ALLETE, Inc. (ALE) Earnings Call Transcript & Summary

Good day, and welcome to the ALLETE investor presentation 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 those discussed 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 view only as of the date here for. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise. I would now like to turn the conference over to ALLETE President and Chief Executive Officer, Bethany Owen. Please go ahead.

Good morning, everyone, and thank you for joining us today. Corresponding slides for this morning's presentation can be found on our website at allete.com in the Investors section. We'll do our best to call out each slide number as we go through today's presentation. As you'll see on Slide 3, with me this morning are ALLETE's Senior Vice President and Chief Financial Officer, Bob Adams; Vice President, Controller and Chief Accounting Officer, Steve Morris; and President of ALLETE Clean Energy, Al Rudeck. Before we begin our presentation, I want to thank you for your patience and understanding as we adjusted our original schedule in light of the evolving risk associated with COVID-19. We at ALLETE value the health and safety of all of our employees, our families, our communities and all of you. So we appreciate that you're joining us by conference call this morning. All of ALLETE's businesses provide critical energy services, and we are working diligently internally as well as with EEI and state, regional and federal resources to ensure uninterrupted service to all of our customers. In addition, we have robust plans in place to help ensure we continue to successfully execute our strategy as the COVID-19 situation evolves. On the strategy execution front, we announced some very exciting news just this morning, ALLETE Clean Energy's acquisition of the 303-megawatt Caddo wind project in Oklahoma. When completed, this project will double the company's presence in the C&I energy market and will bring ALLETE Clean Energy to 1,300 megawatts of installed capacity by the end of 2021. The Caddo project is yet another example of ALLETE's proven execution capabilities and leadership role in transforming to a clean energy economy. I couldn't be more proud of the ALLETE Clean Energy team. Al Rudeck will share more information about the Caddo project in a few minutes. On Slide 4, you're familiar with all of this, but I want to reiterate that ALLETE is an energy company focused on sustainability and action. We believe the clean energy space is a wonderful place to be with significant strategic opportunities given the fact that society's expectations for clean energy solutions are only increasing. Continuing on Slide 5. ALLETE is uniquely positioned to seize these opportunities because of our geographic location, our financial strength and our long track record of successful execution. All of this gives us high confidence in our average annual growth outlook of 5% to 7%. On Slide 6, you will see just a few of our successes from 2019 and some of our strategic initiatives for 2020. We are positioning for the future and unleashing growth through credit headroom as well as adding competencies, such as our success in tax equity financing and multi-project construction. I'm very proud of our team's strong track record of accomplishments. We do what we say we're going to do, and that's important to us, and we know it's important to our investors. On Slide 7, again, this is all familiar to you, but I will reiterate that we believe there are many opportunities for growth still to come in connection with continued transformation of Minnesota Power's generation fleet. Given Minnesota Power's customer mix, we will always need to ensure we are balancing competitiveness of rates while we grow the business. Slide 8 gives some specific examples of some of the projects that will drive growth for Minnesota Power over the next decade. Slide 9 highlights the opportunities we see for ALLETE's growth in transmission and distribution. This is true not only for Minnesota Power but also for Superior Water, Light and Power and ALLETE Clean Energy. We believe T&D is one of the most exciting areas, providing growth and enabling ALLETE's strategy. I'll now turn the call over to Bob Adams to speak in greater detail regarding ALLETE's financial strength, performance and outlook. Bob?

