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How To Survive The Coming Market Crash

If we have an atom that is in an excited state and so is going to emit a photon, we cannot say when it will emit the photon. It has a certain amplitude to emit the photon at any time, and we can predict only a probability for emission; we cannot predict the future exactly. —Richard Feynman This week, the S&P 500 finally broke through its 2,100 level, despite a huge influx of negative earnings reports . Though it failed to hold, the resistance has been tested. We ask whether the fundamentals of the stocks in this index could justify a true breakthrough of this resistance level. Much of this 7-year rally has been bolstered by central bank stimuli and stock buybacks. Both of these catalysts are coming to their ends. Most notably, as pointed out by Seeking Alpha contributor Gary Gordon, corporations are abandoning their buyback programs as a result of debt concerns. The next market crash will inevitably be labeled a “debt” or “balance sheet” market crash – allow me to explain: The Japanese market crash of the 1990s was caused by companies selling their assets to pay off debt. Individually, each company was doing the logical thing: Cleaning its balance sheets. However, when the majority of corporations engage in this action at once, you have a situation in which no companies are borrowing – despite ZIRP. The quiet liquidation of assets to pay off debt leads to a market crash that is stealthy at first but quickly turns into a landslide. The problem in the current market is investors’ ignorance of such an activity in favor of the go-to data, such as strong nonfarm payroll reports and interest rates. When we see such positive data, we feel the equity prices are justified. The problem is that if the economy really does look good, the Federal Reserve (the Fed) will have no choice but to “slow things down” by raising interest rates; and we all know what happened last time the Fed raised rates. That is, we are in trouble either way. On the one hand, if the fundamentals as per company activities and earnings look bad, the market should react negatively. On the other hand, if economy data supports a strong economy, the “data-driven” Fed must raise rates, which will cause a market correction. It seems that in either case, the 2,100 level of the S&P 500 should not hold for long. From a technical standpoint, the S&P 500 is stuck between 1,810 and 2,134. If this condition holds, we have much more downside at the 2,100 level than upside; i.e., a downward movement can bring us down 300 points but an upward movement is unlikely to bring us up more than 30 points. One problem with earnings being so poor is that the drop in earnings necessarily raises the P/E of stocks in the S&P 500. We are looking at an average P/E of 25. Falling earnings should be seen as a warning sign that the P/E is on the rise – that stocks are becoming increasingly expensive. The natural – logical – reaction would be to sell stocks and instead short stocks or buy bonds and other non-correlated investments, such as gold . Still, the market could continue to rise, as a result of short squeezes and algorithmic trading, which makes up 50% of the market’s trades. A new all-time high could be on the horizon, but it would be historical: The first all-time high created by a short squeeze, not by fundamentals. The question we must ask now is whether a reversal is also on the horizon. Thesis Corporate debt will be the catalyst for the next market crash. This market crash will be the result of balance sheet recession, which was the same type of recession that caused the Japanese market crash. This type of crash is fueled by debt: Corporate debt reaches all-time highs Companies begin to default Other companies begin paying off their debt out of fear To pay off this debt, assets are sold (this is where the crash begins) Borrowing slows The government lowers interest rates to attract borrowers Monetary policy fails because it relies on the assumption that borrowers always exist The economy grinds to a halt Investors move their capital into savings and precious metals, as bonds and equities no longer pay off Food for Thought Balance sheet recessions are basically invisible because only two groups of people look at balance sheets: fundamental investors and creditors (banks). The latter group only wants to know the probability that a company will default. The former group only sees the trees – not the forest. To put it more clearly, think of it this way. If you’re an investor looking at company ABC and you notice ABC paying off debt, you’ll think of this as a bullish indicator. After all, paying off debt is the responsible thing, especially when the company’s debt is at record-high levels. However, the point of a company is to invest your money better than you can. If that company is not investing but paying off debt, it is ignoring its main duty. In addition, paying off debt is not part of the growth cycle of a business, and a company spending its money to reduce debt is therefore not a worthwhile investment. As for how this relates to a market crash, investors look at companies individually. Rarely would an investor note that the result of a massive number of companies engaging in debt reduction equates to a lack of borrowing, which equates to the government engaging in new fiscal and monetary policies – the latter of which fails during the beginning stages of a balance sheet recession, and the former only softens the blow, delaying the inevitable. When we step back and look at company behavior as a whole, we begin to see the forest: Paying debt when interest rates are near-zero is the sign of a recession. What spurs debt reduction? Defaults, exposure to debtors at risk of default, and heightened overall default risk. Food for thought: Click to enlarge The Contrarian Strategy