U.S. dollar, a slowing or fracking in tubular steel demand due to low oil and natural gas prices, weak Chinese demand, and a general overabundance of iron ore. With regard to excess iron ore capacity, Cliffs Natural Resources recently idled their Empire Mine in Michigan. On May 5, Magnetation announced that it has reached an agreement with noteholders to restructure their balance sheet and provide liquidity to support longer-term operations. To effectuate the restructuring, Magnetation has filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Codes. Magnetation stated that it expects its operations to continue in the ordinary course and they intend to continue to pay employees, suppliers, and vendors, under normal terms. To-date, Minnesota Power has not seen a decline in sales to Magnetation. On a brighter note, Cliff's CEO Lorenzo Goncalves, recently signaled further investment in Cliff's Minnesota operations is very likely, including an investment in enhanced superflux or DR pellets. These new value-added products are more universal in nature and that they can be easily utilized in new electric or steelmaking, as well as traditional glass furnace application. Domestic steelmakers are calling for implementation of fair trade practices to outflow the tide of imports and the combination of new technologies, market forces, and political pressure, could have a favorable impact on Minnesota producers. The final 2015 nomination period for our taconite customers will occur on August 1. As I mentioned earlier, if they should nominate at lower than current levels, we will attempt to mitigate as much of the financial impact as possible to marketing of the excess power in a wholesale market, power market condition, and to expense control efforts inside the company. Turning to ALLETE Clean Energy, ACE expects regulatory approval of the 107 megawatt wind facility construction project for its customer Montana-Dakota Utilities during the second quarter. I would like to point out that we have not yet included any earnings on this project in our guidance, pending regulatory approval from the North Dakota Public Service Commission. We expect to restate our 2015 earnings guidance after regulatory approval is granted. As I previously mentioned, by investing in our energy infrastructure and related services strategy, we balance our exposure to business cycles and changing demand. The benefits of our strategy are playing out already here in 2015, as expected earnings at ALLETE Clean Energy will help balance some of the steel industry dynamics being faced by Minnesota Power. I would now like to ask the operator to open up the lines so that Steve and I can take your questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from Paul Ridzon with KeyBanc. Your line is open.

[Paul Ridzon:]

First question for Steve, and that's just an update on Florida and any interest that you're seeing down there?

[Steve DeVinck:]

No significant change in interest at ALLETE properties. Our strategy remains to strategically sell partials over time as opportunities arise.

[Paul Ridzon:]

The ATC income was lower, was that a retroactive restating of ROE or is that, you implemented a lower ROE for this -- lower assumed ROE for this quarter?

[Steve DeVinck:]

Yes. So ATC took a reserve and we take our flow through of that. The majority of that was prior period related retroactive to last year, before, and we did disclose the exact amount in the 10-Q that was related to prior period. But it was most of it.

[Paul Ridzon:]

Okay. Okay. And then so that should not continue through the year?

[Steve DeVinck:]

Correct.

[Paul Ridzon:]

That piece of it.

[Steve DeVinck:]

That piece of it.

[Paul Ridzon:]

And then given crisp commentary around DRI, on a produced ton of steel basis, what's the electricity intensity of producing DRI? In other words, DRI has a higher iron content so I think we can --

[Al Hodnik:]

I don't know that I readily have that available. Probably, Paul, we could get that to you offline I guess as I think about it. The type of pellet that they're talking about producing right now is sort of a superflux power it has a factor of additional limestone and other things added to it. So from a superflux perspective, I don't know that there would be necessarily increased sales in that regard, if you will, for a superflux. Now DRI on the other hand now gets going up to 98% iron content is another matter. Steel Dynamics of Indiana of course has a plant over in our service territory and that is about a 20 megawatt to 25 megawatt load it was projected to produce about 500,000 per year. It's probably operating somewhere around 280,000 tons per year at the time it was ideal here in the spring. So I might think about those factories depending on their size again somewhere on the order of 15 megawatts to 25 megawatts.

[Paul Ridzon:]

So should we still be thinking about the impact of a million ton production reduction is $0.03 of earnings before cost cutting initiatives?

