Scalper1 News
ALLETE Inc. (NYSE: ALE ) Q4 2014 Earnings Conference Call February 17, 2015 10:00 AM ET Executives Al Hodnik – Chairman, President and Chief Executive Officer Steve DeVinck – Senior Vice President and Chief Financial Officer Analysts Paul Ridzon – KeyBanc Brian Russo – Ladenburg Thalmann Chris Ellinghaus – Williams Capital Operator Good day and welcome to the ALLETE Fourth Quarter 2014 Financial Results Conference 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, and the terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in the filings made by the company with the Securities and Exchange Commission. Many of the company’s 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 the management’s views only as of 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 call over to ALLETE’s President and Chief Executive Officer, Al Hodnik. Please go ahead. Al Hodnik Good morning everyone and thank you for joining us. With me is ALLETE’s Chief Financial Officer, Steve DeVinck. Today, we reported our year-end financial results, which capped off an active and productive 2014 for ALLETE. Our reported earnings per share were $2.90 including two one-time items equaling $0.09 per share, which we have talked about during the year: one related to transaction cost relative to an ALLETE Clean Energy acquisition and the other for an EPA settlement. Our fourth quarter results were stronger than we had initially anticipated. Therefore, we slightly exceeded our previous earnings guidance of the upper half of a range between $2.75 to $2.95 a share excluding the two items previously discussed. I’ll ask Steve to provide the financial details in a few moments, but I would like to say that I’m well pleased that we were able to deliver another year of solid earnings growth to our investors. Before Steve goes to the earnings results, I want to review a few significant accomplishments from 2014. These events help to position ALLETE for a continued growth through the end of the decade and beyond. Minnesota Power made significant progress during the year in executing its EnergyForward strategy. Construction was completed at the 205 megawatt Bison 4 wind generating facility in North Dakota and Minnesota Power now owns and operates approximately 520 megawatts of wind generating capacity also construction continued on the mercury emissions reduction project at Boswell Unit 4. So far 145 million has been spent on the estimated $250 million project, which will be completed by 2016. Both of these construction projects qualified for current cost recovery treatment. There were also advancements during the year with the Great Northern Transmission Line, the proposed 220 mile 500 kV line that will deliver hydroelectricity generated from Manitoba to Minnesota Power. During 2014, the Minnesota Public Utilities Commission determined our Certificate of Need and route permit applications were complete. Manitoba Hydro commenced construction of its new hydroelectric generation facility during the third quarter of 2014 and we expect to begin construction of the transmission line in 2016. As you know, the line is scheduled to be completed by 2020. After over two years of restoration and repair work, the Thomson Hydro generating station returned to partial generation in the fourth quarter of 2014 and should return to full generation early this year. Total project cost are expected to be approximately $90 million, net of insurance, and a couple of weeks ago the Minnesota Public Utilities Commission approved cost recovery treatment to a renewable resource writer for this project. On the industrial front, Minnesota Power’s Taconite customers had a strong year, producing approximately 39 million tons of Taconite. On December 1, their power nominations indicated that they expect to operate at or near full capacity for the first four months of 2015 and we expect another strong production year overall. Construction was competed during the fourth quarter on Magnetation’s new iron ore concentrate facility. Minnesota Power expects to supply approximately 20 megawatts of power to this new facility. And during 2014, the Minnesota Public Utilities Commission approved a new 10-year electric service agreement that will be effective to at least December 31, 2025. I will have some additional comments on other new potential customers later on. ALLETE Clean Energy significantly wrapped up its presence during 2014. ACE began the year by acquiring 231 megawatts of wind generating capability at three facilities in January. Then in December, they acquired the 108 megawatts Storm Lake 1 wind generating facility. On December 31, ACE signed a purchase agreement to acquire another 97.5 megawatts of wind generating capacity in Southern Minnesota and of course they have the option to acquire the 101 megawatt Armenia Mountain wind energy facility in Pennsylvania. If the Southern Minnesota