Well, thank you, Bethany, and good morning, everyone. So if you go to Page 10, this is a slide that you are all intimate with by now. It's our value proposition for investors. And I just want to call out a couple of points here. First of all, to be able to speak to this slide in the context of our -- the fact we have delivered on these promises, I'm very proud about that. The team is very proud about that. And as Bethany said, we take these commitments very seriously. So targeting a shareholder return of 9% to 10%, the earnings growth of 5% to 7%. And as I've said, it is our objective to be at the higher end or potentially exceeding that growth over time. We think that's important to differentiate our value proposition to investors given the risk profile of the company and our small size. So we are continuing to be laser-focused on that. And as we get into this in a little bit with regard to the nonregulated growth, Caddo, that is cementing that outlook even further into the future. So we'll talk more about that. Hopefully, the dividend action we took here recently, a little bit over 5%. Again, you will see that as meeting our commitment and what we had told you we would do in terms of aligning our dividend growth with our earnings growth, that had not been the case up until a few years ago. So we continue to be focused on that. And I would say that, again, back to earnings growth, it's one thing to talk about absolute growth. But it's really important in terms of what is the quality of the earnings growth behind that. And so in terms of how we measure that, it's obviously the cash flow characteristics that come along with the growth, the returns. You've heard me say a lot about our individual business unit discipline around the cost of capital each one needs to achieve, exceed their cost of capital, hit their targeted returns and, of course, contribute to the overall dividend of ALLETE overall. So returns are important. And then also the visibility and the variability around these business models so that our investors can see and have confidence in the future of performance of the company. So quality of earnings growth is really, really important to us. As we look at the growth of the business, and Bethany alluded to this, in my view, it's really fueled by 3 things. One is the, of course, the energy transformation itself. It's a wonderful industry to be in, if you will. There's a lot of change and change means opportunity, in our view; two, our unique position with regard to whether it be sort of our geography, the businesses that we have in place that we had developed in the case of ALLETE Clean Energy back in 2012; and frankly, I think the leadership of these businesses across the board. They're very entrepreneurial, very focused on getting the things done out in execution. So -- and finally, I would say just discipline. There's a lot that continues to go on in the renewable market, in particular, in the clean energy market. Returns are being pressured. There's a lot of new entrants, as you guys know. And so having the discipline to say no on certain projects and yes on ones that really make sense and our ability to move quickly and adeptly has been a real differentiator. I would say, in terms of the balance sheet and credit ratings, we have, as we go into the next while here, of course, our debt-to-equity continues to be very low, give or take, 39% to 40% of our total cap structure. So we like the position in terms of our leverage. As -- we've been working with rating agencies, as you know, as we continue to grow the nonregulated part of our business. And we have found them to be very supportive of the strategy, in light of the fact that we have delivered on promises and kept the discipline in terms of the quality of things that we've been doing. So we are very confident that from a credit position, we will have plenty of room to grow the nonregulated well into the 2020s. If you flip to Page 11, the multiyear growth expected from ALLETE Clean Energy, just a few points around this arrow. The Diamond, if you look at the 750 megawatts going to 1,050 megawatts, that's Diamond, of course. Going from 1,050 to 1,500, 300 of that would be represented by Caddo. And of course, that would imply -- and this would be by 2022, by the way, the 1,500 megawatts, that we're still highly focused on securing another 200 megawatts in that time period. Now some of these may come a little bit earlier than that. We have not given up on 2021. We still have some 100% PTCs. But I want you to know, again, as I told you in the last earnings call, that 2022 is really a big focus of mine because we have wonderful growth, 30% to 40%, all the way through 2021. And so executing on Caddo and getting that will actually extend that 30% to 40% growth profile into 2022. And that could potentially be higher to the extent that we get another 200 to fill that. Going from 1,500 to 2,000 megawatts, that would imply the 2 to 3 projects we talked about times a couple of years, that's 400 to 600 megawatts. That gets us to at least 2,000 megawatts. And I would just want to remind you guys that, again, these aren't just PTC projects. This would be a combination of PTC and potential acquisitions that Al Rudeck will speak to in a little bit. So we continue to gain momentum in the business. The reputation of the business is solid. The optionality now in terms of geographic territory getting into the C&I market continues to expand. So again, we're very, very excited about the position of ALLETE Clean Energy, and I hope you guys are, too. Just to pause a little bit before I turn it -- or get into the CapEx schedule a little bit, I do want to talk a little bit about coronavirus and how the company is positioning with