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Allete Inc (NYSE:ALE)
Q4 2019 Earnings Call
Feb 13, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the ALLETE Full Year 2019 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 and 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 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 conference over to ALLETE President and Chief Executive Officer, Alan R. Hodnik. Please go ahead.

Alan R. Hodnik -- Executive Chairman

Good morning, everyone, and thanks for joining us today. With me are ALLETE's President and Chief Executive Officer, Bethany Owen; Senior Vice President and Chief Financial Officer, Bob Adams; and Vice President, Controller and Chief Accounting Officer, Steve Morris.

Before we get into the details of financial results and our outlook for 2020 this morning, I want to again congratulate Bethany Owen on her election by the ALLETE Board of Directors to Chief Executive Officer. Bethany's strong values-based leadership style, her proven ability to deliver results while effectively positioning against winds of change, and her laser focus on talent development will assure ALLETE's forward thrust continues as the new decade dons. Look for great things from Bethany and her ALLETE team in the years ahead.

I will remain ALLETE's Executive Chairman until the spring of 2021 and will partner closely with the ALLETE Board and Bethany to ensure a continued smooth transition. It is my hope to see many of you out in New York at our upcoming investor breakfast, at which time, I will be more personally able to thank you and say farewell.

This morning, ALLETE reported full year 2019 financial results of $3.59 per share on net income of $185.6 million. These results are within our previously issued 2019 earnings guidance and reflect a year of many accomplishments, while solidly positioning ALLETE for further clean energy growth. We often highlight ALLETE's differentiated strategy and sustainable positioning. These, of course, all driven by our dedicated, innovative and hard working employees, whom I've been so privileged to lead from my long career. Given the continued execution by Bethany and her team, and in full recognition of ALLETE's clean energy positioning, the Board of Directors has once again demonstrated its confidence by raising the ALLETE common stock dividend to an annual rate of $2.47 per share, reflecting an increase of 5%.

For further details on ALLETE's outlook and an update on its growth initiatives, I will now turn the call over to ALLETE"s President and Chief Executive Officer, Bethany Owen. Bethany?

Bethany M. Owen -- President and Chief Executive Officer

Thank you, Al. I'd like to take a moment to congratulate ALLETE's Executive Chairman, Al Hodnik, on his recently announced retirement from the company planned for May of 2021. At the time of his retirement, Al will have dedicated 40 years of service to the company. Al has been a tireless leader of ALLETE's growth strategy and our shared purpose of answering the call to transform the nation's energy landscape. Under Al's right results-right way leadership, ALLETE has developed a new generation of exceptionally talented employees and has experienced tremendous growth and diversification with the company in a position of strength for a clean energy future.

I'm proud of the accomplishments of our entire ALLETE team in 2019, a year of strong execution with record levels of construction and significant progress on key initiatives across the company. Minnesota Power's EnergyForward strategy is one of the most significant and transformative initiatives in the long history of our organization. The company continues to balance the interests of its many stakeholders, while positioning well with respect to emerging environmental and regulatory policy, renewable energy expansion and modernization of the energy grid. The company plans to make strategic investments in its transmission and distribution system to ensure clean, safe, reliable and affordable service to all of our customers.

To that end, we're pleased to report that just a few weeks ago, Minnesota Power completed construction of the Great Northern Transmission Line ahead of schedule and under budget. This milestone capped a decade of hard work and ingenuity. The 224 mile transmission line was built to the Canadian border and now awaits Manitoba Hydro's completion of its Manitoba to Minnesota transmission line expected later this year. The Great Northern Transmission Line is a one of a kind North American renewable energy project. It will facilitate an innovative form of storage, much like a massive battery allowing Minnesota Power to enhance reliability by balancing its abundant but intermittent wind resources in North Dakota with 250 megawatts of carbon-free renewable base load hydro energy from Manitoba Hydro.

Another transformative EnergyForward initiative is the Nemadji Trail Energy Center, or NTEC. Planned to be built in partnership with Dairyland Power Cooperative, this 525 megawatt to 625 megawatt state-of-the-art combined cycle natural gas plant will enable Minnesota Power to add even more renewable generation to its significant existing renewable energy capabilities. We are pleased that the Public Service Commission of Wisconsin recently approved the project. This approval recognizes the important role that this plant plays and reliability as Minnesota Power continues its transition to a cleaner energy future. As part of Wisconsin's robust review and regulatory process, the project must next obtain air and water permits.

Minnesota Power also received Minnesota Public Utilities Commission approval for NTEC. However, more recently, the Minnesota Court of Appeals determined that the Minnesota Commission should have applied Minnesota environmental review laws to this Wisconsin-based project. We believe the Court of Appeals erred and we filed a petition with the Minnesota Supreme Court requesting review of that decision. Meanwhile, we are considering options with our NTEC partner Dairyland, and we're confident we will successfully navigate this recent challenge.

