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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the ALLETE Fourth Quarter 2018 Financial Results Conference Call. Today's call is being recorded. Certain statements contained in this conference call that are not descriptions of historical fact are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can involve 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 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 can reflect management reviews 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 conference over to ALLETE's Chairman and CEO, Alan Hodnik. Please go ahead.
Good morning, everyone and thanks for joining us today. With me are ALLETE's President, Bethany Owen; Senior Vice President and Chief Financial Officer, Bob Adams; and ALLETE's Vice President, Controller and Chief Accounting Officer, Steve Morris.
Began I begin our call this morning, I want to again congratulate Bethany Owen on her election by the ALLETE Board of Directors to President of ALLETE. ALLETE has always had a strong talent development process and pipeline and this plan succession process and action by the Board is a clear demonstration of those embedded values.
Bethany was also recently elected to the ALLETE Board by its Directors. I will remain ALLETE's, Chairman and CEO and look forward to partnering with Bethany and the entire senior team as we collectively keep ALLETE well-positioned, executing various growth strategies, and delivering shareholder value.
This morning we reported full year 2018 financial results of $3.38 per share, a net income of $174.1 million. These results are fully consistent with our previously issued 2018 earnings guidance and reflect a year of many accomplishments.
Necessary rescaling of Minnesota Power and ALLETE certainly brought challenges for our team, however our talented employees across all business unit stay focused and delivered outstanding safety, operational and financial results. ALLETE will be 113 years young this spring and I could not be more proud of the way we have and continue to answer the call to transform the nation's energy and water landscape while growing ALLETE.
Before Steve and Bob take you through the details of our 2018 financial results and 2019 earnings guidance, I wish to highlight a few of the many accomplishments achieved during the year.
Minnesota Power has been hard at work for years balancing multiple stakeholder interests while executing this EnergyForward strategy. With support from state policy and regulatory leaders, Minnesota Power has evacuated the thoughtful retirement of 700 megawatts of coal resulting in a material reduction of greenhouse gas and other emissions, and a sizable expansion of renewable generation all while modernizing its delivery system.
Major construction advanced on it's Great Northern Transmission line which will be ready to move carbon free Hydro power into the MP service territory as early as June of next year. Manitoba Hydro is of course still working on their end of the line.
Another transforming EnergyForward initiative, the Nemadji Trail Energy Center was also approved late last year by the Minnesota Public Utilities Commission. NTEC represents the first natural gas source generation in Minnesota Power's portfolio and will support additional renewable generation while assuring grid reliability.
Late in 2018, renewable energy expansion within the company experienced another major 250 megawatt leap forward as the Nobles 2 wind generation project received approval from the Minnesota Public Utilities Commission. The Nobles 2 initiative is designed to deliver carbon free energy to MP customers for decades to come.
As recent as 2005, Minnesota Power was a 95% coal dominated utility. Given its relative start point EnergyForward has propelled Minnesota Power further and faster than many other utilities in the upper Midwest.
In terms of carbon deduction MP anticipates being 45% renewable by 2025, well ahead of Minnesota's 25 by 2025 standard. Given its geographic positioning the wind rich North Dakota and water rich Canada including transmission superhighways to both Minnesota Power is well-positioned to deliver an even more sustainable energy future ahead.
On the customer front, Minnesota Power's taconite customers finished 2018 at near full production and it anticipates continued strength in 2019. A strong economy and trade protection has resulted in high levels of production along with significant customer investment in the respective iron ore and steel producing facilities. These actions support our view that Minnesota Power's natural resource-based service territory here in Northeastern Minnesota has a bright future.
ALLETE Clean Energy experienced the year of significant project construction and fleet optimization. ACE highlights include the completion and sale of the Thunder Spirit wind to energy facility. The establishment of a new customer and long-term wind energy power sales agreement with Northwestern Energy in Montana. Ongoing refurbishment activities on its own wind generation fleet. Securing its first major contract extension with Northern states power [Excel] energy in Minnesota and beginning preliminary work on large wind generation projects that will ramp into robust construction mode with targeted completion for later this year.
ALLETE Clean Energy safe harbor turbines are a key differentiator for the company thereby providing a unique opportunity for ALLETE Clean Energy to materially expand its operations and earnings base. ALLETE Clean Energy has many paths for multiyear growth, has maintained its financial discipline and it steel pipeline remains robust. They remain busy negotiating potential new customer power sales agreements while pursuing additional projects for the future. 2019 will be an exciting year for ALLETE as we see opportunities for our continued Clean Energy progression to be as robust as ever.
On a different note, last Friday we announced the execution of an agreement to sell our interest in U.S. water services for a cash purchase price of $270 million. As we emphasized, this transaction provides a timely opportunity to reposition and refocus ALLETE's growth initiative on Cleaner Energy for the future. We will continue to execute on our multifaceted multiyear growth strategy and believe our unique business mix will continue to deliver a strong value proposition to shareholders for the longer term.