regard to its performance, et cetera. And I guess I would, first of all, start with many of you know our track record and our positioning around managing around contingency events more generally. Now this has come most often in the form of economic cycles for the company that impact our large power customers. So in my 35 years, the entire time, we have been closely managing variability within the business. We have playbooks in place with regard to managing that variability and that volatility. So in many respects, although it's a different type of challenge, we are drawing on those very same skill sets, and if you will, the DNA of the company, to manage through these things. So we have a very active group that has been, for really a couple of months now, looking at this risk, how it may impact our customers, how it may impact our performance. And we have a multiple of tools that we are -- have in place and are ready to prosecute as we go to manage this as this evolves. I would tell you that our large industrial customers have continued to signal strong production through the nomination process. So we have nominations for a good part of the calendar year. The exception would be the last 4 months of the year. We've received no intelligence that their strong production would change. That's a possibility, for sure. But remember that our large power customers, particularly those in the taconite industry, lag the general economy. So although there is potential risk in the back half of the year, I would expect that there's more potential pressure into the next year, and we'll have to see how this evolves. But at least currently, we've got no intelligence that signals of their intention to not come off of production at this time. And recall our rate case that we filed here recently assumed full production as well. Each of these customers are very sophisticated. They have their own contingency planning underway as it relates to this issue. So I want you to know that. And again, we work very closely with them as well, so that we get ahead of any formal nomination issues and can take appropriate actions. I would say, in terms of the capital markets, we see no change in our ability to access capital markets to fund our large growth CapEx plans. And we're also confident we have adequate liquidity in the event that a scenario unfolds that impacts our customers or the capital markets more broadly. It has been interesting. We have been in the market recently, just this last several days, on a bond offering to refinance about $100 million for the first mortgage bonds and have found actually the effective coupon rate to be quite attractive, actually well below what we had planned. So in some respects, again, this is not a scenario we all want in terms of the coronavirus and its impact on people, et cetera. But from -- at least from a financial market standpoint, it has represented an opportunity to secure some very cost-competitive financing. So we can talk more about that as we get into the Q&A, but I wanted you to at least know our posture with regard to that issue more broadly. If you turn to Page 12, this represents an updated CapEx plan from the one that was just recently published in our 10-K. And you'll see it reflects about a 20% increase at about $2.4 billion. It was $2 billion in the K, and that represents the update for the Caddo investment. But there's really a couple of things here that I want to highlight for you, too. In addition to Caddo is that in the Regulated Operations piece, you'll see Base and Other. And so in 2020, you see the $135 million, another $135 million in 2021. Most of the change in that line item reflects some of the investments we've been talking about in the distribution-hardening efforts. So there has been some addition of some numbers in that time period. And there's also been a bit of an acceleration with regard to other CapEx. So there's about $100 million of additional CapEx in that Base and Other during that period of time. So that's one change. The DC Line Modernization & Upgrade, that now reflects a higher level of upgrade that we've talked about, the 900 megawatts. And so if we go back to the number we had in there, for example, just last year, that number was $280 million. Now we've got $425 million. So those would be the big changes. As we get into the financing on Page 13, next page, we talk a lot about our position of strength with regard to our balance sheet and limited equity needs, and that's true. But with the -- I would tell you that with the acceleration of about $100 million in capital with the increase in that capital number on the base side plus the size of the Caddo project, recall I said we could do 1 to 2 projects without having to issue any significant equity. Given the size of that, there will be some modest equity that we're going to have to issue. So if you look at the financing sources on the equity side, you see a total of $195 million there. That represents about $95 million in additional equity than you otherwise would have seen in the prior financing slide that we presented. So it's a modest amount of equity. We'll do that through our PIE program, of which we have plenty of capacity, about $200 million, actually to draw upon, if you will, without significantly impacting the market. So a modest amount of equity, but I wanted you to be aware of that. You'll also notice on the tax equity side that we've increased the tax equity from the last version of this that you have seen. And that is representative, as you would expect, from Caddo. We're anticipating about another $250 million of tax equity to fund that project. So with that, I'm pleased to turn it over to Mr. Morris here to talk about Minnesota Power and its rate case.