[Steve DeVinck:]

Yes, that's a good rule of thumb.

[Paul Ridzon:]

Okay. And then what do you think is a likely outcome for production out of -- reductions out of Minntac and Keetac after August.

[Al Hodnik:]

It's difficult to predict, Paul, the rate of change and the way these cycles have come and gone it could be, it's bring back situation like we saw in 2009 where there was kind of a steep down and then also fairly quick return back to normal operations. They have signaled sort of temporary idling. The demand in the United States for steel is still very strong. So the level of imports is coming down as we look at some of the metrics going on here and to the extent that oil continues to rise and fracking returns to even a reasonable level of activity as frac steel returns to the U.S. Steel context again they could spring back. So it's very difficult to predict what's going to happen with U.S. Steel in Keetac. But we're fully versed with them, we spend a lot of time inside their operations, and we would probably have more to say sometime later in the summer as these nominations come through.

[Paul Ridzon:]

Has these items actually occurred?

[Al Hodnik:]

No, they are in the process of taking the steps during the month of May and heading off into June. So they had said when they expressed their plans to take an idling that they would begin in May, they have a required WARN acts or notification to employee acts to try to manage of course through their contractual obligations and frankly just because they want to be good stewards around their employees. And so they're just beginning to effectuate those knowledge as we go into the month of May and June both at Keetac and at Minntac.

[Paul Ridzon:]

Okay. Thank you very much for the updates.

[Operator:]

Thank you. Our next question comes from Chris Ellinghaus with Williams Capital. Your line is open.

[Chris Ellinghaus:]

Do you guys have any idea in terms of the U.S. Steel idling, how much of that was related to transportation issues that built-up their inventories?

[Al Hodnik:]

Don't have anything specific on that, Chris, necessarily. I don't know that that is the largest factor this time around. There were certainly those challenges last year both at Cleveland-Cliffs and with United States Steel. But in large measure it is just a point steel dumping and slowdown in frac for U.S. Steel principally. And so they're just trying to take their inventory levels down in Duluth and their factories in Gary and other places.

[Chris Ellinghaus:]

Okay. And they haven't given any kind of indications over what sort of timeframe they require to reduce inventories?

[Al Hodnik:]

No, they just expressed when they announced their plans to temporarily idle some processing at Keetac and at Minntac that they would evaluate through the summer months if these inventories come down. As they said earlier the points steel dumping levels are starting drop a bit, that's been a concern for all of them. Secondarily oil prices are starting to rise and so will frac return to some normal activity again later this year hard to say, but I think they're watching both of those fronts.

[Chris Ellinghaus:]

Okay. And ACE's has done a lot lately. Can you start to give us some color in terms of what your target returns look like and how you're structuring equity in these projects?

[Steve DeVinck:]

I'll say this on our returns. Our returns will be commensurate with risk. We don't have any specific numbers that we intend to disclose. But I'll say this, our strategy as you know, is to invest in companies that have regulated, contracted, or demonstrably recurring revenues, of course that is what ACE is up to these facility they are buying have long-term PPAs. As we mentioned last quarter, we do expect to trip the requirements of segment reporting later this year or early next year for our energy and construction related services businesses. And certainly at that time you'll begin to see more information provided as we typically do for our segments.

[Chris Ellinghaus:]

Okay. So as we look at these acquisitions, can you give us any sense in particular what the capital structure, is there a target, are they going to be individually assessed? But is there minimums, can you give us any flavor for that?

[Steve DeVinck:]

Well, we don't have any minimums and we will look at it both project-by-project and ACE overall. But I will say this; we will capitalize these consistent with our current investment grade credit rating. That credit rating is very important to us and our capitalization will follow the metrics required to keep that.

[Operator:]

Thank you. Our next question comes from Jay Dobson with Wunderlich Securities. Your line is open.

[Jay Dobson:]

Question, Al on cost reductions. Obviously what happens in August or what gets announced in August and happens in September through December will determine what actions you have to or for that matter don't have to take. But can you give us an idea of what cost reductions you might or at least planning to take? Obviously, you all have been at this for a very longtime and have seen a lot of these cycles. So may be just give us an idea sort of what reactions might look like?

