10-K: ALLETE Reports Lower 2024 Earnings Amid Merger Progress

ALLETE's 2024 earnings decreased to $3.10 per share, influenced by merger-related expenses and lower ALLETE Clean Energy earnings, despite progress in regulated operations and strategic initiatives.

Summary

• ALLETE reported 2024 earnings of $3.10 per share, a decrease from $4.30 per share in 2023.
• Net income for 2024 was $179.3 million, with operating revenue at $1.5 billion, compared to $247.1 million net income and $1.9 billion operating revenue in 2023.
• The 2024 results include a $22.6 million after-tax impact (approximately 39 cents per share) from transaction expenses related to the merger agreement with Canada Pension Plan Investment Board and Global Infrastructure Partners.
• Regulated Operations contributed $160.9 million to net income in 2024, up from $147.2 million in 2023, driven by interim rate implementation at Minnesota Power.
• ALLETE Clean Energy's net income decreased to $17.8 million in 2024 from $71.7 million in 2023, impacted by a network outage at the Caddo wind energy facility and a transformer outage at Diamond Spring.
• Corporate and Other businesses reported net income of $0.6 million in 2024, down from $28.2 million in 2023, due to merger transaction expenses and lower earnings from Minnesota solar projects and ALLETE Properties.
• Minnesota Power's 2024 retail rate increase request was settled with an overall rate increase of $33.97 million, net of rider revenue and amounts transferring to the fuel adjustment clause, a return on equity of 9.78 percent, and an equity ratio of 53.00 percent.
• SWL&P's 2024 general rate case was approved with an annual increase of approximately $5.5 million, reflecting a return on equity of 9.80 percent and a 55.00 percent equity ratio, effective January 1, 2025.

Sentiment

Score: 6

Explanation: The document presents a mixed sentiment. While it highlights progress in strategic initiatives and regulatory approvals, it also acknowledges lower earnings and merger-related expenses. The overall tone is cautiously optimistic.

Positives

• Minnesota Power's net income increased due to interim rate implementation.
• SWL&P implemented new rates on January 1, 2025.
• New Energy Equity team continues to execute on its strategy and robust pipeline of projects.
• Earnings from the American Transmission Company and New Energy Equity slightly exceeded expectations.

Negatives

• ALLETE's 2024 earnings were lower than 2023.
• Merger transaction expenses reduced 2024 earnings by approximately 39 cents per share.
• ALLETE Clean Energy's net income decreased due to network and transformer outages.
• Corporate and Other earnings were lower due to merger expenses and reduced earnings from solar projects and ALLETE Properties.

Risks

• The merger with Canada Pension Plan Investment Board and Global Infrastructure Partners is subject to regulatory approvals and could face delays.
• Economic downturns or reduced demand from industrial customers could negatively impact ALLETE's regulated operations.
• Environmental regulations and climate change initiatives could increase capital expenditures and operating costs.
• Operational risks at electric generation facilities could lead to unexpected failures and increased costs.
• Volatility in electricity and fuel prices could adversely affect ALLETE's financial position.
• Cybersecurity attacks and terrorist activities could disrupt operations and compromise sensitive data.

Future Outlook

ALLETE expects net income from Regulated Operations to be approximately 75 percent of total consolidated net income in 2025 and has a long-term objective of achieving consolidated earnings per share growth within a range of 5 percent to 7 percent.

Management Comments

• I am pleased and extremely proud of our entire ALLETE team this past year, working diligently on many fronts to execute our Sustainability in Action strategy in tandem with initiatives as part of the merger agreement with Canada Pension Plan Investment Board and Global Infrastructure Partners, said ALLETE Chair, President, and Chief Executive Officer Bethany Owen.
• The merger continues to progress as planned, and we remain on track for a 2025 closing, subject to all necessary approvals.
• With the Federal Energy Regulatory Commission approval in December, we met another important milestone that brings us closer to realizing the benefits of this transaction for our customers, our communities, our co-workers, and our shareholders, and we held the first of multiple public hearings in January.
• At Minnesota Power and Superior Water, Light & Power, our teams continue to execute on our commitments to provide safe, resilient, reliable, and affordable service to our customers.
• We were pleased that the Minnesota Public Utilities Commission approved Minnesota Powers 2023 rate case settlement agreement in the fourth quarter, with final rates expected to be implemented in the first quarter of 2025.
• Overall results for 2024 were slightly above expectations excluding transaction expenses and interim rate refund reserves resulting from the Minnesota Power rate case settlement, said ALLETE Senior Vice President and Chief Financial Officer Steve Morris.
• While earnings were lower at ALLETE Clean Energy, primarily due to a longer than expected forced outage near its Caddo wind energy, earnings from the American Transmission Company and New Energy Equity slightly exceeded expectations.

Industry Context

The document reflects the ongoing trend in the energy industry towards renewable energy sources and the challenges of balancing this transition with maintaining reliable and affordable service. The merger indicates a strategic move to attract investment for infrastructure development and renewable energy projects.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• However, the company's focus on renewable energy aligns with broader industry trends.
• Comparable companies in the regulated utility sector include Xcel Energy and Otter Tail Power Company.
• ALLETE's investment in ATC is similar to other utilities' investments in transmission infrastructure.
• The company's efforts to comply with environmental regulations are consistent with industry-wide requirements.

Legal Proceedings

• Minnesota Power received a Notice of Violation from the MPCA related to the ash wastewater spill at Boswell.
• Minnesota Power appealed with the Minnesota Court of Appeals (Court) specific aspects of the MPUCs February 2023 and May 2023 rate case orders for the ratemaking treatment of Taconite Harbor and Minnesota Powers prepaid pension asset.
• A complaint has been filed in the U.S. District Court for the Southern District of New York alleging violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, disclosure deficiency in the Preliminary Proxy, and seeking to enjoin the transaction until certain disclosures are corrected.
• Two additional complaints were filed on August 6, 2024, and August 7, 2024, in New York State Supreme Court, alleging negligent misrepresentation and negligence related to alleged deficiencies in the Preliminary Proxy.

Related Party Transactions

• Minnesota Power has a natural gas capacity dedication and other affiliated interest agreements for NTEC, an approximately 600 MW proposed combined-cycle natural gas-fired generating facility to be built in Superior, Wisconsin, which will be jointly owned by Dairyland Power Cooperative, Basin and South Shore Energy, ALLETEs non-rate regulated, Wisconsin subsidiary.
• Minnesota Power is expected to purchase approximately 20 percent of the facility's output starting upon the completion of the facility pursuant to the capacity dedication agreement.

Stakeholder Impact

• Shareholders will be impacted by the lower earnings per share and the potential benefits of the merger.
• Customers may see changes in rates due to the rate case settlements and cost recovery riders.
• Employees may be affected by the merger and any resulting organizational changes.
• Communities will be impacted by the company's investments in renewable energy and infrastructure projects.

Next Steps

• Implement final rates based on the 2024 MPUC retail rate order in the first quarter of 2025.
• File the next Integrated Resource Plan in March 2025.
• Continue to work with state and federal agencies to evaluate and mitigate the impacts from the ash wastewater spill at Boswell.
• Continue to pursue the North Plains Connector project.
• Continue construction on the Minnesota end of the HVDC transmission system project in early 2025.
• Continue to work with USS Corporation to meet USS Corporations evolving energy needs.

Key Dates

Keywords

ALLETE, earnings, merger, Minnesota Power, ALLETE Clean Energy, regulated operations, rate case, renewable energy, financial results, ATC, SWL&P, New Energy Equity