The ALLETE Board recently demonstrated its confidence in our strategy and the future by raising the dividend this for the ninth year in a row. We will remain financially disciplined as our future dividend increases are expected to align with our long-term earnings growth and strong cash flow. Bethany Owen will provide some additional 2019 perspective shortly and I will provide an update another key initiatives and developments later in the call.
But first, I will ask Steve and Bob to go through the 2018 financial results and the 2019 earnings outlook. Steve?
Thanks Al and good morning everyone. I would like to remind you that we filed our 10-K this morning along with an 8-K that provides details of our 2019 earnings guidance. I encourage you to refer to them for more details.
For the year ended 2018, ALLETE reported earnings of $3.38 per share on net income of $174.1 million. Earnings in 2017 were $3.38 per share on net income of $172.2 million. Earnings were diluted by $0.04 per share in 2018 due to additional shares of common stock outstanding at year end.
Before I discuss the segment details, I will call out significant year-over-year timing variances and other items for comparison consideration. We have included further details of these items in our first four slides for your reference at our website @allete.com in the Investor Presentation section.
Recall that results for 2017 reflected a $13 million after-tax or $0.25 per share benefit for the remeasurement of the lease deferred income tax assets and liabilities resulting from the Tax Cuts and Jobs Act that was enacted in December of 2017.
Net income for 2017 also included a benefit of $7.9 million after-tax or $0.16 per share for the favorable regulatory decision on the allocation of North Dakota investment tax credits. The favorable impacts were partially offset by a non-cash $11.4 million after-tax charge or $0.22 per share in 2017 for the write-off of a regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodology.
Interim retail rates recognized in 2018 of approximately $30 million pre-tax were fully offset by corresponding reserve recorded throughout the year. In the fourth quarter of 2017 Minnesota Power recorded interim retail rate refund reserves of approximately $32 million pretax to fully offset interim rates recognized throughout the year in 2017. From a full year-over-year comparison there was no impact on our financial results from interim rate refund reserves.
A few details from our business segments, ALLETE’s regulated operations segment which includes Minnesota Power, Superior Water, Light and Power and the company's investment in the American Transmission Company recorded net income in 2018 of $131 million an increase of $2.6 million compared to 2017. The 2017 net income reflected the previously mentioned $11.4 million after-tax charge for the write-off of a regulatory asset for deferred fuel adjustment clause costs.
Net income for our regulated operations decreased in 2018 due to lower transmission revenue, fuel adjustment clause recoveries, industrial sales and higher property tax and interest expense. These decreases were partially offset by lower operating and maintenance expense higher pricing on power supply agreements with other power suppliers, increased cost recovery rider revenue and higher kilowatt hour sales to residential and commercial customers due to more favorable weather conditions in 2018.
Net income in 2018 also included higher depreciation expense resulting from the reduction in the Depreciable Life of Boswell Units 3 and 4 to 2035 which was offset by the benefits of the lower federal income tax rate resulting from tax reform. Net income at Superior Water Light and Power and are after-tax equity earnings in ATC were similar to 2017.
Net income at ALLETE Clean Energy decreased $7.8 million from 2017. Net income in 2017 included a $23.6 million after-tax benefit due to the remeasurement of deferred income taxes resulting from tax reform. Net income in 2018 included the sale of a wind energy facility to Montana Dakota utilities resulting in an after-tax profit of approximately $10 million or $0.20 per share.
ALLETE Clean Energy recognized $7.4 million of additional production tax credits as it continues to execute on its refurbishment strategy. These increases were partially offset by lower revenues due to lower wind resources primarily at its Midwest facilities and higher operating and maintenance expenses.
U.S. Water Services net income decreased $7.5 million from 2017. Net income in 2017 included a $9.2 million after-tax benefit due to the remeasurement of deferred income taxes resulting from tax reform. Net income in 2018 included increased revenue partially offset by higher operating expenses.
Turning to the fourth quarter of 2018, ALLETE reported earnings of $1.18 per share on net income of $61.1 million. Earnings for the fourth quarter of 2017 were $0.81 per share on net income of $41.4 million. The fourth quarter of 2017 included the previously mentioned benefit for the re measurement of deferred income taxes of $0.25 per share, and the write-off of a regulatory asset related to deferred fuel adjustment clause cost of $0.22 per share.
The fourth quarter of 2017 also included recognition of a full year of interim rate refund reserves, of which approximately $14 million after tax related to the first three quarters in 2017. In 2018, interim rate refunds reserves were recorded throughout the year. Depreciation expense also decreased in the fourth quarter of 2017 due to the Minnesota Public Utilities Commission decision to increase the depreciable life of Boswell Units 3 and 4 to 2050, resulting in lower depreciation expense of approximately $14 million after tax.