[Al Hodnik:]

Well, I appreciate your commentary, Jay, about the companies having weathered these business cycles over the many decades. I've seen five of these cycles, they've all had their own varying shades and flavors over the years and the company has done well in flexing and adapting to meet not only customer changing demands and also working with our customers closely as we always have but also internally. As far as expense reduction also and just managing costs in total, we're not a low cost producer nationwide by accident. Of course, third or fourth lowest utility rates on an EI basis in the country. So we mange expenses very, very carefully inside our company and always have. With respect to what actions we would take of course, summer as a routine as reducing overtime within our generating facilities and other places where we don't necessarily need to do the work right now or deferring outages of that type into another season or into another year. And certainly, evaluating the organization as far as hiring and not adding additional people here at this point in time where we don't need to along the way would be another area that we would definitely take a look at inside the organization. And so we're evaluating all of those fronts as we typically do. And actually effectuate some of those as we go along here, not necessarily waiting for August 1 for a shoe to drop or something like that but rather being much, much more deliberate and much, much more inattention about managing cost. So there won't be sort of one of those kind of moments here, it will be what we've always done, which is to adjust influx side of the company and still manage a low cost position and work with our customers.

[Jay Dobson:]

Got you, and that's great. Is there any guideline or may be internal expectation you'd put on what of that $0.03 per million tons you could offset with cost reductions?

[Steve DeVinck:]

No, we don't have any numbers to actually disclose here today. But we're hopeful we can mitigate some portion of that.

[Jay Dobson:]

Got you. That's great. And then away from that, Al, I know you all have been working with an outside advisor on cost reduction efforts that are more durable and sustainable over time. Where are we in that process?

[Al Hodnik:]

Yes. That is all part of I think our rate case timing strategy, which in February, we indicated that we estimated Minnesota Power's return on equity be approximately 8.5% this year. Of course that estimate was based on continued strong industrial sales as we've talked about today, August and industrial nominations will provide more information on any 2015 earnings and ROE impacts. But in the longer-term Minnesota Power is making efforts to improve its return on equity over time and that will include cost efficiencies and more clarity on potential load growth. So it's part of that process. We don't have anything to report today. That will develop over time. And as we move through the course of this year, we'll probably have some more to report on how that process is unfolding.

[Jay Dobson:]

Okay, great. And then last for Steve, Steve, can you remind us what the tax rate is, the effective tax rate, you're assuming in the $3.00 to $3.20 guidance?

[Steve DeVinck:]

Approximately 14%.

[Jay Dobson:]

About 14%. Okay, great. Thanks very much.

[Operator:]

Thank you. Our next question comes from Joe Zhou with Avon Capital Advisors. Your line is open.

[Joe Zhou:]

So I understand that this headwind from taconite is not materialized and this could be temporary, but I just wanted to have your idea that with this potential headwind so first, do you think you can still confirm your long-term meaning 5% EPS growth? And second, is there any way to mitigate that, should that happen -- may be just the last four -- may be half year or one year -- can you mitigate that with a rate case? Thank you.

[Al Hodnik:]