Minnesota Power is also adding 250 megawatts of carbon-free wind energy through a power purchase agreement beginning later in 2020, a joint venture between an ALLETE subsidiary and Tenaska will own and operate the Nobles 2 wind farm in southwestern Minnesota with ALLETE's share of the project investment estimated to be $170 million. Upon completion, this state-of-the-art wind facility will deliver low cost carbon-free energy to Minnesota Power's customers for decades to come.

Briefly on the customer front, Minnesota Power's Taconite customers finished 2019 at near full production, and we anticipate that strong performance to continue as we begin 2020. These high levels of production along with significant investments by these customers and their operations support our view that there is a bright future for Minnesota Power's customers here in northeastern Minnesota. Our Wisconsin-based utility company Superior Water, Light and Power is also planning significant investments in projects and systems to benefit its customers, including a community solar garden project, which is currently being considered by the Public Service Commission of Wisconsin. Superior Water, Light and Power anticipates filing a general rate case in the second quarter of this year.

The second largest company in the ALLETE family, ALLETE Clean Energy, completed a year of significant new project construction and fleet optimization. The company also began work on large wind generation projects that are scheduled to be completed later this year. ALLETE Clean Energy recorded a milestone of its own a few weeks ago, setting an all-time record for energy production, all renewable and carbon-free. Production reached 503 megawatts, the first time ALLETE Clean Energy registered over 500 megawatts, driven by strong wind across the fleet, excellent turbine availability at all sites, and full production at the new Glen Ullin Energy Center in North Dakota.

We're also pleased to report that the 80 megawatt South Peak wind site at Montana began delivering test energy to its customers yesterday, and is expected to be fully operational in the coming weeks. In addition, construction began a few weeks ago on ALLETE Clean Energy's 300 megawatt Diamond Spring project in Oklahoma. This project is fully contracted to three Fortune 500 customers and is expected to be online at the end of 2020, at which point ALLETE Clean Energy's portfolio will expand to more than 1,000 megawatts of installed capacity.

ALLETE Clean Energy's safe harbor turbines continue to be a differentiator. In addition, the company's current operating and development portfolio includes strategic land and access rights, strong landowner relationships and hard to obtain interconnection rights, as well as permits already in hand. With all of this and the fact that we expect higher renewable standards across the country in the coming years, ALLETE Clean Energy is well positioned to materially expand its operations and earnings into the future.

I'll provide a few additional thoughts on our closing remarks. But first, I'll ask Steve to go through the 2019 financial results and 2020 earnings guidance. Steve?

Steven W. Morris -- Vice President, Controller and Chief Accounting Officer

Thanks, Bethany, and good morning, everyone. I would like to remind you that we filed our 10-K this morning, along with an 8-K that provides details of our 2020 earnings guidance. I encourage you to refer to them for more details. For the year ended 2019, ALLETE reported earnings of $3.59 per share on net income of $185.6 million. Earnings for 2018 were $3.38 per share on net income of $174.1 million.

Before I discuss segment details, I will point out several significant year-over-year timing variances and other items for comparison considerations. We have also included further details of these items in our first four slides for your reference at our website at ALLETE.com in the Investors section. For the year ended 2019, earnings included a gain on the sale of US Water Services -- excuse me -- of $0.26 per share, of which $0.04 per share was recognized in the fourth quarter of 2019 for the favorable settlement of a US Water Services patent infringement case, offset by $0.02 per share for US Water Services' first quarter operating results prior to the sale. For the year ended 2018, earnings included $0.30 per share in total for ALLETE Clean Energy's gain on the sale of a wind energy facility, contributions from US Water Services operating results for the year, and a change in fair value of the contingent consideration liability with most of these impacts recognized in the fourth quarter of 2018.

A few details from our business segments. ALLETE's Regulated Operations segment, which includes Minnesota Power, Superior Water, Light and Power and the company's investment in the American Transmission Company, recorded net income of $154.4 million compared to $131 million in 2018. Earnings reflected higher net income at Minnesota Power, primarily due to lower operating and maintenance and property tax expense, increased cost recovery rider revenue, higher transmission margins and fuel adjustment clause recoveries. These increases were partially offset by lower kilowatt-hour sales and associated margins from retail and municipal customers.

Net income at Superior Water, Light and Power increased over last year due to higher rates implemented in early 2019, and ALLETE's earnings in the American Transmission Company were higher than 2018, primarily due to additional equity investments and period-over-period changes and an estimated refund liability related to MISO return on equity complaints. ALLETE Clean Energy recorded net income in 2019 of $12.4 million compared to $33.7 million in 2018. Earnings in 2018 included the sale of a wind energy facility of $10.2 million after-tax and $3 million of production tax credits that resulted from the retrospective qualification of additional wind turbines in 2016 and 2017.

