ALLETE’s Latest Transition Acknowledges the Water-Energy Nexus

ALLETE Inc., a Minnesota holding company known mostly for its Minnesota Power subsidiary, is making a major strategic transition into the broader world of energy services, exemplified by its recent purchase of U.S. Water Services. At the same time, Minnesota Power, which previously transitioned from hydro to coal, now is shifting to a portfolio of coal, gas, and renewables, in roughly equal thirds.

ALLETE Inc., based in remote and rugged Duluth, Minn., was a bit of an enigma when it announced earlier this year that it would buy 87% of U.S. Water Services Inc., a privately held, Minnesota-based industrial water treatment company, for $168 million.

Why would a company built around electricity generation and distribution want to acquire a firm in the water services business? "It was entirely an intentional move," Robert Adams, ALLETE's vice president for "energy-centric business" and chief risk officer, told POWER in March. "Our focus is broadly energy. We think not just about power, but energy infrastructure and energy services. That includes transmission, pipelines, delivery of services." Add water and wastewater management.

Adams said the U.S. Water acquisition was the result of "a four-year effort to find opportunities in the energy space." He noted that energy-related businesses are "among the largest consumers of water." The industrial customers that Minnesota Power serves-taconite (iron ore) mining and pelleting, pulp and paper, and oil and gas refineries and pipelines-are large water consumers with needs related to water conservation and management, water quality, and effluent discharge. U.S. Water has developed a successful business and a stellar reputation in that market.

A water services business aimed at large industrial and energy customers, Adams said, "Was directly in our business wheelhouse." Specifically, Minnesota's taconite industry-mining the basic raw material for primary iron and steel production-faces a number of water challenges, including upcoming changes in discharge guidelines under the Clean Water Act. "We are trying to provide solutions to our customers," said Adams. Water solutions are among them.

Electric generating plants are also large water users (see "Water and Wastewater Treatment Technology Update" in the March issue or at powermag.com). Minnesota Power's 57-MW Hibbard Station, which largely burns wood and wood wastes, had a contract with U.S. Water for work on engineering and chemistry. Adams said the plant's management was quite pleased with their relationship with U.S. Water. That gave ALLETE confidence in its acquisition.

A History of Diversification

The U.S. Water buy represents just the latest business diversification move ALLETE has made over the years. The company's foundation is Minnesota Power, its prime business asset with 144,000 customers. Over half of the utility's load is made up of large industrials such as taconite and paper and pulp, industries running 24/7 and buying a lot of electric power. Its other utility is Superior Water, Light & Power, a small Wisconsin combination utility (15,000 electric customers, 12,000 natural gas customers, and 10,000 water customers) that purchases wholesale power from Minnesota Power. ALLETE also owns BNI Coal, a large lignite mine in North Dakota, supplying the cooperative-owned Milton Young 2 power plant (Minnesota Power takes 100 MW of its production); ALLETE Clean Energy, which develops renewable projects, primarily wind; and, most recently, U.S. Water Services.

"We've had a robust history of diversification," Adams said, "with a lot of success. We are very deliberate in our approach, and focus on the culture and values of the businesses we invest in." He said that a "big part of our approach is culture. While we move quickly, we are careful. We start with the management team, looking for similar values. If we don't see a strong management team, we don't even go there."

From U.S. Water's standpoint, the deal with ALLETE came at a time when the water treatment company wanted to move to a more stable and long-range financial position. The privately owned company had major financing from Denver-based private equity firm Excellere Partners, which was looking to cash out its profitable investment in the fast-growing company. "ALLETE was ideal for us," U.S. Water's LaMarr Barnes, vice president for marketing and business development [title corrected 5/1/15] , told POWER. "It is a related industry, and believes strongly in the energy and water nexus." In addition, he said, ALLETE has access to relatively low-cost capital to fuel the water company's projected growth.

U.S. Water's business strength is an integrated approach to water management, said Kent Herbst, vice president for equipment and engineering services. Herbst said the major approach of the company is offering a complete solution for the needs of the customer (Figure 1). Traditionally, he noted, "Firms in the water business offered off-the-shelf approaches, some chemical, some equipment-based," that might not work together. U.S. Water offers tailored solutions "combined under the same roof."

1. From lab to plant. These U.S. Water Services research and development scientists are testing water. The company offers customized water services to power producers that integrate equipment and chemistry components. Courtesy: U.S. Water Services Inc.

Since its founding in 1997, when it initially focused on ethanol producers, U.S. Water has seen extraordinary growth, both through acquisitions and in its basic business. The company has experienced up to 30% annual growth since its founding, and has never seen a year with less than 20% growth, the company said. Now it is transitioning to a new business environment, owned by a company with a diverse, although mostly energy-related, line of businesses. Barnes said, "We expect to continue on a similar growth path," focusing on markets including oil and gas mid-stream businesses, food and beverage firms, power generation (see sidebar), biofuels (primarily ethanol), and commercial and institutional customers.

Managing Cooling Tower Phosphorus DischargeOne of the water quality challenges facing steam-electric generating plants is phosphorus discharge from closed-cycle cooling towers. Phosphorous is a biological nutrient that can cause severe impacts, such as algal blooms in rivers, lakes, and estuaries. According to U.S. Water Services' LaMarr Barnes, states are ratcheting down on phosphorus discharges. Wisconsin, in particular, is adopting rules limiting discharges to "very close to the minimum detectable levels."This is a problem for power plants with closed-cycle cooling towers. "Everybody has phosphorus in their water chemistry" for cooling towers, Barnes said. Power plant operators widely use phosphorus chemistry to prevent mineral scale build-up in the cooling towers and corrosion. Scale decreases the efficiency of the cooling tower, and corrosion eats into the life of the equipment. What to do?U.S. Water has developed what it claims is a cost-effective alternative to phosphorus chemistry for protecting power plant cooling systems, called "Phos Zero." In an interview with POWER Associate Editor Aaron Larson (see http://bit.ly/1xfAXNu), Barnes said his company's new cooling water chemistry "has no phosphorus in it, and it provides equivalent and better protection compared to a stabilized phosophate cooling water program or an all-organic phosphate program." U.S. Water is working with a major coal-fired plant in Springfield, Ill., to demonstrate the commercialization of its Phos Zero technology.

