A Utility Company Making Green Pay

02/11/2013 11:30 am EST

Focus: ENERGY

Timothy Thorp

Vice President-Investor Relations, ALLETE, Inc.

Tim Thorp, VP of Investor Relations at Allete, discusses his company's growth prospects while it tries to update its utility practices to the new realities of alternative energy.

Nancy Zambell: My guest today is Timothy Thorpe, the vice president of investor relations at Allete (ALE), an energy provider in the upper Midwest. Thank you so much, Tim, for joining me today.
 
Tim Thorp: Well thank you for having me.
 
Nancy Zambell: Can you tell us a little bit about the regional economic growth in your service territory, which is in very cold northern Minnesota?
 
Tim Thorp: It's a very cold northern Minnesota, but there is a lot of activity that's been going on in the past couple of years. Basically it all revolves around growth, and not only the traditional iron-ore mining that has occurred in northern Minnesota for probably 100 years.

It's one of the world's-some folks say it's the second-largest-but it's quite a large deposit of copper, nickel, and precious metals. And most ores have never been mined in Minnesota. So there are a number of entities, companies with deposits of copper, nickel, and precious metals.

The first one of those is a company called PolyMet (PLM), a publicly-traded company. They're based out of Vancouver, I believe, but they are currently in the final stages of environmental permitting, and if that's successful, they would probably be in a position to begin mining in either late 2014 or 2015.

Beyond that, there are a number of other companies that are basically allowing this process to happen, so it sort of sets a standard for them for their environmental permitting as well. If PolyMet's successful, there could be a real boom in our service territory. And of course, these folks are all electric customers of our largest company, Minnesota Power, and they're huge electric users.

I don't want to forget the iron-ore mines and the taconite mines that have been in our service territory for many, many years. A number of them have recently undergone expansions. There are a couple more that have expansion plans, and then there's one brand new taconite facility being constructed that's going to come online this year.

Some of these facilities will take about 200 megawatts of electricity. One megawatt would serve about 500 homes, so you can see how large these customers are. And, obviously, if they're buying electricity from us, that is good for our bottom line and also will help us pay a substantial dividend as well.
 
Nancy Zambell: And speaking of your dividend, I saw that you had just increased it to 47.5 cents per share. Can you tell us a little bit about what your current yield is and about Allete's policy?
 
Tim Thorp: As we speak, the price of Allete stock is around $46, so that equates to about a 4.1% yield, and that's pretty standard for a utility company our size. That's pretty average yield, but a very healthy yield.
 
Nancy Zambell: Especially in light of what you can get at the bank today.
 
Tim Thorp: Exactly, exactly. The board has a dividend policy, basically, to maintain a payout ratio of earnings similar to a peer group of utilities.

We have a peer group that's roughly the 25 or so smallest investor-owned utilities in the country, and the average payout ratio for that group right now ranges between 60% and 70%. So that's kind of what our board takes a look at, and we want to maintain that payout ratio. But, of course, with earnings growth going forward, that's going to allow us to continue to grow the dividend.
 
Nancy Zambell: Very nice. Now Minnesota Power is your largest business. Can you describe why your company says that the geographic location is strategic?
 
Tim Thorp: Well that's a good question, and we do talk a lot about our strategic location. There are two factors to that.

I already mentioned that in our service territory there are large deposits of copper, nickel, precious metals, and also iron ore, or taconite. So if a company wants to mine those materials, they would have to buy electricity from Minnesota Power. You know, it's not like you can pick up the ore and move it somewhere else and move it to a different service territory.
 
Secondly, and also this is a big part of our strategy going forward, is that we are just south of a very large hydroelectric generation that's being developed that is also being developed in Manitoba, which is just north of us. We are just east of some of the best-quality wind in North Dakota. And we have transmission that goes out into North Dakota, and we do own windmills out there.

It allows us as a company to meet some state-mandated renewable requirements, and all this power has been very low cost. Actually, we've developed wind and it's lowered the cost to our customers, believe it or not. We take what we need to serve our customer base to meet our renewable requirements.

But then we're just at the crossroads transmission-wise where we can deliver this renewable energy to other utilities who may have the same mandates from their states, but may not have access to it. We basically are saying we have a strategic location with transmission access out to this renewable energy, and then we're also next door to larger-end users of this product, so we're kind of the middleman if you will.
 
Nancy Zambell: Well, that makes a lot of sense, and it sounds like that sort of feeds right into your new energy plan.
 
Tim Thorp: It does. It's part of the Energy Forward plan. Energy Forward basically is a comprehensive plan that deals with a number of issues, one of which obviously is to reduce our reliance on coal. Currently, about 75% of our generation is coal-based generation, but the other 25% is a combination of wind, hydroelectric, and other renewables at the current time.

Our vision going forward is by 2020 to 2025, to be about 1/3 coal, 1/3 natural gas (we don't have any natural gas now), and 1/3 renewables. Our energy forward plan is basically all the details of how we're going to get there, and it revolves around the hydroelectric power that we'll be taking from Manitoba.

We're going to add additional wind generation in North Dakota. We plan to convert one of our old coal plants, Alaskan Energy Center, from coal to natural gas in 2015, and we're also going to retire a small coal unit. The combination of all those things will allow us to reach that vision.

And, of course, these are all rate-based capital investments. The Minnesota Commission allows us a return on that investment, and that hits us at our bottom line, so there are also earnings growth initiatives as well.
 
Nancy Zambell: Well it sounds like a pretty good plan, considering how green our country is striving to be.
 
Tim Thorp: Well that's a big value of our company. And, of course, Minnesota historically has been a very environmental conscious state, but we're just gratified that we're able to achieve these goals and at the same time maintain-or in a lot of cases reduce-the cost of energy production. That's also good to our customers, and at the same it's good for investors, so it's almost a win-win situation.
 
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