Net income in 2019 included lower revenue resulting from lower non-cash amortization related to the expiration of power sales agreements and higher depreciation expense. These decreases were partially offset by $5.3 million of additional production tax credits generated in 2019 compared to production tax credits generated in 2018 as ALLETE Clean Energy continues to execute on its refurbishment strategy.

Our corporate and other businesses, which includes BNI Energy and ALLETE Properties, recorded net income of $19.9 million in 2019 compared to net income of $6.2 million in 2018. Net income in 2019 included the gain on sale of US Water Services of $13.2 million after-tax and higher earnings on cash and short-term investments.

I'll now turn to our 2020 guidance. I would ask that you refer to the slide titled 2020 Guidance Highlights for further reference and our full 2020 guidance 8-K filed with the SEC earlier this morning. Today, we initiated 2020 earnings guidance of $3.40 to $3.70 per share on net income of $180 million to $190 million. This guidance range is comprised of our Regulated Operations segment within a range of $2.75 to $2.95 per share and ALLETE Clean Energy and Corporate and Other within a range of $0.65 to $0.75 per share.

Our guidance includes interim rate -- revenue for Minnesota Power as part of the ongoing rate case filed in late 2019 of approximately $36 million beginning January 1st, 2020, which is subject to refund. On November 1st, 2019, Minnesota Power filed a retail rate increase request seeking an increase of $66 million in total additional annual revenue. We anticipate an administrative law judge report in September, followed by a written order from the Commission in December of this year. We anticipate final rates would be implemented sometime in mid-2021.

Our 2020 guidance assumes that we will achieve reasonable outcomes in regulatory proceedings. We expect increased cost recovery rider revenue from the Great Northern Transmission Line with $26 million of additional capital investments in 2020 as we complete all-related projects and commissioning. Industrial sales for Minnesota Power are expected to be at approximately 7 million to 7.5 million megawatt hours, reflecting Taconite customer production levels of approximately 39 million tons. Minnesota Power will realize lower revenues due to an expiring power marketing agreement and an expired municipal customer contract. In addition, we expect increased operating and maintenance property taxes and depreciation expenses of approximately 5% as compared to 2019.

A few highlights from our 2020 guidance regarding ALLETE Clean Energy and our corporate and other businesses. ALLETE Clean Energy expects to generate approximately 2.3 million megawatt hours in 2020 versus 1.1 million megawatt hours in 2019 with the expectation of normal wind resources in 2020. 2019 generation was 20% below our expectations. Our 2020 guidance includes the Glen Ullin wind facility in service for the full year, and the South Peak wind facility beginning in the first quarter of 2020. We anticipate Diamond Spring wind project to be in service in late 2020 with minimal earnings expected this year.

ALLETE Clean Energy expects additional business development and operating expenses due to investment in growth initiatives. We expect production tax credits related to ALLETE Clean Energy's refurbishment projects to be approximately $20 million in 2020. We anticipate similar results at BNI Energy and ALLETE Properties as compared to 2019. As mentioned earlier, the Nobles 2 wind facility is expected to begin commercial operations in late 2020 with minimal earnings expected this year.

I'll now hand it off to Bob for additional comments on our 2019 financial performance and our 2020 outlook. Bob?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Thanks, Steve, and good morning, everyone. Let me begin by saying how pleased I am with the progress on our strategic initiatives in 2019, further positioning ALLETE for significant growth in 2020 and well into the future. ALLETE's ongoing execution translates to cleaner energy and sustainability, while supporting earnings growth, robust dividends and expanding cash flows for our valued investors.

Before I share more details of our 2020 earnings guidance, I want to highlight a few points and accomplishments from 2019. Earlier in 2019, we sold our industrial water services company for a significant premium, and soon after redeployed the $270 million in cash proceeds to fund clean energy growth initiatives. The sale proceeds effectively mitigated the need for new equity financing and support of ALLETE Clean Energy's Diamond Spring project and clearly demonstrates the discipline we have around capital allocation more broadly. We completed significant construction on the approximately $1.5 billion of clean energy supporting investments. This included brand-new wind farms, refurbishment of existing wind generation projects and renewable energy enabling transmission investments.

In December 20 of '19, ALLETE Clean Energy became -- began commercial operations of its 106 megawatt Glen Ullin Energy Center and successfully closed on tax equity financing. Indeed, we are pleased to report that the asset is performing quite well selling energy to Xcel under a 20-year power sales agreement. Construction of the 80 megawatt South Peak wind project is expected to be completed in the first quarter of this year and tax equity financing were closed shortly after operations began. We expect a full year of earnings from Glen Ullin and earnings for three quarters of the year from South Peak in 2020.