In 2018, the Minnesota Public Utilities Commission reduced the depreciable life of Boswell Units 3 and 4 to 2035. The increase in depreciation expense in 2018 was offset through the use of the lower federal income tax rate enacted as part of tax reform. Other significant variances from a quarter-over-quarter comparison include a lead clean energy sale of the wind energy facility resulting in earnings of $0.20 per share, and an increase in U.S. water services operating income due to higher capital project sales. Capital projects sales amounted to approximately $15 million pretax in the fourth quarter of 2018.
I'll now hand it off to Bob, for additional comments on our 2018 financial performance and 2019 guidance. Bob?
Thanks, Steve, and good morning, everyone.
Let me begin by saying how proud I am of ALLETE's 2018 performance. Not only did we meet the financial promises we made to our investors coming in a bit north of our 2018 midpoint EPS guidance, we also advanced several major strategic initiatives which will set the stage for added growth, cash flow generation and optionality as we go forward.
First, we materially completed a historic rescale of Minnesota Power's operating structure, reducing costs for customers, increasing returns earned for investors while still maintaining our high standard for safety and reliability. Second, we announced three major new clean energy investments and additional refurbishment opportunities that are regulated and non-regulated segments as we continue to execute on our lease overall sustainable, cleaner energy forms spaces.
The investments included South Peak, Nobles and NTEC, collectively representing approximately $650 million in total investment. As illustrated on the Slide titled "Schedule of capital expenditures", we have over $1.8 billion in total spend scheduled for the next 5 years, of which clean energy projects represent the vast majority as highlighted. These clean energy projects will provide an opportunity to invest approximately $300 million of additional equity during the 2019 through 2023 time frame.
Finally, as announced on Friday of last week, we reached an agreement to sell our industrial water services company, U.S. Water, for significant premium. The cash proceeds of which would now be redirected to fund other clean energy growth initiatives, opportunities we are confident will materialize throughout the year. Specifically the sale price was $270 million, which would result in an estimated gain of approximately $20 million pretax upon closing. The transaction will generate approximately $260 million of net cash proceeds and is expected to close in the first quarter of 2019.
We expect that this action will increase our overall credit headroom as we seek to accelerate our growth at ALLETE Clean Energy. A business which has demonstrated higher returns, less earnings variability and stronger cash flows than U.S. Water, Going forward, we are excited about our ability to increase our annual dividend from $2.24 to $2.35 per share, a healthy 5% increase over 2018.
Fulfilling our goal that future dividend increases would more closely match our 5% to 7% average annual earnings growth objectives while maintaining healthy dividend payout ratios.
ALLETE is a much stronger Company as we enter 2019 with multi-year growth drivers already in place at ALLETE Clean Energy, a solid pipeline of additional opportunities yet to be announced and on a platform of solid fundamentals including improving returns from all of our businesses, significant free cash flow generation which can be used to fund new initiatives, a strong balance sheet supported with low leverage, increased credit headroom which will enable further non-regulated growth, and an improvement in overall earnings quality measured in terms of reduced variability.
Consistent with this view and as we look forward to the next 5 year time frame, we're upward revising our average annual growth expectations for the regulated segment to be approximately 4% to 5% from the 3% to 4% previously communicated, reflecting improved returns and added investments on our DC transmission line to increase the capacity with the assumption of reasonable regulatory outcomes.
Our non-regulated segment average annual growth is projected to increase at least 15%, reflecting a recently announced $170 million investment in Nobles 2, and our confidence and added wind projects from ALLETE Clean Energy. These growth rates appropriately exclude any contributions from U.S. Water given the previously announced divestiture.
Indeed our 2019 guidance which I will review in a moment, reflects an increase of over 8% above 2018 results, exceeding our 5% to 7% annual average objective. When normalized for both the MDU gain and the U.S. Water sale gain in 2018 and 2019 respectively. As we look forward to 2020, we expect the strong growth to accelerate even further as two of ALLETE Clean Energy newest wind farms Glen Ullin and South Peak representing approximately $300 million in total investment are in service for the full year in 2020.
So now let's get on into more specifics of our 2019 guidance. In 2019 we expect to generate a range of $3.50 to $3.80 per share on net income of $180 million to $190 million, which includes an expected gain on the sale of U.S. water of approximately $10 million after tax or $0.20 per share. This guidance range is comprised of regulated operations segment earnings within a range of $2.85 to $3.05 per share. And ALLETE Clean Energy incorporate another earnings within a range of $0.65 to $0.75 per share, which includes the U.S. Water services gain of $0.20 per share.
I would ask that you refer to the Slide titled "2019 guidance highlights" for further reference, and our full 2019 guidance 8-K details filed with the SEC early this morning. I'll share a few other factors and assumptions from our guidance starting with our regulated operations. We expect additional cost recovery revenue from the Great Northern Transmission Line capital investments with Minnesota Power's portion of the anticipated expenditures estimated at $127 million in 2019.
