Aug 4, 2015
Executives
Al Hodnik - President and CEO Steve DeVinck - CFO
Analysts
Paul Ridzon - KeyBanc Chris Turnure - JPMorgan Brian Russo - Ladenburg Thalmann Chris Ellinghaus - Williams Capital Jay Dobson - Wunderlich Andy Levi - Avon Capital
Operator
Good day and welcome to the ALLETE Second Quarter 2015 Financial Results Call. Today's call is being recorded.
Certain statements contained in this conference call that are not description of historical facts are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.
Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, those discussed in filings made by the company with the Securities and Exchange Commission. Many of the factors that will determine the company's future results are beyond the ability of management to control or predict.
Listeners should not place undue reliance on forward-looking statements, which reflect management's views only as the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any forward-looking statements whether as a result of new information, future events, or otherwise.
For opening remarks and introduction, I would now like to turn the conference over to ALLETE's President and Chief Executive Officer, Alan R. Hodnik.
Please go ahead.
Al Hodnik
Good morning everyone and thanks for joining us today. With me on today's call is Steve DeVinck, ALLETE's Chief Financial Officer.
This morning we reported our second quarter financial results. Quarterly earnings were $0.46 per share which included acquisition related fees of $0.02 per share.
Second quarter operating revenue increased by 24% over the last year, primarily due to results from U.S. Water Services and ALLETE Clean Energy, as well as increased cost recovery rider revenue at Minnesota Power.
I am pleased with our second quarter financial and operational performance. During the quarter we had success and challenges on different fronts.
Our operating businesses however delivered and remained on course to provide sustainable value to our shareholders. We are pleased that our energy infrastructure and related services businesses are already benefitting our strategy.
Taking everything into account we are adjusting 2015 full year guidance to a range of $3.20 to $3.40 per share to reflect higher earnings at ALLETE Clean Energy due to the recently approved sale of a wind energy facility under construction to Montana-Dakota Utilities. Steve will go through the financial details in just a moment.
Let us talk first about our successes. During the quarter Minnesota Power's Great Northern Transmission Line Project was guaranteed a Certificate of Need by the Minnesota Public Utilities Commission.
This was a significant milestone for the project. We expect construction of the Great Northern Transmission Line to begin during 2016 and be completed in 2020.
Total project cost on the United States portion of the line, including substation work, is estimated to be between $560 million and $710 million, depending on the final route of the line. Minnesota Power will have majority ownership of the new line and anticipate an investment opportunity of $345 million.
In early July, Minnesota Power publicly announced its plans to further reduce carbon emissions as part of its EnergyForward strategy. Minnesota Power's EnergyForward strategy is already answering our nations call to transform its energy sector to be less carbon intense and more sustainable, this relative to President Obama's Clean Power Plant.
Beyond Minnesota Power’s 500 megawatt Bison Wind Energy addition, and it's great Northern Transmission initiative, EnergyForward contemplates adding natural gas to further balance overall power supply. As the transition continues, some smaller coal units in the Minnesota Power fleet will seize operation.
EnergyForward effectively balances reliability, affordability, and stewardship and Minnesota Power intends to recommend next steps with EnergyForward in an integrated research plan to be filed with the Minnesota Public Utilities commission by September 1, 2015. ALLETE's energy infrastructure and related service businesses continue to move forward with their strategies.
ALLETE Clean Energy reported two significant events related to its strategy execution. In early July, ALLETE Clean Energy closed down the purchase of a 100 megawatt Armenia wind energy facility in Pennsylvania.
This facility began commercial operations in 2009 and has power purchase agreements in place for its entire output through 2025. The addition of this facility is ALLETE Clean Energy and attractive entry into the Eastern U.S.
market for renewable energy. ACE now owns and operates more than 500 megawatts of wind generation with an expanded footprint to meet the nations demand for renewable energy.
Additionally, ALLETE Clean Energy continues construction of a 107 megawatt wind facility project for its customer Montana-Dakota Utilities. The project is expected to be completed in 2015.
This transaction is a great example of how the company is leveraging its reputation as an accomplished owner and operator that can also respectively manage the construction of these projects. I’m pleased to report that U.S.
Water Services is profitable and will undoubtedly be a noteworthy contributor to our financial results in the not too distant future. As you may recall, near-term results are impacted by a purchase accounting allocation.