Thanks, Bob, and good morning, everyone. So let's go to Slide 14 related to Minnesota Power's rate case. And as you know, interim revenue of $36 million, which is subject to refund, began January 1, 2020, as part of Minnesota Power's rate case filed in late 2019. Again, the primary drivers for this request are the expiration of certain large power sales agreements, lower transmission revenue, customer plant shutdowns and higher projected expenses. The rate case process is going as we would expect at this time, with ongoing data requests from various interveners. We would expect to receive direct testimony from interveners next month and provide various reply comments thereafter. And as Bob mentioned earlier, our rate case filing also assumes full production from our large industrial customers. Minnesota Power's large industrial customers recently have signaled strong production for the latest nomination period. So on the next slide, Slide 15 provides you with additional details of the anticipated rate case time line. We do expect an administrative law judge report in September with the commission's oral decision in October. And we would expect the commission's written decision in December of this year, with final rates implemented sometime in mid-2021. So going to Slide #16 related to Superior Water, Light and Power. With a rate base of approximately $80 million, Superior Water, Light and Power is a consistent performer with their own robust levels of capital investment in water, gas and electric services in support of reliability and the overall customer experience. The company is making significant investments of approximately $50 million in projects and systems to benefit its customers over the next several years, including a proposal for a community solar garden, which is currently being considered by the Public Service Commission of Wisconsin. Superior Water, Light and Power does anticipate filing a general rate case in the second quarter of this year driven largely by the significant planned capital expenditures. We would anticipate then final rates in effect sometime in early 2021. Just as a reminder, our 2020 guidance assumes that we will achieve reasonable outcomes in our various regulatory proceedings. I'll now turn it over to Al Rudeck for his update and outlook on ALLETE Clean Energy. Al?

