ALLETE Inc (ALE) 2016 Q4 法說會逐字稿

Good day and welcome to the ALLETE fourth-quarter 2016 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. Such terms are 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 statements. Factors that could cause the 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 these 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 of the date hereof. The Company undertakes no obligation to revise or update any forward-looking statements or make any other forward-looking statements, whether as a result of new information, future events, or otherwise.

For opening remarks and introduction, I'd now like to turn the conference over to ALLETE's President and Chief Executive Officer, Alan R. Hodnik. Please go ahead.

Good morning, everyone, and thanks for joining us today. With me are ALLETE's Chief Financial Officer, Steve DeVinck, and ALLETE's Senior VP and Chief Risk Officer, Bob Adams.

As we announced previously, Bob will succeed Steve as part of a planned and orderly CFO succession in March of this year. With all this in mind, I do wish to recognize Steve DeVinck this morning. While Steve will be with us during our upcoming New York investor and rating agency meetings, this will effectively be the last time Steve will be participating in earnings calls with us. Steve, you are a true professional and it's been a real privilege to serve with you and partner with you during our time together here as CEO and CFO. Thank you for all you have and continue to do for ALLETE. Much appreciated.

This morning, we reported our 2016 financial results of three dollars and ten -- $3.14 per share, a net income of $155.3 million. Our results reflect many accomplishments, as well as operational excellence, despite a few challenges that came our way during the year. Our full-year earnings results were consistent with our previous earnings guidance of the low end of a range between $3.10 to $3.40 per share. Results from 2015 were $2.92 per share on net income of $141.1 million.

Before Steve and Bob go through the 2016 earnings results, I would like to review a few significant accomplishments for the year. These accomplishments are a testament to our great people, great culture, strong leadership, and to the resiliency of our Company.

In July 2016, a large portion of Minnesota Power's service territory was devastated by severe storms and straight-line winds, which significantly impacted nearly 57,000 customers at peak of the storm. This required tremendous efforts and restoration and repair work and we were pleased to learn that Minnesota Power's efforts were recognized by industry peers.

Last month, the Edison Electric Institute, or EEI, presented Minnesota Power with the association's Emergency Recovery Award, this for its outstanding power restoration efforts. Our remarkable employees, the communities we serve, and other industry partners rose to meet all the challenges, fully recognizing that our customers' everyday lives were put on hold as our teams worked safely to restore power.

Minnesota Power made significant progress during the year building on its energy forward strategy, this while demonstrating its commitment to security, comfort, and quality of life for our customers. A few examples of Minnesota Power's energy forward strategic execution and operational excellence include an all-time production record that was set at the 500-megawatt Bison Wind Energy facility in North Dakota. Minnesota Power's hydro operations closed the year at near-record production levels since inception in 1906. Boswell Energy Center's Unit IV recently went through a significant environmental retrofit and set all-time reliability records, while achieving 90% mercury emission reductions.

We also tallied our first solar generation from Camp Ripley, a 10-megawatt solar energy installation near Little Falls, Minnesota. This $22 million project will help Minnesota Power achieve about one-third of its requirement under Minnesota's new solar energy standards.

Last, but certainly not least, in late 2016 Minnesota Power received a Presidential permit from the Department of Energy, enabling Minnesota Power to move forward with the Great Northern Transmission Line. The 220-mile, 500-kV line will deliver hydroelectric-generated electricity from Manitoba to Minnesota Power. We have started preliminary work on construction of the transmission line, which is expected to be completed by 2020.

EnergyForward balances stewardship, reliability, and affordability while assuring fuel diversity within Minnesota Power's generation portfolio. In the future, we expect Minnesota Power's generation mix will be comprised of a combination of approximately two-thirds renewable and renewable-enabling natural gas and one-third environmentally compliant coal.

Although challenged in the beginning of 2016 with several temporarily idle taconite operations, Minnesota Power's taconite customers finished the year with an upward trend in production and we anticipate continued improvement in 2017. We expect all taconite pellet customers to be back online in 2017.

In June of last year, we were pleased that Cliffs Natural Resources extended contracts with Minnesota Power for its United Taconite and Babbitt Mine operations under a new 10-year agreement. Cliffs also signed its first-ever contract with Minnesota Power, a 50-megawatt growing to 90-megawatt 15-year agreement to serve its Northshore Mining operation. This speaks to the long-term viability and attractiveness of natural resource-based mining operations in Minnesota Power's service territory. I will have some additional comments on other new potential customers later on in the call.

Last November, Minnesota Power submitted an independent rate review filing with the Minnesota Public Utilities Commission. This request supports an increase in base electric rates to adequately recover costs associated with significant investments made by Minnesota Power to enhance environmental performance, add resiliency to the region's electric system, and bring new renewable energy to northeastern Minnesota. We were pleased that our filing was deemed complete in mid-December of last year, effectively allowing interim rates of approximately $35 million, which went into effect January 1 of this year.