We believe strongly in the nexus of energy and water and related growth prospects driven by water scarcity, conservation, and tightening water use regulation. As a point of interest, U.S.
Water now have customers in excess of 4,000, an increase of 20% since the beginning of the year. ALLETE's energy infrastructure and related services businesses are well positioned to complement the core regulated utility, balance exposure to business cycles and changing demand, and provide long-term earnings growth.
I will comment briefly on recent challenges as well. We continue to monitor the domestic steel industry and its impact on iron ore production by our customers.
As you've read in the press, these steel makers are pushing elected officials to take action against unfair trade practices to slow the pace of imports. Progress on this front has been made so more work needs to be done, as there are still high levels of imports creating difficulties for our steel markets.
Several steel companies have announced second quarter financial results and they're reporting that market conditions in the first half of the year were very challenging to say the least but they do anticipate improvement in the second half of the year. Recently Cliffs Natural Resources announced plans to temporarily idle their United Taconite mine in North Eastern Minnesota.
Cliffs stated that the idling of the production at the plant will be initiated as soon as feasible returning to production as soon as demand from customers return. On the positive side, Cliff also stated that the idling offers a chance to invest and start reengineering the plant to produce a fully fluxed taconite pellet.
That new product will replace a flux pellet now made at Cliffs' Empire mine operation in Michigan which is scheduled to shut down at the end of 2016. In the second quarter of 2015, United States Steel Corporation temporarily idled it's Minnesota ore operation Keetac plant in Keewatin, Minnesota, and a portion of its Minnesota ore operations Minntac plant in Mountain Iron Minnesota.
These actions were due to its current inventory levels and ongoing adjustments of its steel producing operations throughout North America. I am pleased to report that Minnesota Power received near full demand nomination for October to December 2015 from United States Steel Corporation.
In summary, Minnesota Power's Large Power Taconite customers nominate at approximately 80% of full demand levels for September and approximately 90% of full demand levels for October to December of 2015. All of our energy businesses carry unique strength and opportunities.
We are especially focused on approving our earned ROE at Minnesota Power, and on complementary growth at U.S. Water Services and ALLETE Clean Energy.
We like our portfolio of companies and are confident that their respective positioning will provide future shareholder value. I will make some additional comments after Steve takes you through the quarterly financial results.
Steve?
Steve DeVinck
Thanks, Al. And good morning everyone.
I would like to remind you that we filed our 10-Q this morning and I encourage you to refer to it for more details on the quarter. Today we reported second quarter 2015 earnings of $0.46 per share on net income of $22.5 million and operating revenue of $323.3 million.
Earnings for the second quarter of 2014 were $0.40 per share, a net income of $16.8 million and operating revenue of $260.7 million. This marks the 12th consecutive quarter of quarter-over-quarter consolidated revenue growth.
This year's quarterly results included acquisition transaction fees amounting to $0.02 per share, included in last year's second quarter results was a $0.06 per share non-recurring charge associated with the settlement agreement with the Environmental Protection Agency. Earnings per share for the second quarter of 2015, were diluted by $0.07 due to an increase in the number of shares outstanding.
Earnings from ALLETE's Regulated Operations segment which includes Minnesota Power, Superior Water Light and Power, and our investment in the American Transmission Company, were $23.6 million, an increase of $6.1 million over 2014 second quarter net income. This year's result reflect increases and cost recovery rider revenue, production tax credits, and power marketing sales partially offset by increased depreciation and interest expense.
Included in last year's quarterly results was the previously mentioned non-recurring charge related to a settlement agreement with the EPA. Operating revenue from this segment was similar to 2014, as higher cost recovery rider revenues and kilowatt-hour sales were offset by lower fuel adjustment cost recoveries, transmission revenue, and gas sales.
Cost recovery rider revenue increased $7.6 million, mainly due to higher capital expenditures for our Bison Wind Energy center and the Boswell Unit 4 environmental upgrade. Revenue from regulated operations increased $7.6 million due to increased kilowatt-hour sales.
Total regulated utility kilowatt-hour sold was 7.3% higher than 2014, primarily due to increased power marketing sales as the Minnkota Power sales agreement commenced in June 2014. Sales to residential, commercial and municipal customers were down 4.5%, mainly because of unseasonably cold temperatures during the second quarter of 2014.
Industrial sales decreased 12% due to reduced taconite production. Please keep in mind that although industrial kilowatt hour sales decreased for the second quarter of this year, revenue from our taconite customers was comparable to 2014 as these customers, as these customers nominated at full demand levels through August.