We should always be hedged against a Japan-like market crash. But going short on the S&P 500, such as via the SPDR ETF (NYSEARCA: SPY ) could be dangerous during a phase in which government intervention and short squeezes could bring us to new highs. Instead, I recommend a ratio back spread: Click to enlarge Here, we short an out of the money (OTM) put option with a near strike price and buy two OTM put options with a far strike price and long expiration date. This position is taken when we think a large downward movement will happen in the future for SPY but simply cannot pinpoint when. Here, we are delta neutral and theta positive, which means that the small, daily fluctuations of the SPY will only help us profit via time decay. However, once a large downward move takes place, we will see the profit of the above option strategy skyrocket, as the delta for the bought put will increase much more quickly than that of the sold put (note how gamma is negative). Vega is high, implying that any volatility change in the SPY will lead to an increase in the above spread. With market volatility at a relative low, now is a good time to open such a spread. We only need to do one thing to manage the spread: Roll over the front-end put every month. That is, every month, sell a monthly put option that is roughly $10 out of the money. In this way, we keep the strategy delta-neutral and theta positive. Happy trading. Learn More about Earnings My Exploiting Earnings premium subscription is now live, here on Seeking Alpha. In this newsletter, we will be employing both fundamental and pattern analyses to predict price movements of specific companies after specific earnings. I will also be offering specific strategies for playing those earnings reports. In our last four newsletters, have accurately predicted earnings beats 100% of the time. In the most recent newsletter, we predicting how Microsoft (NASDAQ: MSFT ) will react after its upcoming earnings report. Request an Article Because my articles occasionally get 500+ comments, if you have a request for an analysis on a specific stock, ETF, or commodity, please use @damon in the comments section below to leave your request. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

ALLETE’s (ALE) CEO Al Hodnik on Q4 2015 Results – Earnings Call Transcript

Operator Good day and welcome to the ALLETE Fourth Quarter 2015 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 in filings made by the company with Securities and Exchange Commission. Many other 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 or introduction, I’d like to now turn the conference over to ALLETE President and Chief Executive Officer, Alan R. Hodnik. Sir, please go ahead. Al Hodnik Good morning everybody and thank you for joining us today. With me is ALLETE’s Chief Financial Officer, Steve DeVinck. Before I began with my remarks, I would like Steve to briefly cover the 8-K we issued last week relating to a non-cash impairment charge at ALLETE Properties. Steve? Steve DeVinck Thank you, Al. Last week we announced that 2015 results were reflected $22.3 million after-tax or $0.46 per share non-cash impairment charge at ALLETE Properties on legacy Florida real estate investment. In response to market conditions and recent transaction activity, we have revaluated our strategy for ALLETE properties to include the possibility of a bulk sale of the entire portfolio which have consummated would likely be below book value. We will also continue to pursue sales of individual parcels overtime. Established in 1991, ALLETE Properties has been a successful business and contributed meaningfully to both earnings and cash flow through 2007. We have not made an acquisition of ALLETE Properties since 2002 and our strategy in recent years has been to thoughtfully exit over time as opportunities arose. Our objective is to unlock capital as we close out this historically successful legacy business and deploy proceeds into our strategy initiative. Al? Al Hodnik Thanks Steve. Earlier this morning we reported our 2015 financial results which reflect many successes for ALLETE during the year despite challenges on several fronts. Our reported earnings per share were $2.92 per share which includes profit from ALLETE Clean Energy’s construction and sale of a wind energy facility, the non-cash impairment charge at ALLETE Properties and acquisition transaction fees related to ALLETE’s energy infrastructure and related services businesses. Our full year results from our operating segments were as expected and Steve will go through the financial details in a moment. ALLETE’s value proposition remains intact and our 2015 results are a good example of how our operating businesses support ALLETE’s mission and how management deals with economic challenges and delivers on shareholder value. Our earnings guidance for 2016 remains at a range of between $3.10 to $3.40 per share and among other things reflects strong cost control efforts and increased cost recovery rider revenue in Minnesota Power, as well as growth at both ALLETE Clean Energy and U.S. Water. Before Steve goes through the earnings results, I would like to highlight several accomplishments from 2015. I believe the tremendous progress we have made on our strategy is clearly positioning ALLETE for continued growth through the end of the decade and beyond. ALLETE’s unique family of businesses is committed to service and reliability as we thoughtfully expand our significant renewable energy platform for answering the nation’s call to transform its energy and water sectors. ALLETE is well positioned to capitalize on an emerging environmental landscape that will not only require cleaner energy sources, but will also plays even greater emphasis on energy and water conservation to meet changing societal expectation. First, I’ll highlight several accomplishments from our regulated