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

Good day, and welcome to ALLETE conference call discussing The New Energy Equity acquisition. 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 put undue reliance on forward-looking statements, which reflect management's reviews only as of the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise. [Operator Instructions] I would now like to turn the call over to Bethany Owen, Chair, President and CEO. You may begin.

Thank you. Good morning, everyone, and thanks for joining us today. With me are ALLETE's Senior Vice President and Chief Financial Officer, Steve Morris; and ALLETE's Senior Vice President, Bob Adams. Also with us this morning is Jeff Scissons, ALLETE Clean Energy's Chief Financial and Strategy Officer. Yesterday, we announced an exciting transaction as part of ALLETE's sustainability and action strategy. With this significant and strategic entry into solar opportunities, we will grow and expand ALLETE's capabilities, providing cleaner energy for the future. After a thorough market analysis with our senior team, outside advisers and our Board, we have signed an agreement to acquire 100% ownership of New Energy equity a developer of distributed solar projects for approximately $165.5 million, subject to a working capital adjustment. New Energies projects are tailored for community, commercial and industrial applications and up to 10-megawatt utility-scale projects. The company was founded in 2010 and is headquartered in Annapolis, Maryland. We believe this distributed solar space is very attractive. These projects have higher returns and as opposed to larger utility scale projects, their smaller size helps mitigate supply chain and other risks while allowing New Energy to nimbly enter new markets. New Energy has proven its ability to compete in new and existing markets in the rapidly growing space. New Energy has strong relationships with regional co-development partners that drive future business opportunities across the nation. The company is engaged in greenfield development as well as acquiring mid-stage and late-stage projects and bringing them through to completion. New Energy has successfully completed more than 250 projects across the nation totaling more than 310 megawatts. The company's national reach includes projects completed and under development in 26 U.S. states. New Energy also offers comprehensive solar operations, maintenance and asset management services through its wholly owned subsidiary, Energy Support Services. New Energy's offtake agreements are sourced both internally and through third-party aggregators and are ultimately executed with corporate customers, municipalities and nonprofit organizations. We're very pleased to have the talented and experienced New Energy team joining ALLETE as we execute our sustainability and action strategy, along with their expertise and proven track record of completed projects New Energy brings a current pipeline of more than 2 gigawatts of community solar projects with more on the way. As included in our presentation slides, as a percentage of market cap, ALLETE is already the largest investor in renewables of all public companies in North America and this transformative transaction reflects the beginning of a new and exciting chapter for ALLETE. Adding New Energy to ALLETE's family of businesses provide strong support to our long-term EPS growth target of 5% to 7%. Our objective is to remain predominantly a regulated utility, but as we've highlighted in past investor conversations and presentations. Our sustainability in action strategy offers attractive growth within and beyond our regulated utility operations. And even with the significant growth we anticipate from New Energy, we're confident in our ability to maintain solid investment-grade credit ratings. In addition to providing solar expertise that will benefit all of ALLETE's businesses, we expect New Energy to be a meaningful contributor to ALLETE's financial performance. In 2021, New Energy equity closed 35 solar projects, representing more than 80 megawatts in total and generated adjusted EBITDA of approximately $20 million. Under ALLETE's ownership, we expect the transaction to be accretive to earnings in 2022 when adjusting for transaction costs and purchase price accounting. Before we turn to Q&A, I want to emphasize that our businesses are operating from a position of strength. The addition of new energy solidifies and even enhances the drivers for our EPS long-term growth objective of 5% to 7%, and we could not be more excited about ALLETE's future. Finally, just a reminder that today's conference call is for the exclusive purpose of announcing this transaction, so we aren't providing a lot of additional details. And as a result, we may not be able to answer your questions today, but we look forward to sharing more details after the expected transaction closing in April as part of our first quarter conference call. Thank you for your time today and for your interest in ALLETE. At this time, I will ask the operator to open up the line for your questions.

[Operator Instructions] We have a question from the line of Brian Russo with Sidoti.

Just some of the financial metrics is with the acquisition, maybe in terms of margins. I mean, I think typically developers of utility scale Solar have EBITDA margins in the high single digits to low double-digit range. Is that a fair assumption for New Energy?

I'll ask Jeff to take that question. Thanks, Brian.

Brian. And certainly, as Bethany mentioned, there'll be more to come after we close the transaction. But again, distributed solar is different than utility scale, smaller projects, more projects and stronger economics. I think we'll talk a little bit more about net development fee as we move forward in this rather than margins brand.

Got it. But just to clarify a comment earlier that higher returns, higher returns than what than ALLETE Clean Energy or utility-like returns?

Yes, that's correct, Brian. That's what the reference was to.

Okay. Great. And if you had to compare New Energy with any other publicly traded peers or comps? Are there any that you could reference at this time?

Brian, we see the distributed energy as being part of a lot of other larger organizations, but not a direct comp that we could point people to. So -- like mentioned earlier, once the transaction closes, we'll be looking forward to engaging and telling the story in more detail and providing you more information.

Okay. And just to clarify, this will be a separate subsidiary under the ALLETE parent umbrella? So it's not part of ACE per se?

Brian, this is Bethany. Yes, that's correct. Part of our Clean Energy segment.

Okay. So this is outside of the target of at least 15% EPS growth at ALLETE Clean Energy or is that -- is this part of that target?

It's part of that target.

Okay. Got it. And then you mentioned the term loan to finance the acquisition. So if this doesn't change your last conveyed financing kind of strategy and outlook that I think was updated on the last conference call?

Brian, Steve Morris. So yes, we'll get into that more in Q1, as Bethany mentioned. But just so you know, we at ALLETE intends to appropriately finance this acquisition over the long term and obviously in line with our credit ratings.

Our next question comes from Richard Sunderland with JPMorgan.

Thanks for the update here. Curious if this transaction covers your storage aspirations or if you're still looking to make a move on that side?