ALLETE, Inc. (ALE) is a diversified energy company with a strong presence in the regulated utility space as well as growing renewable energy investments. With a history dating back over a century, ALLETE has evolved to meet the changing demands of the energy industry, positioning itself as a leader in the clean energy transition.
Business Overview ALLETE was originally incorporated in 1906 as the Minnesota General Electric Company, focusing on providing electric power to the northeastern region of Minnesota. The company changed its name to Minnesota Power & Light Company in 1923. In the 1980s and 1990s, ALLETE underwent a major transformation, diversifying beyond its core electric utility business. It acquired various non-utility subsidiaries, including a real estate development company and a coal mining operation in North Dakota. This diversification strategy helped the company weather challenges in its traditional utility business, as industrial customers faced economic headwinds.
In the early 2000s, ALLETE refocused on its core electric utility operations, selling off many of its non-utility businesses. It also made strategic investments to modernize and upgrade its generation and transmission infrastructure, helping to improve reliability and efficiency. This included significant investments in renewable energy projects, such as wind farms developed through its ALLETE Clean Energy subsidiary.
Over the past decade, ALLETE has navigated a number of challenges, including stricter environmental regulations, shifts in customer demand, and evolving power generation technologies. The company worked to reshape its generation portfolio, reducing its reliance on coal-fired power plants while expanding its renewable energy assets. It has also focused on controlling costs and maintaining reasonable utility rates for its customers. Despite these challenges, ALLETE has maintained its position as a leading electric utility in the Upper Midwest region.
Today, ALLETE's primary business segments are Regulated Operations, ALLETE Clean Energy, and Corporate and Other.
Regulated Operations ALLETE's Regulated Operations segment is anchored by its two utility subsidiaries - Minnesota Power and SWLP. Minnesota Power serves approximately 150,000 retail customers in northeastern Minnesota and has 14 non-affiliated municipal customers. SWLP provides electric, natural gas, and water service to around 15,000 electric, 13,000 natural gas, and 10,000 water customers in northwestern Wisconsin. This segment also includes ALLETE's investment in American Transmission Company (ATC).
Over the years, Minnesota Power has been actively transitioning its generation mix away from coal and toward renewable sources. In 2021, the company announced a vision of delivering 100% carbon-free energy by 2050. This strategic shift has been aided by regulatory support, with Minnesota passing legislation in 2023 that requires the state's electric utilities to source 100% of their retail sales from carbon-free energy by 2040.
In the first nine months of 2024, Regulated Operations accounted for approximately 79% of ALLETE's total operating revenue and 87% of ALLETE's net income attributable to the company. Operating revenue increased slightly compared to the same period in 2023, driven by higher interim rate revenue which was partially offset by lower fuel adjustment clause recoveries, transmission revenue, and kWh sales. Operating expenses also increased, primarily due to higher operating and maintenance, depreciation, and property tax expenses. Net income attributable to ALLETE from the Regulated Operations segment was relatively flat compared to the prior year period.
ALLETE Clean Energy ALLETE Clean Energy, a wholly-owned subsidiary, focuses on developing, acquiring, and operating clean and renewable energy projects. The company currently owns and operates over 1,200 MW of nameplate capacity wind energy generation across seven states, with a majority of the output contracted under long-term power sales agreements.
In addition to its own project development, ALLETE Clean Energy also engages in the acquisition of operating wind energy facilities, often with an eye toward repowering and recontracting opportunities. This strategy has allowed the company to grow its renewable energy portfolio while diversifying its asset base.
In the first nine months of 2024, ALLETE Clean Energy's operating revenue decreased significantly compared to the prior year period, primarily due to the sale of several wind energy facilities in 2023. Net income attributable to ALLETE from ALLETE Clean Energy was $10.1 million in the first nine months of 2024, compared to $66.4 million in the same period of 2023. The decrease was largely due to the absence of a $44.3 million after-tax gain recognized in 2023 related to a favorable arbitration ruling.