Fuel cost recoveries were down $8.7 million due to lower fuel and purchase power cost attributable to our retail and municipal customers. Transmission revenue was down $3.8 million largely due to our reserve recorded in the second quarter of 2015 from MISO return on equity complaint.
Please note that our overall reserve for the MISO complaint also includes the reserve for an estimated refund of MISO transmission expense resulting in a pretax net reserve of $1.9 million. $1.5 million was attributable to prior years.
Gas sales at Superior Water Light and Power were down $3.7 million compared to the second quarter of last year due to unseasonably cold weather in 2014. On the expense side, fuel and purchase power expense decreased $3.5 million primarily due to lower purchase power prices in 2015.
Transmission expense increased by $800,000 over 2014 primarily due to higher MISO related expenses offset by the estimated refund of the MISO transmission expense I mentioned earlier. Cost of sales decreased $3.3 million compared to 2014 due to less gas purchased by Superior Water Light and Power.
Operating and maintenance expense decreased $5.8 million compared to last year primarily due to the $4.2 million expense that was recorded in the second quarter of 2014 to reflect the EPA settlement. Salary and wage expense was also lower in 2015.
Depreciation and amortization expense increased $4.1 million or 14% from 2014, reflecting additional property, plant and equipment in service. Taxes other than income taxes increased $1.5 million or 14% over last year due to higher taxable plant and rates in 2015.
Interest expense rose by $1.9 million or 17% over last year primarily due to higher average long-term debt balances. Income tax expense declined by $3.2 million in the second quarter of 2015 compared to the same quarter last year mostly due to higher federal production tax credits with the completion of the Bison 4 Wind Energy center in December of 2014.
Equity earnings in ATC decreased $500,000 primarily due to the reserves recorded for the FERC ROE complaints. Year-to-date we have recorded $1.7 million in lower net income from ATC related to the FERC ROE complaints of which $1.1 million is attributable to prior years.
The Investments and other segment is comprised primarily of our energy infrastructure in related services companies, ALLETE Clean Energy, U.S. Water Services, and BNI Coal.
It also includes other miscellaneous corporate income and expenses as well as ALLETE Properties. This segment reported a net loss of $1.1 million compared to a second quarter 2014 net loss of $700,000.
Operating results from the companies in this segment were as expected. The net loss for the second quarter of 2015 included the acquisition transaction fees of $900,000, after-tax and higher interest and income taxes.
Revenue from this segment increased $62.2 million or 200% compared to the same period last year primarily due to U.S. Water Services, which was acquired on February 10.
ALLETE Clean Energy also contributed to the increase reflecting revenue from recently acquired facilities and the recognition of revenue under percentage of completion accounting for the MDU transaction. Costs of sales increased $36.7 million and operating and maintenance expense increased $16.9 million primarily due to the recent acquisitions of U.S.
Water Services and ALLETE Clean Energy wind acquisitions. Cost of sales also includes construction costs recognized under percentage of completion accounting for the MDU transaction.
Operating and maintenance expenses includes acquisition transaction fees of $1.6 million. Depreciation and amortization expense increased $3.3 million over 2014 reflecting additional property plant equipment, as well amortization of intangible assets related to the recent acquisitions.
Income tax expense increased $4.7 million over the same quarter last year. Accounting rules require the recognition of quarterly income tax expense at the estimated effective annual effective tax rate.
The estimated annual effective tax rate could differ from what a quarterly effective tax rate would otherwise be on a standalone basis and this may cause quarter-to-quarter differences and the timing of income taxes. During the second quarter, we reflected additional income tax expense in our investment and other segment of $2.5 million to reflect total tax expense at our estimated annual consolidated effective tax rate of 16.8%.
Of this amount, $1.2 million was related to the first quarter as we increased our estimated annual effective tax rate during the second quarter to 16.8% from 13.5% at March 31 2015. Year-to-date, ALLETE's cash flow from operating activities was $182.3 million and we carried a 44% debt-to-capital ratio as of June 30 2015.
As Al mentioned, ALLETE's full year earnings guidance has been adjusted to a range of between $3.20 and $3.40 to include higher earnings at ALLETE Clean Energy due to the expected development fee from the MDU transaction. We estimate the development fee to be between $20 million and $25 million pretax.