Well, first of all, our view continues to be that the expressions made by U.S. Steel and by Cleveland-Cliffs and others that this current headwind impacts in the industry is more temporary in nature than it is long-term. As far as length of cycle, if you think back to 2008, 2009 that particular cycle which had nothing to do with mining district competitiveness that had to deal with the U.S. recessionary impacts or global recession that went on for about a year roughly speaking. So relatively steep cycle and then back quickly. So the company is quite capable of taking on these cycles and dealing with them in a thoughtful manner. I don't see anything getting in the way of sort of our average annual 5% earnings growth goals we have stated it. Going forward, we certainly would go to the power markets, if we needed to, as I expressed, when you have a relatively low cost position as we do right now, with our generating supply we're able to go to market to offset some of the down. We worked very closely with our customers inside their operations on a day-in, day-out basis. As you may know we have key account managers right inside the operations of all of these facilities have a very, very close working relationship in anticipating where there needs may be and where this market is going. And so there nothing is accidental in that regard in knowing the kind of a close working relationship with our customers. As far as reductions, we continue to, again as I said earlier manager our cost quite intentionally and always have, are running a relatively nimble shop here at this company because of these sorts of cycles over the years. And I'm fully confident again that we can if we have to make the necessary expense reductions to help us meet our stated guidance for this year and also continue our growth plan through 2016. With regards to rate case, as Steve expressed earlier, there is a number of alternatives with a rate case and that we would like to think that if we had to have a conversation with the regulators that it would be more strategic in nature around something larger energy policy changes, changes in generating fleet, even in customer mix as new customers come on. So our situation is one of more strategic and sort of intentional about a rate case rather than just having to go in but have we gone in, in the past when we needed to do something like this on a large sort of restructuring of the industry in the 80s or the 90s there have been times when we've gone in. There has also been times when the regulator has called us in to come in and have a conversation. So it's always a tool but for us it's a tool that we would use but only in a strategic sense we would likely to use more in a strategic sense rather than just go down because of the temporary idling of taconite at the moment.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Bedula Martine with CDT Capital. Your line is open.

[Bedula Martine:]

This is a little bit of a follow-up on Jay Dobson's question. I think he had cited or mentioned a $0.03 per-million-ton kind of sensitivity based on, I think, the August 1 nominations as to the delta on that. Can you kind of give -- can you quantify kind of how much exposure is there over -- either through the course of 2015 or on a 12-month basis that, in theory, is up for grabs here on this nomination? In that way, we have a sense as to both the mix as to what is being nominated versus and what's combination that you guys can do on cost in terms of potentially mitigating anything that may come up?

[Steve DeVinck:]

No, we can't disclosure any or actually we don't even have any knowledge of the amounts that might ultimately impact 2015. It will depend on August nomination for the debt and duration of this cycle is unknown at this time. It's possible that has little or no impact on us. The $0.03 per share is a disclosure we make to try to help people to put some context on what can happen here. And of course that is at today's wholesale prices, the net income before any operating expense reductions that $1 million ton that's on an annual basis would have on the company.

[Bedula Martine:]

And you can't say how many tons of production are going to be coming up for nomination for August 1?

[Al Hodnik:]

Well it's difficult to say how many tons are going to be nominated for in a context right now that we don't know and we can't speak for them. Again we've seen these cycles come and go. I think 2008 and 2009 are recessionary cycles probably a good cast, if you well, or a good measure of the company's ability to manage through these cycles. What they were doing all summer and then sprung back in the fall. So we have to be ready for either circumstance. Our view is it continues to be temporary in nature and we will take up the nominations in August when they come and issue an 8-K as we said we would when we have them. Right now, it's unclear to us and it would be because again they it's their business and their plans, we try to work closely with them, and that they're watching the markets as we are. Steel demand in the United States is strong. Autos, appliances, and ultimately as I said earlier, frac and natural gas are likely to be bouncing back if oil prices continue to rise. And so again it's those kinds of things that make it a little bit fussy on steel production in the U.S. Steel dumping is coming down as well. Any reasonable look at those metrics would indicate that that is coming down as well and that would be a factor in what our domestic producers nominate in August.

[Bedula Martine:]

May be I'll just ask this way -- how much million tons right now are being produced at for which you're being compensated and whatever that are -- that we have to work with a potential delta come out of it?

[Al Hodnik:]

Well, the full production here in Minnesota is roughly 40 million tons of taconite and the demand nominations in the March timeframe were full out for full production. And so I would just leave it at that.

[Bedula Martine:]

Okay, so the thing is, is that if you get a full nomination again, you'll be at 40, may be everyone higher. But basically, we're working from a 40 base come August?

[Al Hodnik:]

Yes. 40 is the peak amount, they range anywhere between 35 million tons and 40 million tons over the years plus or minus depending on who is operating and what is going on production wise. But their much nominations were for full production at all the facilities. What August will be, it's unclear at this point in time, but we'll work our way through that to power sales, if we need to and expense reduction to go along with it.

[Operator:]

Thank you. We have a follow-up from Joe Zhou with Avon Capital Advisors. Your line is open.

