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Edited Transcript of ALE earnings conference call or presentation 13-Feb-20 3:00pm GMT

Q4 2019 ALLETE Inc Earnings Call

Duluth Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of ALLETE Inc earnings conference call or presentation Thursday, February 13, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan R. Hodnik

ALLETE, Inc. - Executive Chairman

* Bethany M. Owen

ALLETE, Inc. - President & Chief Executive Officer

* Robert J. Adams

ALLETE, Inc. - Senior VP & CFO

* Steven Wayne Morris

ALLETE, Inc. - VP, Controller & CAO

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Conference Call Participants

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* Brian J. Russo

Sidoti & Company, LLC - Research Analyst

* Christopher Ronald Ellinghaus

Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst

* James R. Schaefer

Guggenheim Securities, LLC - Senior MD

* Kevin Fallon

* Vedula Murti

Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager

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Presentation

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Operator [1]

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Good day, and welcome to the ALLETE Full Year 2019 Financial Results Call. Today's call is being recorded. Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to discuss in 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 reflect management's views only as the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a results of new information, future events or otherwise.

For opening remarks and introductions, I would now like to turn the conference over to ALLETE [Executive Chairman] (corrected by company after the call), Alan R. Hodnik. Please go ahead.

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Alan R. Hodnik, ALLETE, Inc. - Executive Chairman [2]

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Good morning, everyone, and thanks for joining us today. With me are ALLETE's President and Chief Executive Officer, Bethany Owen; Senior Vice President and Chief Financial Officer, Bob Adams; and Vice President, Controller and Chief Accounting Officer, Steve Morris.

Before we get into the details of financial results and our outlook for 2020 this morning, I want to again congratulate, Bethany Owen, on her election by the ALLETE Board of Directors to Chief Executive Officer. Bethany's strong values-based leadership style, her proven ability to deliver results while effectively positioning against winds of change and her laser-focus on talent development will assure ALLETE's forward thrust continues as a new decade dawns.

Look for great things from Bethany and her ALLETE teams in the years ahead. I will remain ALLETE's Executive Chairman until the spring of 2021. And and will partner closely with the ALLETE Board and Bethany to ensure a continued smooth transition. It is my hope to see many of you out in New York at our upcoming investor breakfast at which time, I will be more personally able to thank you and say farewell.

This morning, ALLETE reported full year 2019 financial results of $3.59 per share, a net income of $185.6 million. These results are within our previously issued 2019 earnings guidance and reflect a year of many accomplishments, while solidly positioning ALLETE for a further clean energy growth.

We often highlight ALLETE's differentiated strategy and sustainable positioning, these, of course, all driven by our dedicated, innovative and hardworking employees, whom I've been so privileged to lead over my long career. Given the continued execution by Bethany and her team and in full recognition of ALLETE's clean energy positioning, the Board of Directors has once again demonstrated its confidence by raising the ALLETE common stock dividend to an annual rate of $2.47 per share, reflecting an increase of 5%.

For further details on ALLETE's outlook and an update on its growth initiatives, I will now turn the call over to ALLETE's President and Chief Executive Officer, Bethany Owen. Bethany?

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Bethany M. Owen, ALLETE, Inc. - President & Chief Executive Officer [3]

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Thank you, AL. I'd like to take a moment to congratulate ALLETE's Executive Chairman, AL Hodnik on his recently announced retirement from the company planned for May of 2021. At the time of his retirement, AL will have dedicated 40 years of service to the company. AL has been a tireless leader of ALLETE's growth strategy and our shared purpose of answering the call to transform the nation's energy landscape. Under AL's right results, right way leadership, ALLETE has developed a new generation of exceptionally talented employees and has experienced tremendous growth and diversification, with the company in a position of strength for a clean energy future.

I'm proud of the accomplishments of our entire ALLETE team in 2019, a year of strong execution with record levels of construction and significant progress on key initiatives across the company.

Minnesota Power's EnergyForward strategy is one of the most significant and transformative initiatives in the long history of our organization. The company continues to balance the interest of its many stakeholders, while positioning well with respect to emerging environmental and regulatory policy, renewable energy expansion and modernization of the energy grid.

The company plans to make strategic investments in its transmission and distribution system to ensure clean, safe, reliable and affordable service to all of our customers.

To that end, we're pleased to report that just a few weeks ago, Minnesota Power completed construction of the Great Northern Transmission Line, ahead of schedule and under budget. This milestone capped a decade of hard work and ingenuity.