ALLETE Clean Energy's facilities performed well during 2016, with solid operational performance from its fleet of 535 megawatts of wind-generating capability in key markets across the United States. 2016 reflected a full year of performance from its most recent addition, the 101-megawatt Armenia Mountain Wind Energy facility located in Pennsylvania.

ALLETE achieved many notable accomplishments in 2016 and is re-energized for the new year ahead. I will make some remarks about our outlook for 2017, but first I will ask Steve and Bob to go through the financial details. Steve?

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 2016 results.

For 2016, ALLETE reported earnings of $3.14 per share on net income of $155.3 million and operating revenue of $1.34 billion. This compares to 2015 earnings of $2.92 per share on net income of $141.1 million and operating revenue of $1.49 billion.

Operating revenue in 2015 included $197.7 million for ALLETE Clean Energy's construction of a wind energy facility, which was sold late in the year. Net income in 2016 was impacted by a gain related to the change in fair value of the U.S. Water Services contingent consideration liability, offset by the impact of an adverse November 2016 Minnesota regulatory order on the allocation of North Dakota investment tax credits and a goodwill impairment charge and debt prepayment expense at ALLETE Clean Energy.

2015 was impacted by an impairment charge related to the real estate assets of ALLETE Properties, profit recognition on the sale of a wind energy facility at ALLETE Clean Energy, and acquisition costs related to U.S. Water and ALLETE Clean Energy. Earnings per share were diluted by $0.07 in 2016, due to additional shares of common stock outstanding.

ALLETE's regulated operations, which includes Minnesota Power, Superior Water, Light and Power, and the Company's investment in the American Transmission Co., recorded net income of $135.5 million for 2016, an increase of $3.9 million compared to last year.

Net income increased at Minnesota Power due to higher cost recovery revenue, production tax credits, and FERC formula-based rates, as well as lower operating and maintenance expenses. These increases were partially offset by higher depreciation expense, lower industrial sales and demand revenue, and restoration costs associated with a severe storm in July 2016. Our equity earnings in ATC increased $1.3 million after tax.

Operating revenue from regulated operations increased $9.5 million or 1% from 2015, primarily due to higher transmission revenue, cost recovery rider revenue, pricing on power sales agreements with other power suppliers, and FERC formula-based rates, partially offset by the impact of an adverse regulatory outcome related to the allocation of North Dakota tax credits.

Transmission revenue increased $9.7 million, primarily due to period-over-period changes in our estimate of a refund liability related to MISO return on equity complaints and higher MISO related revenue. Cost recovery rider increased $7.5 million, primarily due to the completion of the Boswell 4 environmental upgrade in the fourth quarter of last year.

Despite lower kilowatt-hour sales, revenue increased $4.9 million from 2015, primarily due to higher pricing on power sales agreements with other power suppliers this year. Sales to other power suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations.

Sales to industrial customers decreased 2.7%, primarily due to reduced taconite production. In addition, demand revenue from industrial customers was down in 2016 as a result of lower demand nominations.

Revenue from our wholesale customers under FERC formula-based rates increased $3.8 million, primarily due to additional environmental upgrades and other investments. Revenue was reduced $15.0 million this year to reflect the impact of the adverse November regulatory order on the allocation of North Dakota investment tax credits and a corresponding regulatory liability was established.

On the expense side, fuel and purchase power expense increased $4.8 million or 1% from 2015, primarily due to higher fuel and purchase power prices this year compared to last year. Transmission services expense increased $11.1 million or 21% from last year, primarily due to higher MISO related expense and period-over-period changes in our estimate of a refund related to MISO return on equity complaints.

Operating and maintenance expense decreased $8.9 million or 4% from last year, primarily due to lower pension and other postretirement benefit expenses, a $3.6 million sales tax refund received in 2016, and a $4.1 million decrease in Conservation Improvement Program expenses. Operating and maintenance expense included higher restoration costs of approximately $3 million associated with the severe storm in July of 2016.

Depreciation and amortization expense increased $19.2 million or 14% from last year, primarily due to additional property, plant, and equipment in service.

Equity earnings in ATC increased $2.2 million or 13% from 2015, primarily due to additional investments in ATC and period-over-period changes in ATC's estimate of a refund liability related to MISO return on equity complaints.

Net income at ALLETE Clean Energy decreased $16.5 million and revenue decreased $181.6 million from 2015, primarily due to the construction sale of a wind energy facility late last year. Results for 2015 included $20.4 million of net income or $0.42 per share and $197.7 million of revenue related to that transaction. 2015 net income also included $1.8 million of after-tax expense, or $0.04 per share, for acquisition costs related to wind energy facilities.

Net income at ALLETE Clean Energy in 2016 included a $3.3 million after-tax, or $0.07 per share, non-cash goodwill impairment charge and a $900,000 after-tax expense, or $0.02 per share, for the early repayment of debt.

