ALLETE (ALE) Q1 2022 Earnings Call Transcript

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ALLETE (ALE 2.09%)
Q1 2022 Earnings Call
May 05, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the ALLETE first quarter 2022 financial results call. Today's call is being recorded. Certain statements contained in this conference call 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 risk and uncertainties, actual results may defer materially from those expressed or implied by such forward-looking statements.

Factors that could cause results to defer materially from those expressed or implied by such forward looking statements include, but are not limited to those discussed in the 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. A listener should not place undue reliance on forward looking statements, which reflect management 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.

Welcome to the ALLETE first quarter 2022 financial results call. For opening remarks and introductions, I'd now like to turn the conference over to ALLETE chair, president, and chief executive officer, Ms. Bethany Owen. Please go ahead.

Bethany Owen -- Chairman, President, and Chief Executive Officer

Good morning, everyone. And thanks for 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. Corresponding slides for this morning's call can be found on our website at allete.com in the investor section.

To follow along, we'll call out each slide number as we go through today's presentation. This morning, ALLETE reported first quarter 2022 earnings of $1.24 per share or net income of $66.3 million. Last year's results were $0.99 per share on net income of $51.8 million. Our financial results for the quarter were firmly in line with our expectations and support ALLETE's full-year earnings guidance range of $3.60 to $3.90 per share, which we originally shared in February.

Steve will be providing more financial details from the quarter in a moment. Please refer to Slides 3 through 5. We are in full execution mode on ALLETE's sustainability and action strategy, including advancing renewables, reducing carbon, strengthening the electric grid and developing innovative sustainability solutions. We're proud to be recognized as a leader in advancing clean energy, and we're not just talking about the importance of sustainability, we're putting sustainability into action and Slide 4 proves that as a recent independent study ranked ALLETE as the number one largest investor in renewable energy as a percentage of market cap among all investor owned energy companies in the country.

And that doesn't even include the latest exciting milestone in ALLETE's strategy, our significant entry into the solar space with the acquisition of New Energy Equity, one of the nation's leading distributed solar developers. We've signaled our plan to move into the solar industry for some time, and we know we found the right company to position us well. The talented New Energy team bring significant distributed and community solar expertise and experience to ALLETE, along with a proven track record of financial success and a strong pipeline of future projects. We believe the distributed solar space has tremendous optionality for future growth as solar plays an increasingly important role in the country's clean energy transformation.

New Energy's distributed scales projects have higher returns than larger utility scale projects. Also helping to mitigate supply chain risks. The company has a proven ability to grow organically through Greenfield development and strategic partnerships, enabling New Energy to establish a meaningful presence in new and existing markets. The addition of New Energy solidifies and even enhances the drivers of ALLETE's long term average annual EPS growth objective of 5% to 7%.

It enhances our strong portfolio of companies and capabilities and brings new growth opportunities and we could not be more excited about ALLETE's future. ALLETE's family of businesses all listed on Slide 5 provides unique value, supporting long term earnings and dividend growth. Sustainability is the very foundation of our strategy and each of our businesses is playing an important role as we lead the way to a sustainable clean energy future. Now I'll turn it over to Steve for further details on our Q1 financial results and our full-year earnings guidance.

Steve.

Steve Morris -- Senior Vice President and Chief Financial Officer

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 Slide 6 and 7 for significant variances and other items for comparison considerations.

Today, ALLETE reported first quarter 2022 earnings of $1.24 per share or net income of $66.3 million. Earnings in 2021 were $0.99 per share or net income of $51.8 million. Net income in 2022 included transaction costs of $1.4 million after-tax or $0.03 per share related to the acquisition of New Energy. Net income in 2021 included an approximately $5 million after-tax or $0.10 per share negative impact related to ALLETE clean energy's Diamond Spring wind energy facility due to an extreme winter storm event in the Southwestern United States in February, 2021.

A few details from our business segments. ALLETEs regulated operations segment recorded first quarter, 2022 net income of $51.5 million compared to $45 million in 2021. Earnings reflect higher net income at Minnesota Power, primarily due to the implementation of interim rates in January 1st, 2022, and higher kilowatt-hour sales to residential and commercial customers due to colder weather conditions as compared to last year. These increases were partially offset by higher costs under a power purchase agreement, higher operating and maintenance expense and lower kilowatt hour sales to industrial customers.