The 224-mile transmission line was built to the Canadian border and now awaits Manitoba Hydro's completion of its Manitoba to Minnesota transmission line expected later this year.

The Great Northern Transmission Line is a one of a kind North American renewable energy project. It will facilitate an innovative form of storage, much like a massive battery, allowing Minnesota Power to enhance reliability by balancing its abundant but intermittent wind resources in North Dakota, with 250 megawatts of carbon-free renewable baseload hydro energy from Manitoba Hydro.

Another transformative EnergyForward initiative is the Nemadji Trail Energy Center or NTEC, planned to be built in partnership with Dairyland Power Cooperative, this 525- to 625-megawatt, state-of-the-art combined cycle natural gas plant will enable Minnesota Power to add even more renewable generation to its significant existing renewable energy capabilities.

We are pleased that the Public Service Commission of Wisconsin recently approved the project. This approval recognizes the important role that this plant plays in reliability as Minnesota Power continues its transition to a cleaner energy future.

As part of Wisconsin's robust review and regulatory process, the project must next obtain air and water permits. Minnesota Power also received Minnesota Public Utilities Commission approval for NTEC. However, more recently, the Minnesota Court of Appeals determined that the Minnesota commission should have applied Minnesota environmental review laws to this Wisconsin based project.

We believe the Court of Appeals erred, and we filed a petition with the Minnesota Supreme Court requesting review of that decision. Meanwhile, we're considering options with our NTEC partner, Dairyland, and we're confident we will successfully navigate this recent challenge.

Minnesota Power is also adding 250 megawatts of carbon-free wind energy through a power purchase agreement beginning later in 2020. A joint venture between an ALLETE subsidiary and Tenaska will own and operate the Nobles 2 wind farm in Southwestern Minnesota with ALLETE's share of the project investment estimated to be $170 million.

Upon completion, this state-of-the-art wind facility will deliver low-cost carbon-free energy to Minnesota Power's customers for decades to come.

Briefly on the customer front, Minnesota Power's taconite customers finished 2019 at near full production, and we anticipate that strong performance to continue as we begin 2020. These high levels of production, along with significant investments by these customers and their operations, support our view that there is a bright future for Minnesota Power's customers here in Northeastern Minnesota.

Our Wisconsin based utility company, Superior Water, Light and Power is also planning significant investments in projects and systems to benefit its customers, including a community solar garden project, which is currently being considered by the Public Service Commission of Wisconsin.

Superior Water, Light and Power anticipates filing a general rate case in the second quarter of this year.

The second largest company in the ALLETE family, ALLETE Clean Energy completed a year of significant new project construction and fleet optimization. The company also began work on large wind generation projects that are scheduled to be completed later this year.

ALLETE Clean Energy recorded a milestone of its own a few weeks ago, setting an all-time record for energy production, all renewable and carbon-free. Production reached 503 megawatts, the first time ALLETE Clean Energy registered over 500 megawatts, driven by strong wind across the fleet, excellent turbine availability at all sites and full production at the new Glen Ullin Energy Center in North Dakota.

We're also pleased to report that the 80-megawatt South Peak wind site in Montana began delivering test energy to its customers yesterday and is expected to be fully operational in the coming weeks.

In addition, construction began a few weeks ago on ALLETE Clean Energy's 300-megawatt Diamond Spring project in Oklahoma. This project is fully contracted to 3 Fortune 500 customers and is expected to be online at the end of 2020, at which point, ALLETE Clean Energy's portfolio will expand to more than 1,000 megawatts of installed capacity.

ALLETE Clean Energy's safe harbor turbines continue to be a differentiator. In addition, the company's current operating and development portfolio includes strategic land and access rights strong landowner relationships and hard to obtain interconnection rights as well as permits already in hand.

With all of this and the fact that we expect higher renewable standards across the country in the coming years, ALLETE Clean Energy is well positioned to materially expand its operations and earnings into the future.

I'll provide a few additional thoughts in our closing remarks, but first, I'll ask Steve to go through the 2019 financial results and 2020 earnings guidance. Steve?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [4]

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Thanks, Bethany, 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 2020 earnings guidance. I encourage you to refer to them for more details.

For the year ended 2019, ALLETE reported earnings of $3.59 per share on net income of $185.6 million. Earnings for 2018 were $3.38 per share on net income of $174.1 million.

Before I discuss segment details, I will point out several significant year-over-year timing variances and other items for comparison considerations. We have also included further details of these items in our first 4 slides for your reference at our website at allete.com in the Investors section.