and Armenia Mountain transactions closed, ACE could own and operate approximately 540 megawatts of wind generating capability by mid-year 2015. In addition to that, in November, ACE acquired the rights to develop and construct 107 megawatt wind facility for Montana-Dakota Utilities, or MDU, which is expected to be completed and sold by the end of 2015 for approximately $200 million. All in all, it has been a tremendously busy and important year as ALLETE Clean Energy has established itself. Financially and operationally ALLETE had a very successful year. All of our businesses posted improved financial results and we made significant strides in executing our strategic plans. I will make some comments about our outlook for 2015 and beyond, but first I will ask Steve to go through the financial details. Steve? Steve DeVinck Thanks Al and good morning everyone. I would like to remind you that we filed our 10-K this morning and I encourage you to refer to it for more details on our 2014 results. For the year, ALLETE earned $2.90 per share on net income of $124.8 million versus $2.63 per share on net income of $104.7 million in 2013, an increase of 10%. Included in 2014 results were $1.4 million after-tax or $0.03 per share of cost related to ALLETE Clean Energy acquisition and a non-recurring $2.5 million after-tax or $0.06 per share charge associated with an EPA settlement. 2014 results also include dilution of $0.23 per share from common stock we’ve issued in support of our capital investments. Annual consolidated revenue increased to $1.1 billion, a 12% increase over the last year, primarily due to higher cost recovery rider revenue, increased kilowatt-hour sales and contribution from ALLETE Clean Energy’s wind facilities. The fourth quarter of 2014 marked the tenth consecutive quarter of consolidated revenue growth. Earnings from ALLETE’s regulated operation segment, which includes Minnesota Power, Superior Water Light and Power, and our investment in the American Transmission Company, were $124.4 million, compared to $104.9 million in 2013, an increase of $19.5 million. Net income for 2014 reflected the $2.5 million after-tax expense to reflect a liability associated with the EPA settlement. The increase in net income was primarily attributable to higher cost recovery rider revenue, production tax credits, and kilowatt-hour sales. These increases were partially offset by higher operating and maintenance, depreciation and interest expenses. Operating revenue from this segment rose $78 million or 8% over 2013, mostly due to a 5% increase in kilowatt-hour sales and higher cost recovery rider revenue. Revenue from kilowatt-hour sales increased $30.5 million, primarily due to the commencement of the Minnkota Power sales agreement in June of this year. Industrial sales were also strong and increased 2% from last year driven in part by increased sales to pipeline customers. Sales to municipal customers were lower due to a wholesale customer contract that expired at the end of 2013. Cost recovery rider revenue increased $29.4 million, primarily due to higher capital expenditures for our Bison Wind Energy Center and the Boswell Unit 4 environmental upgrade. Total operating expenses at our regulated operation segment increased $52.3 million or 7% and included increased fuel, purchase power, operating and maintenance and depreciation expenses. Fuel and purchase power expense increased $21.3 million, due to higher kilowatt-hour sales and wholesale power prices. Operating and maintenance expense increased $23.2 million and included $4.2 million pre-tax expense in 2014 to reflect the liability for environmental mitigation projects required as part of the EPA settlement mentioned earlier. The increase was also attributable to higher transmission, purchase gaps and property tax expense. Deprecation expense increased $7.8 million or 7% from 2013, directly attributable to the capital investment program. Interest expense rose by $4.8 million or 11% from 2013, primarily due to higher average long-term debt balances. Other income increased $3.1 million due to higher AFUDC-Equity. Income tax expense increased $3.8 million, due to higher pre-tax income, partially offset by higher federal production tax credits in 2014. The investments in other segment which includes results from BNI Coal, ALLETE Clean Energy and ALLETE Properties as well as Other Miscellaneous Corporate Income and Expenses reported $400,000 of net income for the year, compared to a net loss of $200,000 in 2013. ALLETE Clean Energy posted net income of $3.3 million as a result of its newly acquired wind energy facilities in Minnesota, Iowa and Oregon. BNI Coal recorded net income of $6.1 million and ALLETE Properties recorded a net loss of $2.3 million. Revenue from this segment increased $40.4 million or 43% compared to the same period last year, primarily due to revenue generated by