Industrial sales for Minnesota Power are expected to be approximately 7 million to 7.5 million megawatt hours, reflecting taconite customer production levels of approximately 39 million tons. As we project forward to 2020, Minnesota Power will realize a significant reduction in revenue associated with expiring power sales, reduce transmission revenues. In addition we would expect normal expense increases in the future with inflationary pressures.
Given the significant revenue deficiencies, we do anticipate the need to file a rate case in late 2019, and we will be sharing more information as 2019 progresses as it relates to the timing and approach plus potential impacts in 2020. Additional investments in American Transmission Company of approximately $9 million, which is on top of our 2018 year-end balance of $128 million, earning an attractive ROE of 10.82%.
A few highlights from our 2019 guidance regarding ALLETE Clean Energy and corporate and other. We continue to be excited about future growth prospects for ALLETE Clean Energy as it executes on its 4-pronged growth strategy that at a high level includes optimization of existing facilities building owning and transferring facilities to others, building owning and operating facilities under long-term power sales agreements and acquiring additional renewable facilities.
Our guidance excludes the impact of any possible acquisitions or new additional development projects. ALLETE Clean Energy expects to generate approximately 1.5 million megawatt hours versus 1.2 million megawatt hours in 2018. With return of normal wind resources and South peak in Glen Ullin projects coming online in late 2019.
ALLETE Clean Energy expects additional business development expenses plus added staffing as well as higher depreciation expense. ALLETE Clean Energy is investing in its future with additional staffing that will enhance origination, development and back office support as needed for orderly scaling is it further expands its operations. We expect to spend approximately $22 million in requalification of wind turbine generators in 2019. Production tax credits related to these refurbishment projects are estimated to be approximately $14 million in 2019.
I would encourage you again to review the complete 8-K disclosure filed this morning which includes additional details of our 2019 guidance. As we look forward, I'm excited about the prospects for all of our businesses at ALLETE. We believe these businesses provide a differentiated mix of long-term earnings and cash flow growth potential as well as balanced exposure to our regulated industrial customers. We are indeed in an exciting chapter at ALLETE.
Al?
Well thank you for the financial update Steve and Bob.
ALLETE is an energy company with a differentiated strategy a strategy that brings about cleaner energy solutions to initiatives underway within our regulated and unregulated family of businesses. We continue to see growth opportunities primarily driven by the call to upgrade our nation's infrastructure, to transform its energy supply and to further electrify its broad economy. Minnesota Power strategic EnergyForward plan is done just that greatly transforming its overall energy platform with significant rate-based investments in clean generation, carbon free renewable and modernizing transmission projects.
As expressed earlier the Nemadji Trail Energy Center a partnership between Minnesota Power and Dairyland Cooperative successfully completed a major regulatory hurdle in Minnesota as its capacity dedication agreement was approved by the Minnesota Public Utilities Commission in a final order dated January 24, 2019. Action is now shifted to the State of Wisconsin as an application for public convenience and necessity was submitted to the public service commission of Wisconsin on January 8 with a final decision expected in 2020.
In regards to Minnesota Power's companion filings, filings that are part of its EnergyForward energy resource package. We were pleased that the twenty-year 250 megawatt Nobles two wind power purchase agreement was approved by the Minnesota Public Utilities Commission in order dated January 23, 2019.
In addition to the Nobles two power purchase agreement our wholly-owned subsidiary ALLETE South Wind entered into a partnership with Tenaska to purchase a 49% equity interest in Nobles 2 providing an attractive investment opportunity for ALLETE. Yet another great example of the creativity of the talented ALLETE team.
I would like to make a comment on a new natural resources customer that is staged to begin production in the next two years. PolyMet's proposed copper, nickel and precious metal mining operation in Northeastern Minnesota continues to report advancement on major permitting milestones. During 2018 PolyMet received its permit to mine and certain water related permits from the Minnesota Department of Natural Resources. And on December 20, 2018 the Minnesota Pollution Control Agency issued PolyMet's final state water and air quality permits.
These final records of decision by federal agencies is required and expected in 2019 before final action can be taken on required federal permits as they relate to financing, constructing and ultimately operating the first in Minnesota history nonferrous mining operation.
I will turn now it over to Bethany Owen for a few more comments on our renewable energy business and outlook for the future. Bethany?
Thanks Al.
I couldn’t be more excited about ALLETE future and I am honored to work with Alan and his talented team as together we lead this world class organization. 2019 is a year of strategic positioning at ALLETE as we continue to execute on our growth strategy. With an anticipated Minnesota Power rate review in 2020 and historic level of capital projects underway at ALLETE Clean Energy and the announced sale of U.S. water services the proceeds of which are expected to be used to further ALLETE growth strategy we are moving forward from a position of strength.