The construction of ALLETE Clean Energy's Diamond Spring project started in the fourth quarter of 2019 and is advancing as planned. At this time, the substation is complete and turbine deliveries are expected this month. The 303 megawatt wind generation project with a total cost of approximately $430 million is expected to be operational in late 2020. Corporate customers and utilities alike have accelerated their sustainability commitments to achieve a carbon-free energy between now and 2050. With its unique investment in PTC qualified wind turbines, ALLETE Clean Energy remains poised to secure another 500 to 600 megawatts in new PTC projects.

Though transmission limitations are a challenge to overcome in the MISO region, the challenge I reported on in last quarter. We remain confident in our ability to secure additional projects and are particularly focused on projects which would contribute to earnings in the post 2021 time period.

Taken as a whole, we are highly confident ALLETE Clean Energy's wind generation portfolio will reach 1,500 megawatts by the end of 2022 based on PTC qualified projects alone. As I have expressed previously, the company is also pursuing acquisitions of existing assets and high quality wind regimes across the country, which would further augment this growth. ALLETE Clean Energy strategy is contemplative and highly customer-centric in nature, and the company is currently evaluating several additional clean energy product and service offerings, which will further differentiate itself in the market. We will be providing more color on their evolving strategy as the year progresses.

Importantly, the company remains highly focused on operational effectiveness and overall efficiency as we scale the business. Indeed, overall availability of the fleet has continued to improve as we implement new technology, systems and complete our refurbishment projects. Overall, ALLETE has approximately $2 billion of projects scheduled in our capex planned for the next five years, of which clean energy projects represent the vast majority. As our history demonstrates, we conservatively and thoughtfully only include capital projects that have a very high likelihood of coming to fruition as part of our capex table. We continue to expect only minimal equity issuances, which would be required to fund the $2 billion in projected investments.

In addition to the scheduled projects, we fully expect additional project announcements from ALLETE Clean Energy, along with other potential renewable supporting projects at our regulated segment that would expand and extend our capex levels over the next five to 10 years as the region transitions further to a clean energy future and we advanced efforts to harden the grid and enhance overall reliability. We were pleased in our ability to increase our annual dividend to $2.47 per share from $2.35 per share, just north of a 5% increase over 2019. Again, delivering on our objective to align future dividend increases with our 5% to 7% average annual earnings growth objectives, while maintaining healthy dividend payout ratios. ALLETE is in full execution mode in 2020 with newer earnings and cash flow streams and with additional growth drivers. We are excited about projects already under way and emerging new clean energy opportunities yet to be announced. Our differentiated growth strategy is well supported by ALLETE's solid fundamentals and a longer runway of credit headroom, which will enable further non-regulated growth.

As Steve mentioned, our 2020 guidance range is $3.40 to $3.70 per share. The midpoint of our 2020 earnings guidance implies an increase of 6% over 2019 results when normalized for the US Water Services sale again in 2019 and is within our 5% to 7% annual average long-term earnings objectives. As we look forward to 2021, we expect growth to accelerate even further as ALLETE's Clean Energy's largest wind farm Diamond Spring and the Nobles 2 wind project are expected to be operational near the end of this year, generating a full year of financial contributions in 2021. At ALLETE Clean Energy, we anticipate minimum average annual earnings growth of approximately 30% to 40% over the next two years.

In closing, we remain very bullish about the latest strategic positioning and overall growth prospects and are particularly proud of how this growth will continue to advance our sustainability objectives across our company.

Bethany?

Bethany M. Owen -- President and Chief Executive Officer

Thank you, Steve and Bob, for the financial update and guidance highlights. ALLETE has thrived through many decades of change, and I'm confident in our talented team of employees and in opportunities that lie ahead. We look forward to another year of strong execution on our strategic initiatives, including projects already under way as well as new projects yet to be announced. Society's demand for a clean energy future is increasing and ALLETE's family of businesses is well positioned to deliver excellence to all of our customers. In addition, we believe ALLETE's diversified multi-year growth platform, along with our proven ability to execute, offer an attractive and differentiated value proposition to investors. I couldn't be more proud of the ALLETE team or more excited about the opportunities ahead for our company.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Shar Pourreza from Guggenheim Partners. Please go ahead.

James Schaefer -- Guggenheim Partners -- Analyst

Good morning, guys. It's actually James for Shar. Congrats on the quarter, and congrats to Bethany and Al on the transition.

Alan R. Hodnik -- Executive Chairman

Thank you.

Bethany M. Owen -- President and Chief Executive Officer

Good morning. Thank you.