ALLETE Clean Energy’s new wind facilities, which were acquired in the first quarter of this year. Operating expenses rose $31.4 million or 32% from 2013, primarily due to higher operating and depreciation expenses at ALLETE Clean Energy. Our consolidated effective tax rate in 2014 was 22.6% compared to 21.5% in 2013. We anticipate the effective tax rate for 2015 will be approximately 15%. ALLETE’s cash flow continues to be strong. In 2014, we generated $269.8 million of cash from operating activities and we carried a 46% debt-to-capital ratio at quarter end. Al? Al Hodnik Thank you for the financial update Steve. ALLETE is a growing energy company that provides sustainable energy solutions to initiatives at our regulated utility businesses and at our complementary energy infrastructure and related services businesses. Let me now detail for you some of our expectations for 2015. Minnesota Power will continue to execute its EnergyForward initiatives, pursue customer growth opportunities, and cost recover rider approval for qualifying investments as well as working with regulators to earn a fair rate of returns. The EnergyForward initiative is Minnesota Power’s strategic plan as you know for assuring reliability, protecting affordability and further improving environmental performance. Significant elements of the EnergyForward plan includes wind investments that we’ve made in North Dakota, the Boswell 4 environmental project to reduce emissions and planning for the proposed Great Northern Transmission Line to deliver hydroelectric power from Northern Manitoba by 2020. In 2015, we expect cost recover rider revenue will increase due to a full year impact from the recently completed Bison 4 Wind Energy project and from the continuation of the Boswell 4 environmental retrofit project in which we expect to spend about $90 million this year. Bison 4 will also generate increased production tax credits in 2015. On the sales side, we anticipate continued strong sales to our existing industrial customers. As I mentioned earlier, our Taconite customers nominated at near full capacity levels for the first four months of this year and their nominations will be due in March and for the May to August time period and again in August for the final four months of 2015. In addition, Magnetation’s recently completed facility will consume approximately 20 megawatts of electric load as it moves toward full production levels. We also project minimal sales in 2015 to the Nashwauk Public Utilities Commission for electric service to Essar Steel Minnesota’s new taconite mine and processing facility. Essar has indicated it plans to begin operations during the second half of 2015. As you will recall the Essar facility will result in approximately 110 megawatts of new load once it reached its full production levels. PolyMet will soon reach an important date with respect to its proposed new copper-nickel and precious metal mining operation. The Minnesota Department of Natural Resources has estimated that the Supplemental Draft Environmental Impact Statement or SDEIS process could be completed during the first half of 2015. Upon receipt of the applicable permits, construction could commence and Minnesota Power could begin to supply between 45 megawatts and 50 megawatts of new load through a ten-year power supply contract that would begin upon start-up of the mining operations as early as 2017. We also expect a full year’s impact of higher power marketing sales under the Minnkota Power sales agreement, which commenced on June 1 of last year. Under this agreement, Minnesota Power’s sold a portion of its output from Square Butte to Minnkota Power. Along with Minnesota Power’s revenue growth, we’ll be increase depreciation, interest, operating and maintenance expenses related to recent asset addition. Construction of the new Great Northern Transmission Line is slated to begin next year in 2016. In our new five year capital expenditure table within the 10-K, you can see that the new estimate is now $315 million on a project we expect to complete by 2019. In October, we indicated that two pending current cost recovery rider request, our 2015 integrated resource plan and potential new industrial customer loads were important factors in the timing of Minnesota Power’s next rate case. Since then, the Minnesota Public Utilities Commission has issued final decisions on our two rider requests and granted current cost recovery for our $90 million investment to restore and repair our hydroelectric facilities. While the commission approved our transmission billing factor filing, they did not allow inclusion of other transmission investments we were seeking. We indicated in October that we estimated Minnesota Power’s return on equity would be approximately 9% in 2015, if both requests were approved. We now estimate that Minnesota Power’s return on equity will be approximately 8.5% in 