At our regulated business across base Superior Water, Light and Power continues to enhance the reliability and safety of electric gas and water services for its customers while growing its business. We were pleased that its 2018 rate case was approved at the end of last year when final rates going into effect on January 1 of this year. Superior Water, Light and Power anticipates another year and significant capital investment approximately $15 million in 2019.
As Bob highlighted a moment ago 2019 will be a monumental year with a record high level of PTC related construction activity at ALLETE Clean Energy. Upon completion of the South peak in Glen Ullin projects ALLETE Clean Energy will have close to 750 megawatts of carbon free renewable wind generation in operation resulting in significant growth for ALLETE in 2020 and beyond.
We anticipate additional opportunities for growth at ALLETE Clean Energy with the advent of higher renewable standards across the country over the next several years. The demand for carbon free and renewable energy is staged for multiyear growth since only 29 states thus far have well-established renewable portfolio standards. In addition most of those 29 states are expected to increase their renewable requirements over time. ALLETE Clean Energy is ready and able to capture a meaningful share of this opportunity.
The company’s current operating and development portfolio includes 60,000 acres of land and access rights, 300 landowner relationships and more than 700 megawatts of interconnection rights along with permits already in hand. This is truly an exciting time for all of us at ALLETE as we continue to demonstrate our commitment to sustainability.
We look forward to a great opportunities for our employees, excellent service for our customers and delivering value to our shareholders through earnings growth and dividend. We believe ALLETE’s diversified growth platform and our proven ability to execute offer an attractive and differentiated value proposition to investors.
Thank you for your interest and for your investment in ALLETE. At this time, I will ask the operator to open up the line for your questions.
[Operator Instructions] Our first question comes from Chris Ellinghaus with Williams Capital.
Bob I've got - I was particularly interested in the final slide where in CapEx as the DC line upgrade. I assume that includes the capacity expansion. And can you just sort of talk about what's changed there and can we infer that there is additional projects out West that necessitate that?
Yes, so very good question. Chris you'll recall this is something that we've been evaluating for a while recall that the DC line capacities - current capacities are little over 500 megawatt and that provides a very unique path from very high quality wind in North Dakota that particular line. And so we've been in this schedule now we are contemplating upgrading the capacity by about 200 megawatts, and so there's about $50 million incremental capital that would be on top of the approximately 200 million that we would otherwise be doing just to modernize the path.
And so it will - we are definitely bullish on what that will mean that additional capacity for additional projects. Again it is unique and keep in mind the Midwest itself as we look forward is still looking at another 8000 megawatts of wind. And so we're pretty excited about it.
The [magiline] the CapEx does that suggest that it's complete in 2023?
It is not quite complete. I believe Steve, you can correct me here; it goes into service in early 2025.
2025, there some small capital Chris, that's outside of this schedule in 2024. And then there's some testing obviously in mid-2024 with the start date expected very early in 2025.
Chris this Al – that assumes of course that permitting in the State of Wisconsin goes as we anticipate and also obviously within MISO, that the MISO queue as we anticipate. But that's kind of our projections for right now.
Al as far as PolyMet goes, what's the current thought process in terms of starting construction and what the construction timeline looks like?
Well, I can only speak to what the company shared online and on their website. I would say what's still needed from the permitting side is the permit from the Army core of engineers, that got a little bit stymied by virtue of the government shutdown that were ensued in January/February kind of timeframe. The U.S. EPA had an obligation to do a final review of that Army core permit. So the company is waiting for that to come in.
Once we have that permit we have all the permits they would move into kind of solidifying their financing. The construction schedule as they've outlined is anywhere from 18 to 20 some months. So you can kind of extrapolate from there then base on that the financing comes into play. So they're suggesting within a two year timeframe they would be up and operating. It could be plus or minus that.
And Bob, one last question. As far as the U.S. Water equipment sales in the fourth quarter, was that the total of what you were expecting might be pushed into the first quarter?
Yes, actually we had about $15 million that we had planned in the fourth quarter, and all of the $15 million did end up shipping. So we had a little bit of slippage $1 million or $2 million that we had thought we could even pull into the fourth quarter. But overall it turned out to be a fair outcome.
Our next question comes from Elizabeth Guynn with Mizuho.
Could you clarify what the base is for the 5% to 7% growth rate?
So that is an average annual range. Within that range as I expressed to you this morning, we are looking at the utility of the regulated side of the business if you will which would include Superior Water, Light and Power growing at a rate of 4% to 5% on average. So we've increased that from 3% to 4%.
And sorry, that's 4% to 5% off of the 2018 actual or off of the 255 midpoint?
That would be off the midpoint.
And then at the unregulated business?
Yes, so on the unregulated pieces you'll recall we have talked about that segment growing at about 15%. And the difference maker here of course at the time we had expressed 15% last year and in prior year as we had U.S. Water in the mix. So this is back to what we talked about before which is we feel confident now that without U.S. Water, we can maintain that 15% growth in part that is being fueled by our Nobles investment now that we just announced. That'll be done in the 2020 timeframe and we are also expecting additional growth from ALLETE Clean Energy.