James Schaefer -- Guggenheim Partners -- Analyst

So, my first question is actually in regards to the ongoing integrated distribution plan process at Minnesota Power. Specifically how should we think about the potential incremental capex opportunities there from the ITP versus what you have in your base five-year plan already. I realize you added a little bit to it with 3Q, but could there be more there and what would the timing for that be?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Yeah. James, this is Bob Adams. So we have not incorporated any of the approximately $150 million that's reflected in that planned filing. So that's -- and it's associated with hardening and grid reliability, etc. So -- and we're also working on sort of the timing of that $150 million over that 10-year period of time. It's scoped out over 10 years. So, more to come on that front.

James Schaefer -- Guggenheim Partners -- Analyst

Got you. Perfect. And then, on the state energy policy side, I realize the Minnesota legislative session just started on Tuesday, but it sounded like Senate Republicans have already been kind of discussing some legislation. either any expectations at this time for something like an RPS updates, that's the spring. I know there's a lot of discussion last year.

Alan R. Hodnik -- Executive Chairman

Yeah, this is Al. I've been working down there in St. Paul in the last couple of weeks and spending time with the various leaders of energy policy transformation both in the Republican and Democratic side. Considerable conversation early on about doing something, Governor Walz of course wants to certainly advance energy policy in a further way. A lot of discussion about electric vehicles in the transportation sector, along with sort of the energy sector. Recall, the energy sector has been the focus over the last five to 10 years. So, of course, in the advent of a session, there's lots of conversation about what should be done, how it all plays out in May, and more to come. The capital bonding bill is probably the top focus, and then negotiations around that often lead to what might be able to get done with an election year coming in the fall on energy and other sorts of critical issues that are facing the state. So, yeah, a lot of conversation, but very early right now.

James Schaefer -- Guggenheim Partners -- Analyst

Got you. Thanks, guys.

Operator

Thank you. Our next question comes from Brian Russo from Sidoti. Please go ahead.

Brian Russo -- Sidoti -- Analyst

Hi, good morning.

Bethany M. Owen -- President and Chief Executive Officer

Good morning, Brian.

Alan R. Hodnik -- Executive Chairman

Good morning, Brian.

Brian Russo -- Sidoti -- Analyst

Hey, just the Regulated Operations guidance and the midpoint and that is assumes the $36 million interim rate and absence of recovery for the expiring wholesale contract. Is that -- is the midpoint net of any optimization opportunities there, meaning sell it elsewhere in the power market or short-term contract, etc?

Alan R. Hodnik -- Executive Chairman

Yeah. Hi, Brian. [Indecipherable]. That's all net in there. So, in our interim rates, we do include significantly lower power marketing sales, so that contract is out of there except for the four months that we are getting in 2020. So we expect the rate case we filed, we expect about $10 million of power marketing margins on a go-forward basis. We expect about $20 million in 2020.

Brian Russo -- Sidoti -- Analyst

Okay, got it. And why final rates would be implemented in mid-2021, not early 2021?

Alan R. Hodnik -- Executive Chairman

Yeah. So, we expect to get an order in December, and then there is various reconsideration requests that could come forward, and then various after that various compliance filings that need to happen based on just rates and the like. And so that just takes some time.

Brian Russo -- Sidoti -- Analyst

Okay. That's helpful. Thank you. And then, just on the new capex disclosures, so it looks like there is some movement in the Regulated Operations. I think it looks like 2020 is down about $30 million, while total capex is up in 2022. It seems to be up at the rig operations but down at the other operational capex. Could you just add some more color into the updated five-year capex and what are the moving parts there?

Alan R. Hodnik -- Executive Chairman

Yeah. So, I'll take that one here, Brian. So, 2020 is down a little bit. You see it in the base and other 2021 and later reflects work on the DC line, so that cranks up in 2021 throughout there. It's going to be significantly less than 2020. You see the transmission current cost recovery of that completion of the Great Northern Transmission Line, and then you see obviously Nemadji Trail Energy Center, the NTEC, really starts construction in 2021.

Brian Russo -- Sidoti -- Analyst

Okay. And then, your comment earlier on, 30%, 40% EPS CAGR at ACE over the next two years, what's the base year we should be using, 2018 or -- 2019 or 2020?

Alan R. Hodnik -- Executive Chairman

Yeah. I would use -- we're still using 2018, and that number we have -- and we've helped you all with the slides on that, and if you do the math, you add it up, we get 308.