Corporate and Other The Corporate and Other segment includes ALLETE's renewable development company New Energy, its investment in the Nobles 2 wind energy facility, its non-regulated Wisconsin subsidiary South Shore Energy, its coal mining operations BNI Energy, its legacy Florida real estate investment ALLETE Properties, as well as corporate expenditures, unallocated interest expense, and earnings on cash and investments.
In the first nine months of 2024, the Corporate and Other segment's operating revenue increased slightly compared to the prior year period, while net income attributable to ALLETE decreased to $6.7 million from $16.8 million. The decline was primarily due to $19.5 million in after-tax transaction expenses related to ALLETE's merger agreement, as well as lower earnings from Minnesota solar projects.
Financial Performance Over the past three years, ALLETE has demonstrated consistent financial performance. In 2023, the company reported annual revenue of $1.88 billion and net income of $247.1 million, or $4.30 per diluted share. The company's cash flow generation has also been solid, with 2023 operating cash flow of $585.3 million and free cash flow of $314.1 million.
For the most recent quarter (Q3 2024), ALLETE reported revenue of $407.2 million, net income of $45.0 million, operating cash flow of $190.8 million, and free cash flow of $94.5 million. The company's revenue increased by 7.5% compared to the same quarter last year, driven by higher contract revenue from its ALLETE Clean Energy segment. Net income decreased by 47.7% year-over-year, primarily due to $19.5 million in after-tax transaction expenses related to the pending merger. Operating cash flow decreased by 27.6% and free cash flow decreased by 45.0% compared to Q3 2023, reflecting lower operating cash flows and higher capital expenditures.
ALLETE primarily operates within the United States, with the majority of its revenue generated from its regulated utility operations in Minnesota and Wisconsin.
Liquidity ALLETE's balance sheet remains healthy, with a debt-to-capital ratio of 35% as of the end of 2023. As of September 30, 2024, the company reported a debt-to-equity ratio of 0.64x, cash of $101.9 million, and available credit lines of $338.6 million. The company's current ratio of 1.45x and quick ratio of 0.95x indicate a strong liquidity position, providing flexibility to fund ongoing operations and future growth initiatives.
Recent Developments and Outlook In May 2024, ALLETE announced that it had entered into a definitive agreement to be acquired by a consortium led by Canada Pension Plan Investment Board and Global Infrastructure Partners. The $3.9 billion transaction, which is expected to close in the second half of 2025, will provide ALLETE's shareholders with $67 per share in cash.
Regarding the company's operational outlook, ALLETE has provided the following guidance: - Net income from Regulated Operations to account for approximately 75% of total consolidated net income in 2024 - Continued investment in transmission infrastructure, renewable energy, and environmental compliance projects
Risks and Challenges While ALLETE has demonstrated resilience, the company faces several risks and challenges common to the utility industry, including: - Regulatory uncertainty and the potential for unfavorable rate case outcomes - Exposure to commodity price volatility, particularly in the coal and natural gas markets - Integration and performance risks associated with renewable energy project development and acquisitions - Potential impacts from extreme weather events and the ongoing transition to a lower-carbon economy
Industry Trends The electric utility industry is seeing increased investment in renewable energy and grid modernization, with a focus on reducing carbon emissions. The compound annual growth rate (CAGR) for the U.S. electric utility industry was approximately 3.5% over the past 5 years.
Conclusion ALLETE's diversified business model, anchored by its regulated utility operations and growing renewable energy portfolio, has enabled the company to navigate the evolving energy landscape. With a strong financial foundation, a commitment to the clean energy transition, and a strategic acquisition in the works, ALLETE appears well-positioned to continue delivering value to its shareholders in the years ahead. The company's solid operational performance, despite recent merger-related expenses, and healthy liquidity position support its ongoing capital investment program focused on renewable energy and grid modernization initiatives.