Fuels Transition

Then there is ALLETE's power generation transition. Al Rudeck, Minnesota Power's vice president for power strategy and planning, said in a POWER interview that power generation transition is a major element in the company's history and its future. The utility began at the beginning of the 20th century as Duluth Edison Electric Co., in a heavily forested territory that was rich in minerals.

At the end of World War I, the company acquired several neighboring utilities and emerged as Minnesota Power and Light. "Until the 1930s," noted Rudeck, "the company's generation was 100% hydro," as the company is located in an area rich with water resources.

In those early days, "red ore," or hematite, was the chief mineral product of the utility's iron ore customers. After World War II, hematite reserves began to dwindle. The iron industry turned to taconite ore (rich in magnetite), where coal-fired generation was able to provide the larger amounts of baseload electricity required for taconite mining, pelletizing, and shipping.

The utility's website says, "Minnesota Power prospered during the years before and after World War II with the expansion of iron ore mining, forestry/paper industries, grain exports and shipbuilding on Lake Superior. Power plants, including Laskin Energy Center, Taconite Harbor Energy Center and Boswell, were built during the 1950s through the 1970s to help accommodate an increasing industrial load." All were coal-fired plants.

By 2006, said Minnesota Power's Rudeck, "We were 97% coal." At that point, assessing the evolving economic and policy environment and the need to meet the state's requirements for renewable energy, the company began a strategic move to diversify its generating mix.

The latest generation transition moves away from coal and toward gas and renewables, primarily wind. While still relying on the muscular 1,000 MW from its four-unit Boswell coal-fired station, Minnesota Power has scaled back its take from the Milton Young plant, owned by Square Butte Cooperative, and is converting its 96-MW Laskin coal-fired plant to gas.

The utility is bullish on wind, which the company believes is well-matched to its large industrial load. The intermittency of wind is less of a problem for Minnesota Power than for the typical utility with big residential loads. The major industrial customers are running full-out, round-the-clock, and can take wind power when it is available.

In recent years, the company has added some 500 MW of utility-owned wind generation from its Bison Wind Energy Center in North Dakota (Figure 2), linked to Duluth by a 465-mile, direct current transmission line. Brad Oachs, Minnesota Power's chief operating officer, said, "We are meeting Minnesota's renewable standard of 25% renewable energy by 2025, a decade early."

2. North Dakota wind.Minnesota Power's renewables portfolio includes three phases of the Bison Wind Energy Center in North Dakota that are linked to Duluth, Minn., via a 465-mile direct current transmission line. Courtesy: Minnesota Power

Minnesota Power also has an innovative deal with Manitoba Hydro, its Canadian neighbor and a water power giant. The U.S. utility will purchase 250 MW of the Canadian utility's big hydro resource. But here's an interesting rub. Minnesota Power is building a 500-kV, 220-mile direct current line between its North Dakota wind generation sites and the Manitoba Hydro system at the Canadian border. The Great Northern Transmission Line, the company said in a 2013 filing with the Minnesota Public Utilities Commission, "will allow Minnesota Power to effectively store excess wind energy from the Bison projects in North Dakota in Manitoba Hydro's hydro facilities."

The bi-directional intertie will treat Manitoba Hydro as a power storage battery to hold North Dakota's wind power, the equivalent of a long-distance pumped storage project. When Minnesota Power doesn't need the wind it is generating in North Dakota, it can send the juice to Canada and its large hydro reserves. When Minnesota needs power that it can't supply from its own system, it can call on Manitoba Hydro under the terms of its power purchase agreement.

Fuel Diversity, and Beyond

While Minnesota Power is moving away from coal, the company is not abandoning the rocks that burn. "We definitely think there is a place for coal," said Rudeck, noting that its BNI mining subsidiary has a long-term contract with the Milton Young 2 plant that lasts through 2035. But the company plans on completely phasing out its power purchases from the Young plant by 2026. "If anybody is going to mine coal, we think we are the best to do it," he said. Adams added that while much of the handwringing in the industry has been about the end of coal, "we think the future will see as much or more coal" than today.

The company is now at 75% coal-fired generation, while it is adding 600 MW of new wind generation and planning to develop up to 250 MW of gas combined cycle generation after 2020. The company's current gas fleet is mostly combustion turbines used to meet peak loads. The company is also investing in conservation, said Adams, exceeding the year-on-year goal of 2% for several years.

The proposed Environmental Protection Agency (EPA) plan to clamp down on carbon dioxide power plant emissions, the Clean Power Plan, is casting some clouds of doubt over ALLETE's strategic vision. "We think the patchwork of emission rate targets [in the EPA proposal] creates winners and losers," said Rudeck. He said the company is working with state trade associations, the Edison Electric Institute, the National Association of Manufacturers, and other groups to make its points with the EPA.

Rudeck added that he doesn't think the Clean Power Plan is going to have much immediate impact. "Look at the mercury and air toxics rule [MATS]," he said. "It was first promulgated in 1990. It's finally sticking in 2015."

As for the union of ALLETE's power interests with U.S. Water's liquid focus, U.S. Water's Barnes noted, "This is the first example of a true energy player joining forces with a true water player. The energy-water nexus is coming to fruition." a-

- Kennedy Maize is a frequent POWER contributor.

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