Great, so is that 15% off of the $0.80 minus the $0.20 one-time gain on though -sales or really 15% off of base of $0.60 EPS?
That's correct.
So then on a consolidated basis we can think of the 5% to 7% off of a 318 base?
That's correct.
Or actually the 315 because the A sale is actually $0.20, so it’s the 335 minus the $0.20 A sale?
This is Steve Ideas are 338 actual pickup the $0.20 and get the 318.
But we shouldn't use the actual – at the different segments?
Well, I think you got account for on the non-reg side you need to obviously back off the MBU, the $0.20 from that too. So - I believe in 2018 it was $0.84, and so I think you need to back off the MBU sale of that as well.
So it will be the $0.84 the base should really be off of 60 and EPS of $0.64 is non-regulated?
Yes, I wouldn't look at that and so that also included $0.06 for U.S. Water which we won't have in 2019 as well, so keep that in mind. And that's why you heard on this call we talked about positioning for 2019 with significant growth in 2020 right. So we’ll have two new projects in line late 2019 so factor that in. So it's 5% to 7% average annual earnings growth.
Our next question comes from Paul Ridzon with KeyBanc.
I had a question on - you talk about refurbishment in 2019 adding $14 million to production tax rate, is that $14 million incremental to the 74 in 2018 or is that $14 million total?
It's $14 million in total Paul.
So kind of basically doubling what you did in 2018?
Yes, so it includes [indiscernible]. And then as you know as you do wind turbines they go online and generate PTC's right away. These projects are expected to be complete mid-2020, so we would have obviously some incremental from whatever we recognized in 2018. It was actually around 8 some. So it's probably an increase of about $6 million overall.
And then in the past you shared with us how many megawatts of RFPs you bid into an ACE, is there a current number there?
Yes, Paul, that's still around 1,500 to 1,600 megawatts.
And then how are you looking at I know what we're calling it now SR Mesabi Metallics, can you just give us an update on what's going on there the prospects for promoting that?
So you probably read in the paper that the State of Minnesota has taken action as the new governor, governor Walz. He's taken action right now through his attorney general's office and the Department of Natural Resources and issued a debarment notice to the SR essentially are those that entity that come back into Minnesota to finance and play a role in the project.
So that's kind of underway right now and we'll see how that kind of proceeds at this point in time. The company of course has a contract with the City of Nashwauk through 2032. There was talk that Metallics as we knew it would begin construction in the spring. I think they're still representing that they will do that. I think the jury's out on there right now and of course the State of Minnesota as I told you has issued that debarment sort of proceeding to no longer declare them if you will acceptable to do business in Minnesota.
So that's where it sits in the moment. I probably have more to say about that in the spring as winter gives way to spring here and we'll see what actually happens on the ground there. But that's still about 100 megawatts, 120 megawatts load for the company. The project is essentially have finished right now and Cleveland Cliffs of course still has a strong interest in the property. And they have said to the governor again at this point in time that they would very much be interested in the property. And of course they would like to do some value-added here in Minnesota as well under the HBI thesis. And so [indiscernible] is also sort of in the mix in the conversation right now, and we'll see how it all plays out.
So if you are gambling man, what odds would you put that you'll be signing them power in three years?
Well, I don't want to speculate on that. I would be a liar and would lose all my money because this has been going on for 10 years already, Paul. So, I'm not going to speculate there with regards to that, but I feel fully confident that it will ultimately get up and running. As I have said to you all many, many times, that is one of the last remaining sort of sizable and untapped orebodies. Cleveland-Cliffs has a sizable ownership stake right now – by virtue of the actions they took about a year and half ago.
And so that orebody is very attractive, it's got the right mineralogy, it's got the right softness if you will with respect to ore and ore grinding. And it's very good and very conducive right now by virtue of its characteristics for enhanced HBI type products. And so everybody wants that ore and everybody wants that project over there. The State just got it clear, the decks and all the complexity that it had created during Governor Dayton's administration and/or the courts created by virtue of people coming in and out of bankruptcy.
And the midpoint of your regulated operations guidance for 2019, what's the assumed earned ROE in that?
The 285 to the 305 Paul?
Yes.
Yes, I would use the midpoint on that.
At that midpoint, what is the assumed ROE?
Yes, as we talk Paul it's 905. So we use our authorized ROE of 9.25 and of course we have been on a rescaling for Minnesota Power. So as we've talked, we've achieved that with the caveat of the temporary outage at Husky, that's about a $3 million impact in 2019. They don't believe it will be up and running until sometime in 2020. We're about 20 basis points. So I'd take the 925 minus the 20 and it's a 905 ROE.
So you scaled your O&M to hit the 9.25 but we have this headwind?
Yes, exactly.
Our next question comes from Christopher Turnure with JPMorgan.