Brian Russo -- Sidoti -- Analyst

Okay. And then, also you add some color and your confidence level of having the total of 500 megawatts of renewable generation at ACE by 2022, it implies quite a bit of incremental project announcements to come?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Yeah. So, Brian, this is Bob. So, obviously we have the Diamond Spring 300 megawatt projects that's going to be completed this year. Beyond that, that's going to get us to the 1,000 megawatts. And then, we have the 500 to 600 megawatts of PTC safe harbor turbines that are driving a lot of that confidence there. But in addition, remember, when we talk about two to three projects, we are also looking at exact acquisitions of existing wind farms. And as I've expressed over the last couple of quarters, we have really ramped up our efforts in our origination team on that. So, our confidence is very high that we will be able to accomplish that.

Brian Russo -- Sidoti -- Analyst

Okay, great. And just, it seems that you have been, it appears in negotiations, and I know they're highly confidential on new projects. But we've yet to see any announcements. Just any color on the negotiations and what might be the sticking points in signing contracts at new projects?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Yeah. So -- yeah, thanks, Brian. Again, as I've said here, I think over the last quarter or two, so we've got -- I mean, from a demand standpoint, customer demand and interest in our projects, there is substantial interest. So it's not that the biggest challenge we've had for projects that are in the upper Midwest, which is really around the couple of projects I referred to. There has been two 100 megawatt projects we've been highly focused on, have been running into some transmission challenges given what's going on in terms of transmission challenges generally in MISO. So that's been the sticking point, if you will. There's significant cost of upgrade to transmission, given the nature of what's going on with MISO, and the sharing of those costs or the risk of what those transmission costs would ultimately be has been the challenge between us and the counterparties.

One of the things I've said many times is that we were not going to --we're going to hold tie to our underwriting criteria on these projects. We're in a very solid position in 2020 and 2021 already with regard to our earnings. My comment earlier with regard to our focus, it's not that we wouldn't take more projects in 2020 and 2021, but I'm really more focused on earnings in 2022, so we can be selective. We'll be selective on these projects as we go forward. And having said all that, I do believe that these transmission challenges notwithstanding that those are projects that still have substantial potential that we can get done.

Brian Russo -- Sidoti -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Agostina Colaizzo from Mizuho Securities. Please go ahead.

Agostina Colaizzo -- Mizuho Securities -- Analyst

Hi, everyone, and congrats, Bethany. So I just wanted to better understand the long-term growth rate and clarify the starting point. So when we think about the 5% to 7% rate, is the right base to be using the 2018 normalized number of 308?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Yeah, I would -- so the answer is yes. On 2018 as a base, but I would tell you also -- this is Bob -- that as we look at adding another year, now when we look at the numbers that we just penciled on a normalized basis for 2019, we're solidly within that range, we're on the higher end of that range. So, whether you use '18 or '19 at the highest level, we are still very confident in the range and being at the higher end of that range.

Agostina Colaizzo -- Mizuho Securities -- Analyst

Perfect. Okay. Thank you. That's it.

Bethany M. Owen -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Chris Ellinghaus from Siebert Williams. Please go ahead.

Chris Ellinghaus -- Siebert Williams -- Analyst

Hey, everybody. How are you?

Alan R. Hodnik -- Executive Chairman

Good morning, Chris.

Chris Ellinghaus -- Siebert Williams -- Analyst

Congrats to Al and Bethany. I'm sure everything is going to be wonderful going forward. The Nemadji Trail legal challenge, how -- do you have any sense of how long you think that timeline will be before you get some greater clarity or resolution?

Bethany M. Owen -- President and Chief Executive Officer

Yeah. Thanks, Chris. This is Bethany. We expect -- as we mentioned, we have filed an requested review of the Minnesota Supreme Court of that Court of Appeals decision. We do believe the Court of Appeals erred, and so we are awaiting kind of the Minnesota Supreme Court that their review is discretionary. So we are awaiting that decision. We should know that within the next few weeks, likely by early April, and -- but meanwhile we are in conversations with Dairyland about other options and a path forward, and we are confident that we'll be able to move forward. But if we were required to kind of go down this other path that would be a bit of a delay in the project, but we're confident there are other path forward, and so we're working on that with Dairyland.

Chris Ellinghaus -- Siebert Williams -- Analyst

Okay. Bob, have you got any thoughts on the prospects for properties going forward?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

We're down, Chris, to a very small amount of acreage on a relative basis, about 1,400-1,500 acres now at properties. And I'm actually -- given what we've got left there, I'm actually feeling quite good about us ramping that up, if you will, this year in terms of getting completely liquidated. There continues to be actually increasing interest. We've had a good year, as you know, in 2019, actually ended up with a gain in our property segment -- small gain, but again nevertheless. And so, pretty bullish about our ability to kind of move on beyond that after we get through 2020.

Chris Ellinghaus -- Siebert Williams -- Analyst

Okay. One last thing, I might have missed this somewhere along the lines, but can you give us any color on where ACE's backlog stands today?