Revenue at U.S. Water Services increased $17.7 million in 2016 compared to the period from February 10, 2015, to December 31, 2015. The results for 2015 reflect operations from the date of acquisition. Revenue from recurring chemical sales and related services was $110.5 million in 2016, compared to $92.5 million in 2015. Revenue from equipment and related services, which include sales of water treatment equipment, was $27 million for 2016, compared to $27.3 million in 2015. Equipment sales can fluctuate from period to period.

Net income at U.S. Water increased $600,000 in 2016, reflecting, among other things, lower expense related to purchase accounting adjustments related to inventory and sales backlog. Importantly, 2016 earnings reflect increased investments in back-office systems and support at U.S. Water Services as we create a platform for future growth.

Corporate and other, which includes results from BNI Energy, ALLETE Properties, and other miscellaneous corporate income and expense, reported net income of $4.9 million in 2016, compared to a net loss of $21.3 million last year. Net income in 2016 included an after-tax gain of $13.6 million, or $0.28 per share, related to the change in fair value of the U.S. Water contingent consideration liability, partially offset by an $8.8 million after-tax, or $0.18 per share, impact for the adverse regulatory order on the allocation of North Dakota investment tax credits. In 2015, the net loss included a $22.3 million after-tax, or $0.46 per share, impairment charge related to the real estate assets of ALLETE Properties and a $3 million after-tax, or $0.06 per share, in acquisition costs related to U.S. Water Services.

ALLETE's effective tax rate for 2016 was 11.3%, compared to 15.2% in 2015. The decrease was primarily due to increased production tax credits in 2016 related to additional wind energy generation.

ALLETE's financial position continues to be solid. Cash from operating activities was $332 million and our debt to capital ratio was 45% at the end of 2016. We are an organization committed to financial discipline as we execute on delivering value to our shareholders.

I'll now hand it off to Bob Adams for a few more details on 2016 and positioning for 2017. Bob?

Thanks, Steve, and good morning, everyone.

In November 2016, as you'll recall, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of 9% for retail customers, reflecting about $55 million in total additional annual revenue. The filing seeks a return on equity of 10.25% and a 53.8% equity ratio. At December 2016, due to a change in its sales forecast related to the start-up of US Steel's Keetac taconite operation, Minnesota Power filed a request to modify its original interim rate proposal, reducing its requested interim rate increase to $34.7 million from the original request of approximately $49 million.

Minnesota Power will file to update its final retail rate increase request by February 28 of this year and expects the final retail rate increase request to decrease similar to the interim rate proposal. As part of this rate review request, we are seeking an extension of the recovery period for the Boswell Energy Center to better reflect recent environmental investments at the facility and mitigate rate increases for our customers. If approved, annual depreciation expense will be reduced by approximately $25 million. If the requested recovery period extension is not approved, we would expect final rates to be increased by a similar amount.

In late December, the MPUC accepted the filing as complete and authorized the annual interim rate increase of $34.7 million beginning January 1, 2017.

On a similar note, back in June 2016 Superior Water, Light and Power filed a rate increase request with the Public Service Commission of Wisconsin, requesting an average overall increase of 3.1%. The requested rate increase would generate approximately $2.7 million in additional annual revenue. Hearings are expected to be scheduled for the first half of 2017 and we anticipate new rates will become effective in the first half of 2017. We cannot predict the level of final rates that may be approved by the MPUC or the PSCW.

In December, we initiated our 2017 earnings guidance at a range of $3.10 to $3.50 per share. The midpoint of our guidance range represents a 5% growth over 2016 earnings per share of $3.14.

With respect to our regulated operations, 2017 guidance includes the recently approved $34.7 million Minnesota interim rate increase that went into effect January 1, as well as a partial year for the requested Wisconsin increase. The high end of our guidance range includes the impact of the Boswell recovery life extension request. Additionally, we expect industrial sales of approximately 7 million to 7.5 million megawatt hours, a significant improvement from 2016's 6.5 million megawatt hours. The Great Northern Transmission Line qualifies for current cost recovery and we expect additional rider revenue as we begin making capital investments in 2017.

On the expense side, we expect higher depreciation, interest, and property tax expense attributable to recent capital investments, as well as increased operating and maintenance expense, due primarily to higher salary and benefit costs, and a nonrecurring $3.6 million sales tax refund in 2016.

At our energy infrastructure and related services businesses, we expect higher earnings at both U.S. Water Services and ALLETE Clean Energy, excluding the $3.3 million goodwill impact. Our guidance excludes the impact, if any, of possible acquisitions or development projects. We anticipate our effective rate to be approximately 20% in 2017 due to federal production tax credits.

Next, I'd like to talk briefly about tax reform. Lower corporate tax rates, interest deductibility, and the expensing of capital expenditures have all been discussed, among other issues. These items could have offsetting impact to both customer rates and earnings, so it remains difficult to speculate on ultimate impact until we get clarity on final outcomes. Importantly, we do not have any significant holding company debt, and ALLETE Clean Energy does not have any projects with tax equity partners.