Yes. Thanks, Steve, and good morning, everyone. On Slide 17, ALLETE Clean Energy is well positioned as our country and world embrace cleaner and more efficient energy forms. America's energy transformation is fertile ground, as Bob said, for innovation and opportunity. We believe ACE is positioned well and is agile, responsive and flexible and really customer-focused. We're expanding our diversity through new geographic regions, customers, technologies and new sources of steady earnings streams to strengthen ALLETE. What I'm most proud of, though, is the how: how our teams engage with our stakeholders in development, construction and long-term operation, delivering the right results the right way. On Slide 18, we highlight how we've been and some of our recent successes. We focus on providing customers and stakeholder value through respectful, trusting and win-win partnerships. These relationships and partnerships are differentiators in the market as seen by our many repeat transactions with customers and development partners, strong results in regulatory and policy arenas and consistently positive feedback from our community host and landowner partners. Our size is a strength because we're nimble and able to adapt to the markets and tailor our solutions to give the customers what they want. And we won't lose sight -- won't lose our way in terms of discipline around financial returns and creditworthy counterparties. And we have a talented team across ACE and ALLETE to effectively execute. A few of the highlights here for 2020. We did put our Glen Ullin project into full production at the end of last year, and it's in service. And we're breaking production records every day, with over 500 megawatts of peak in our system back in January. South Peak energy project up in Montana began producing energy in February, and we expect to close on tax equity in the second quarter and put that into full production. Also the Diamond Spring project in Oklahoma is in full swing with construction underway, and we expect it to go online and be financed by the end of the year. And as Bethany mentioned, we're proud to announce our next major investment, the Caddo wind project in Caddo County, Oklahoma. And we're looking for a couple hundred more megawatts of projects to begin producing before 2022 to provide additional earnings contributions. On Slide 19, I wanted to reinforce our strategy of adding 2 to 3 projects per year of about 100-megawatt size each, so Caddo effectively is 3 projects the way we think about it and talk about it, of either acquisitions of operating assets, which is where ACE started or newbuild projects to support ALLETE's strong growth outlook. We're expanding into new markets with sales of renewable energy to corporate customers, extending and expanding utility sales contracts and exploring new technology opportunities in the marketplace. We're in the midst of considering some pilot projects in storage and solar and working directly with customers that we can tailor those projects to meet their needs to achieve their clean energy goals. So you'll hear more about those plans from us as they mature in coming quarters. On Slide 20, we're expanding rapidly and now have constructed or operating, refurbishing or have under development more than a dozen projects across 7 states. Each location is strategic as it provides a home base to consider new growth opportunities. We're growing this national footprint to diversify the seasonal weather patterns around the country and to reach more states, where often most of the most meaningful policy developments are happening in the state houses across the country. Now I want to just focus on the next 4 or 5 slides just to give you a sense of how we look at the marketplace. In Slides 21 to 26, we wanted to highlight a half dozen areas of interest in the market for us and some high-level views of those opportunities in each area. The source of this information is IHS CERA from their November report 2019 and their North American renewable power outlook between now and 2050. And we all know 2050 is an important date from a Paris Accord standpoint and from a carbon reduction goal standpoint to try and hit that 2 degrees C increase or lower. As you look at this, we look broadly across these markets and have taken a deep dive into each submarket and the opportunity set that's there. And there's about 6 areas that we find very attractive. Collectively, we see wind growing from about 100 gigawatts today in this country to about 250 gigawatts by 2050. That's a tremendous opportunity. And within that 100 gigawatts of existed installed base, we think there's opportunities for acquisitions and new growth opportunities. So as you see on Slide 21, we're talking about the Rocky Mountain region and the Pacific Northwest. And I'll just tell you how to think about these slides. The top part is, in the box, there's 50% to 75%. That's the total renewable generation penetration that we see and CERA sees in that market in 2050. So in 2050, 1/2 to 3/4 of the energy for electricity in that market will be renewables in total. And then a narrower subset of that, CERA and we believe there's going to be 21 gigawatts, 21,000 megawatts of new wind built between 2019 and 2050. Particularly of interest to us is Oregon. Just to highlight in that region, Oregon passed their 50% renewable portfolio standard by 2014 -- or excuse me, 2040 recently. And Colorado has a 30% standard by this year and wants the clean -- expand to 100% clean energy by 2050. So if you turn to Slide 22. As we look at the southwest region, it's interesting to us in that we expect, again, a 50% penetration of renewables by 2050 with about 9 gigawatts of wind opportunity newbuild in that area. There'll be a lot more solar built in that region. So as we continue to think about pilots and how we might play in that region, understanding our returns profile and such, we'll be looking at that more broadly, solar and storage, but that 9 gigawatts of additional wind in that area by 2050. And a highlight there is Nevada has passed the 50% RPS by 2030; in New Mexico, an 80% renewable portfolio standard by 2040. If you want to flip to Slide 23, in the Texas market, this is the one area of the 6 areas I'm going to talk about we do not have an asset yet. But it's a very interesting market to us. We expect a 50% renewable penetration by 2050 and 30 gigawatts of additional wind being built in that time frame. Texas is the largest wind market in the country, and ERCOT and its free market structure is really intriguing. And it's really an innovation hub for where a lot of the innovative contracting is happening around the country. And several of the corporate customer contracts are being served from that ERCOT market. If you move to Slide 24, the Great Plains area, Missouri, Oklahoma, Kansas and Nebraska. We see renewable penetration up to 70%, wind-rich regions of the country, and 24 gigawatts of additional wind being built. Oklahoma is the second-largest wind producer in the country, and you see us -- we've added 2 big projects, commitments there with Diamond Spring and Caddo. And the policy environment in Oklahoma is increasingly favorable for wind development in the future. If you go to Slide 25 in the Upper Midwest, our home ground, our home turf, if you will, up here in Minnesota, Iowa, the Dakotas through Wisconsin, and into the heart of Illinois and Indiana, we have a lot of exciting things to think about there and talk about. Governor Walz is looking at 100% clean energy by 2050. And in fact, the State House on the House and the Senate side in Minnesota here are debating clean energy legislation as we speak this week. And so we think there'll be more opportunities right in our home state of Minnesota. The Dakotas have built a lot of transmission through South Dakota, in particular. It opens up new markets potentially. And we see a 50% renewable penetration in that region by 2050 as well, with 40 gigawatts of wind expected to be built there. And then finally, up in the Northeast, we have our Armenia Mountain project there. And we see even a greater penetration of renewables to 60% as many of the states there, Maine, Vermont, New York have all passed 70%, 80%, 85% renewable portfolio standard goals between 2030 and 2045. So we're really excited about that region in a mature market with adjacency to PJM and New York ISO. Those are very mature broader markets to invest in. So in sum total, we're very excited about where the opportunity set is for renewables in the country, and I believe ALLETE Clean Energy is well positioned. And finally, on Slide 27, as Bethany said, we're pleased to announce Caddo today, a 303-megawatt project in Oklahoma. This project is projected to serve 3 Fortune 500 companies of market capitalization of over $5 billion each and plan to be online by the end of 2021 and contributing to earnings in 2022. You'll hear more about this project and specific customers in due time. Caddo's acquisition is strategic. It represents a key part of our strategy to grow into the Southwest area power pool, with Minnesota Power and the Superior Water, Light and Power both being MISO companies and some of our initial assets at ACE being MISO-type companies. This really diversifies the company's overall energy position into the Great Plains, into the southern part of the country. And together with Diamond Spring, Caddo and Diamond Spring will produce over 2 million megawatt-hours a year of clean energy and provide great diversity for the Northern Tier projects that ACE was founded on. And once operational, the efficiency and scale of Diamond and Caddo in Oklahoma will serve us well for decades to come. So thanks again for your time this morning. I'll turn it back over to our President and CEO, Bethany Owen.