operations and additional efforts towards positioning our energy services businesses for the future. If you recall back in 2012, a severe rainstorm caused significant damage to Thomson Hydro, Minnesota Power’s largest hydro generation station. We are pleased that the Thomson Hydro Generating Station came back to full production in the fourth quarter of 2015, after more than 3 years and $90 million of restoration in repair work. This facility provides approximately 70 megawatts of carbon-free generation to our system. Minnesota Power recently completed the mercury emissions reduction project at Boswell Unit 4 which completes the compliance at our largest generating unit. There were also significant advancements during the year with the great northern transmission line, the proposed 220 mile, 500 kV line that will deliver hydro-electric generated electricity from Manitoba to Minnesota Power. During 2015, the Minnesota Public Utilities Commission determined the certificate of need and the route permit application were complete. Minnesota Power anticipates final route in presidential permit approval this spring. Great Northern Transmission Line construction is expected to begin in [Ernest] [ph] in 2017, with completion scheduled for 2020. We recently received commission approval to proceed with a 10 megawatts solar installation which will be built at Camp Ripley, Minnesota’s primary national-guard base near Little Falls on the southwestern edge of Minnesota Power’s service territory. The $30 million project will help Minnesota Power to achieve about one-third of its requirements under the state’s solar energy standard. Construction of the solar array is expected to begin in May, and continue to December with the goal to be producing solar power by November of this year. This creative partnership is a latest example of how Minnesota Power is achieving and advancing its Energy Forward strategy. Energy Forward balances stewardship, reliability, and affordability while maintaining fuel diversity within a generation portfolio that by the early 2020s will be comprised of one-third renewable, one-third natural gas, and one-third coal. All of these construction projects I just mentioned qualify for current cost recovery treatment which has provided as rate recovery outside of a general rate case proceeding. Related to our regulated businesses, on the industrial customer front, Minnesota Power’s taconite customers had a year of challenges to say the least. While there is no lack of domestic steel demand, challenges continue due to high levels of steel dumping into the United States. Minnesota Power’s customers nominated at approximately 80% of their capacity for the first four months of 2016. We continue to work closely with these customers on this and other issues, while we monitor developments with their production levels as we move forward into 2016. As you know, Minnesota Power also serves over a dozen wholesale customers. In September, we reported that electric contracts with 14 municipal customers were successfully amended to extend contract terms through December 31 2024. ALLETE Clean Energy expanded its renewable energy footprint in presence in 2015. During 2015 ACE acquired the 97.5 megawatt Chanarambie-Viking wind generation facility in Southern Minnesota, and they also acquired the 101 megawatt Armenia Mountain wind energy facility in Pennsylvania. ACE currently owns and operates approximately 535 megawatts of wind generating capability across the United States. In addition to owning and operating renewable energy facilities, in late 2014, we announced that ACE obtained the rights to develop and construct a 107 megawatt wind facility for Montana-Dakota Utilities. Earlier this year, we reported that Thunder Spirit was completed as planned at the end of 2015. We are proud of ALLETE Clean Energy’s accomplishments including adding this build-owned-transfer capability to its playbook. And we are excited about its prospects to leverage the cleaner energy future before us. Last but certainly not least, ALLETE acquired U.S. Water Services in early 2015. U.S. Water is a leader in integrated water management to growing number of industrial customers throughout the United States. With societal expectations rising around water quality, conservation, scarcity and reuse, we believe U.S. Water is well positioned to grow while addressing these interests. Financially and operationally, ALLETE had a very successful year even with the headwinds coming at some of our nation’s largest industries. ALLETE’s businesses posted financial result as expected and we made significant strides in executing our strategic plans. I will make some comments about our outlook for 2016 and beyond, but I will first ask Steve to go through the financial details. Steve? Steve DeVinck Thanks Al. For the year, ALLETE reported earnings of $2.92 per share on net income of $141.1 million versus earnings of $2.90 per share on net income of $124.8 million in 2014. Included in 2015 results are $20.4 million or $0.42 per share profit on the construction and sale of the Wind Energy facility by ALLETE Clean Energy, a $22.3 million or $0.46 per share non-cash impairment charge at ALLETE Properties; and $4.8 million or $0.10 per share of acquisition transaction fees related to ALLETE’s energy infrastructure and related services businesses. Earnings in 2014 included $1.4 million or $0.03 per share in acquisition transaction fees and a $2.5 million or $0.06 per share charge associated with an environmental protection agency settlement. ALLETE’s results are within its November 2015 earnings guidance range of $3.35 to $3.50 per share, which did not include impacts of the impairment charge or acquisition transaction fees. ALLETE also met its original December 2014 guidance of $3 to $3.20 per share, which did not include the impacts of the impairment