On the regulated front, we are working with EEI to protect the interests of our customers, the industry, and our shareholders. Consistent with EEI's viewpoint, there are five provisions of tax reform that we believe are critical to achieving these goals -- maintaining the federal income tax deduction for interest expense, as well as the federal income tax deduction for state and local taxes; providing for the continuation of normalization, including addressing excess deferred taxes resulting from a reduction in the tax rate; and keeping dividend tax rates low and on par with capital gains. We expect that our nonregulated businesses would benefit from lower corporate tax rates.

As we look forward, I am excited about the prospects of our emerging energy infrastructure and related services businesses, namely ALLETE Clean Energy and U.S. Water Services. We believe these synergistic businesses with their strong customer base will provide long-term earnings and cash flow growth potential, as well as balanced exposure to our regulated industrial customers.

As Steve touched on earlier, during the fourth quarter of 2016 we reduced the estimated liability for the earnings-based contingent payout that was part of the U.S. Water acquisition. Generally Accepted Accounting Principles require that an estimate be established at acquisition and subsequent changes be recognized as income or expense. As such, we recorded $13.6 million of income, consistent with the reduction of the liability. This earnings-based contingent payout was designed to both mitigate purchase price risk for ALLETE and incentivize U.S. Water management.

The revised estimate reflects our acquisition contractual agreements and does not impact our view of the future prospects of the business. Since our acquisition of U.S. Water in February 2015, we have seen its recurring customer base grow to about 4,800 today from 3,600, an increase of over 30% or about 15% per year across a wide range of industries. The two acquisitions we've completed since our acquisition, namely A and W and WEST, are performing in line with expectations and our pipeline remains robust.

Overall, we expect demand for integrated and customized water solutions to grow and U.S. Water is well positioned.

We continue to be excited about the overall performance of ALLETE Clean Energy and its continued growth prospects, which Al will touch on in a moment. As Steve touched on earlier, during the fourth quarter of 2016 ACE recorded a $3.3 million goodwill impairment primarily related to the Storm Lake acquisition in January 2014. The impairment was the result of lower estimated energy prices in periods subsequent to the contracted power sales agreement. This represents all the goodwill recorded at ACE and was a minor portion of the $566 million of total assets at ACE on December 31, 2016. Al?

Thank you for the financial update, Steve and Bob.

ALLETE is a growing energy company that provides sustainable energy solutions through initiatives at our regulated utility businesses and also at our complementary energy infrastructure and related services businesses. I would like to share a few details on near-term initiatives and some of our expectations for 2017.

As expressed, significant elements of Minnesota Power's EnergyForward strategic plan are already in progress or being considered, including additional renewable generation with an element of renewable enabling natural gas generation, likewise the completion of the Great Northern Transmission Line, designed to deliver hydroelectric power from northern Manitoba by 2020.

In 2017, we expect cost recovery rider revenue will increase as the construction on the Great Northern Transmission Line begins. We expect to spend approximately $120 million this year and estimate our total investment in the line will be $330 million upon completion.

While always balancing Minnesota Power's unique customer mix and fuel diversity, we will share more on the timing of any new EnergyForward initiatives and related investment opportunities as we finalize details. We continue to believe the optimal generation mix for the future includes a combination of two-thirds renewables and renewable-enabling natural gas and one-third environmentally compliant coal generation.

Minnesota Power anticipates strong sales to its existing industrial customers in 2017. The World Steel Association, an association of over 160 steel producers; other national and regional steel industry associations; and steel research institutes representing approximately 85% of world steel production projects U.S. steel consumption in 2017 will increase by approximately 3% compared to 2016. President Trump has also signaled a preference for American-made steel as it relates to pipeline expansion, as well as his stated goal of significant investment in rebuilding our nation's infrastructure.

Next, a few comments on potential new natural resources customers. PolyMet's proposed copper, nickel, and precious metal mining operation in northeastern Minnesota continues to move forward with final permitting. On January 9, 2017, the United States Forest Service signed the final record of decision authorizing a land exchange with PolyMet, which, upon completion of title transfer, will result in PolyMet obtaining surface rights to land needed to develop its mining operation. The land exchange was a major step forward in the project and all necessary air, water, and mine permits have been submitted to state agencies.

Minnesota Power could supply between 45 to 50 megawatts of new load under a 10-year power supply contract that would begin upon startup of the mining operation.

Consistent with our last update, the former Essar project remains on hold for now as courts work through planned restructuring with the Company, local units of government, vendors, and the state of Minnesota. Mesabi Metallics, which changed its name from Essar Steel Minnesota LLC in December 2016, recently submitted its restructuring plan in a Delaware court. Mesabi Metallics would be a retail customer of the Nashwauk Public Utilities Commission. Minnesota Power has a contract for electric service to the city of Nashwauk through 2028.

While we cannot ultimately predict the outcome of this project, with the nearly $1 billion invested to date and given the high-quality nature of the ore body on which its idle projects sits, our view remains not if but only when new value-added products are produced at this site. Completion of this project could generate up to 110 megawatts of new load for Minnesota Power.