Based on demand nominations we received on July 31, Minnesota Power's Large Power Taconite customers nominated at approximately 90% of full demand levels for October to December of 2015. ALLETE's full year earnings guidance includes the impacts of these large power nominations and excludes acquisition related transaction fees.
Al?
Al Hodnik
Thank you, Steve. Let me provide you with a few additional updates and observations before Steve and I take your questions.
The Essar Steel Minnesota project continues with ongoing construction activity ramping up as evidenced by statements from Essar and regional media stories that they now have 550 building and trades workers on site. Essar has stated that it has spent $1.3 billion on the expected $1.9 billion project and it expects to continue to receive full production capability by 2016.
The new Essar facility will result in up to 110 megawatts of new load once the facility reaches full production. PolyMet's proposed copper-nickel and precious metal mining operation continues to advance.
The Minnesota Department of Natural Resources has indicated they would likely have the final environmental impacts statement or FEIS out in November of this year and shortly after that PolyMet will file key permits with the State of Minnesota. Minnesota Power has a contract with PolyMet, and it could begin to supply between 45 to 50 megawatts of new load beginning upon startup of mining operation as early as 2017.
I would now like to ask the operator to open up the line so that Steve and I can take your questions.
Operator
[Operator Instructions] Our first question comes from Paul Ridzon of KeyBanc. Your line is open.
Paul Ridzon
Good morning. How are you?
Just looking what your reaction was to the nominations and what visibility you might have at this point with regards to the December 1 nominations?
Al Hodnik
I feel pretty good about the demand nominations given the amount of buffeting that the industry is taking throughout the early part of the year. So, we feel very good about the nominations at this point.
With respect to going off into the Winter Paul, I don’t have any additional reconnaissance with regards to that. We do work closely with our industrial customers in their operations with our engineers and the like we watch market signals, as well I feel pretty good about domestic fuel consumption in autos, down there in the Great Lakes for most of this steel goers as no sign of weakness there at all.
And so I’m hopeful that whether this sort of glut of iron ore if you will and also fuel importation illegally that the federal trade commission is getting on now, we won a few of those battles up here and ultimately that they can get on with their operations and getting them back to normal. I’m also encouraged that they’re looking at sort of speaking their technology and looking at investments where they can to improve their pellet quality and products that they produce.
Paul Ridzon
What do you see as a calendar for tariff to come in?
Al Hodnik
For the tariff remediation?
Al Hodnik
Yes.
Al Hodnik
I don’t know those are long winded Paul in nature. Each one is individual in nature.
Each complaint that gets filed has its own sort of runway that it goes on. So, some other complains that have been resolved here more recently were from a year and half or more ago, some are going to get resolved here some time during the winter month.
So the trade commission works on a individual basis on each one of those and it’s very difficult to predict how they’ll map out on a runway basis.
Paul Ridzon
Okay. Thank you for the update.
Al Hodnik
You’re welcome.
Operator
Thank you. Our next question comes from Chris Turnure of JPMorgan.
Your line is open.
Christopher Turnure
Good morning Al and Steve, I just wanted to get some more color on the steel side of things or the taconite side of things at least and you talked about both U.S. Steel and Essar.
On the U.S. Steel side I wanted to get a sense of - if you knew - I don’t think you mentioned this in your prepared remarks but if you knew kind of when they were coming back on mine at each of the two facilities and if you have visibility into that.
And how - if so this downtime kind of compares to prior idlings of these or other taconite facilities in your territories years ago. And then also on the Essar front, you said that construction is ramping up is there or has there been any kind of slower than expected progress there versus their original expectations last fall when they resumed the whole process or has anything kind of changed, I don't know over the last six or so months?
Al Hodnik
Well I'll take the United States steel question first Chris. We don’t have any additional information that what U.S.
Steel has released at this point in time about their schedule return to production what alliance that they idle at U.S. Steel Minntac and at Keetac, but certainly there are demand nominations for the fall would signal that they’re finding to ramp up here and we feel very good about that.
With respect to how relatable these temporary idlings are to past history, I think you potentially recall the 2009 economic collapse of the U.S. economy or global economy and that particular instance the industry was down from May to the December time period and then swung back and recovered nicely.
There are other periods of the history where the industry has cycled up and down. This industry produces about 40 million tons per year.