For the year ended 2019, earnings included a gain on the sale of U.S. Water Services, a $0.26 per share, of which, $0.04 per share was recognized in the fourth quarter of 2019, for the favorable settlement of the U.S. Water Services patent infringement case, offset by $0.02 per share for U.S. Water Services first quarter operating results prior to the sale.

For the year ended 2018, earnings included $0.30 per share in total for ALLETE Clean Energy's gain on the sale of a wind energy facility, contributions from U.S. Water Services operating results for the year, and a change in fair value of the contingent consideration liability, with most of these impacts recognized in the fourth quarter of 2018.

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 of $154.4 million, compared to $131 million in 2018.

Earnings reflected higher net income at Minnesota Power, primarily due to lower operating and maintenance and property tax expense increased cost recovery rider revenue, higher transmission margins and fuel adjustment clause recoveries.

These increases were partially offset by lower kilowatt hour sales and associated margins from retail and municipal customers.

Net income at Superior Water, Light and Power increased over last year due to higher rates implemented in early 2019, and ALLETE's earnings in the American transmission company were higher than 2018, primarily due to additional equity investments and period-over-period changes in an estimated refund liability related to MISO return on equity complaints.

ALLETE Clean Energy recorded net income in 2019 of $12.4 million compared to $33.7 million in 2018. Earnings in 2018 included the sale of a wind energy facility of $10.2 million after-tax and $3 million of production tax credits that resulted from the retrospective qualification of additional wind turbines in 2016 and 2017.

Net income in 2019 included lower revenue, resulting from lower non-cash amortization related to the expiration of power sales agreements and higher depreciation expense.

These decreases were partially offset by $5.3 million of additional production tax credits generated in 2019 compared to production tax credits generated in 2018, as ALLETE Clean Energy continues to execute on its refurbishment strategy.

Our Corporate and Other businesses, which includes BNI Energy and ALLETE properties recorded net income of $19.9 million in 2019 compared to net income of $6.2 million in 2018. Net income in 2019 included the gain on sale of U.S. Water Services, a $13.2 million after-tax and higher earnings on cash and short-term investments.

I'll now turn to our 2020 guidance; I would ask that you refer to the slide entitled 2020 guidance highlights for further reference and our full 2020 guidance 8-K filed with the SEC earlier this morning.

Today, we initiated 2020 earnings guidance of $3.40 to $3.70 per share on net income of $180 million to $190 million. This guidance range is comprised of our Regulated Operations segment within a range of $2.75 to $2.95 per share and ALLETE Clean Energy and Corporate and Other within a range of $0.65 to $0.75 per share.

Our guidance includes interim rate revenue for Minnesota Power as part of the ongoing rate case filed in late 2019 of approximately $36 million beginning January 1, 2020, which is subject to refund.

On November 1, 2019, Minnesota Power filed a retail rate increase request seeking an increase of $66 million in total additional annual revenue.

We anticipate an Administrative Law Judge report in September, followed by a written order from the Commission in December of this year. We anticipate final rates would be implemented sometime in mid-2021.

Our 2020 guidance assumes that we will achieve reasonable outcomes in regulatory proceedings. We expect increased cost recovery rider revenue from the Great Northern Transmission Line with $26 million of additional capital investments in 2020 as we complete all related projects and commissioning.

Industrial sales for Minnesota Power are expected to be at approximately 7 million to 7.5 million megawatt hours, reflecting taconite customer production levels of approximately 39 million tons.

Minnesota Power will realize lower revenues due to an expiring power marketing agreement and an expired municipal customer contract. In addition, we expect increased operating and maintenance, property taxes and depreciation expenses of approximately 5% as compared to 2019.

A few highlights from our 2020 guidance regarding ALLETE Clean Energy and our Corporate and Other businesses. ALLETE Clean Energy expects to generate approximately 2.3 million megawatt hours in 2020 versus 1.1 million megawatt hours in 2019, with the expectation of normal wind resources in 2020. 2019 generation was 20% below our expectations.

Our 2020 guidance includes the Glen Ullin wind facility in service for the full year and the South Peak Wind facility beginning in the first quarter of 2020. We anticipate Diamond Spring wind project to be in service in late 2020 with minimal earnings expected this year.

ALLETE Clean Energy expects additional business development and operating expenses due to investment in growth initiatives. We expect production tax credits related to ALLETE Clean Energy's refurbishment projects to be approximately $20 million in 2020.