Next, I would like to call your attention to initiatives within ALLETE's energy infrastructure and related services businesses. ALLETE Clean Energy continues to pursue growth through acquisitions of existing facilities, which have long-term power sales agreements in place; or build, own, and transfer projects, which will have long-term power sales agreements in place for the output or which may be sold upon completion for a development fee.

Federal production tax credit qualification was an important component to broader ALLETE Clean Energy strategy and overall project development economics. Late in 2016, ALLETE Clean Energy invested approximately $100 million in wind turbine equipment to meet production tax credit Safe Harbor provisions.

These investments further positioned ALLETE Clean Energy in several strategic ways. First, in terms of wind farm refurbishment opportunities available within ACE's 535-megawatt fleet. Second, opportunities for the ACE team to build new projects and partner with quality off-takers on long-term power sales agreements. Third, to construct for a developmental fee build, own, and transfer projects, again with quality partners.

The fact that ACE has secured Safe Harbor turbines further improved an already strong deal flow pipeline and further connected ACE with many new industry partners. An example of this strategy in action was just recently completed and announced by ALLETE Clean Energy on January 3, 2017. ACE announced that it will develop a new wind energy facility of up to 50 megawatts after securing a 25-year power sales agreement with Montana-Dakota Utilities. This agreement includes an option for our business partner, MDU, to purchase the facility upon completion for a development fee. ACE expects to begin construction on the expansion to the original Thunder Spirit wind site owned by MDU in 2018. More about the opportunities before ACE as their strategy further unfolds.

We remain excited about our newest addition to the ALLETE family of companies, U.S. Water Services. U.S. Water Services provides integrated water management for industries by combining chemical, equipment, engineering, and service for customized solutions to reduce water and energy usage while improving efficiency. U.S. Water Services is located in 49 states and Canada and its tailored solutions result in over 90% repeat business, highly recurring revenues, and solid cash generation. U.S. Water has grown its customer base from 3,600 to 4,800 customers since 2015, or 33%.

Our strategy is to grow U.S. Water Services' North American presence by adding customers, new product offerings, and new geographies. We believe water scarcity and a growing emphasis on conservation will continue to drive significant growth in the industrial, commercial, and governmental sectors, leading to organic revenue growth for U.S. Water Services.

U.S. Water Services also expects to pursue periodic strategic tuck-in acquisitions. In the second half of last year, U.S. Water announced a tuck-in opportunity by acquiring WEST. WEST is a strong regional company located in the California marketplace. WEST is a good example of U.S. Water Services' acquisition criteria in action, expanding geographic reach, adding new technology, and deepening its capabilities to serve its expanding customer base.

We remain very energized about our prospects at ALLETE and look forward to delivering another year of earnings growth. A resurgent U.S. economy bodes well for Minnesota Power's industrial customers and our energy infrastructure and related services businesses are well positioned to capitalize on multifaceted growth and investment initiatives.

Our Board is confident in our strategic direction and execution as well. Recently, the Board voted again to increase dividends on our common stock, our seventh year in a row of dividend increases. Since 2011 and fully consistent with our stated objective to investors, ALLETE's five-year EPS compound average growth rate has been 5.6%.

Thank you for your continued confidence and for your investment with us. At this time, I will ask the operator to open up the line for your questions.

(Operator Instructions). Chris Turnure, JPMorgan.

Good morning, guys, and congratulations, Steve. I wanted to ask about the depreciation expense. I know you guys had tried for this probably about a year ago with no success, and now you're trying to get the benefit again here. But am I correct in assuming that the $25 million benefit is fully embedded in this rate case and therefore on a run rate basis going forward the Company's EPS would not benefit at all from this lower expense?

Hi, Chris, this is Steve DeVinck. Thanks, first of all.

Let me shed a little light on that and then see if this answers your question. First of all, we never reached a final conclusion on our Boswell depreciation filing, and I'm talking about the filing that we had out there last year. We pulled that filing before it was heard for efficiency to incorporate it into our rate case. So I want to be clear about that. That has not been ruled on.

Secondly, our rate request is reduced and does reflect that recovery life extension. Now what we're asking for is an extension, as you know, in recovery life, which would reduce depreciation expense by about $25 million, and we've asked for that to be retroactive to January of this year, 2017. Accounting rules do not allow us to reflect that new recovery life until it's approved by the regulator, so it will have earnings benefit to us either when it's approved, if we get that recovery life extension granted, or if the regulator does not approve that recovery life, our expectation is that final rates will be increased by a corresponding amount.

So what that means to earnings guidance in 2017 is the high end of our range reflects that that recovery life extension is approved effective in January of 2017. So I'm going to pause right there and see if I answered some of your question.

I guess I'm still a little bit confused there. Maybe it would be easier to talk about 2018 and beyond, because at that point there wouldn't be an accounting consideration. We have the final order, essentially, from the commission there. Let's assume that they do approve the full $25 million. Would your earnings be benefiting as a result of that, at that time at least?