[Joe Zhou:]

I'm sorry, I have a follow-up question following Bedula's question. So the total is 41 million tons, right? So I'm looking at the Keetac and Minntac. So Keetac is 5 million. Minntac is like 15 million, and they are probably running, let's say running by half. And then Steel Dynamics may be 0.5 million or 1 million. And Magnetation has 3.5 million. So there's a total of roughly 17 million to 18 million, and could be an impact of $0.30 to $0.40 on a full-year basis. So I just want to understand, how do you mitigate that -- with like may be cost cutting, or -- I mean, basically, how do you do it?

[Al Hodnik:]

Well, good question. And first of all, all those products are not the same right. So first of all, Magnetation is not pellet production, its concentrate. Magnetation despite its curtailment and bankruptcy issues at the movement, we're seeing no decline in sales to Magnetation at this point in time. And in their release of the other day, the CEO there said they would continue to go on paying employees, suppliers, and vendors a normal course. And so from a Magnetation perspective we are not seeing and not planning to see sort of reductions in iron ore concentrate production. Keewatin Taconite does produce pellet part of that 40 million tons, if you will, and they are temporarily idle for the summer. That is roughly a 5 million ton capacity facility and it has produced tons already this year, as you know, and will produce into May here, before it's temporarily idle. If it springs back in the fall, its impact will be relatively minor; it's difficult to predict that. United States Steel Minntac is the largest producer of course of pellet and they're talking right now about only reduced demand at that facility. So not a fully idling of that facility by any stretch of imagination so that would be a very big leap to go to a full 12 million tons or even reduce that by half for United States Steel. And of course, Mesabi Nugget, a Steel Dynamics, they produce direct reduced iron or pig iron, that's a different product as well. Again, there are concentrates of course involved with that to produce that product. They were largely affected by rail and rail transportation issues initially last fall and early this winter in getting their product actually to the mill. Now, of course they're facing a little bit of demand reduction, if you will from foreign steel. The discussion about Mesabi Nugget from the CEO's perspective and Steel Dynamics is that they would take another look at that facility's operations sometime in the month of July and what they'd do with that I'm not exactly sure. But some combination of market sales will offset the reduction in demand from the taconite producers and some form of cost reduction inside the company. Again, I would call your attention to the 2008, 2009 recessionary year, where we saw a sweeping stoppage of production, if you will, on the iron range and yet went to market and also reduced cost inside the company to produce a respectable year there within the range of guidance that the company provided. And so our guidance remains unchanged for this year. We're also lastly offset, as Steve DeVinck said earlier, by our strategy in itself. So our strategy is to continue to work on developing ALLETE Clean Energy, continuing to develop U.S. Water, and the role of those not only in the energy centric role, where we see there is growth but also to offset these business cycles. And so as a combination of all those parts and pieces working together that give us the confidence to leave our guidance range unchanged at the moment between $3.00 and $3.20 a share.

[Joe Zhou:]

Great. I'm assured. Thank you.

[Operator:]

Thank you. We have an additional follow-up from Paul Ridzon with KeyBanc. Your line is open.

[Paul Ridzon:]

Through August, these are still take-or-pay, right? So is there any financial harm by the idling before August is over?

[Steve DeVinck:]

Yes. That's correct, Paul. They are take -or-pay through August so they are committed. So there is minimal financial impact.

[Paul Ridzon:]

And the power they don't potentially take, you'll get paid for, and you could resell?

[Steve DeVinck:]

The way that it works is, we resell it on their behalf and any profit goes back to them. So that has -- that's not incremental margin benefit for us.

[Paul Ridzon:]

Okay, okay. Thank you.

[Operator:]

Thank you. I am showing no further questions at this time. I'd like to turn the call back to Mr. Hodnik for any closing remarks.

[Al Hodnik:]

Well, thank you again everybody for participating in our earnings call this morning. And know that we will provide updates throughout the summer and fall as we go along and we'll certainly hopefully run into some of you at various conferences along the way or directly in your offices. Thanks again for taking the time to be with ALLETE this 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.