The indefinite idling of two large industrial customers and a slowdown among other commercial customers is expected to put a dent in the earnings of Duluth-based Allete, Minnesota Power’s parent company. But company officials are hopeful as most of the Iron Range mines come back online.
Although several mines shut down at the beginning of the pandemic have returned or are returning to full production, U.S. Steel’s Keetac iron mine and pellet plant in Keewatin and the Verso paper mill in Duluth remain shut down with no known restart date.
In a conference call announcing second-quarter financial results with investors Wednesday morning, Allete officials said its revised 2020 guidance is $3.09-$3.29 per share. That’s down from the $3.40-$3.70-per-share-range it expected for 2020 before the pandemic.
“This guidance reflects year-to-date results along with several assumptions into the end of the year, these assumptions include primarily lower power demands related to Keetac and Verso that remain indefinitely idled, and lower kilowatt hour sales to commercial, other industrial and municipal customers for the second half of the year and to expected continued negative impacts of COVID,” Bob Adams, Allete’s senior vice president and chief financial officer, said on the call.
Allete suspended its 2020 guidance in May when announcing its first-quarter results due to uncertainty caused by the pandemic and a wave of industrial customers idling operations.
Industrial customers make up about half of Minnesota Power's revenue and some of the company's largest customers — three of the six mining operations in Northeastern Minnesota, UPM's Blandin paper mill in Grand Rapids and Verso — announced idlings this spring as the demand for steel and paper products fell.
But on Aug. 1, the industrial customers made nominations based on projected production, giving Minnesota Power a better idea of what power demand it can expect for the rest of the year.
“We're very pleased to report that the nominations reflect significant improvement in plant production levels extending to the end of 2020,” Bethany Owen, president and CEO of Allete, said on the call. “With the exception of the Keewatin taconite plant and Verso paper-making facility that remain indefinitely idled, the majority of large power customers, including Minnesota Power’s three largest taconite customers, have nominated full production levels for the remainder of this year.”
As demand for steel returns, Cleveland-Clffs’ Northshore Mining in Silver Bay and Babbitt will resume operations this week and ArcelorMittal-managed Hibbing Taconite, which U.S. Steel and Cliffs own a share in, is also expected to restart this month. While it never fully shut down, U.S. Steel’s Minntac in Mountain Iron, the largest mine and plant on the Range, brought back most of its 250 laid-off employees as it ramped production back up last month.
Pandemic felt in second quarter
Allete on Wednesday reported a second-quarter profit of $20.1 million or 39 cents per share, down from a profit of $34.2 million and 66 cents per share reported in the second quarter of 2019. Second quarter results included a 16-cent per share charge from the rate case resolution.
The second-quarter results were the first to show the effects of the pandemic. Allete’s regulated businesses, which includes Minnesota Power; Superior Water, Light and Power; and its investment in the American Transmission Co., recorded a profit of $11.1 million, compared to $30.3 million in the second quarter of 2019.
At Minnesota Power, that drop was largely due to the rate case resolution, which refunded $12 million to customers when the company opted to return to pre-pandemic rates, as well as some of its largest industrial customers going offline due to the pandemic.
“In the second quarter, we did experience some negative impacts on kilowatt hour sales to commercial, other industrial and municipal customers related to COVID-19, resulting in lower kilowatt hour sales of approximately 15%. As compared to 2019, residential sales were higher by approximately 7%,” Steve Morris, Allete’s vice president, controller and chief accounting officer, said on the call. “Overall we estimate that the COVID-19 pandemic impacted earnings by approximately 6 to 8 cents per share for the quarter.”
Asked by an analyst when Minnesota Power is expected to ask Minnesota regulators for a rate case or rate increase to make up for the loss in demand from Keetac and Verso, Morris acknowledged the company is considering one. The soonest Minnesota Power could seek a rate case is March 1, 2021.
“We could file with Keetac and Verso down on March 1. Interim rates wouldn’t go into effect until May 1 at the earliest, and then we would have to do a back-to-back rate case … or a multi-year rate case,” Morris said. “More to play out on that. Right now, it’s too early when we would file exactly as we do our budget and we get more clarity on Keetac and Verso into 2021.”
Shares of Allete fell $2.07 to close at $57.83 Wednesday. The stock has traded as high as $88.60 and as low as $48.22 in the past 52 weeks.