We anticipate similar results at BNI Energy and ALLETE Properties as compared to 2019.

As mentioned earlier, the Nobles 2 wind facility is expected to begin commercial operations in late 2020, with minimal earnings expected this year.

I'll now hand it off to Bob for additional comments on our 2019 financial performance and our 2020 outlook. Bob?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [5]

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Thanks, Steve, and good morning, everyone. Let me begin by saying how pleased I am with the progress on our strategic initiatives in 2019, further positioning ALLETE for significant growth in 2020 and well into the future.

ALLETE's ongoing execution translates to cleaner energy and sustainability, while supporting earnings growth, robust dividends and expanding cash flows for our valued investors.

Before I share more details of our 2020 earnings guidance, I want to highlight a few points and accomplishments from 2019.

Earlier in 2019, we sold our industrial water services company for a significant premium and soon after redeployed the $270 million in cash proceeds to fund clean energy growth initiatives. The sale proceeds effectively mitigated the need for new equity financing in support of ALLETE Clean Energy's Diamond Spring project and clearly demonstrates the discipline we have around capital allocation more broadly.

We completed significant construction on approximately $0.5 billion of clean energy supporting investments. This included brand-new wind farms, refurbishment of existing wind generation projects, and renewable energy enabling transmission investments.

In December 2019, ALLETE Clean Energy became -- began commercial operations of itS 106-megawatt Glen Ullin Energy Center and successfully closed on tax equity financing. Indeed, we are pleased to report that the asset is performing quite well, selling energy to Xcel under a 20-year power sales agreement.

Construction of the 80-megawatt South Peak Wind project is expected to be completed in the first quarter of this year, and tax equity financing will close shortly after operations begin. We expect a full year of earnings from Glen Ullin and earnings for 3 quarters of the year from South Peak in 2020. The construction of ALLETE Clean Energy's Diamond Spring project started in the fourth quarter of 2019 and is advancing as planned.

At this time, the substation is complete and turbine deliveries are expected this month. This 303-megawatt wind generation project with a total cost of approximately $430 million is expected to be operational in late 2020.

Corporate customers and utilities alike have accelerated their sustainability commitments to achieving carbon-free energy between now and 2050. With its unique investment in PTC qualified wind turbines, ALLETE Clean Energy remains poised to secure another 500 to 600 megawatts in new PTC projects. Though transmission limitations are a challenge to overcome in the MISO region, a challenge I reported on in last quarter, we remain confident in our ability to secure additional projects and are particularly focused on projects which would contribute to earnings in the post 2021 time period.

Taken as a whole, we are highly confident ALLETE Clean Energy's wind generation portfolio will reach 1,500 megawatts by the end of 2022, based on PTC qualified projects alone.

As I've expressed previously, the company is also pursuing acquisitions of existing assets and high-quality wind regimes across the country, which would further augment this growth.

ALLETE Clean Energy strategy is contemplative and highly customer-centric in nature, and the company is currently evaluating several additional clean energy product and service offerings, which will further differentiate itself in the market. We will be providing more color on their evolving strategy as the year progresses.

Importantly, the company remains highly focused on operational effectiveness and overall efficiency as we scale the business. Indeed, overall availability of the fleet has continued to improve as we implement new technology, systems and complete our refurbishment projects.

Overall, ALLETE has approximately $2 billion of projects scheduled in our CapEx planned for the next 5 years, of which clean energy projects represent the vast majority. As our history demonstrates, we conservatively and thoughtfully only include capital projects that have a very high likelihood of coming to fruition as part of our CapEx table.

We continue to expect only minimal equity issuances, which would be required to fund the $2 billion in projected investments. In addition to the scheduled projects, we fully expect additional project announcements from ALLETE Clean Energy, along with other potential renewable supporting projects at our regulated segment that would expand and extend our CapEx levels over the next 5 to 10 years, as the region transitions further to a clean energy future, and we advance efforts to harden the grid and enhance overall reliability.

We were pleased in our ability to increase our annual dividend to $2.47 per share from $2.35 per share, just north of a 5% increase over 2019, again, delivering on our objective to align future dividend increases with our 5% to 7% average annual earnings growth objectives, while maintaining healthy dividend payout ratios.

ALLETE is in full execution mode in 2020 with new earnings and cash flow streams and with additional growth drivers.

We are excited about projects already underway and emerging new clean energy opportunities yet to be announced. Our differentiated growth strategy is well supported by ALLETE's solid fundamentals and a longer runway of credit headroom, which will enable further non-regulated growth.

