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ALLETE execs weigh asking Minn. regulators to reconsider rate cuts in 2018

ALLETE Inc. executives are committed to controlling costs and "rescaling" subsidiary Minnesota Power Inc. after a significant cut to its allowed rate of return by state regulators, but they are still looking for opportunities for the state to reconsider the rate cut.

In November 2016, Minnesota Power applied to the state Public Utilities Commission for a $55.1 million increase to its electric base rates, which is based on a return on equity of 10.25% and an overall rate of return of 7.6%. In January, the commission approved a $12.1 million increase based on an ROE of 9.25%. Executives expect the PUC to release an order with their decision on March 12 and for the new rates to go into effect in the fourth quarter of 2018, they said Feb. 15 on the company's fourth-quarter 2017 earnings call.

"Minnesota Power fully intends to earn its 9.25% return, and it will be reviewing all dimensions within the enterprise as it rescales and repositions the business," Alan Hodnik, ALLETE's chairman, president and CEO, said.

He indicated the company is going to use "normal channels," including asking the commission to reconsider excluding certain factors from rate base. One factor the company might ask the commission to reconsider is an annual rate review mechanism, which the PUC in January denied but would have allowed Minnesota Power to adjust rates in between rate cases. The mechanism helps given half of ALLETE's regulated electric sales go to industrial customers whose operations fluctuate based on market conditions. During the rate case, for example, Hodnik noted that that one of its industrial customers, paper products manufacturer UPM Blandin, in October 2017 closed one of two paper machines, which accounted for the loss of about 25 MW of load.

Instead of asking for reconsideration, Hodnik also said the company may reopen discussions with the PUC and other state agencies on the ARRM.

ALLETE reported fourth-quarter 2017 net income of $41.4 million, or 81 cents per share, down from $44.3 million, or 89 cents per share, in fourth-quarter 2016, according to the company's earnings release. The fourth-quarter results surpassed S&P Capital IQ consensus estimates of 73 cents per share.

For full-year 2017, ALLETE booked net income of $172.2 million, or $3.38 per share, compared to $155.3 million, or $3.14 per share, in 2016. The company expects earnings in 2018 to fall within a guidance range of $3.20 per share to $3.50 per share, according to its release.

Hodnik told analysts to expect announcements to come on its renewable development arm, ALLETE Clean Energy. The division in 2016 and 2017 contributed 6% to ALLETE's overall consolidated operating revenue, but executives expect its share to grow, according to the parent company's Form 10-K. Three quarters of the company's consolidated revenues in 2017 came from its regulated operations which includes Minnesota Power, Superior Water Light and Power Co., and its 8% stake in transmission firm American Transmission Co. LLC.

Electric sales in 2017 to regulated customers in Wisconsin and northeastern Minnesota totaled 14.7 million MWh, up about 4% from levels in 2016, according to its Form 10-K. Industrial customers made up about 7.3 million MWh of electric sales in 2017.