Thank you, Al, Bob and Steve. I couldn't be more proud of the ALLETE team or more excited about the opportunities ahead for our company. At this time, we'll ask the operator to open the line for your questions.

[Operator Instructions] I show our first question comes from Chris Ellinghaus from Siebert Williams.

Bob, I think this is important. Can you just sort of review -- I mean you talked about the Caddo tax equity plan. But can you just sort of give us your longer-term view of how ACE gets financed?

Yes. So with regard to the -- first of all, I would say, with regard to PTC projects, the first thing to understand is that as we go from 100% PTC projects to now Caddo, the amount of equity that we will be putting into an 80% PTC-qualified project is going to be about 40% versus roughly 1/3. So that's the first thing that you guys need to consider in the modeling. And so which would imply, of course, that 60% would be coming from tax equity. So that's the -- if you look at roughly $400 million -- a little over $400 million for Caddo, about 60% of that or about $240 million, $250 million is coming from the tax equity market. So that will evolve as you go to 60% PTCs. Again, that equity components in terms of the amount from us versus tax equity would increase again as we go forward. So that's the first thing we need to keep in mind. When we do the -- and of course, we don't know where the PTC program is going. We expect that that program is probably not going to be further extended beyond the 60%. So we're going to be -- in that world, we're going to be in a more traditional sort of, I'll just call it, 60% equity, probably 40% debt financing market, which would be aligned with how we finance that business more broadly over the long run. 60% equity, 40% debt. And so any acquisitions that we do and the team, as Al will get into within the Q&A here as well, is very focused on that M&A front now as well. They're redoubling those efforts. And so that would be financed more in a traditional 60% equity, 40% debt.

Okay. And Bob or Al, can you sort of give us an idea where after Caddo, you might sit with your turbine situation?

Yes. So thanks, Chris. This is Al Rudeck. At the highest level, we still have a few of the 100 percenters left that we're talking with a couple of counterparties on utilizing. We'll have a half dozen of the 80 percenters left. So we had a capacity for about 500 megawatts of 80% turbine buildout. So 300 of that is Caddo, and then there's a couple of hundred megawatts left. And then we did, a couple of years ago, buy 4 of the 60 percenters. So we have a couple of hundred megawatts worth of the 60 percenters. And we're considering expanding that 60% inventory program we have until later this year to do that, of course, and then take title by April of next year for that to -- for this last -- I see the last window of PTC. So we have enough -- adequate PTC turbines to support the project growth of 2 to 3 a year. And it gives us optionality to either do it that way with newbuild projects or go back to our roots, which is acquiring existing operating projects. So we could kind of go either way on it. We wanted to make sure we had that flexibility and optionality. Caddo also provides us a backstop. We like to keep a project in front of us. So if we want to evolve that strategy and really focus on a newbuild -- or excuse me, an acquisition of an existing project and sunset the PTCs, we can plant them at our sites. And the last thing I would say is as we think about the longer term of our existing fleet, by the mid-2020s, that fleet is going to be ready for redevelopment. And so some of these safe harbor turbines could be used as follow-on turbines to redevelop our current legacy portfolio. Some of the projects are 20 years old that we own in our fleet. So I think there's a lot of embedded optionality in that, but we have a good complement of turbines to support the 2 to 3 projects a year.

Okay. And Al, do you see the coronavirus having any sort of material impact on your ability to construct at this point?

Yes. Good question. We've had that conversation with all of our suppliers and contractors. Right now, the answer is really no. We've been notified by some of our contractors that there is this potential impact out there. The nice thing about our Diamond project is we got ahead of it, right? So we're well into construction now, and we expect to be all delivered out by May. So we'll have all of our parts on the ground before midyear, which is an enviable place to be in this market. We have the end of the PTC period coming for the 100 percenters at the end of this year. We want to be done well before the end of the year and be into the financing element of the project. And so we're feeling good about that. And we do have contingency plans in place as well around how we might source should something come up, particularly for Caddo. And as we look at our projects too, the nice view of being in Oklahoma, it's very proximate to Mexico, and some of our suppliers are building some of the components in Mexico and the nacelles. This is a GE project at Diamond Spring. The nacelles are all built in Florida, and so we have good line of sight. And the vast majority of our equipments are already either on soil in the U.S. or being built in the U.S. or Mexico. So we're feeling pretty good about it at the moment, Chris. But we're watching it. It is a dynamic situation.

Okay. Bob, have you -- in light of where the economic situation appears to be headed, have you thought about -- obviously, taconite is going to be heavy on investors' minds. Have you thought about maybe changing or going back to the old sort of taconite nomination disclosure process so that investors get a better sense of what's going on there?

