2023-08-11 12:30:00 ET
Summary
- Allete, Inc. exceeded expectations in Q2 2023, reporting higher GAAP EPS and revenue than estimated.
- The company's Regulated Operations segment saw increased net income due to higher retail sales and lower property tax expenditures.
- Allete Clean Energy benefited from the sale of the Red Barn project and reduced operational expenses, contributing to higher earnings.
Thesis
In the second quarter of 2023, Allete, Inc. ( ALE ) exhibited a strong financial performance, surpassing expectations and revealing a promising trend across various business segments. The company reported a GAAP EPS of $0.90 , beating estimates by $0.11, and a revenue of $533.4M, which beats by $86.83M. Despite challenges in areas like wind energy resources and inflationary pressures, the company's overall direction is positive, supported by key sales and strategic alignments. This analysis argues that ALLETE's combination of solid financials, steady growth, and strategic planning positions it favorably for investors, with various segments contributing to a healthy outlook for the future.
Company Overview
Allete, Inc., headquartered in Duluth, Minnesota, is a diversified energy company established in 1906 and formerly known as Minnesota Power, Inc. Its operations are divided into three main segments: Regulated Operations, ALLETE Clean Energy, and Corporate and Other, encompassing various energy sources including coal-fired, natural gas, hydroelectric, wind, and solar. With a strong regulated utility presence in northwestern Wisconsin and northeastern Minnesota, ALLETE also focuses on renewable energy, owning approximately 1,300 megawatts of wind energy facilities, and has additional interests in coal mining and real estate investment, operating 162 substations with a total capacity of 10,116 megavolt amperes.
Allete's Q2 Earnings Highlights
In the second quarter of 2023, ALLETE has reported a discernible uptick in its financial performance, showcasing an earnings of $0.90 per share, a leap from the previous year's $0.67 per share. Delving deeper into the numbers, the net income reached $51.5 million, outperforming 2022’s $37.6 million. This upswing is fundamentally tethered to an impressive $7.4 million earnings from the New Energy division, and a positive trend in retail sales within the Regulated Operations bracket.
Analyzing the figures further, the Regulated Operations segment presents an encouraging narrative. The net income stands at $37.8 million for the aforementioned quarter, rising from $29.6 million the prior year. The impetus behind this rise? A confluence of bolstered retail sales and a dip in property tax expenditures. Additionally, it's worth noting some temporal disparities in interim rate refund reserves which are poised to balance out as the year progresses.
ALLETE Clean Energy's financial narrative is punctuated by the noteworthy sale of the Red Barn build transfer project for a sum of $160 million. This was acquired in April by both the Wisconsin Public Service Corporation and Madison Gas and Electric, manifesting a gain which surpassed forecasts by $0.03 per share. Furthermore, this segment witnessed a fiscal windfall due to diminished operational and maintenance expenses, which added another $0.03 per share to their earnings.
However, when broached with the question of ALLETE's strategy regarding transactions like Red Barn on the conference call, Jeff Scissons, Director of Corporate Development, offered a nuanced view. The company’s strategy is dynamic, he noted, and is not averse to either build-own-transfer models or recontracting under power purchase agreements, as was seen with Condon. The essence is to find a strategy that not only provides fiscal benefits, but also aligns with ALLETE Clean Energy and ALLETE's broader goals.
Shifting our lens to the Corporate and Other business segment – a conglomerate of New Energy, BNI Energy, and renewable energy facility investments – the numbers are equally compelling. The net income stood at $10.6 million, a vast improvement over 2022’s $2.2 million. Moreover, a positive influx was observed from the Minnesota Solar projects launched in the tail end of 2022.
CFO Steve Morris, when discussing New Energy's quarterly dynamics, commented on the predictability of significant project closings in the second quarter. While they had anticipated this and incorporated it into their financial predictions, Morris emphasized that such peaks might not be a regular feature each quarter.
Looking ahead, ALLETE remains poised on its initial projections for 2023. Their earnings prediction oscillates between $3.55 and $3.85 per share for the year.
Performance: Crawling, Not Leaping
Looking at Allete's share price performance in the medium-term, investors will notice a growth from USD $50.83 to USD $57.18 over the period. This represents an annualized rate of return ((ROR)) without dividends of only 1.56%. In contrast, the broader market index ( S&P 500 Index ) grew at an annualized rate of 10.84%. This tells me that ALLETE's share price performance has been somewhat sluggish, lagging significantly behind the broader market.
Now, looking at the dividends, it appears that Allete has been committed to delivering value to shareholders through consistent dividend payments. The dividend growth rate, averaging 3.68% over the 7-year period, shows a stable commitment to growing this aspect of shareholder value.
Valuation: Undervalued
Allete's blended P/E of 16.03x compared to the normal P/E ratio of 20.35x suggests that the market might be undervaluing ALE.
When it comes to earnings, the adjusted (operating) earnings growth rate is pegged at a relatively modest 2.15%. It's not stellar, but it's steady and might explain the stock's undervaluation. However, steady growth can often be a sign of stability, which might be a plus point for more conservative investors. And the EPS yield at 6.24% is somewhat impressive and offers a favorable return on investment.
Allete's Challenges: Fighting Headwinds
Allete Clean Energy's performance encountered headwinds, figuratively and literally. During the second quarter, the company's earnings stood $3.1 million , notably diminished from the previous year's $5.8 million. When dissected, management attributed a significant portion of this downturn, approximately $0.15 per share in earnings, to the less than optimal wind resources available at numerous facilities, a pattern resonating across the nation. Allete's management has subsequently adjusted their forecast, anticipating sub-par wind conditions for the remainder of the year across their entire fleet.
While the immediate challenge presents concerns, an expansive view of the prevailing wind trends provides grounds for cautious optimism. A study undertaken by S&P Global Commodity Insights , drawing upon the 20-year average 100-meter wind speed data from the European Centre for Medium Range Weather Forecasts, unearths a more favorable long-term trajectory. This analysis indicates that, contrary to the current downturn, wind speeds have actually risen in every state with existing operational capacity within the contiguous U.S. from the second quarter of 2000 to the second quarter of 2022.
The specifics of these increases present a varied landscape, with a minimal 0.7% growth in South Dakota to an appreciable 6.4% in Utah. The most pronounced expansions have been discerned in the Western and far Northeastern regions of the United States. In contrast, the Upper Midwest has only seen a modest increase, registering less than 1% growth in average wind speed over this past 22-year period.
Shifting focus to Allete's financial structuring, the second quarter additionally saw an erosion in earnings per share by an estimated $0.02. This can be traced back to the addition of shares of common stock as of June 30.
Finally, turning to Minnesota Power, their financial landscape for the first half of 2023 painted a brighter picture, surpassing anticipations. However, there is an underlying skepticism regarding their potential to match or outperform the permitted return on equity this year. Delving deeper, inflationary pressures combined with the onboarding of new personnel - integral for their green energy transition strategy - are predominantly responsible for this sentiment. Subsequently, Minnesota Power is strategizing a rate case scheduled for November.
Rating: Buy
Allete's Q2 financial performance has shown improvements across several segments, most notably in earnings per share and net income. Although the company has faced challenges in Clean Energy due to unfavorable wind conditions, long-term data suggests a more optimistic outlook for wind trends. The stock is currently undervalued, with a blended P/E lower than its normal P/E, and a consistent dividend growth rate. Despite underperforming the broader market index, the solid financials, undervaluation, and potential for growth make Allete an attractive buy for investors.
For further details see:
Allete's Q2 Performance: Generating Energy And Enthusiasm