So our earnings will benefit when a decision is made on this one way or another. Either the recovery life is going to be extended and our earnings will benefit from the effective date of that order on, or it will be added to final rates and our earnings will benefit from the date of final rates forward.

Okay. So then as soon as final rates are implemented going forward, you would be kind of booking one lower depreciation expense and benefiting from that, but your customers would be paying a higher embedded depreciation expense in their rates, and therefore the spread between those two is the benefit to the bottom line of the Company.

I don't think so. Right now, our rate request reflects lower depreciation expense, so our customers benefit by this. One of the reasons we're doing this is to lower our depreciation expense to help mitigate some of the rate increases.

Okay. All right. So then I kind of had it, I think, correct originally. It would not benefit your EPS because your customers are collecting all of that benefit on a run rate basis going forward.

Our EPS -- we can take this off-line a little bit here, too, but our EPS will be benefited by lower depreciation expense, so net net if you add lower depreciation expense plus our requested rate increase, that's what earnings are going to be benefited by. Maybe we're saying the same thing, but we can also talk more about this off-line, too, if that's not quite clear.

Okay. That would be helpful.

And then, my second question is on taconite demand, right now and your full-year expectation. I think you gave some color on this in terms of what's embedded in your guidance, but I wanted to think about the difference there, if there's a recovery embedded in your guidance versus current state of the world. And then, what's embedded in the rate case? So going forward again from that point on, if customer demand does come back from your existing customers, would there be further benefit after the new rates are effective?

Very good. This is Steve again. Yes, we do expect significant improvement in our industrial sales at Minnesota Power. This year, we had about 6.5 million megawatt hours sold to industrial customers. We expect that to be somewhere in the 7 million to 7.5 million megawatt hours in 2017.

From a taconite perspective, it looks like taconite production in northern Minnesota was around 28 million tons in 2016, and we expect substantial improvement in that in 2017. All of our customers have nominated at full capacity levels here for the first four months of the year.

With respect to the rate case, what we have embedded in our rate case is that 7 million to 7.5 million megawatt hour sales of industrial sales, and a component in our rate case that we are seeking, Chris, is we are calling it a revenue adjustment mechanism and we'll see how it plays out over the course of the rate case. But it is to recognize that Minnesota Power is a unique utility with a high industrial load. And this revenue adjustment mechanism would have an automatic true-up as our ROE would deviate from the allowed ROE by, say, 0.5% either way. So to the extent we get new customers and that improves the outlook at Minnesota Power, there could be refunds to customers, and to the extent it went the other way, there could be a surcharge.

So, we are seeking that in our rate case as we move forward and we'll see how that plays out, but we definitely think that type of adjustment makes sense at Minnesota Power.

Okay. Great. That's very clear. And just then on -- let's maybe assume for a second that you are not approved for that adjustment mechanism coming out of the rate case. If everything else is kind of approved as requested, you would already be charging all customers a rate that assumes all taconite customers are back online and there would be no further upside if any more customers came online after that point?

That's probably true status quo, but, of course, in our rate case we have nothing for PolyMet or Essar.

Paul Ridzon, KeyBanc.

Did you say you have 100 megawatts or 100 million of wind turbine Safe Harbor?

We invested $100 million in Safe Harbor turbine equipment to qualify under the PTC over at ACE, yes.

And would that be used for the MDU expansion?

A portion of those turbines will be used for the MDU expansion, yes. But, as you know, we can sprinkle those Safe Harbor turbines around for various projects, and so that's part of the strategy with respect to that three prongs that I talked about, refurbishment, new projects, or build or transfer.

Do you have a -- how many megawatts is that $100 million? Is that 50, 60 megawatts?

Again, you have to think about it that that's $100 million of PTC qualifying turbines, and so if you sprinkle those turbines into various projects, they would in effect trigger additional development there. So a typical wind farm project -- I don't know, Steve, help me here with Bison 2 or 3. That was about 100 -- 200 megawatts of wind. What was the million dollars that we spent on that, roughly, do you know?

A couple hundred. So Paul, this is Steve. We've done this to both protect ourselves and also have the optionality to leverage it, as Al said, for more, so it could be as little as a $100 million investment in these facilities, of which the MDU project itself could cover up to half of that already, or we could sprinkle it in, as Al said, and leverage it to more megawatts.

And what's driving the increase -- I think you said a 20% effective tax rate in 2017 versus 11% in 2016. What's driving that increase?

It's things such as higher pretax income, some lower permanent differences would be the primary contributors to that.

I believe when you got the MPUC decision on the North Dakota tax credits, there was some discussion of challenging that. Where does that stand?

So on February 9 of this year, Paul, the MPUC decided to reconsider their prior order on these North Dakota investment tax credits and will be requesting further comments.

Of course, Minnesota Power will provide further support of its position. We're glad that the commission is taking a second look at this issue, and as we've stated, we believe it could be a larger industry issue, so they are going to reopen their previous order to take some additional comments and review that decision, so we're glad they're taking a second look at it.