As Steve mentioned, our 2020 guidance range is $3.40 to $3.70 per share. The midpoint of our 2020 earnings guidance implies an increase of 6% over 2019 results, when normalized for the U.S. Water Services sale gain in 2019, and is within our 5% to 7% annual average long-term earnings objectives.

As we look forward to 2021, we expect growth to accelerate even further, as ALLETE Clean Energy's largest wind farm, Diamond Spring and the Nobles 2 wind project are expected to be operational near the end of this year, generating a full year of financial contributions in 2021.

At ALLETE Clean Energy, we anticipate minimum average annual earnings growth of approximately 30% to 40% over the next 2 years.

In closing, we remain very bullish about ALLETE's strategic positioning and overall growth prospects and are particularly proud of how this growth will continue to advance our sustainability objectives across our company. Bethany?

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Bethany M. Owen, ALLETE, Inc. - President & Chief Executive Officer [6]

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Thank you, Steve and Bob, for the financial update and guidance highlights. ALLETE has thrived through many decades of change, and I'm confident in our talented team of employees and in the opportunities that lie ahead. We look forward to another year of strong execution on our strategic initiatives, including projects already underway as well as new projects yet to be announced. Society's demand for a clean energy future is increasing and ALLETE's family of businesses is well positioned to deliver excellence to all of our customers.

In addition, we believe ALLETE's diversified, multi-year growth platform, along with our proven ability to execute, offer an attractive and differentiated value proposition to investors.

I couldn't be more proud of the ALLETE team or more excited about the opportunities ahead for our company.

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.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Shar Pourreza from Guggenheim Partners.

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James R. Schaefer, Guggenheim Securities, LLC - Senior MD [2]

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It's actually James for Shar. Congrats on the quarter and congrats to Bethany now in the transition.

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Alan R. Hodnik, ALLETE, Inc. - Executive Chairman [3]

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Thank you.

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Bethany M. Owen, ALLETE, Inc. - President & Chief Executive Officer [4]

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Thank you.

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James R. Schaefer, Guggenheim Securities, LLC - Senior MD [5]

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So my first question is actually in regards to the ongoing Integrated Distribution Plan process at Minnesota Power. Specifically, how should we think about the potential incremental CapEx opportunities there from the IDP versus what you have in your base 5-year plan already? I realize you added a little bit to it with 3Q. But could there be more there? And what would the timing for that be?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [6]

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Yes, James, this is Bob Adams. So we have not incorporated any of the approximately $150 million that's reflected in that planned filing. So that's -- and it's associated with hardening and grid reliability, et cetera. So -- and we're also working on sort of the timing of that $150 million over that 10-year period of time. It's scoped out over 10 years. So still have more to come on that front.

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James R. Schaefer, Guggenheim Securities, LLC - Senior MD [7]

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Got you. Perfect. And then on the state energy policy side. I realize the Minnesota legislative session just started on Tuesday. But it sounded like Republicans have already been kind of discussing some legislation. Do you have any expectations at this time for something like an RPS update past this spring? I know there was a lot of discussion last year.

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Alan R. Hodnik, ALLETE, Inc. - Executive Chairman [8]

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Yes. This is AL. I -- I've been working down there in St. Paul, in the last couple of weeks and spending time with the various leaders of energy policy transformation, both in the Republican and Democratic side. Considerable conversation early on about doing something, Governor Walz, of course, wants to certainly advance energy policy in a further way. A lot of discussion about electric vehicles in the transportation sector, along with sort of the energy sector.

Recall, the energy sector has been the focus over the last 5 to 10 years. So of course, in the advent of a session, there's lots of conversation about what should be done. How it all plays out in May -- more to come. The capital bonding bill is probably the top focus and then negotiations around that often lead to what might be able to get done with an election year coming in the fall on energy and other sorts of critical issues that are facing the state. So yes, a lot of conversation, but very early right now.