It's actually Rich [indiscernible] on for Chris. Just a lot of great questions today, just wanted to ask on the rate case. I know we're a little early here but the contracted expirations that you referenced, how could we think about the bill impact from those and just maybe some other high-level puts and takes on the direction of rates?
Yes, I can help with that. So I'd start by saying we are working on our 2020 forecast right now which is going to take some time. So we aren't coming out and saying: Hey, how big this rate case is. So we need to work through that. We would expect to have that probably by the early third quarter of 2019. So it's a little too early to get into how much and what the impact on rates are.
And Bob mentioned some of the reasons for this rate cases because we do have some expiring contracts with power marketing customers, some transmission revenue that we had that came off line right during the rate case that we were not able to get into that rate case. We had a customer, a paper customer shutdown one of their smaller of their paper machines which we did not have in this rate case. Potentially a Manitoba Hydro contract that we have that couldn't start roughly on June 2020, that could come into play.
We also expect higher expenditures. So we've done a lot of cost reduction that is non-sustainable over long-term. You seen the CapEx schedule that we have as well as what we believe is will be and/or approved improving ROEs in Minnesota.
Rich, this is Al. With respect to contracts and rates for large customers if that's what you're referencing, in general we're feeling very good about where our rate structure is at the moment. When you marry that up with all the transformative work that Minnesota Power has done or has been requiring to do in the State of Minnesota to mercury reduction, to clean energy expansion and renewables to grid security and reliability with respect transmission upgrades; when you add all that up, we move Minnesota forward, we Minnesota energy policy forward and we kept our rates reasonable for the most part.
The large part our customers rates have come down modestly since the rate case and since the Trump tax reform and other things that have impacted them. And of course trade policy and a strong economy is lifting them as well. And so we have good solid our relationships right now with our big customers, the model remains with our SR situation or metallic situation as I described earlier.
That load has been up and down by virtue of kind of bankruptcy and whatnot, but the contractor is solid and we look forward to serving that low to the City of Nashwauk, a mini customer of ours that we've had a long-standing relationship with. So right now I would say we're positioned well both in terms of our customers, it's rates and also planning for you know rate case filing sometime later this year.
And just a quick one finally here. As per interim rates, do you implement the ROE file or is it that the ROE are currently authorized when you get there?
Yes, it depends. Generally if it's lower you would have a lower interim that would result in lower interim rates you would use that, if it's higher generally not.
Our next question comes from [indiscernible] with Avon Capital.
A few things here; one, can you just remind me what is the anticipated net income earnings contribution from the PolyMet facility when it comes online? I think it's in 2022?
We don't get into kind of growth or net numbers around all that. So 50 megawatt expected load we've cited in our 10-K. Steve can highlight this what roughly a ton of taconite is but copper, nickel slightly different.
So we've used about $0.04 for a 1 million ton increase or decrease.
Okay. That's 5 million tons?
Well, the average taconite production on the iron range is 40 million tons and so that's the average of that. Of course PolyMet would be the first of a kind in Minnesota history. And its production right now is - the permitted production is 32,000 tons of production per days. So it's a little difficult but think about taconite at 40,000 or 40 million tons per year - excuse me, Steve's reference there plus or minus $0.04 based on up or down based off that production rate.
So, every million tons is plus or minus $0.04?
Correct.
In taconite.
When you talked about your - the growth outlook and guidance, I was looking at the capital expenditure slide. And it appears that there is especially within ALLETE Clean Energy except for what is already been specifically identified with regards to the repower refurbishments and [indiscernible] there's nothing else included in there right now.
And I'll assume that the growth rate is consistent with the capital forecast that's here such that as you backfill in capital opportunities over the next 3-4 years on this plan that that in fact should be additive to where we are today and would be on top of what you'd see as the 15% growth rate?
This goes back a little bit to our conservatism as a Company I would say too. When we put these CapEx schedules out, these do not include projected new projects if you will. Now, we do have - I already mentioned in the DC line, there are high confidence kinds of things as it relates to the upgrade, but in the absence of that these are established projects. So we would certainly be looking to add additional projects at ALLETE Clean Energy.
You may recall our target has been one to two projects per year and we would need the one to two projects per year to get to the growth rate overall. So we're going to need to and are working on projects for example that would come in the 2021 through 2023 time frame as we move forward.
And I guess given the incremental capacity to been able to achieve on your balance sheet inefficient to the cash from the sale of U.S. Water. Can you give me a sense to what you would consider a realistic amount of fire power you would have or dry powder now so to speak in terms of capital will be effectively deployed going forward here?
Yes, so I would start with the fact that our business over all ALLETE now generates about $50 million to $70 million on average in equity free cash flow. So that's net off dividend and based capital expenditures. So that is a source of capital that we would look to redeploy. For example, if we did a 100 megawatt new wind farm that's about a $50 million equity check. So we don't have to raise equity in that circumstance, we could use the cash flow just for that.