Thank you very much, and Steve, it's been great working with you. Enjoy your retirement.

Thank you, Paul.

Chris Ellinghaus, Williams Capital.

Good morning, guys. We'll start with the big one. Can you give us any color on RFP results?

I can't at this point in time, Paul. As I said in my comments, the two things we've been focusing on is that at Minnesota Power and kind of how that marries up or could marry up with the natural gas project as well, and so we're looking at the combination of wind and renewable enabling natural gas. We believe that's an important component, so more on that in the spring or later this summer as we continue to work with our regulators on that.

We've also been focusing, of course, as we moved into year-end on this Safe Harbor or qualifying investment over at ACE so that we could position ACE for success along that tri-legged strategy that I talked about there. So a part of our focus in the last half of last year was to further position ACE. So we feel good about our renewable opportunities both at the regulated side, Minnesota Power, and also with respect to the non-reg, or ACE, and we're trying to work in both strategies at the same time here.

Okay. The way you are thinking about it today, is the gas required in order to enable addition of additional wind?

Very much so. As the United States continues to take out more and more coal and continues to add more and more wind, as you can imagine the amount of variability in RTOs like MISO and even within our service territory, so we see natural gas as that renewable enabler that would marry up with wind and we're continuing to have conversation with our regulators about that right now.

So if there's a positive result, you would sort of have theoretically two projects ongoing simultaneously?

We would certainly have an interest in building natural gas and adding natural gas to the fleet to continue to diversify the portfolio to complement wind, and we'd also continue to look at wind, whether that would be direct investment or whether that would be PPAs or how we'd come at it was the basis of the RFPs, and we'll have to respond back to our regulators about all of that. The calling on that RFP had elements of not only wind, but it had aspects of solar, it had aspects of demand response, things like that. So we'll respond to our regulators as they've asked.

On the ACE side, of course, it's primarily focused on wind at the moment and we see lots of opportunities in the deal flow pipeline for ACE, including the one we just did with MDU. That's a representative example of kind of the opportunities that we think we have before us with ACE.

Okay. Steve, can you just address your reserving strategy versus the interim rates?

Sure. As facts or developments in the case become known, those would be triggering events for reserves, so to the extent that our final rate decisions are going to be less than the interim rates that were put into effect in January, we would begin to reserve. But that's really simply stated our strategy.

Okay. So there could be various periods during the year?

Yes.

Al, can you give us an update on PolyMet and your sort of thinking on timing?

We feel very good about where PolyMet is at at the moment with respect to that US Forest Service land transfer. That was a big deal. That is as big a deal as achieving its environmental impact statement.

So the land transfer conversation is now underway between PolyMet and the Forest Service to actually exchange the land where the mining will occur, so that's a very positive, positive step forward. All of their permits, of course, are submitted to the state of Minnesota right now and they are being processed, and those permits are on a tighter timeline, if you will, or a prescriptive timeline or more prescriptive timeline than something like an EIS, so we feel good about that.

But just looking at the company's report out on it, they continue to believe that it's possible to have permits in hand by the end of this coming year or early next year. They've got financing to do, of course, that's parallel to all that, and at that point, then, they would move into a construction period of anywhere from 15 to 25 months, something like that, to get that done. So you can kind of add on that to kind of year-end here and kind of estimate when production might occur up there.

But I feel very good about where PolyMet sits at the moment, and we have possibilities there with a contract that already exists to supply 45 to 50 megawatts of load to them, and brand new mineral mining in Minnesota, which would be diversified mineral mining and be on a different cycle than taconite.

Okay. Great. Thanks for the details.

Brian Russo, Ladenburg Thalmann.

Just referencing the updated CapEx table in the 10-K, it looks like there's a noticeable increase in 2018 to 2019. Could you just elaborate on that? It looks like you've got an other category, which I assume could be the MDU investment, but it looks like base and other also have increased.

So it reflects our current projections of real capital expenditures. As we've talked about extensively, we have in our five-year capital table items that have a high likelihood of happening. First of all, at our regulated operations, it includes our current thought on our timeline for the construction of the Great Northern Transmission Line, which will be done by 2020 in the regulated portion.

In terms of base and other, it's just our current estimates of required generation, transmission, and distribution maintenance-type capital. For the other, in 2018 the increase there is primarily ACE's development project that it has announced here not too long ago with MDU. Construction of that will be in 2018.

Those are some of the highlights. Brian, let's see if I answered your question.

Yes, you did. That was helpful. Now on the ACE MDU project, do you expect to complete that in 2018 and book -- and then start booking either PPA revenues and/or some sort of return on your investment, if it's a build-to-own transfer?

Yes.

In 2018?

Yes.

Okay, great. And then, can you remind us how many megawatts is the RFP? Is it up to 500?

For Minnesota Power?

Yes.

Brian, this is Bob Adams. It's 200 to 300 megawatts.

In total? The renewables and the gas?

No, just the renewables portion, Brian.

Okay. So if you were to also pursue gas, would it be a comparable amount?