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Operator [9]

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Our next question comes from Brian Russo from Sidoti.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [10]

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Just the regulated operations guidance and the midpoint, and that assumes the $36 million interim rate and absence of recovery for the expiring wholesale contract. Is that -- is the midpoint net of any optimization opportunities there, meaning sell it elsewhere in the power market or in the short-term contracts, et cetera?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [11]

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Yes. Brian, Steve Morris. Yes, it's -- that's all net in there. So in our interim rates, we do include significantly lower power marketing sales. So that contract is out of there, except for the 4 months that we are getting in 2020. So we expect, when the rate case we filed, we expect about $10 million of power marketing margins on a go-forward basis. We expect about $20 million in 2020.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [12]

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Okay, got it. And why final rates would be implemented in mid-2021 not early 2021?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [13]

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Yes. So we expect to get an order in December, and then there is various reconsideration requests that could come forward. And then various -- after that, various compliance filings that need to happen based on just rates and the like. And so that just takes some time.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [14]

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Okay. That's helpful. And then just on the new CapEx disclosures. So it looks like there's some movement in the regulated operations. I think it looks like 2020 is down about $30 million, while total CapEx is up in 2022, seems to be up at the reg operations, but down at the other operational Capex. Can you just add some more color into the updated 5-year Capex? And what are the moving parts there?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [15]

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Yes. So I'll take that one here, Brian. So yes, 2020 is down a little bit. You see in the Base & Other, 2021 and later reflects work on the DC line. So that cranks up in 2021, throughout there, it's going to be significantly less in 2020. You see the transmission current cost recovery, that's the completion of the Great Northern Transmission Line. And then you see, obviously, Nemadji Trail Energy Center, the NTEC really starts construction in 2021.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [16]

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Okay. And then you commented earlier on 30%, 40% EPS CAGR at ACE over the next 2 years. What's the base year we should be using 2018 or -- 2019 or 2020?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [17]

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Yes. I would use -- we're still using 2018 and that number we have, and we've helped you all with the slides on that, and if you do the math, you'd add it up, you get [308].

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [18]

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Okay. And then also, could you add some color on your confidence level of having a total of 1,500 megawatts of renewable generation at ACE by 2022? It implies quite a bit of incremental project announcements to come?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [19]

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Yes. So Brian, this is Bob. So obviously, we have the Diamond Spring 300-megawatt projects that's going to be completed this year. Beyond that, that's going to get us to the 1,000 megawatts. And then we have the 500- to 600 megawatts of PTC safe harbor turbines that are driving a lot of that confidence there. But in addition, remember, when we talk about 2 to 3 projects, we are also looking at exact acquisitions of existing wind farms. And as I expressed over the last couple of quarters, we have really ramped up our efforts and our origination team on that. So our confidence is very high that we will be able to accomplish that.

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Brian J. Russo, Sidoti & Company, LLC - Research Analyst [20]

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Okay, great. And just -- it seems that you've been -- it appears in negotiations, and I know they're highly confidential on new projects, but we've yet to see any announcements. Just any color on the negotiations and what might be the sticking points in signing contracts at new projects?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [21]

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Yes. So yes. Thanks, Brian. Again, it -- its -- as I've said here, I think, over the last quarter or 2. So we've got -- I mean, from a demand standpoint, customer demand and interest in our projects, there is substantial interest. So it's not that. The biggest challenge we've had for projects that are in the upper Midwest, which is really around the couple of projects I referred to, there's been 2 100-megawatt projects we've been highly focused on, have been running into some transmission challenges, given what's going on in terms of transmission challenges generally in MISO.

So that's been the sticking point, if you will. There's significant cost of upgrade to transmission, given the nature of what's going on with MISO, and the sharing of those costs or the risk of what those transmission costs would ultimately be has been the challenge between us and the counterparties. And one of the things I've said many times is that we -- we're not going -- we're going to hold tight to our underwriting criteria on these projects. We're in a very solid position in 2020 and 2021 already with regard to our earnings. My comment earlier with regard to our focus on -- it's not that we wouldn't take more projects in 2020 and 2021. But I'm really more focused on earnings in 2022. So we can be selective -- will be selective on these projects as we go forward. And having said all that, I do believe that these transmission challenges, notwithstanding, that those are projects that still have substantial potential that we can get done.

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Operator [22]

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Our next question comes from Agostina Colaizzo from Mizuho Securities.

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Unidentified Analyst [23]

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Congrats, Bethany, so I just wanted to better understand the long-term growth rate and clarify the starting point? So when we think about the 5% to 7% rate, is the right base to be using the 2018 normalized number of [308]?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [24]

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Yes. I would -- so the answer is, yes, on 2018 as a base. But I would tell you also, this is Bob, that as we look at adding another year now when we look at the numbers that we just penciled on a normalized basis for 2019, we're solidly within that range, we're on the higher end of that range. So whether you use '18 or '19 at the highest level, we are still very confident in the range and being at the higher end of that range.

