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Allete reports solid 2017, cost-cutting for 2018

DULUTH—Corporate leaders of Allete Inc., the Duluth-based parent company of Minnesota Power, said Thursday, Feb. 15, that they will take steps this year to control costs, increase efficiencies and "impose discipline" as they "rescale the business" to bolster profitability in 2018.

Allete CEO Alan Hodnik told industry analysts in a conference call that if the company can't get increased returns via higher utility rates, Allete will hit its 9.25 percent return on revenue goal "by virtue of discipline with the business."

Hodnik did not detail what that discipline would be. Return on revenue, a measure of company profitability, is calculated by dividing net income by revenue. A business can increase its return by increasing profit or by cutting expenses.

Allete had sought a $55 million annual increase in revenue from its Minnesota Power electric customers as the primary way to hit a higher return on revenue. But that request was scaled back to just $13 million by the Minnesota Public Utilities Commission in a decision released Jan. 18.

"While several key customer objectives were met during the rate review, Minnesota Power is disappointed ... that the overall rate review decision was below its original request from a credit market report and investor perspective," Hodnik said Thursday. As a result of the PUC's decision, Standard & Poor's downgraded its outlook for Allete from "stable" to "negative." Moody's termed the rate review outcome as "credit negative."

Hodnik said Allete may ask the PUC to take another look at key facts in the rate case, or it may re-submit the request for a second review.

Thursday's conference call with analysts came after Allete released its final 2017 financial results, showing earnings of $3.38 per share on net income of $172.2 million and operating revenue of $1.42 billion. That's up from 2016, which saw earnings of $3.14 per share on net income of $155.3 million and operating revenue of $1.34 billion. The increase came mostly from Allete's non-regulated businesses as well as a $13 million positive impact from the new federal tax bill approved in December.

But the company reported that its regulated businesses — including Minnesota Power and Superior Water, Light and Power — saw lower revenues in 2017 than 2016 for myriad reasons, including "lower kilowatt hour sales to residential, commercial and municipal customers due to milder temperatures in 2017."

Hodnik said Minnesota Power's mining customers, which account for more than half its electricity sales, will continue at full capacity in 2018, with steel production expected to increase nationally by 1 percent. He expressed optimism that both the proposed PolyMet copper mine and Mesabi Metallics taconite projects will continue to advance. PolyMet would use about 50 megawatts of Minnesota Power electricity.

Hodnik also expressed hope that Cleveland-Cliffs and Chippewa Capital Partners, owners of Mesabi Metallics, can work out their heated battle for iron ore reserves in Nashwauk, Minn.

"I think it's possible for both operations to do what they want to do," Hodnik said.

"I am pleased with our financial performance and accomplishments in 2017 as we continued to execute on our multi-faceted strategy for growth while returning more than $100 million to shareholders in the form of dividends. Our businesses are well-positioned as we move into 2018 and beyond," Hodnik said, adding that the company will seek to increase long-term earnings growth from 5 percent to between 5 and 7 percent for 2018.

Allete also announced Thursday that it will increase its quarterly dividend on the company's common stock to 56 cents per share, an increase of 4.7 percent. On an annual basis, the increased dividend is equivalent to $2.24 per share. The company expects 2018 earnings per share to be within a range of $3.20 to $3.50.

"Allete is proud of its track record of returning value to its shareholders, and this represents the 68th consecutive year of dividends on its common stock," Hodnik said.

In addition to Minnesota Power and Superior Water, Light and Power, Allete also owns BNI Energy in North Dakota; Allete Clean Energy, a developer of energy projects with limited environmental impact; U.S. Water Services, based in St. Michael, Minn., which provides integrated water management; Allete Renewable Resources, which operates and maintains wind generation facilities in North Dakota; and Allete Properties, which owns real estate in Florida.