Alan R. Hodnik -- Executive Chairman

As far as there are a pipeline of opportunities they are reviewing, Chris?

Chris Ellinghaus -- Siebert Williams -- Analyst

Yeah.

Alan R. Hodnik -- Executive Chairman

Yeah. So they're still in that, I would say, roughly 1,000 to 1,500 megawatts of projects we're evaluating. What's interesting about it though is that, again, the nature of the backlog in terms of the C&I space, recall the Diamond Springs was an entrant -- new entrants into the C&I space, and we've got a very healthy mix of C&I interest now on the heels of that deal within the 1,000 to 1,500 megawatts.

Chris Ellinghaus -- Siebert Williams -- Analyst

Okay, great. Thanks for the color. I appreciate it.

Operator

Thank you. Our next question comes from Vedula Murti from Avon Capital. Please go ahead.

Vedula Murti -- Avon Capital -- Analyst

Good morning.

Alan R. Hodnik -- Executive Chairman

Good morning, Vedula.

Bethany M. Owen -- President and Chief Executive Officer

Good morning.

Vedula Murti -- Avon Capital -- Analyst

If I'm thinking about kind of rolling out here in '21, in particular at ACE with Diamond Spring and Nobles 2 coming into operation, cumulative that's now a little over $600 million of capital investment that will then be going into service. And if my recollection is that you generally have kind of like a whole thumb or guideline that every $100 million of capital investment translates to about $5 million of net income when fully operational. Is that still a fair representation?

Steven W. Morris -- Vice President, Controller and Chief Accounting Officer

Yeah. Hi, Vedula. This is Steve Morris. We are still using that as a benchmark for a 100 megawatt project, and that's on a levelized basis. So what we're seeing is, the accounting for these projects is under HLBV, you'll be hearing more about that. It isn't an exactly a straight line, it will start lower than that and it will gradually increase to that. So what we're looking at using is probably 60% to 70% of that number in the first year, and that's going to gradually increase to about 60% to 70% over that $5 million by the time we hit your 10.

Vedula Murti -- Avon Capital -- Analyst

Okay. And you also indicated that you are following the consummation of Diamond Springs that there were -- that that transaction has initiated discussions on for similar types of transactions with commercial third parties. Can you kind of up this a little bit as to -- at this point kind of like how far along those types of things might be in the potential size increment that you -- that might be involved?

Steven W. Morris -- Vice President, Controller and Chief Accounting Officer

Yeah. Vedula, I would say this. I would say that the size of the projects are -- that we're looking at that are in and around the that region we're Diamond Springs was for example are greater than the 100 megawatt in size. So I can tell you that. And I would tell you that we're pretty enthusiastic about our ability to get something done here within the earlier part of the year. So that's what we're -- that's what we're really focused on right now.

Vedula Murti -- Avon Capital -- Analyst

Okay. All right. Thank you very much.

Bethany M. Owen -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Kevin Fallon, please go ahead, from Citadel.

Kevin Fallon -- Citadel -- Analyst

Good morning.

Bethany M. Owen -- President and Chief Executive Officer

Good morning.

Alan R. Hodnik -- Executive Chairman

Good morning, Kevin.

Kevin Fallon -- Citadel -- Analyst

Just to make sure I understand the base for the clean energy to grow 30% to 40% is what year and what amount.

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Yeah, it is 2019 actual, as -- and we've then actually adjusted that to normalized ALLETE Clean Energy for the win this year. So obviously we were down significantly because of wind, so we assume normal wind. But we expect 2020-2021 to be 30% to 40% higher, as Bob mentioned, on a normal wind year.

Kevin Fallon -- Citadel -- Analyst

Okay. So what exactly is the '19 actual that you're using?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Yeah. Roughly $20 million.

Kevin Fallon -- Citadel -- Analyst

$20 million of net income? Yeah. Okay. And then, and then when we look at the 5% to 7% growth rate that's anchored off 3 hours and $0.08 in 2018. Correct?

Robert J. Adams -- Senior Vice President and Chief Financial Officer

Right. Correct.

Kevin Fallon -- Citadel -- Analyst

And are there years where you're above the top end or is the market being too -- or estimates being too aggressive in any given year if you're above 7%?

Steven W. Morris -- Vice President, Controller and Chief Accounting Officer

No, there will be years that we are above, there could be years that we're below, but at least, as Bob mentioned, with a significant ACE growth that we have in the next several years, we could be above that number well that's specifically what I was getting to. So you're implying that there is a very solid chance of being above the 7% growth range in '21 and '22 because of the strength of ACE. Is that what you're trying to communicate? That's really happening, yeah.

Alan R. Hodnik -- Executive Chairman

Yeah. Yeah, that's likely.

