ALLETE, Inc. (NYSE:ALE) Q1 2023 Earnings Call Transcript May 3, 2023

ALLETE, Inc. misses on earnings expectations. Reported EPS is $1.02 EPS, expectations were $1.18.

Operator: Good day, and welcome to the ALLETE First Quarter 2023 Financial Results Call. Today’s call is being recorded. Certain statements contained in this conference call that are not descriptions of historical fact 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 put undue reliance on forward-looking statements, which reflect management’s reviews only as of 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 events or otherwise. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Bethany Owen, Chair, President and CEO. You may begin.

Bethany Owen: Thank you and good morning everyone. We appreciate you joining us today. With me are ALLETE’s Senior Vice President and Chief Financial Officer, Steve Morris; Jeff Scissons, ALLETE Clean Energy’s Chief Financial and Strategy Officer; and Frank Frederickson, Minnesota Power’s Vice President of Customer Experience and Engineering Services. Corresponding slides for this morning’s call are available on our website at allete.com in the Investors section. We’ll call out each page number as we go through today’s presentation. This morning, ALLETE reported first quarter 2023 earnings of $1.02 per share on net income of $58.2 million. Last year’s first quarter results were $1.24 per share on net income of $66.3 million.

Although weather conditions in the quarter did affect our results, we are on track and reaffirming ALLETE’s original full-year earnings guidance range of $3.55 to $3.85 per share. Steve will be providing additional details on our financial performance during the quarter in a moment. Please refer to Slides 3 through 5. We continue to be recognized as a leader in advancing clean energy. In fact, for the second year in a row, an independent study has ranked ALLETE as the Number 1 investor in renewable energy relative to market capitalization among all U.S. investor-owned utilities. We’re proud of that statistics, but ALLETE’s strategy is not just about adding renewable energy. It’s also about making important investments in projects to help ensure we get this clean energy transition right, right for our customers, our communities and the climate.

This is what we mean when we describe our purpose as leading the way to a truly sustainable clean energy future. On Slide 4, you can see some of the details of our sustainability in action strategy, which is designed to meet these critical goals, while providing value and supporting long-term earnings and dividend growth for our shareholders. Our Minnesota Power team is hard at work executing our more than $3 billion CapEx plan. We’re making significant progress on our HVDC modernization project, including selection of the technology provider and securing key land rights. And we expect to file the certificate of need application with the Minnesota Public Utilities Commission later this month. In addition, in the second half of this year, Minnesota Power will begin the initial phases of the RFPs for nearly all the 700 megawatts of wind and solar that were included in our recently approved integrated resource plan.

These RFPs will emphasize attributes such as meaningful reinvestment in host communities, the use of local labor and a focus on increasing supplier and workforce diversity. All of this will help ensure these clean energy projects deliver the best overall value to customers, while strengthening the communities we are privileged to serve. This is important to us at ALLETE because it will mean growing our company and advancing the energy transition in ways that are truly just inequitable. I’m looking forward to sharing additional information as these important projects progress. As we announced more recently, ALLETE Clean Energy has completed two of its build transfer projects with the sale of its 100-megawatt Northern Wind project in Minnesota in January and in early April, the sale of its 92-megawatt Red Barn wind facility in Wisconsin to Madison Gas and Electric and Wisconsin Public Service Corporation.

And last month marked the one-year anniversary of New Energy equity joining the ALLETE family of companies. New Energy is one of the nation’s leading solar development companies and is the top solar development company in the states of Virginia, Illinois, and Minnesota. We’re very proud that the talented New Energy team had a record first quarter of project closings, and they continue to grow their already strong pipeline of future projects. Now, I’ll turn it over to Steve for further details on our 2023 first quarter financial results. Steve?

Steve Morris: 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 6 and 7 for significant variances and other items for comparison consideration. Today, ALLETE reported first quarter 2023 earnings of $1.02 per share on net income of $58.2 million. Earnings in 2022 were $1.24 on net income of $66.3 million. Net income in the first quarter of 2023 included $4.7 million after tax and $0.09 per share, due to the timing of reserves for interim rates resulting from Minnesota Power’s 2022 general rate case. As you may recall from our year-end earnings call in February, the entire 2022 interim rate reserve was recorded in the fourth quarter of 2022.

So, you will see similar timing differences in the second and third quarters and fully reversing in the fourth quarter this year. Interim rates will continue to be collected until final rates are implemented, which is expected to occur in the third quarter this year. Overall weather conditions also impacted ALLETE’s consolidated earnings by approximately $0.10 per share versus last year. ALLETE’s Regulated Operations segment recorded first quarter 2023 net income of $40.6 million, compared to $51.5 million in 2022. Earnings for 2023 reflect lower net income at Minnesota Power, primarily due to the timing of interim rate reserves previously mentioned and lower kilowatt hour sales due to milder winter weather conditions as compared to last year.

Also impacting 2023 was higher operating and maintenance expense. ALLETE Clean Energy recorded first quarter 2023 net income of $8.5 million, compared to $16.5 million in 2022. Net income in 2023 reflects lower wind resources and availability across much of the fleet and higher operating and maintenance expense, compared to 2022. Net income last year also included earnings from the legacy Northern wind facilities, which were decommissioned in April 2022 as part of ALLETE Clean Energy’s Repower and sale of the Northern Wind project. We do expect some of the negative weather impacts in the first quarter to be offset by the profitable sale of the Red Barn project in the second quarter this year. Our corporate and other businesses, which include new energy, BNI Energy and our investments in renewable energy facilities recorded net income of $9.1 million, compared to a net loss of $1.7 million in 2022.