2015. Minnesota Power is making efforts to improve its return on equity over time and that will include cost efficiencies and more clarity on potential industrial load growth. Potential return on equity improvement and our 2015 integrated resource plan will be important factors in the timing of Minnesota Power’s next rate case. ALLETE Clean Energy is positioned for earnings growth in 2015 as a result of the wind energy facilities that acquired during 2014. ACE will make a decision within the next couple of months on its option to acquire the Armenia Mountain wind energy facility and we’ll continue to pursue other similar opportunities. During 2015, ACE will also develop and construct the North Dakota wind energy facilities for MDU. Last week, we finalized our acquisition with U.S. Water services, which was announced last month. U.S. Water is an integrated industrial water management company, headquartered in St. Michael, Minnesota. ALLETE initially purchased 87% of U.S. Water for $168 million and we’ll purchase the remaining the 13% in the future for an amount that will be based on its future earnings. Water and energy are intricately linked and attention to that nexus is increasing. We believe regulation and social expectations 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. U.S. Water recorded approximately $120 million of revenue in 2014 and we expect revenue growth of between 10% to 15% annually. This acquisition is consistent with our strategy of investing in energy infrastructure and related services businesses to complement core regulated operations, balance our exposure to business cycles and changing demand, and provide long-term earnings growth. U.S. Water is an attractive size investment for ALLETE and it has demonstrated a recurring and predictable revenue stream as evidenced by its customer retention rate of over 90%. Its cash flows will be supportive. This acquisition completes ALLETE’s search for complementary energy centric businesses. ALLETE’s focus in this particular area going forward will be to strengthen and grow U.S. Water and ALLETE Clean Energy. Our earnings guidance for 2015 remains at a range of between $3 to $3.20 per share and excludes transaction cost associated with the U.S. Water acquisition. Our guidance includes the expectations I have spoken about, but be mindful it does not include at this point the ACE MDU project, which is not received regulatory approval yet. Included in our guidance is between $0.20 and $0.25 of expected dilution from equity we have issued since the beginning of 2014. 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 as well and recently voted to increase the dividend on our common stock. Thank you for your confidence and your investment with us. And at this time, I’ll ask the operator to open up the line for your questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question comes from Paul Ridzon with KeyBanc. Your line is open. Paul Ridzon Good morning. How are you? Steve DeVinck Good morning, Paul. Al Hodnik Good morning. Paul Ridzon ATC was down in the quarter. What drove that? Steve DeVinck Yes, ATC in the fourth quarter took a reserve with respect to a compliant that has been filed on their return on equity, their current allowed return on equity is 12.2%, and they’re in a complete proceeding with respect to that. So they took a reserve and we took [indiscernible] flow through of that. Paul Ridzon And that reserve goes back to the initial date of complaint? Steve DeVinck It does. Paul Ridzon Okay. Steve DeVinck Yes. Paul Ridzon What was the – at the midpoint of guidance, what is your assumed ROE at the regulated businesses? Steve DeVinck Approximately 8.5%. Paul Ridzon And when you issued guidance, did you contemplate – what was your assumption regarding Thomson? Steve DeVinck Our guidance range contemplated the host of outcomes on those pending regulatory riders. So the midpoint would probably reflect Thomson and then some of our [indiscernible] investments out. Paul Ridzon So that was in the $0.20 window? Okay. Steve DeVinck Yes. Paul Ridzon Thank you very much. Al Hodnik Thanks Paul. Operator Our next question comes from Brian Russo with Ladenburg Thalmann. Your line is open. Brian Russo Hi, good morning. Al Hodnik Good morning, Brian. Steve DeVinck Good morning, Brian. Brian Russo Just the general rate case strategy, you seem comfortable with an earned ROE of 8.5% in 2015. Is kind of the strategy to see how some of these industrial projects ramp up, which could help your overall regulated return prior to pursuing any rate case filing? Steve DeVinck Our rate case strategy, as Al articulated it, we’re working on two fronts. One front is more clarity on the potential industrial load growth, so yes. The other front, we’re taking a very hard look at cost efficiencies here at Minnesota Power to improve our ROE over time. So we’re coming at this on two