Our taconite customers started the year with full production. However, one customer experienced some operational curtailments in the first quarter, and another announced an idling at one facility that commenced in May and is expected to continue through this fall. As a result and as we factored such variability into the Minnesota Power rate case, taconite production is expected to be in line with our sales forecast estimates of approximately 35 million tons. On average taconite production over the years is approximately at the 35-million-ton level.

As you might recall, Minnesota Power has asked for a large power sales true-up mechanism in its recently filed rate case to fairly balance this type of variation in sales between customers and investors. ALLETE clean energy recorded first quarter 2022 net income of $16.5 million, compared to $7.4 million in 2021. Net income in 2022 reflects higher wind resources compared to last year. Net income in 2021 included an approximately $5 million after-tax negative impact at ALLETE's clean energy's Diamond Spring wind energy facility related to an extreme winter storm event in February, 2021.

Our corporate and other businesses, which includes BNI energy, ALLETE properties, and our investment in the Nobles 2 wind energy facility recorded a net loss of $1.7 million, compared to net loss of $600,000 in 2021. Results this quarter reflect $1.4 million after tax of transaction costs related to the New Energy acquisition and higher expenses as compared to 2021, partially offset by higher earnings from our investment in the Nobles 2 wind energy facility this quarter, reflecting higher wind resources. I'll now turn to our 2022 earnings guidance. As you know, in April, we executed on significant initiatives in support of our long term growth objectives, the acquisition of New Energy and the equity financing which funded this acquisition and previously anticipated amounts related to the cattle project.

All considered, we are affirming our full year 2022 earnings guidance of $3.60 to $3.90 per share and anticipate immaterial net impacts on consolidated 2022 earnings from these initiatives. Please refer to Slide 8 for a view of New Energy. Keep in mind that under ALLETE's ownership, New Energy's partial year financial results for 2022 will be impacted by transaction costs and purchase price accounting. Excluding these items, the acquisition of New Energy is expected to be accretive to ALLETE this year.

And we anticipate meaningful accretion in the first full year of our ownership in 2023. New Energy has successfully completed more than 250 distributed solar projects across the nation, totaling more than 330 megawatts. And we are confident in New Energy's ability to replicate successful execution and profitability on future projects as the company has a robust and diversified development pipeline of over 2 gigawatts across 26 states that positions the company to achieve profitable growth over the next several years. We anticipate providing you with additional details from New Energy's financial results beginning in the second quarter of this year.

In addition, we would be remiss if we did not address the supply chain challenges currently facing the solar industry and recent focus by the US department of commerce on imported solar components. The US department of commerce investigation is having a material impact on the solar market broadly and New Energy is not immune. We were well aware of supply chain concerns and inflationary pressures during our diligence and spent a considerable amount of time and resources on research. The current market for modules is in the range of sensitivities that allows New Energy to meet their financial targets and the distributed solar development model continues to be well-positioned with flexibility around the timing of monetization and higher margin projects relative to utility scale.

Over the long-term, we do expect a supportive operating environment for renewable and solar development to enable the clean energy transition. And we will continue to navigate the current challenges in a disciplined manner. Please refer to Slide 9 for a view of projects in the pipeline at ALLETE clean energy. ALLETE clean energy continues to seek opportunities to optimize its existing PTC Safe harbor wind turbines, and enhance future return of the existing portfolio.

The 92 megawatt Red Barn build transfer project not only provides an opportunity to utilize safe harbor turbines, but also expands our customer base and presence in another geographic region of the country. This project is on track for closing in 2023. Also in Wisconsin, the 67 megawatt Whitetail development project is positioned to move forward and has optionality in the region for either a longer term PPA or build-on transfer project. The Northern wind project with Xcel Energy entails a repowering expansion and plant sale of ALLETE clean energy's Chanarambie, Viking wind energy facilities and construction is placed to begin soon.