charge, acquisition transaction fees or profit on the construction sale of the Wind Energy facility. Earnings from ALLETE’s regulated operation segment, which includes Minnesota Power, Superior Water Light and Power and the company’s investment in the American Transmission Company recorded net income of $131.6 million, an increase of $8.6 million over 2014. Earnings increased primarily due to higher cost recovery rider revenue, production tax credits, and power marketing sales, as well as lower operating and maintenance expenses. These increases were partially offset by lower industrial sales and higher depreciation interest and property tax expense. In addition, Minnesota Power recorded a reserve in 2015 for estimated refunds of $1.6 million after tax related to MISO return on equity compliance of which $900,000 was attributable to prior years. Our equity earnings in ATC in 2015 also reflected a $3 million after tax charge for reserves related to the same complaint of which $1.4 million after tax was attributable to prior years. Operating revenue from the regulated operation segment decreased $12.3 million or 1% from 2014 primarily due to lower field cost recoveries and gas sales, partially offset by higher cost recovery rider revenue, total kilowatt hour sales, as well as FERC pro forma based rate increases. Fuel cost recoveries decreased $37.1 million due to lower fuel and purchase power cost attributable to our retail and municipal customers. Revenue from gas sales at Superior Water Light and Power decreased $11 million as a result of the unseasonably cold weather in 2014 and warmer than average 2015. Heating degree were approximately 16% lower in 2015 compared to 2014. Cost recovery rider revenue increased $17.8 million primarily due to the completion of our 205 megawatt addition to our Bison Wind Energy Centre and CapEx 2020 projects, as well as higher capital investment balances for the Boswell Unit 4 environmental upgrade. Revenue increased $14.7 million due to a 3.1% increase in total kilowatt-hour sales. Sales to other power suppliers increased 48.4% mostly due to the commencement of the Minnkota Power sales agreement in June of 2014. Sales to our residential and municipal customers were lower due to the decline in heating degree days previously mentioned, and sales to our industrial customers decreased 11.4% primarily due to reduced taconite production. Revenue from our regulated customers increased $6.9 million primarily due to additional renewable, environmental, and other investments. On the expense side, transmission services increased $8.5 million or 19% from 2014, primarily due to higher MISO related expenses. Cost of sales decreased $9.4 million from 2014 due to the previously mentioned lower gas sales at Superior Water Light and Power. Operating and maintenance expense decreased $11.2 million or 5% from 2014, due to cost reduction efforts and $4.2 million charge in 2014, related to the EPA consent decree settlement. Cost reduction efforts resulted in lower wage, vehicle fleet, and miscellaneous employee expenses. These reductions were partially offset by no increases for the operation and maintenance of the 205 megawatt addition at our Bison Wind Energy Center that went into service at the end of last year. Depreciation and amortization expense increased $17.1 million or 14% from 2014, primarily due to additional property, plant and equipment and service. Taxes other than income taxes increased $4.3 million or 10% from 2014, primarily due to higher property tax expenses resulting from higher taxable plant and rates. Interest expense increased $4.7 million or 10% primarily due to higher average long term debt balances. Our equity earnings in ATC decreased $3.3 million or 17% from 2014. As we previously mentioned, our equity earnings in ATC were impacted by a $5.2 million charge, $3 million after-tax, the reserves related to the MISO return on equity compliance. Other income decreased $4.4 million from 2014, primarily due to lower AFUDC-Equity. Income tax expense decreased $14.6 million or 37% from 2014, primarily due to increased production tax credits as a result of the previously mentioned 205 megawatt addition to our Bison Wind Energy Center. Before I move on from the regulated businesses, I want to emphasize that we remain committed to cost containment at Minnesota Power. Despite known operating and maintenance expense increases for the 205 megawatt addition at our Bison facility, I am pleased that regulated operations, operating and maintenance expense is lower than 2014. We are reducing cost at Minnesota Power to reduce rate increases for our customers, improve our return on equity overtime, and manage through the impact of temporary cyclicality facing our customers in taconite mine. ALLETE’s energy infrastructure and related services businesses which include ALLETE Clean Energy, and U.S. Water Services, recorded net income of $29.9 million and $900,000 respectively. Earnings at ALLETE Clean Energy, increased $26.6 million over the last year due to higher earnings from its growing portfolio of Wind Energy facilities and a $24.4 million in profit earned on the construction and sale of the Wind Energy Facility. Operating revenue increased $228.9 million from 2014, with $197.7 million coming from the sale of the wind facility. Acquisitions in late 2014 and during 2015 also contributed to the year-over-year increase. U.S. Water acquired by ALLETE on February 10th of last year, is a leader in integrated water management to a growing number of industrial and commercial customers throughout the United States. U.S. Water Services had net income of $900,000 on revenue of a $119.8 million for the period February 10, 2015, through December 31, 2015. Earnings included $2.2 million of after-tax expense related to purchase accounting for inventories and sales backlog. The total impact of this purchase