fronts. Brian Russo Okay, so no filing is I guess imminent or – it’s something you guys are going to manage going forward? Steve DeVinck Well, the timing of our rate case will be dictated by how we do on ROE improvement, our 2015 integrated resource plan. So we as we move later into this year, how those two things come together will determine the timing of our rate case. If we’re successful on a lot of these fronts including new potential load growth and some reasonable cost efficiencies, it’s possible that may push out the timing of our rate case. Brian Russo Okay. And what were the drivers of the fourth quarter coming in ahead of expectations? And is that kind of upside sustainable into 2015? Steve DeVinck I would say there’s a couple of things that led to a very good fourth quarter. One of which is we had very strong industrial sales, driven to a large part by our taconite customers which were to some extent catching up from the first quarter. We had a very cold first quarter of 2014 here which impacted shipping on the Great Lakes, so to some extent they were catching up, so sales were a reason. Another reason was our operating expenses during the quarter were slightly more favorable than we had projected. And then another reason was around the shares outstanding. As you may recall, we did a secondary offering in 2014 and we had taken half of the shares earlier in the year. And we had projected we would take the remaining half in the fourth quarter. Well, our needs were such that we didn’t take the second half of that secondary until early February of this year. Brian Russo Okay. And remind us what your total diluted share count will be once this is settled for a full year? Steve DeVinck Our earnings guidance for this year has $0.20 to $0.25 of EPS dilution. Brian Russo Okay. And other than the Armenia option, is there anything in the ACE pipeline that you would like to talk about? Steve DeVinck Well, ACE continues to look at various opportunities out there Brian and continues to work also in North Dakota on energy corridor concepts with folks out that way. So I would just say there is plenty of deal flow, plenty of things to take a look at. I think ACE has really grown in stature in this space through the last year and half and credibility with those that have understood the business and come calling. So there are plenty of opportunities to shift. I can’t elaborate at this point in time on what the next ones might be specifically. Brian Russo Okay, thank you very much. Steve DeVinck Thank you. Al Hodnik You’re welcome. Operator [Operator Instruction] Our next question comes from Chris Ellinghaus with Williams Capital. Your line is open. Chris Ellinghaus Hey, guys. How are you? Al Hodnik Good morning, Chris. Steve DeVinck Good. Chris Ellinghaus Can you give us a little detail on U.S. Water and when you expect accretion from that acquisition? And maybe give us a little thought on any accounting issues related to it? Steve DeVinck Well, first of all we’re excited about the acquisition of U.S. Water as Al had articulated. We have stated that the U.S. Water acquisition is expected to provide long-term earnings growth and diversity and have no material impact on 2015 earnings per share. I’ll say this purchase accounting as you probably know requires us to identify intangible assets, things like non-compete agreements, contract backlog, customer relationships, et cetera and amortize them over the appropriate useful life. Some of these intangibles have short life, two years or less. And therefore, it will impact the earnings at U.S. Water here in the near term. So we again think that earnings at U.S. Water are not going to be material to our operations here in 2015, given some extent by some of the amortization of intangibles required by purchase accounting. We do expect that U.S. Water will be required to be a reportable segment either later this year or early next year and at such time you’ll begin to see some more detail on U.S. Water. Chris Ellinghaus Okay. So would it be fair to say without the intangibles it probably would be more accretive on the short-term? Steve DeVinck Well, definitely yes, that’s fair to say. Chris Ellinghaus Okay, thanks. I appreciate the detail. Steve DeVinck Thanks, Chris. Operator I’m showing no further questions. I’ll now turn the call back over to Al Hodnik for closing remarks. Al Hodnik Well, thank you again everyone for your time this morning and for your investment and interest in ALLETE. Steve and I and others will be out on the road here in a short while to visit with each of you and we look forward to further conversation. Thanks again and have a good day. Operator Thank you, ladies and gentlemen. That does conclude today’s conference. You may all disconnect and 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. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you! Scalper1 News
Scalper1 News