Well, I don't know -- that's a good question, Chris. I don't know that we would get into the granularity of quarter-by-quarter nomination per se, but we will certainly be talking about our views and the developments of that industry. There's -- that has to be part of the dialogue for sure. So we will definitely be doing that, and hence some of the comments even that I made here earlier this morning in light of that. I mean the taconite industry clearly serves the auto industry. They serve what we call hardgoods, which are the appliance industry. They serve oil and gas in terms of tubular steel that's put in for the pipelines, et cetera. So the oil and gas disruption that's been going on, on a worldwide basis is going to have some impact as well. So we'll be talking about that and closely pacing with you guys as we go.

Can we assume that should there be a significant change in nomination patterns that that would be something that rose to an 8,000 level anyway, even if you weren't going to sort of disclose nominations themselves?

Well, Chris, this is Steve Morris. So I would say it's -- we would likely do something like that. We have signaled that, at least for this period, we assume full production. And we've said in the past, that's about 7 million, 7.5 million megawatt hours. If we have a material change from that, we'll notify you. So the next nomination period is around August 1 for the last 4-month period of time, which should be around the time we have our earnings release. So we would report anything from the last nomination period at that time anyway, Chris.

Okay. And lastly, the -- I think, Al, you were talking about -- or maybe this was Bob, the opportunity set that you see in talking about being disciplined. Are you seeing, at least in numbers, a very robust acquisition market at this point, regardless of what the returns might look like?

We are. Yes. Chris, the deal flow is strong. And again, our preference is to stay out of auctions. And so you see a lot of -- when I talk about deal flow, it's 2 ways. It's one, auctions and what a lot of people see, but we're ahead of the market. We're in the front end, and we're all building those relationships with customers, developers, owners, strategic owners. And we would prefer to get a shot at assets before they come to market, not that we wouldn't ever compete in markets. And we look at all those things and screen and engage with folks because there could be some really good opportunities. But yes, we're seeing a lot of churn in the marketplace as people evolve their strategies and stakes and where they put projects, recycle capital. Some of the players are international players, and they're moving their money in and out. So yes, it's a very robust market. And we always look at kind of what I call the graduating class of projects. And so you think about the 10-year PTC subscription and you go back, in this case, now to 2009, 10 years ago from 2019, that graduating class of 7,500 megawatts is something we're always looking at. So we know when these projects are naturally ready for recapitalization and keep a good eye on the market. So we're poised to maybe see some operating asset acquisitions in the future and balance all of that resource need and the financing need, particularly in this market. I think it's a good pivot strategy to have if we want to do things a little bit differently and bring some more earnings in sooner. So we're kind of reevaluating all of that in the overall strategy. Anything more, Bob?

Yes. Yes. So Chris, as a follow-on to that, and I'm sure it's on people's minds too, it hasn't been asked yet, but what are the sort of the inherent returns in these projects? We -- I just got a data download from one of our advisers. So this is an ROE -- sort of ROE returns. And there are players in the market that are signing up for returns that are -- ROE returns that are 6.5% and 7%. So that is very, very low. So we -- I told you guys in the past, back to discipline, generally speaking, we look at about a 10%, on average, ROE for the project. So again, back to 100-megawatt project where we would have roughly $50 million in equity. These are for the 100% PTCs. I've said roughly 10% ROE, which drives $5 million. Now we have seen -- in our projects, we've seen some pressure on returns because some of the PTC is going from 100% to 80%. That differential in terms of the pricing is not being completely absorbed by the customer. Some of that's being spread to the vendor. The vendor is picking up some of that. The customer is getting some of the benefit of it, and we're taking a little bit of that as well. But having said that, our ROE -- the ROEs we're looking at are still high 8%, 9% range, which is in the range of where we want to be. So it is interesting. We are seeing people signing up for projects that are relatively low ROE. Very concerning. We would never do a project like that, but that just gives you an indication of some of the competition that's in the market generally.

Okay. I appreciate the color, guys. And Bethany, thanks for keeping the call this week.

Yes. Absolutely, Chris. We are glad to share some good news today.

Our next question comes from Brian Russo from Sidoti.

Just first, a couple of questions on ACE. The press release on the Caddo announcement was -- lacked quite a bit of detail other than megawatts. And I'm just curious whether return parameters and purchase price, et cetera, should we use Diamond Springs as a proxy for that?