accounting adjustment is $2.5 million after-tax and is expected to be fully recognized by the first quarter of 2016. The corporate and other segment which includes BNI Energy, ALLETE Properties, and other miscellaneous corporate income and expense, posted a net loss of $21.3 million compared to a net loss of $1.5 million in 2014. The net loss for 2015,included the $22.3 million after-tax impairment charge at ALLETE Properties, and the $3 million after-tax expense for acquisition cost for the acquisition of U.S. Water Services. Earnings per share for 2015,were diluted by $0.36 due to an increase in weighted average shares outstanding. Our effective tax rate in 2015,was 15.2% compared to 22.6% in 2014. The decrease was mostly due to increased production tax credits resulting from the addition at our Bison Wind facility. We anticipate the effective tax rate for 2016, will be approximately 20%. ALLETE’s financial position continues to be solid, driven primarily by higher net income in non-cash expense. Cash from operating activities increased $70.3 million in 2015, to a total of $340.1 million. Our debt-to-capital ratio at year end was 47%. As Al, mentioned, ALLETE’s 2016 earnings guidance initiated last December includes a range of $3.10 to $3.40 per share. I would direct you to the 8-K filed last December for more details and key assumptions as part of our earnings guidance. Al? Al Hodnik Thank you for the financial update, Steve. ALLETE is a growing energy company that provides sustainable energy solutions through initiatives that are regulated utility businesses and at our complimentary energy infrastructure and related services businesses. I will highlight several areas for you along with some of our expectations for 2016, at our regulated businesses, Minnesota Power, will continue to execute its energy forward initiatives and pursue customer growth opportunities. Construction on the Great Northern Transmission line is ready to begin next year, and will provided investment and growth opportunities through the end of the decade. We feel that our energy forward actions have positioned us very well for the CPP, and other regulations. But like many other utilities, we harbor some concerns about ensuring we receive credit for early action taken to the benefit of all stakeholders. As well as the consequential nature of this regulation as it relates to reliability and affordability. While the CPP was stayed last week in a decision by the U.S. Supreme Court, we continue to work with stakeholders in shaping Minnesota’s CPP state implementation plan, continue to monitor its legal status and are taking necessary and prudent action to protect the value of our investments. We worked hard to reduce cost at Minnesota Power, and we have made significant progress. We have thoughtfully made workforce reductions with the elimination of approximately 100 position or 8% in 2015. We are pleased that the overwhelming majority of these reductions are made through coal fleet and other forms of attrition. We have also recently filed a proposal to implement Minnesota’s Energy-Intensive Trade-Exposed or EITE legislation signed into law by Governor Dayton. The EITE by design would allow for more competitive rates for large industrial customers. Last week the Minnesota Public Utilities Commission gave the EITE a fair hearing but rejected the petition without prejudice. The commission in taking the action they did, indicated they require more cost benefit information before they could make a final determination. Minnesota Power intends to meet once again with all stakeholders before determining next steps with EITE. In addition, Minnesota Power filed a depreciation life extension request, fully consistent with the environmental upgrades completed at our Boswell generating facility. If approved, this request would share some of the benefits immediately with customers. As I mentioned earlier, our Taconite customers nominated 80% capacity level for the first four months of the year. Nominations will occur in March, for the May to August time period, and in August, for the final four months of 2016. I should say that some of the idling reflected in these lower production levels could provide opportunities that have long, positive effects on taconite production here in northeastern Minnesota. To be specific, Cliffs Natural Resources has publicly shared its plan to retool its United Taconite plant in to produce Eveleth, to produce a fully fluxed taconite pellet. That new product will replace a flux pellet now made at Cliffs Empire operation in Michigan, which is scheduled to shutdown at the end of 2016. On the new customer scene, Essar’s last public update indicated it will achieve full production capability in 2016. As you will recall, the Essar facility will result in approximately 110 megawatts of new load for Minnesota Power, once it reaches full production levels. So the project has had its share of financing and market challenges since it was announced several years ago. We believe this opportunity for additional new load remains intact and operational startup is simply a matter of “when” and not “if”. To date, Essar has invested in excess of $1 billion in this facility which sits on the substantial, and very high quality ore body in Northeastern Minnesota. We do not anticipate any meaningful sales related to the Essar facility in 2016. PolyMet is anticipating the record of decision on its environmental impact state adequacy from the State of Minnesota in February, and action on applicable permits will follow. Construction could commence late this year, and Minnesota Power could begin to supply between 45 and 50 megawatts of new load to a 10year power supply contract that would begin upon start up of mining operation. ALLETE Clean Energy is positioned for earnings growth in 2016, as a result of the wind energy facilities it acquired during 2015. ACE will continue to target acquisitions of existing facilities which have long term power sales agreements in place. U.S. Water will further compliment our core regulated operation, balance exposure to our Utilities industrial customers, and provide potential long term earnings growth. 