They cycled on average between 35 and 40 million ton. So it’s not a highly regular cycle at this point in time, the amount is still doubling of course a sort of new in this particular case, so I think that affects the situation more than anything else at this point.
With respect to Essar Steel, construction again with the trades on the ground has reached 550 full time people working there that's substantial, that’s significant that really reflects sort of peaking towards peaker construction at this point in time. And so they really ramped up significantly.
They're going to work right onto the winter at this point in time to finish up the project. Their financing difficulties are behind them as well and we fully expect that they will commence some operation in 2016.
And as I have expressed many times that starting up a taconite facility is not like turning on a light switch in your bedroom, it takes time to ramp up these large pieces of operation and then integrate them all. So, we expect to ramp up in 2016 and ultimately as we move out in later year sort of enhanced or near full production.
Christopher Turnure
And then you mentioned on the water business seeing a customer count growth of 20% since the beginning of the year, is that better than you had originally expected. And could you just give us a little bit more color on how that business is performing after the first four quarter that has been part of you guys?
Steve DeVinck
Good morning Chris, this is Steve. First I want to say as we’ve kind of indicated we will be providing more information on U.S.
Water Services and ALLETE Clean Energy later this year as they trip to require reporting segment reporting rules. The customer growth is as we expected, but we had a high expectations here.
As we indicated U.S. Water had revenue of about $120 million last year and we expected to grow organically between 10% and 15%.
So it’s meeting our expectations, we have high expectation so they're up to a very good start under our ownership.
Christopher Turnure
Great, thanks.
Steve DeVinck
Thanks Chris.
Operator
Thank you. Our next question comes from Brian Russo of Ladenburg Thalmann.
Your line is open.
Brian Russo
Hi good morning. Just to follow-up on the roughly 90% demand nomination.
So that would imply 36 million tons on an annual basis and I believe you previously disclosed that one ton equals $0.03 annually for cost cutting. Just if you kind of do the math it's probably $0.03 negative impact fourth quarter and if that continues at 90% for all 2016 would be $0.12, is that accurate?
Steve DeVinck
That is a good rule-of-thumb that $0.03 per million tons and the way you’ve outlined it is, would fit with that general rule-of-thumb. And of course that’s before any other cost mitigation but is after selling in the wholesale market.
Brian Russo
Okay. And if you had any discussions with these customers, I mean it seems like it’s more temporary rather than a sustained downturn.
So we shouldn't necessarily extrapolate the 90% in the fourth quarter into 2016. Can you give your thoughts on that?
Steve DeVinck
Yes, I think that’s a good rule-of-thumb. I think that our view and I think their view is expressed all the steel makers express this more temporary than sort of longer lasting and there is some broader macro factors again but iron ore pricing and steel dumping that affect them all each of them have their own individual circumstances as they work through.
But I would say our view and our view is more temporary in nature than long-term.
Brian Russo
And do you know kind of how many megawatt hours one ton of production equates to?
Al Hodnik
We don't - have not disclosed that type of detail historically.
Brian Russo
Okay. And is there any significance of the 80% nomination September and then the step up to 90% in October through December.
I mean is that, it's too early to sense a trend there, but it’s headed in the right direction right?
Al Hodnik
No I would take the trend in the direction as a very positive thing of returning to service conformation affirmation of temporary versus more long lasting. Obviously they got to ramp these facilities backup again as I suggested to you and others, it’s not as simple as a light switch in a bedroom so you have to take time to ramp them all back, but I take the trend as a very positive thing for the industry.
Brian Russo
Okay. And if you wonder the tax affect the development fee on the MDU project, what tax rate should we use on the $20 million $25 million?
Steve DeVinck
Those earnings will be taxed closer to the statutory rate, which is in the 40% range.
Brian Russo
Okay, great. And then what is your year end 2015 projected shares outstanding?
Steve DeVinck
We have not disclosed that but I’ll say you can look at our shares outstanding at the end of the second quarter and we currently have no plans to issue any additional significant equity other than through modest - amounts through our employee and dividend reinvestment plans.
Brian Russo
Okay, great. And then lastly if we were to back out the MDU gain and transaction fees from your updated guidance of 3.20 to 3.40 where would you be, just trying to get a sense of the - of what your estimating the impact for the demand nominations is on 2015 guidance?
Steve DeVinck
Well if you run through the math, the MDU fee is currently estimated up between $20 million and $25 million pretax. You run it through the math it’s probably approximately $0.25 to $0.30 a share.