So Steve just flip to Page 12 of the slide deck, and we have Diamond Spring and Caddo laid out there from a CapEx timing standpoint. So just -- if you've got that number in front of you. As it relates to the returns, the return attributes, Diamond and Caddo are going to be very similar. Now the -- so the Diamond Spring is 80% PTC, Caddo is 80% PTC. So the size is very similar. So the one issue that we need to be watching is HLBV accounting. And just in terms of the ramp-up, and I'll have Steve speak to that a little bit, that's an emerging accounting for these types of projects that the whole industry is dealing with. So when we say average annual for 100-megawatt project of about $5 million, it still is about $5 million for these projects, but there's a ramp-up that occurs in some of the earlier years. And actually, in the later years, it will actually exceed $5 million in contribution. So lower in the initial years, higher in the back-end years. Steve, do you want to comment?

Yes. That's right. We touched on the year-end conference call as well HLBV accounting. So Brian, the Diamond Spring project is 100% project. And so we've said $5 million net income. You have the cost there. And so it's 2/3 tax equity, roughly $5 million net income, our share. As Bob mentioned, this HLBV accounting will have some impact on that over the life of the project, but it's going to start -- net income will start a little bit lower than that. So given a haircut, what we said is about 30%, 40% of a haircut. And then it will grow to the end of the PTC project. By year 10, it will be 30% to 40% above that $5 million mark. So -- and you're going to have the same type of shape, if you will, on an 80% PTC project as well.

Okay. Got it. And are there development expenses that will be incurred in 2020, 2021 related to Caddo, like I believe there was or is for Diamond Springs?

Yes. There'll be some, but it's not significantly material.

Okay. That's great. And then also but on the utility side and the general rate case that's ongoing, how can you address the forward test years sales component with the uncertainty and likely variability around the large power customers?

Yes. So as you know, our rate case assumes full production levels. And as we mentioned on the call, obviously, we had full production levels for the first nomination period. We received the full production levels for the second nomination period that just came in. The remaining piece that's open at least for 2020 is the last nomination period. And so we have no indication that that will be less at this point in time. So on a go-forward basis, after that, though, if that's your question, in 2021, 2022, we don't have any indications that there would be a slowdown, coronavirus aside, from that. And if there is, and if it's significant, it could trigger another rate case, of course.

Okay. So just to clarify, you cannot adjust your sales forecast based on ongoing or expected changes in your industrial sales outlook? Your 2021 rates are going to reflect your 2020 sales forecast?

They will, which is full production. And at this point in time, in the rate case, we'd have no reason to adjust it downward because we have the second nomination period, which is full production. So it's strong. So we would have no reason. And there isn't a mechanism -- we'd be so far on the rate case by the time we received -- the rate case will be over by the time we receive 2021 nominations anyway. Yes. It would be a further rate case, Brian.

Okay. Got it. And then just that sensitivity, you had previously disclosed 1 million-ton change in production of your taconite customers equates to about $0.04 of EPS prior to optimizing that excess capacity. Is that still relatively intact?

Yes. That actually is -- that is a net number mitigated with power marketing sales that you would have. And that's fairly limited with the market as it is now anyway. But it still is $0.04, Brian.

Okay. Great. And then also just to clarify, you reiterated your EPS CAGRs. So I assume you also reiterated your 2020 guidance, specifically the EPS?

We have no change at this time.

Our next question comes from Sarah Akers from Wells Fargo.

Just a clarification on the 5% to 7%. What is the new base year and the actual base EPS number for that CAGR?

So it's another great question. I mean we've been -- typically, when we've talked about this, it's 5% to 7% off '18. But I would tell you that if you use the '19, we're in the high end of that range as well. So it doesn't matter, I guess. And what you'll hear us continuing to talk more about 2019 in the space in light of the strength, of course, of the business and the evolving nature of adding another year, now 2022 with Caddo, et cetera. So...

And is that base year adjusted? I know there was a gain on sale in '19 and a number of moving pieces. So what is a good number, a clean number for '19?

Yes. Sarah, it's Steve Morris. I'd use $3.35.

Okay. And does the CAGR now extend through 2024, aligned with your CapEx program? Or is it shorter term?

Yes, it does. It extends -- it's a 5-year period, rolling 5 year, if you will, off of '19.

Got it. And then on the ACE side, so you mentioned some of your legacy wind projects will be ready for refurbishment in the mid-2020s. How should we think about some of those pushes and pulls? You have contracts rolling off, but then you're upgrading projects and entering into new contracts. And so how should we think about the net impact of those items?