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Operator [25]

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Our next question comes from Chris Ellinghaus from Siebert Williams.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [26]

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Congrats to AL and Bethany, I'm sure everything is going to be wonderful going forward. The Nemadji Trail legal challenge. How -- do you have any sense of how long you think that time line will be before you get some greater clarity or resolution?

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Bethany M. Owen, ALLETE, Inc. - President & Chief Executive Officer [27]

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Yes. Thanks, Chris. This is Bethany. We expect -- as we mentioned, that we have filed a requested review of the Minnesota Supreme Court of that Court of Appeals decision. We do believe the Court of appeals erred. And so we're awaiting kind of the Minnesota Supreme Court that their review is discretionary. So we're awaiting that decision. We should know that within the next few weeks, likely by early April. And -- but meanwhile, we are in conversations with Dairyland about other options and a path forward, and we are confident that we'll be able to move forward. But if the -- if we were required to kind of go down this other path, it would be a bit of a delay in the project, but we're confident there are other paths forward. And so we're working on that with Dairyland.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [28]

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Okay. Bob, have you got any thoughts on the prospects for Properties going forward?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [29]

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We're down, Chris, to a very small amount of acreage on a relative basis, about 1,400, 1,500 acres now at Properties. And I'm actually -- given what we've got left there, I'm actually feeling quite good about us wrapping that up, if you will, this year in terms of getting completely liquidated there. There's -- there continues to be actually increasing interest. We've had a good year, as you know, in 2019, actually ended up with a gain in our property segment, small gain, but a gain, nevertheless. And so pretty bullish about our ability to kind of move on beyond that after we get through 2020.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [30]

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okay. One last thing. I might have missed this somewhere along the lines. But can you give us any color on where ACE's backlog stands today?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [31]

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As far as their -- a pipeline of opportunities they're reviewing, Chris?

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [32]

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Yes.

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [33]

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Yes. So they're still in that, I would say, roughly 1,000 to 1,500 megawatts of projects they are evaluating. I -- what's interesting about it, though, is that again, the nature of the backlog in terms of the C&I space, recall the Diamond Springs was an entrance, new entrance into the C&I space, and we've got a very healthy mix of C&I interest now on the heels of that deal, within the 1,000 to 1,500 megawatts.

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Operator [34]

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Our question comes from Vedula Murti from Avon Capital.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [35]

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If I think -- if I'm thinking about kind of rolling out here through in '21, in particular, at ACE with Diamond Springs and Nobles 2 coming into operation. Cumulative, that's a little over $600 million of capital investment that will then be going into service. And my recollection is that you've generally had kind of like a rule of thumb or guidelines that every $100 million of capital investment translates to about $5 million of net income when fully operational, is that still -- is that still a fair representation?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [36]

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Yes. Vedula, this is Steve Morris. We're still using that as a benchmark for a 100-megawatt project and that's on a levelized basis. So what we're seeing is on the accounting for these projects is under HLBV. You'll be hearing more about that. It isn't exactly a straight line. It will start lower than that. And it will gradually increase to that. So what we're looking at using is probably 60% to 70% of that number in the first year, and it's going to gradually increase to about 60% to 70% over that $5 million by the time we hit year 10.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [37]

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Okay. And you also indicated that you were following on the consummation of Diamond Springs that there were -- that, that transaction has initiated discussions on -- for similar types of transactions with commercial third parties. Can you kind of update us a little bit as to at this point, kind of, like how far along those types of things might be and the potential size increment that you -- that might be involved?

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Robert J. Adams, ALLETE, Inc. - Senior VP & CFO [38]

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Yes, Vedula, I would say this, I would say that the size of the projects are that we're looking at that are in and around the -- that region where Diamond Springs was, for example, are greater than the 100-megawatt in size. So I can tell you that and I would tell you that we're pretty enthusiastic about our ability to get something done here. Within the earlier part of the year. So that's what we're really focused on right now.

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Operator [39]

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Our next question comes from Kevin Fallon from Citadel.

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Kevin Fallon, [40]

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Just to make sure I understand, the base for the Clean Energy to grow 30% to 40% is what year? And what amount?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [41]

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Yes, I'd use 2019 actual, as we've even actually adjusted that to normalize ALLETE Clean Energy for the wind this year. So obviously, we were down significantly because of wind. So we assume normal wind. But we expect 2020, 2021 to be 30% to 40% higher, as Bob mentioned, on a normal wind year.

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Kevin Fallon, [42]

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Okay. So what exactly is the '19 actual that you're using?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [43]

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Yes, roughly $20 million.