So that's a big benefit. Now on top of that of course now we have these proceeds from U.S. Water and we have our eyes set on what I consider to be a pretty robust pipeline that the ACE team is working on and we would look to dedicate a significant amount of those proceeds to offset equity that we would otherwise issue in those projects.
Yes, it seems to me that with the - you highlighted particularly in 2018 versus 2017 all normalized, you were able to grow at 8% growth rate and given the outlook for the utility as well as the opportunities of ACE, it would seem to me that what you were able to achieve in 2018 versus 2017, I should be perhaps more indicative of what you're able to achieve going forward.
So I'm wondering if it - or is it simply a matter of conservatism and that you're keeping 5% to 7% simply to be conservative as opposed to fact that 2018 versus 2017 was about 8% and it seems like you have a lot of pieces in place to be able to continue that?
Yes, really appreciate that comment. We pride ourselves on performing. So what we say we're going to do, we're hell bent on making sure that happened. So let me just start with that. With regard to the 5% to 7%, recall that's a long-term average growth rate. And for sure as you pointed out as we look at in our guidance for 2019, we're at 8%. I've already hinted towards 2020 is going to be a higher rate than that because of these projects coming on. So there will be years that we're going to outperform. But as we look longer into the period and I think this is where the conservatism comes, we have more work to do and I'm talking over the - even past 5 years we feel really good about our growth at the higher end of that range over the next 5 years.
And so we're really working on that. Next 5 year period I want to make sure that we can consistently deliver that range of 5% to 7% which we think we can.
And when we have Analyst Day here in next month, what do you expect incremental that you'll be able to communicate or hope to communicate?
Well, I would tell you this - maybe Al would like to comment or Bethany . We're going to have [indiscernible] joining us from ALLETE Clean Energy once again. He was there last year and he's going to provide - you'll have more time on the agenda, he's going to be providing more color with regard to how they're looking at the business more broadly. We call their evolving their strategy as we speak some of the things that Steve spoke to I spoke to in my script about ramping up the back office new origination resources, operational folks is about - a continued scaling of that business. So he'll speak to that at significant length.
Yes, he'll be addressing all of that. Of course last year we had timing work out for us with respect to the northwestern deal peak we announced that out there at the breakfast. We don't necessarily always control our timing and our market timing that way but we're confident and bullish ACE's future and it's ability to get more projects done as I suggested earlier there in various stages of negotiation on power sales agreements with a variety of customers, they don't always work out but we're confident we're going to get our share and as Bethany pointed out earlier, you've got 30 states right now with mandates and maybe more coming not only within those states but other states. And so we believe that ACE will be and is well positioned to claim it's share of the business.
And as Bob already suggested from a balance sheet perspective the Company is generating a fair amount of cash right now. We have no access to capital challenges at all, we're very financially disciplined, we're very return disciplined and so we don't use chase every deal down and race to the bottom, that's not our strategy and so we're very deliberate and very intentional. So we'll have more to say in New York when we're with you and more throughout the year. So ALLETE has got a lot on the growth right now I'll just leave it there.
And I guess maybe one last thing. You did reference perhaps equity buybacks. I mean I guess given the opportunities that you're seeing right now would any stock buybacks likely be later in the forecast period as you evaluate - as you target a closer line of sight if not announced project development or acquisitions within ACE or do you feel that while that's always an option that in fact the rate of return from these investments will be materially better than the stock repurchase?
Yes, so a lot there. I would tell you that I - in terms of our cash management philosophy overall, I like to keep a cash balance of around $50 million, so let's start there. When I think of these proceeds in terms of roughly $260 million coming in, I want to make sure that we were good stewards of that cash.
So I don't look at this as sitting on that cash for an extended period of time. I'm very much focused on the 2019 calendar year, so and against the backdrop of $50 million in cash. So we're going to be looking hard in the beginning of the year call it the first 3 to 4 months on projects that could come from ALLETE Clean Energy that would require equity.
As I already expressed, we have a very robust pipeline. Those projects could be new development projects, PTC projects or they could be acquisitions of existing facilities, and that would require an equity check.
So that's first and foremost, so I'm thinking about that. And then to the extent that as the year progresses, we're able to dedicate some of those proceeds to those projects grid, to the extent that we don't see projects for example in the last half of the year, we will initiate - likely initiate a program to start that buy back in the second half.
So that's generally how we're looking at. So I'm not looking out 3 years, 4 years in the context of these proceeds.
Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to Al Hodnik for closing comments.
Steve, Bob, Al and I thank you again for being with us this morning and for your investment and interest in ALLETE. We look forward to seeing many of you at our Annual Analyst Breakfast in New York on March 7th, and other investor venues throughout the year. Enjoy the rest of your day.
Ladies and gentlemen this does conclude today's presentation. You may now disconnect and have a wonderful day.