We're looking at various sizes of natural gas -- complementary natural gas at this point in time. That's part of the conversation we're having inside. Of course, we have our load growth to think about when we make that decision. We've got issues around our future of coal in Minnesota and also just how it would pair up and complement our renewables.

So I wouldn't say it's a direct one to one, so we're looking at a complement of the two and we'll clarify that as we move forward.

And when is the 200 to 300 megawatts of renewables expected to be operational? Or when does Minnesota Power need it?

We don't know when it will be operational. Again, our regulators have asked us to take a look at that.

We have taken out coal plants, as you know, in northeastern Minnesota. Taconite Harbor has come out, Laskin was converted to gas, and Boswell 1 and 2 will be coming out in 2018, so part of it is coal plant timing, part of it is load growth, part of it is working with our regulators again on a complementary package of renewable enabling natural gas and wind. And so, it isn't sort of an automatic that 300 megawatts will be coming into service on a specific date, but that's kind of our defined need over the next several years as we look about coal plant retirement, load growth, market conditions, all the things that are going on at Minnesota Power. So more to say as we get into the summer and fall.

Okay. And then just a clarification on the interim rate revenue that was approved by the commission, did they approved the interim revenue increase, as well as the 10.25% ROE, or just the revenue?

Just the revenue. So it's just the interim rate increase that went into effect in January. All the details and components of the case will be heard during the next year or so.

Okay. So that 10.25% embedded in the interim rate is subject to change, I guess?

Correct.

Okay. And then, can you just talk about your financing needs for the updated CapEx?

Yes, we really have -- with this capital projection over the next five years, we really don't have a lot of financing needs. We don't expect to really raise any material amount of equity, and we'll issue a small amount of debt and equity to keep our capital structure in balance. So between internal cash generation, our needs for this five-year capital table are not that great.

Now, that statement does not include any further acquisitions at U.S. Water or ALLETE Clean Energy.

I think you may have in the past mentioned roughly $30 million a year of equity under DRIP and ESOP plans. Is that still the case?

Yes, that's a reasonable number.

Okay, great. And then, just bigger picture, could you just talk about ACE's positioning to benefit from Trump's infrastructure plan and maybe even U.S. Water's positioning as well?

As I said, I think if Trump's infrastructure plan goes into place, I think we're well positioned at all of our businesses, to be honest with you. I feel very good about his comments about use of domestic steel, which implies use of domestic iron ore.

So if you think about bridge decks, think about sort of roadways, freeways, other sorts of that kind of public infrastructure, rail lines and the rest, that all bodes well for Minnesota Power.

From an ACE perspective, we continue to see real demand at state levels for renewable projects and the companies themselves are going to continue, I think, to execute their strategies around all of that.

So, I think that clean energy continues to be in vogue, continues to be very, very positively received by most customers of regulated utilities or others, and so we see lots of possibilities within various states across the United States for ACE to deploy and execute its PTC strategy, so to speak, and to potentially do additional acquisitions of existing farms with long-term PPAs.

U.S. Water, I think it bodes well for them. Oil and gas is starting to recover, of course, a bit. The Saudis, of course, have cut back oil production and we are seeing a rise in oil prices and increased drilling is going on down in Texas and in North Dakota, so that's always a supply and demand thing. So I see opportunities in oil and gas, and of course as the economy picks up in general, U.S. Water is going to see an uptick, I think, from just economic expansion in the US, whether that's governmental sector, commercial sector, or industrial sector.

If you take off the overhang on the economy that has maybe existed here in the last five to eight years due to regulatory oversight and regimes, just like that, uncertainty, I think that all bodes well for a resurgent U.S. economy, and I think all of our businesses are positioned well for growth and to take advantage of that.

Okay. Great. Thank you very much.

Shahriar Pourreza, Guggenheim Partners.

Just real quick, most of my questions were answered, just on tax. Thanks for the additional visibility, but is there any impact on the border adjustment tax on the Great Northern Transmission Line, if any?

Good question. I think yet to be played out how that materializes, so it would be speculation at this point. Hopefully not.

Okay, great. And then just lastly, you guys obviously seem a little bit more confident on the outlook for 2017 and sort of taconite production, so I'm just trying to confirm when you issued your guidance in December, that was sort of consistent with this outlook or is there some room for upside here, just given what seems to be a bit of a subtle change in your language?

That was consistent with -- our guidance is consistent with this outlook.

Great. Thanks, guys. Congrats.

Okay. Thank you.

Ladies and gentlemen, this does conclude today's question-and-answer portion. I would now like to turn the call back over to Alan for closing remarks.

Thank you. Steve and Bob and I would like to thank you again for being with us this morning and we'd also like to thank you for your continued interest and investment in ALLETE. We are going to be out with many of you at our analyst breakfast in New York here upcoming on March 2, and we wish you all a good day and thanks again for your interest in ALLETE. Bye-bye.

Ladies and gentlemen, that does conclude today's presentation. You may now disconnect and have a wonderful day.