2015 marked a productive year of post-acquisition integration efforts, as well as a tuck-in acquisition in the southeastern United States. This, as U.S. Water continues its growth strategy, now, as part of the ALLETE family of businesses. Water and energy are intricately linked and attention to this nexus is increasing. Just like energy, we believe regulation and societal expectation will increasingly drive water conservation and that those macro factors along with opportunities for improved profitability will drive a growing emphasis on the efficient use of both water and energy. All of us at ALLETE are excited about our prospects going forward and we look forward to delivering another year of earnings growth. Our Board is confident in our direction, and recently voted to increase the dividend on our common stock. This is the sixth consecutive year we have had raised our dividend, and ALLETE has paid dividends without interruption since 1948. Thank you for your confidence and your investment with us. At this time, I’ll ask the Operator to open up the line for your questions. Question-and-Answer Session Operator [Operator Instructions] And our first question comes from the line of Paul Ridzon from KeyBanc. Your line is open. Paul Ridzon As you talked to your customers with steel exposure, kind of what’s their tone, are we bouncing on the bottom, are we starting to see some potential upside here, or is it just all in the hands of trade commission? Al Hodnik No, I think the sense is that, we’re bouncing off the bottom, at this point in time there are some green shoots beginning to appear, the ITC and some of the trade action that’s already been taken certainly back in Q4 of last year the sort of fuel consumption, some sort of imports within that 35% range, they’re trending down now and heading hopefully below 30% or heading in the right direction outlaid. There’s certainly more work to be done on some of these ITC sort of proceedings that are going on. We expect to hear more about that. I was also pleased to see that Governor Dayton from Minnesota has stepped up with other Governors, the Governors conference, and a dozen or so of the Governors have had conversation about spending more time with President Obama, on sort of additional levels of protection that might be able to be put into place. As you recall President Reagan and President Bush, impose section 201 of the 1974 Trade Agreement, and shutdown steel dumping altogether. And so we continue to push for that Chief of Staff, McDonough, President Obama, Chief of Staff was in Minnesota in December. I participated in that as there are number of steel company executives to express our concerns about steel dumping and so. Overall, I’m feeling more confident Paul, that we’re making progress on the steel dumping side, and that production here in the U.S. on the iron ore side can then follow. There’s certainly no lack of steel demand in the Great Lakes, as you know auto production is strong at this point in time, other durable goods production is pretty strong as well too. So, U.S. domestic production of steel was strong and we just need to end the steel dumping, and I think its heading in the right direction. Paul Ridzon Thank you. And Steve, can you review your commentary on O&M at Minnesota Power? Steve DeVinck Sure, Paul. I will. We remain committed to cost containment at Minnesota Power, to reduce rate increases for our customers, improve our return on equity overtime, and manage the impact of temporary cyclicality facing our customers on the taconite mining. With our 2016 guidance, we projected 2016 regulated operation and maintenance expense to be approximately 5% to 10%, less than 2014. This despite no increases for the operation and maintenance of these addition to our Bison Wind Energy facility. With respect to 2015, it is approximately $5 million to $11 million or 5% less than 2014, approximately $4 million of that is the charge that we had in 2014 for the settlement of an EPA. Paul Ridzon Okay, that’s the part I missed, that’s the part I missed, Steve, thanks. And given how successful you’ve been and how aggressive you continue to be, what’s your outlook on potential for Rate Cases or Rate Case? Steve DeVinck Yeah, our strategy Paul, as you know has been to improve Minnesota Power’s return on equity overtime through expense reductions and more clarity on load growth. Certainly, we made progress on the expense reductions including the workforce reduction Al, previously discussed. Of course, as we talked about consistent with our energy forward strategy, we’re seeking use for life extension at our Boswell facility, consistent with the remaining use for life of the extensive environmental upgrades that we have completed. This annual benefit is anticipated to be approximately $20 million, and reduced depreciation expense of which approximately one third would be returned to customers through the environmental cost recovery rider. We are evaluating the six months extension requested by the Department of Commerce, yesterday. We are also monitoring developments with our industrial customers to better understand future operation expectations. Nominations from our larger power customers are due March 1, as Al, mentioned, for May through August, and we expect to have more information on our talks about general Rate Case when we release earnings for the first quarter of 2016. Paul Ridzon Okay, thank you very much and I guess I’ll see you in a couple weeks. Al Hodnik Thanks, Paul. See you in New York. Paul Ridzon Thank you. Operator Thank you. Our next