So you can take that away from our 3.20 to 3.40 and our guidance does reflect though in addition to that $20 million to $25 million that reflects the recent taconite nominations, it reflects the seizing of operations at Mesabi Nugget earlier this year, it reflects the impact of the FERC ROE compliance both at ATC and MISO, some of which the charges we've taken are related to prior years. And it also includes some storm damage cost for a severe weather event we had in July in Brainerd, Minnesota.
And we're still assessing those costs. There will be several million dollars and we are assessing what will be capitalized and what will be charged to operating and maintenance expense, but all those events and items are reflected in our updated guidance.
Brian Russo
Okay. So, if you adjust out the MDU, it's kind of like 295 to 310 versus your previous 3 to 320?
Steve DeVinck
That would be the math and the result of the items that I listed.
Brian Russo
Okay, great. Thank you very much.
Al Hodnik
Thank you, Brian.
Operator
Thank you. Our next question comes from Chris Ellinghaus with Williams Capital.
Your line is open.
Chris Ellinghaus
Hey, guys. Good morning, Chris.
A little bit more on the nominations, is Cliffs the predominant element of the 10% shortfall of full nominations?
Al Hodnik
Yes. That's correct.
Cliffs, United Taconite temporary idling is really the major impact resulting in the 90%.
Chris Ellinghaus
Okay. And can you give us a little more flavor for -- they've said, I know you talked about the switching of technologies, that'll take some time but have they given you some indications of how they see the phase back in to full production?
Al Hodnik
No. other than what they signaled, they are looking to see a reduction in steel dumping and or an increase in ore pricing like everybody else on a micro level -- of course they're working with their customers and other off takers who would be interested in their pellets, both existing and the new type of quality pellets that they're producing.
Their mines are all in pretty good shape as Laurenco Goncalves suggested many, many times, their focus is Minnesota, all of their operations in Minnesota and focusing on the iron ore business, so some of the distractions that have sort of impacted Cliffs over the last several years have also been alleviated a bit, Laurenco focuses on Minnesota ore operations, I think that as well, Boswell for northeastern Minnesota, and the fact that they're interested in these technology leaps if you will are taking their pellets to a new level of quality, I think Boswell for application and a variety of settings both blast furnace and with the sort of DRI type Electric Arc style furnaces. So, I'm actually feeling pretty good about Cliffs in the longer term.
Chris, obviously all of them are working through these sorts of steel dumping and low ore pricing challenges that they're facing at the moment.
Chris Ellinghaus
Okay. Can you just go over the prior year portions of the transmission reserves again?
Al Hodnik
I will. Sure.
So with respect to ATC and their FERC ROE compliance, approximately $1.1 million pre-tax or $700,000 after tax year-to-date, that's a year-to-date number, is related to prior years and that was mainly reflected in the first quarter. With respect to the additional MISO charges Minnesota Power will incur approximately $1.5 million or $900,000 after-tax is related to the prior year and that was reflected in the second quarter.
Chris Ellinghaus
Okay. Great.
And can you give us a little flavor on your thinking, on the next Minnesota Power case?
Al Hodnik
Sure. Our strategy for Minnesota Power Rate Case remains unchanged.
And as we stated, our strategy is to improve Minnesota Power's return on equity over time through cost containment and load growth remain committed to that plan, temporary deviations in industrial sales don't impact that, as we've talked out by no indication other than to believe those are temporary and it seems like some current events are demonstrating that. So, we are actively managing our costs and we'll have more to report on that as we move through the next 12 to 18 months and certainly we look forward to load growth both at Essar and PolyMet.
Chris Ellinghaus
Okay, great. Thanks for the color.
Al Hodnik
Thank you, Chris.
Operator
Thank you. Our next question comes from Jay Dobson at Wunderlich.
Your line is open.
Jay Dobson
Good morning. Hi, Al, and Steve, I guess on UTAC, and the Taconite nominations, walk us through just what it would look like I guess from a revenue perspective, but as well from an earnings perspective, if UTAC elected in the fourth quarter to start producing again and I am not asking you to predict whether they will or they won't, but if you look at how long Minntac and Keetac were out UTAC could come back just about October and November before the cooling ponds froze and be able to operate through the winter still having reduced inventory.
What would be the impact of them since they probably nominated a very minimum level?