The first quarter of this year included $4.1 million of net income from new energy and had record closings of over 30 megawatts. 2022 included transaction costs of $1.4 million after tax related to the acquisition of New Energy, which was acquired in April of 2022. We also recorded earnings from Minnesota solar projects placed into service in late 2022. Earnings per share dilution in the first quarter was approximately $0.08, due to additional shares of common stock outstanding as of March 31, resulting from our secondary offering completed in April of last year. Next, a few comments on our outlook and 2023 guidance. Overall, regulated operations were in line with internal expectations for the quarter as higher taconite margins offset negative weather impacts on other regulated sales.

Our taconite customers began the year with production levels similar to where they were the last half of 2022 and with Cleton Cliffs announcement last week that it had restarted part of its Northshore Mining operation and strong nominations from other taconite customers through the summer months. We now expect full-year Taconite production will be higher than our initial sales forecast estimates of approximately 33 million tons. Another positive announcement came last week when Synovus announced they have completed the rebuild of the refinery in Superior, Wisconsin and have restarted operations and plan to be at full production by mid-year. ALLETE Clean Energy was below our expectations for the quarter by approximately $0.05 per share, primarily due to weather impacts causing more wind resources and availability across much of the fleet.

However, the $160 million profitable sale of the Red Barn build transfer project in April will be a positive impact to our second quarter financial results. Also, we are quite pleased that New Energy had another record quarter of project closings and as growing and robust pipeline of over 2 gigawatts further provides confidence for a strong project closings in the coming quarters. As such, New Energy is on track to achieve full year earnings of $16 million to $17 million as reflected in our initial guidance. Considering these items in total, we remain on track to achieve our full-year 2023 earnings guidance of $3.55 to $3.85 per share. Finally, ALLETE’s financial position is supported by a strong balance sheet that includes cash and cash equivalents of $30 million, $230 million in available consolidated lines of credit, and our debt to capital ratio was 37% as of March 31, 2023.

In addition, in April, ALLETE Clean Energy received approximately [$160 million] [ph] in proceeds from the sale of the Red Barn project, and ALLETE issued $125 million in first mortgage bonds last month at an interest rate of less than 5%. I’ll now turn it back to Bethany for additional comments. Bethany?

Bethany Owen: Thanks for that update, Steve. Just a few additional comments before we open the line for your questions. Minnesota Power leads the state in providing renewable energy to our customers, and we’re the only utility to exceed Minnesota’s energy conservation goals for 13 consecutive years. Our team has done all of that while continuing our long track record of providing safe and reliable service to our customers and keeping rates as low as possible. And because constructive regulatory outcomes are critical to our ability to continue the clean energy transition, while maintaining the financial health of Minnesota Power, we plan to file our next rate case in November of this year. In addition to transforming our generation fleet, an important part of Minnesota Power’s strategy includes significant, but prudent investments in our transmission and distribution, which we believe will enable us to meet our clean energy goals, while maintaining and strengthening the reliability and resiliency of our system and the regional grid.

As we make these investments, we’re always focused on our customers and providing the best value and the inflation Reduction Act and Infrastructure and Jobs Act are providing opportunities to help reduce costs for our customers. So, we recently filed requests for state and federal funding to support two innovative Minnesota Power projects to expand transmission and add energy storage. Also on the transmission front, the Northland Reliability Project is a $970 million 345kV 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 part of MISO Tranche 1 is moving forward, and we expect to file the certificate of need and route permit with the Minnesota Public Utilities Commission later this summer.

And our engagement with Grid United also continues as we make progress on the first of its kind North Plains Connector project to enhance interregional reliability and transfer capacity between the middle of the country and energy markets to the west. We look forward to sharing more with you on this exciting project in the coming quarters. These are just a few examples of the progress we’re making and how the very foundation of our growth strategy at ALLETE is sustainability in all of its forms, people, planet, and prosperity. As always, we’re committed to doing everything in the absolutely right way. Slide 8 contains the links to information on this important work, including our recently updated corporate sustainability report. Finally, but importantly, our people are the very reason for ALLETE’s success, and I couldn’t be more proud of our innovative, talented, strategic, diligent and resilient team.

Our team and our culture at ALLETE are unique. And just one example is the fact that ALLETE was recently recognized in the 2022 Minnesota Census of Women in corporate leadership as one of only two public companies in the state with gender parity on our Board of Directors and in our senior executive team. This is unique and special, not only in our state, but in the entire energy industry. I’m proud of this track record, and we’re continuing our work to advance diversity in all forms. But this important work isn’t about numbers or statistics, it’s about creating and strengthening a culture where individuals are valued for their [whole self] [ph] and our team, our communities and our company are more innovative and even stronger as a result. As you can hear, we are pleased with our execution and positioning here in early 2023 as we’re setting the stage for strategic and significant growth, and we look forward to updating you on our progress throughout the year.

Thank you for your interest and your investment in ALLETE. At this time, I’ll ask the operator to open the line for your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Richard Sunderland with J.P. Morgan. Your line is open.

Operator: Thank you. One moment. Our next question comes from Dariusz Lozny from Bank of America. Your line is open.

Operator: Thank you. Our next question comes from Brian Russo with Sidoti. Your line is open.

Operator: Thank you. Our next question comes from Alex Mortimer with Mizuho. Your line is open.

Operator: Thank you. And I’m showing no other questions in the queue. I’d like to turn the call back to Bethany Owen for closing remarks.

Bethany Owen: Thank you. Steve, Jeff, Frank, and I thank you again for being with us this morning and for your investment and interest in ALLETE. We look forward to speaking to many of you at other investor venues throughout the year, and we hope you enjoy the rest of your day.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.