call comes from Brian Russo from Ladenburg Thalmann. Your line is open. Brian Russo Hi, good morning. Just what is the updated net book value — depreciated book value on the floor properties following the impairment? Steve DeVinck Approximately, $50 million. Brian Russo Okay. And what changed from a year ago? What triggered the impairment and is there something pending in terms of a bulk sale, which triggered this impairment? Al Hodnik The impairment was really due to in response to market conditions and other recent transaction activity, where we reevaluate our strategy. This revised strategy incorporates the possibility of a bulk sale for the entire portfolio which if consummated market indicators point to us with that will likely be in sales proceeds below book value. And we’ll continue to pursue sales of individual properties of course overtime. At this time we do not have affirmed sale of ALLETE properties. We expect that as we adjust our selling prices to better reflect market, the sales activity could pick up. As we stated, our objective is to unlock capital as we close out this successful legacy business and deploy the proceeds and our strategic initiatives. Brian Russo Okay, understood. And on the Boswell depreciation study, did I hear you correctly, the Department of Commerce requested a six month extension? Al Hodnik Yes, they did that yesterday. It was requested and granted. Brian Russo Okay. So, requested and granted, got it. Okay, so one of the six months on that. Just remind us what’s assumed in your guidance in terms of demand nominations to the 8% through the first four months or 80% for the entire year? Steve DeVinck So the midpoint of our guidance range, our guidance range is 310 to 340, assumes about 35 million tons of taconite production. And remember that in Northern Minnesota there is at capacities about 41 million tons. Brian Russo Okay, got it. And then you mentioned earlier Essar has publically stated that they assume full operation at 2016, however you guys have assumed no sales to Essar in 2016, are you just being conservative or there is something else that we should be aware of? Al Hodnik We’re just being conservative at this point. The — as I said to you many times and others that the start up of large taconite facilities are — it’s not sort of turn the switch on, and it’s110 megawatts in this case. So there’s a start up period, obviously they’ve had some construction fits and starts too as well. So we just decided to be conservative in 2016 with it and they said they’ve got a $1 billion investment at this stage of the game, and in my mind in our minds at least it’s not a matter of “if” it’s a matter of “when”. Brian Russo Okay. And then lastly, given the challenges that the solar industry is facing now, do you see ALLETE Clean Energy as becoming even more opportunistic as you were in 2015 in pursuing acquisitions? Al Hodnik Well, ALLETE Clean Energy is not going to continue to pursue acquisitions that make sense along all forms of the renewable space, the wind, and solar, and hydro, even clean sort of natural gas projects that come up. We still think cleaner energy forms are involved, the CPP even if it stay, certainly its base is really as cleaner energy forms as well. And so, we’re going to continue to look, they’re going to continue to look. They certainly have a deal flow and a pipeline of opportunities. But we’re going to be very disciplined as we have been and look for those that really provides best opportunities for shareholder value for ALLETE, those that come complete with PPAs, with off takers and credit worthy partners. Brian Russo Okay, thank you. Operator Thank you. Our next question comes from the line of Jay Dobson from Wunderlich. Your line is open. Jay Dobson Steve, earned ROE for 2015 at the regulated operations was? Steve DeVinck Minnesota Power’s total regulated return activity was approximately 8.5% in 2015. We estimate that with full taconite production return on equity would have been approximately 9%. I mean you might be interested about our views on 2016. The midpoint of our 2016 earnings guidance range we estimate Minnesota Power’s ROE would be in the mid-to-high 8% range. We estimate that with full taconite production return on equity would have been approximately 9%. And just a reminder, this does not include any impact from Essar or PolyMet. Jay Dobson Got you. That’s great. And then to the O&M, just for clarity, you said 5% to 10% when you gave guidance lower than 2014, but you got 5% in 2015. So the math isn’t going to be perfect. Is it fair to assume 2016 now relative to 2015, this sort of zeroed 4% to 5% reduction. Steve DeVinck Yes. That is fair. We did better in 2015 than we originally anticipated. So we are happy about that, but your math is probably fairly correct. Jay Dobson Great. And Steve was the real estate drag in 2015 and excluding of course the impairment. Steve DeVinck Yes, thank you. Excluding the impairment ALLETE Properties lost about $1 million. Jay Dobson Great. And then two sort of detailed questions. The purchase accounting impact that U.S Water you sighted is $2.5 million. That was the full impact in 2015. I am stating as the statement, but it’s a question and that’s a pre-tax number? Al Hodnik That is an after tax number and that’s the impact for the full year? Jay Dobson That is. So there will be that little stub period from January 01, 2016 to February 09, 2016 and then it will be exhausted. Al Hodnik Correct. Jay Dobson Great. And then the tax rate 15% roughly in 2015, 20% in ’16. What PTCs are you assuming in the 20% and I only ask that because you said the ’15 was sort of lower than expected, because you had a higher than expected PTCs. Al Hodnik No. I don’t know that it was lower than expected. We had higher PTCs from last year, production tax credits. 