ALLETE clean energy continues to navigate supply chain and inflationary pressures on this project to maximize the value upon closing later this year. Finally, ALLETE's financial position is supported by a strong balance sheet that includes cash and cash equivalents of $60 million, $330 million in available consolidated lines of credit, and our debt to capital ratio was 38% as of March 31st, 2022. I'll turn it back to Bethany for her closing remarks. Bethany.

Bethany Owen -- Chairman, President, and Chief Executive Officer

Thank you for that update, Steve. We're really pleased with our progress and execution on ALLETE strategy. It's been a busy start to the year to say the least, but we have much to do, and we'll be sharing more in the coming quarters. Before we open the line for your questions, I'd like to make a few additional comments.

On the regulated side just last week, Superior Water, Light & Power filed a rate case with the public service commission of Wisconsin. Superior is requesting an overall return on equity of 10.4% and a 55% equity ratio to support the company's plans to continue to upgrade infrastructure and maintain the resilience, reliability, and high quality of services for customers. Turning to Minnesota Power. At the beginning of this year, Minnesota Power's much needed interim rates went into the effect.

Although there is more to play out in the rate case process this year, we view this as a very constructive start that supports Minnesota power's financial health and ability to continue the clean energy transformation while delivering safe, resilient, reliable, and affordable service to our customers. On that note, we're making significant progress on Minnesota Power's vision to provide 100% carbon free energy to customers by 2050. This bold vision reflects our commitment to the climate, our customers, and our communities through Minnesota Power's energy forward strategy. Minnesota Power's clean energy transition detailed in its integrated resource plan, or IRP, is moving forward in the regulatory process with extensive engagement with a broad range of stakeholders, including customers, communities, regulators, employees, and many others.

And we're expecting a commission decision in the second half of 2022, Minnesota Power's continued success assumes reasonable regulatory outcomes in the current rate case and related filings and growth at Minnesota Power will include unprecedented transformation of our generation fleet as well as significant transmission and distribution investments to support this transition. We believe the IRP strikes an important balance of advancing our clean energy goals while ensuring our system remains reliable, affordable, and cost competitive for all of our customers. We're also exploring other infrastructure investments that are needed, particularly in the transmission area as the MISO region continues to be challenged with constraints on the grid. The planned expansion of our 550 megawatt HVDC transmission line and ALLETE's investment in the American Transmission Company are great examples of our transmission strategy already in motion.

One last, but very important callout, as investors and others continue to expect more transparency in sustainability commitments and progress, we are delivering. Please refer to Slide 10, which provides several links to important sustainability information, including our recently updated corporate sustainability report. We talk a lot about the E or environmental aspects of ESG on these earnings calls, but we don't talk a lot about our commitments and track record on advancing other aspects of sustainability, the S and the G. So I'd like to briefly mention something else that makes ALLETE unique and that we're particularly proud of.

ALLETE continues to be recognized by Moody's and others for leadership in advancing gender diversity on our board of directors, 7 of 11 directors are women and in our senior executive team where 50% of our ALLETE executive officers are women. ALLETE is a longtime champion of gender diversity with women on our board and in senior leadership for decades. And we're working to advance all aspects of diversity. Our sustainability and action strategy includes nurturing a more diverse workforce and supply chain and helping to build stronger and more equitable communities.

We know and appreciate the strength that embracing diversity brings. So we're very pleased with our execution and positioning already in 2022, setting the stage for future growth with much more to come as the year plays out, two important rate cases, the results of Minnesota Power' s IRP, the addition of significant solar capabilities with the integration of New Energy and ALLETE clean energy's progress on build transfer projects. We look forward to updating you on our progress throughout the year as we at ALLETE lead the way to a sustainable clean energy future. Thank you for your interest and your investment in ALLETE.

At this time, I'll ask the operator to open the line for your question.

Questions & Answers:

Operator

Thank you. Ladies and gentlemen, the Q&A is now open [Operator instructions] And there are no questions at this time. I would like to hand the call back to Ms. Bethany Owens for closing remarks.

Bethany Owen -- Chairman, President, and Chief Executive Officer

Thank you. So, 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 with many of you at other investor venues throughout the year. We hope you enjoy the rest of your day.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

Bethany Owen -- Chairman, President, and Chief Executive Officer

Steve Morris -- Senior Vice President and Chief Financial Officer

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