Al Hodnik
It would not be material for that short period of time and I am going to use our rule of thumb that we provide about $0.3 per million tons, UTAC produces just under $5 million tons so you could take $0.3 x $5 million roughly give you in the zone of $0.15 per the year and then prorated to that divide that by two months or whatever you can kind of gets to be pretty small.
Q – Jay Dobson
No perfect. And then back to the tax element associated with MDU.
Just make and try understand that so it’s almost sort of I am sure it’s GAAP and the accounts are very smarter than I am, but it seems as if it’s almost lack of matching that you’re increasing the tax rate actually before you sort of receive any proceeds. So Steve I think you’re indicating by year end sort of it all washes out in the annualized numbers you have booked what is then the gain and the effective tax rate is appropriate, but it does have a depressing impact on second quarter and really first quarter I guess given the amount you have booked there even though I appreciate its not a non-recurring item.
Steve DeVinck
Yes that’s true Jay. And it is complicated and somewhat difficult to explain.
It’s not new. This has been - the accounting has been this way for quite some time, but different here in this quarter is the size of it.
And that’s why we felt the need to really provide some color and to talk about it and the reason it’s bigger and it is timing as you indicated and it is the result of what you indicated. The reason is bigger this quarter is that we have more earnings that are taxed at a higher rate and earlier we talked about the MDU transaction tax closer to the statutory rate that’s the reason and the overwhelming majority of those earnings are in the second half of the year, which creates this somewhat of a timing difference as we record to our effective rate estimated for the full year.
So it is a little bit of an anomaly in the second quarter here primarily just a result of timing because some of our -- most of our higher tax earnings are back end weighted. I hope that helped.
Q – Jay Dobson
Yes. Very helpful and then lastly on costs, I guess sort of a two-part question, first sort of how you see cost trending for sort of balance of the year and I am thinking of sort of the controllable costs sort of in reaction to a little bit of the nominations although still pretty close to full power.
And then maybe talk about some of those longer term cost studies you’re working on and how I am appreciate that’s a long-term effort, but sort of how the longer term on costs is looking as you sort of stare down some of the preliminary results of those studies?
Steve DeVinck
Thank you for that question. First of all if you looked at our regulated, operating, and maintenance expense for the first six months of the year its decreased approximately $8 million despite a $2 million required increase attributable to a maintenance service agreement with our Bison for Wind facility that went into service at the end of last year.
Now about half of that $4 million it was a charge we took last year for the nonrecurring EPA settlement liability, but the rest we’re beginning to see some of the work we’ve done its lower salaries and wages and lower maintenance and other miscellaneous expenses. So while not tremendously large at this point we are beginning to see the trend downward already.
So we are happy with the progress we’re making. It will take time for some of these cost containment efforts we’re doing and I mentioned a minute ago over the next 12 to 18 months and that’s what we can expect.
It will come across a broad spectrum of expense items here at Minnesota Power, but I wanted to point out that you’re beginning to see albeit somewhat small, but its trending down in the right way.
Q – Jay Dobson
That’s great thanks very much for the time.
Steve DeVinck
Thanks Jay.
Operator
Thank you. Our next question comes from Andy Levi of Avon Capital.
Your line is open.
Andy Levi
Just unrelated to steel whether or are not but just on the water side I just wanted to see this longer term what the strategy is there, should we should expect more acquisitions for you guys to make, was this is the one-off, are there opportunities to make more acquisitions further out.
Steve DeVinck
Thanks for that question and good morning this is Steve. First of all we are very excited about U.S.
Water and Al had mentioned how much we just really believe in an excess between energy and water. I don’t say this - we expect organic revenue growth between 10% and 15%, as well it is somewhat fragmented market.
So it has the opportunity to do some bolt-on acquisitions to fill a strategic need that could be geographic, it could be product line, it could be things like that. So we are excited about it and I think you will see growth on both fronts.
Al Hodnik
Andy this is Al. Would like additional comment I mean, in the last 24 hours of course the Clean Power Plant has got the most air play, clean ALLETE gas carbon and climate change but certainly just from a regulatory stringency perspective drought, water reuse, and conservation sort of all of that when I think of EPA and the U.S.
Waters Active America, when I think of state regulations in California and Colorado with respect to water consumption or reduction in water consumption, it just implies to me and speaks to me about first of all the an excessive energy and water, secondly that the water and use of water, reuse of water and waste water are going to become enormous issues in the next few years.