20%, it will go up to about 20% in 2016, primarily just due to higher pretax – a higher assumption of higher pretax income. Production tax credits in 2016 and 2015 are probably going to comparable since we had all of our Bison Wind facility in service at the end of 2014. Jay Dobson And then last one. As you think about sort of the acquisitions for U.S. Water and for ALLETE Clean Energy, maybe just talk about sort of what you expect out of acquisitions. Sort of vis-à-vis, I’m just measuring it sort of brutally if you will versus the U.S. Water, which was sort of a big addition, but not a lot of earnings. Steve DeVinck Well, we haven’t really changed our view on size of transaction at ACE. So our size of transaction is $50 million to $150 million plus or minus in that range, but we’d continue to try to pursue it. We had some smaller acquisitions at ACE of course but that’s kind of our focus and as I expressed earlier these broad range of renewable’s are still on the table, so we are not signally looking at Wind in that case. With respect to the U.S. Water tuck-ins if you will, those are likely to be smaller in nature sort of in the $5 million to $50 million range. As we think about our strategic acquisition there, there is a number of factors that come into the strategy in terms of geography and where we want U.S. Water to play and then those opportunities might present themselves. So that’s kind of the range. Both companies have a decent sort of deal flow with strategy to acquire. We also hope on the U.S. Water side accordance, we’d expect organic growth as you know. I think in excess of energy and water, it’s very important and in growing the final expectations are growing and so we just see greater demand for that also. And so organic growth is the part of U.S. Waters go forward strategy as well. Jay Dobson No, that’s great. And then actually just one last question on the Boswell proceeding. The delay for initial comments to August 16, what’s behind that? I mean I recall there was a January date which was extended to February, actually to today and then late yesterday, they extend to August 16. Is it work flow? What sort of driving that? Steve DeVinck Well, we haven’t had any direct conversation with the Department of Commerce regarding that, but I suspect there is a workflow and demand on resources issue down there with the Public Utilities Commission and also with the Department of Commerce. So there is of course a lot of work going on in a number of utilities with projects and with the filings. As you know with regards to Minnesota and what Minnesota is up to on energy policy. So I think it’s largely around sort of demands and resources basically and that would be the basis for their extension. Jay Dobson Got you. And we sort of put that together with EITE and rejecting – although rejected without prejudice and now this delay understanding in response to an earlier question, you indicated you will have more commentary and update on sort of outlook for rate case in 2016 this year – on the first quarter call. How do you think about those two? Obviously, both could be considered context of a broader rate case and at least as an outsider, it looks like on both issues for workflow or whatever the commission sort of kick in the can down the road. Al Hodnik Well, as I said with respect to EITE in the legislation that the legislature passed and the governor signed, we felt we got a fair hearing from the Minnesota Public Utilities Commission, almost an 8-hour in length hearings. One of longer hearings that I recall they were very deliberative. There were many good questions that were raised around the EITE. And in the last analysis, since sort of rejecting that petition unanimously, but without prejudice. That’s an important distinction. They more or less want us to go back and identify additional cost benefit relative to the EITE. They provided many good examples of areas of interest of theirs at least. And so we are going to go back with our stakeholders and work with them on that and draw some conclusions as to how we want to approach the EITE on going forward. Could EITE and depreciation and all that end up in the rate case? I suppose it could, but as Steve said earlier, we have a strategy rate now that really depends on cost reduction in ROE improvement in the near term. It also sort of expecting load growth to materialize and we are watching that very closely because lastly taconite nominations and so all of that kind of rules together. But to the extent, could it all fold in together? It certainly could. Is that what the commission and the DoC are necessarily driving towards? I don’t know that I could say that. Jay Dobson That’s great, Al. Thanks for the insight, Steve. Thank you. Operator Thank you. Our next question comes from the line of Paul Ridzon from KeyBanc. Your line is open. Paul Ridzon Just a follow up. You are beginning of the call you talked about some gives and takes and came back with around 306 ongoing number, wasn’t it about $0.05 of FERC’s reserves that you took out of period? Steve DeVinck Yes, from prior year. That’s probably about what it was probably about a nickel related to prior years. Paul Ridzon So 311 is probably another way at looking at ongoing earnings? Steve DeVinck That’d be another way of looking at it. Yes. Paul Ridzon Okay. Thanks to clarify. Thank you. Operator Thank you. And there is no further questions in queue. I’d like to turn the conference back over to management for any closing remarks. Al Hodnik Well, thank you everyone for being with us and thanks for your confidence and investment with us again. Steve and I look forward to seeing many of you in March 3, in New York. And I certainly will be on the road throughout the year here sharing the ALLETE story. Thanks for spending time with us this morning. Operator Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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