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Kevin Fallon, [44]

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$20 million of net income?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [45]

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Yes.

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Kevin Fallon, [46]

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Okay. And then when we look at the 5% to 7% growth rate that's anchored off $3.08 in 2018, correct?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [47]

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Right, correct.

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Kevin Fallon, [48]

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And are there years where you're above the top end? Or is the market being too or estimates being too aggressive in any given year, if you're above 7%?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [49]

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No, there will be years that we're above. There could be years that were below. But at least, as Bob mentioned, with the significant ACE growth that we all have in the next several years, we could be above that number.

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Kevin Fallon, [50]

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Well, that's specifically what I was getting to. So you're implying that there's a very solid chance of being above the 7% growth range in '21 and '22, because of the strength of ACE. Is that what you're trying to communicate? Not that it's definitely happening.

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [51]

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Yes. Yes, that's likely. And over a long period of time, Kevin, though. So that's a long-term view of 5% to 7%, there's going to be years up, there will be years under.

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Kevin Fallon, [52]

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True. I assume that it's just a reflection of kind of the strength of your pipeline in terms of the wind opportunities in the next few years, which is driving the kind of greater than 7% step up. And then from there, it's less visible?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [53]

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Correct.

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Kevin Fallon, [54]

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Okay. And just what are you guys assuming that the Minnesota Power earns in calendar year '20 in your guidance?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [55]

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Yes, I'd use close to 9%.

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Kevin Fallon, [56]

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Got it. And just lastly, there was something in the K about a critical audit matter. And I just -- it -- well, it seems like some sort of technical thing. I just wanted to make sure that wasn't an issue, it just wasn't clear to me what it was being driven by?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [57]

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Are you talking about our auditor's opinion page?

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Kevin Fallon, [58]

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Yes.

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [59]

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Well, that is a new requirement for all auditors, the audit opinion has to include what they feel as critical audit matters. You will see that in all public companies. So this isn't unique, and they have to have one. So that's what they have. If it's on a regulated -- regulatory assets and liabilities, and they felt that was critical audit matter because of the judgment that can be involved in that. So they have to have one. It is just a new requirement, nothing more than that.

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Operator [60]

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Our next question comes from Vedula Murti from Avon Capital.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [61]

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Yes. In terms of the utility, when you said that, I think, in your opening comments that you're looking at about a 5% increase in O&M, TDA and property taxes. One, how much is that in -- on a nominal basis for the year-over-year? And then secondarily, does that get trued up, such as, that would then be recouped starting in '21, following the completion of the rate case?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [62]

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Yes, it really is reflected in our rate case. So -- but it will be up, but it is part of the $36 million and the $66 million request that we have. I would just take last year's actual expenses times 5%, you'll get the nominal amount.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [63]

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So I guess, what I'm trying to get at is whether this would constitute a regulatory lag item in '24, 2021? Or not necessarily?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [64]

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Not in 2021, it's all reflected in our final rate request here that we asked for a $66 million.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [65]

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But it would -- but its -- would you consider the lag item for 2020, however?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [66]

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Some of it, but not all of it, can't get everything you ask for in interim rates. So there is some lag there.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [67]

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And also, can you remind me in terms of the power contract that expires in April? But in 2021, when we again have the rate case having been determined. The fact that there was a portion that was not permitted in interim rates. That effectively, again, gets trued up. So what would be the uplift in '21 that we should anticipate from the lack of that timing item?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [68]

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Yes. So that amount here is fully reflected in our final rate case request of $66 million. So we'll have to wait and see on the rate case and how that goes just what is fully reflected in final rates in 2021.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [69]

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Because I think it was the difference between what you were granted and what you've requested for interim rates was about $10 million to $12 million, is that correct?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [70]

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That's correct.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [71]

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So that's -- so least that would -- be anticipate that amount would then be normalized for '21?

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Steven Wayne Morris, ALLETE, Inc. - VP, Controller & CAO [72]

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Yes. So our request in our rate case, was power marketing margins of $10 million without that contract in there. That's part of the $66 million request that we have.

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Operator [73]

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I show no further questions in the queue. At this time, I'd like to turn the call over to Bethany Owen, President and Chief Executive Officer of ALLETE for closing remarks. Please go ahead.

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Bethany M. Owen, ALLETE, Inc. - President & Chief Executive Officer [74]

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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 12, and at other investor venues throughout the year. Enjoy the rest of your day.

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Operator [75]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.