Andy Levi
So I guess the answer is yes
Al Hodnik
Certainly, you're going to look at both the organic side and also looking at roll up acquisition in the industry.
Andy Levi
Okay. And is there - just on the roll up side obviously the organic growth is self exploratory and you are in various different state in the acquisition that you have made, but is there a particular area of the country or region of the country is probably a better way to phrase it, that you may focus on just based on the opportunities.
And I assume these are like, would these will be mom and pops or these would be sizeable acquisitions like you have made this year.
Steve DeVinck
As you know or may not know our U.S. Water Services has a national presence predominantly, but there are a few geographic areas that we would like to have more significant presence and I can't name those today, but we are certainly looking at those.
And yes, the acquisitions would be much smaller than the initial acquisition of U.S. Water.
They are more on the smaller regional and local size entities.
Andy Levi
Okay, great. I appreciate it.
Steve DeVinck
Thanks Andy.
Operator
Thank you. We do have a follow-up from Mr.
Paul Ridzon of KeyBanc. Your line is open.
Paul Ridzon
Thank you. My questions are answered.
Steve DeVinck
Thanks Paul.
Operator
Our next question is from Brian Russo of Ladenburg Thalmann. Your line is open
Brian Russo
Yes, thanks for the follow-up. Just curious on any upcoming ACE opportunities or what is the pipeline look like and then what's the longest term strategy for that business or are you trying to achieve some sort of critical mass.
Steve DeVinck
Well we feel very good about what ACE has accomplished so far Brian as expressed. I think the build on transfer competency that's been added to ACE with the MDU project.
We don’t view that as one off at all, or kind of an one off deal, so we think that’s a great competency and a great add to their playbook. Certainly if you look at the Clean Power Plant as delivered yesterday by the Obama administration, certainly Bias stores enhanced renewable production across the country all forms Bias even further - in that way than natural gas even if you look at the rule of - in the last 24 hours.
So we see many more opportunities that ALLETE Clean Energy to be involved in both acquisition projects and building the projects and growing in the renewable space. So we think it's well positioned.
At this point in time as far as science and maths, no way to predict that just yet as well, but we see it is very much complementary to what we’re doing. It's going to be heavily involved and what I would call reoccurring revenues and power purchase agreements that make sense for the long term so nothing merchant, we haven’t changed our views in that regard either and that we see a lots of opportunities ahead for ACLE across the country.
Again ACE like U.S. Water is also spread across the country.
We will be careful and selective and disciplined as we have been right along with our acquisitions but we see the United States as being fertile ground, renewable is being fertile ground, EPA or CPP is being the enabler to help ALLETE Cleaner Energy grow further.
Brian Russo
All right, great. Thank you.
Steve DeVinck
You’re welcome.
Operator
Thank you. We do have a follow-up from Andy Levy of Avon Capital.
Your line is open
Andy Levy
I apologize I did have a follow-up question. I apologize if someone asked this before you talked about say, hopped down a little late, but just on the segment reporting on the Water side from the acquisition, when could we possibly start to see that?
Al Hodnik
We expect to report segment information for ALLETE Clean Energy and U.S. Water Services later this year.
Whether that will be Q3 or Q4 work in progress still.
Q – Andy Levy
Okay. And is that just more or like accounting thing and trying to get all of the numbers together or is there another reason.
Al Hodnik
It will be when it trips the required rules around segment reporting, will be the driver.
Q – Andy Levy
Okay. And just - if you could just let us know what the required rules are, just how we understand them.
Al Hodnik
Simply stated in generally if it's more than 10% of certain metrics, which you're going to have to give me a little leeway here I believe there are assets revenues and net income are the three. I mean I would have that exactly right.
Q – Andy Levy
Okay. I remember there being a CPA next to your name.
Al Hodnik
Well there is.
Q – Andy Levy
Well there is I apologize. I didn't mean to insult you.
Okay, well thank you very much.
Al Hodnik
Thank you, Andy.
Operator
Thank you. At this time, I would like to turn the call back to Mr.
Hodnik for any close remarks.
Al Hodnik
Well thanks again for joining us everyone. We’re very excited about ALLETE's progress broadly and we look forward to catching up with you and meeting with you along the way here as the year closely towards the end of the year.
Thank you very much.
Operator
Ladies and gentleman, thank you for your participation in today's conference. This concludes the program, you may now disconnect.
Everyone have a great day.