Kevin Fallon -- Citadel -- Analyst

Okay.

Alan R. Hodnik -- Executive Chairman

And look at it over a long period of time, Kevin. So that's a long-term view, five to seven. There is going to be years up, there will be years under.

Kevin Fallon -- Citadel -- Analyst

True. And I assume that it's just a reflection of kind of the strength of your pipeline in terms of the wind opportunities in the next few years, which is driving the kind of greater than 7% step up. And then from there, it's less visible.

Alan R. Hodnik -- Executive Chairman

Correct.

Kevin Fallon -- Citadel -- Analyst

Okay. And just what are you guys assuming that the -- that Minnesota Power earns in calendar year '20 in your guidance?

Alan R. Hodnik -- Executive Chairman

Yeah, it is close to 9%.

Kevin Fallon -- Citadel -- Analyst

Got it. And just lastly, there were something in the K about a critical audit matter. And I just -- It seemed like some sort of technical thing. I just wanted to make sure that was an issue or if it wasn't clear to me what it was being driven by.

Alan R. Hodnik -- Executive Chairman

Are you talking about our auditor's opinion page?

Kevin Fallon -- Citadel -- Analyst

Yes.

Alan R. Hodnik -- Executive Chairman

So that is the new requirement for all auditors. The audit opinion has to include, but they fill as critical audit matters. You will see that on all public companies. So this isn't unique and they have to have one. So that's what they have, it's on a regulated regulatory assets and liabilities and they felt that was critical audit matter because of the judgment that can be involved in that. So they have to have on it is just a new requirement, nothing more than that.

Kevin Fallon -- Citadel -- Analyst

That's really helpful. I really appreciate it. And thank you very much. Thanks.

Bethany M. Owen -- President and Chief Executive Officer

Thank you.

Operator

Our next question comes from Vedula Murti from Avon Capital. Please go ahead.

Vedula Murti -- Avon Capital -- Analyst

Yes. In terms of the utility, when you said that I think in your opening comments that you're looking at about 5% increase in O&M TDA property taxes; one, how much is that on a nominal basis for the year-over-year? And then secondarily, does that could trued up such as that would then be recouped starting in '21 following the completion of the rate case?

Alan R. Hodnik -- Executive Chairman

Yeah, it really is reflected in our rate case. So -- but it will be up, but it is part of the 36 million and the $66 million.

Vedula Murti -- Avon Capital -- Analyst

But it would -- but it would -- but it -- would you consider it a lag item for 2020 however?

Alan R. Hodnik -- Executive Chairman

Some of it but not all of it can get everything you asked for in interim rate. So there is some lag there.

Vedula Murti -- Avon Capital -- Analyst

And also, can you remind me in terms of the power contract that expires in April -- in 2021 when we get, have the rate case. Having been determined the fact that there is a portion that was not permitted in interim rate. That effectively again gets trued up. So what would be the uplift in '21 that we should anticipate from the lack of that timing item.

Alan R. Hodnik -- Executive Chairman

Yeah. So that amount here is fully reflected in our final rate case request of $66 million. So we'll have to wait and see on the rate case and how that goes just what is fully reflected in final rates in 2021.

Vedula Murti -- Avon Capital -- Analyst

Because I think it was the difference between what you were granted and what you requested for interim rate. So it's about $10 to $12 million. Correct. That's correct. So that's, so at least double that there will be anticipate that that amount would then be normalized for '21?

Alan R. Hodnik -- Executive Chairman

Yeah. So, our request in our rate case was power marketing margins of $10 million without that contract in there. That's part of the $66 million requests that we have.

Vedula Murti -- Avon Capital -- Analyst

All right, thank you.

Alan R. Hodnik -- Executive Chairman

Thank you.

Operator

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Bethany Owen, President and Chief Executive Officer of ALLETE for closing remarks. Please go ahead.

Bethany M. Owen -- President and Chief Executive Officer

Steve. Bob, Al and I thank you again for being with us this morning and for your investment and interest in ALLETE. We look forward to seeing many of you at our Annual Analyst breakfast in New York on March 12th and at other investor venues throughout the year. Enjoy the rest of your day.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Alan R. Hodnik -- Executive Chairman

Bethany M. Owen -- President and Chief Executive Officer

Steven W. Morris -- Vice President, Controller and Chief Accounting Officer

Robert J. Adams -- Senior Vice President and Chief Financial Officer

James Schaefer -- Guggenheim Partners -- Analyst

Brian Russo -- Sidoti -- Analyst

Agostina Colaizzo -- Mizuho Securities -- Analyst

Chris Ellinghaus -- Siebert Williams -- Analyst

Vedula Murti -- Avon Capital -- Analyst

Kevin Fallon -- Citadel -- Analyst

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