Allete, Inc.

Good day, and welcome to the Elite Third Quarter Financial Results Call. Today's call is being recorded. Certain statements contained in this conference call that are not descriptions 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 followings 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 reviews, only as of the date hereof. The company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise. Welcome to Elite's conference call announcing third quarter 2021 financial results. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star then 1 on your touch-tone telephone. If anyone should require assistance during the conference, please press star then zero to reach an operator. As a reminder, this call is being recorded. I would like to turn the call over to Bethany Owen, Chair, President, and CEO. You may begin.

Thank you, and good morning, everyone, and thanks for joining us today. With me are Elite Senior Vice President and Chief Financial Officer Bob Adams and Vice President and Chief Accounting Officer Steve Moritz. Also with us this morning are Al Rudeck, President of Elite Clean Energy, and Frank Fredrickson, Minnesota Power's Vice President of Customer Experience. Corresponding slides for this morning's call can be found on our website at Elite.com in the Investors section. To follow along, we'll call out each slide number as we go through today's presentation. This morning, Elite reported third quarter 2021 earnings of 53 cents per share on net income of $27.6 million. These results were above our internal expectations for the current quarter and aligned with our ability to achieve our 2021 full year earnings guidance range of $3 to $3.30 per share. In a few minutes, Steve and Bob will provide additional information on the quarter and insights into key financial drivers for the remainder of the year. First, I'd like to highlight ELITE's sustainability in action strategy, a strategy we developed to address the effects of climate change. As many of you know, ELITE was an early mover to significantly decarbonize its energy sources. And as a result, we have been recognized as a leader in our nation's transition to a carbon-free energy future. At Elite, we're committed to answering our nation's call for clean energy with all of our stakeholders in mind, our customers, our communities, our employees, and our shareholders. We couldn't be more excited about the future as we successfully position our businesses to continue to thrive and grow. We'll begin with an update on our largest business, Minnesota Power, which has made significant progress on key initiatives foundational to ELITE's sustainability in action strategy. Please refer to slide three. In late October, Minnesota Power filed its second ever integrated distribution plan. This IDP details Minnesota Power's five-year investment plan and 10-year outlook for its distribution system. The clean energy transition requires investment in infrastructure and related technology to ensure continued reliability of our essential services. Our plan focuses on creating a more resilient grid to ensure the safe and reliable delivery of energy to our customers and advances new technologies that will provide customers with even more control over their energy use. The comment period will begin in the coming weeks, and we expect to receive final approval later next year. Similar to the IDP, but with a broader scope, Minnesota Power filed its integrated resource plan with the Minnesota Public Utilities Commission in February of this year. The IRP outlines our plans to further transform Minnesota Power's energy supply to 70% renewable by 2030, and to be coal-free and 80% lower carbon by 2035. All of these plans lay the strong foundation for our vision to provide 100% carbon-free energy to customers by 2050. Just last week, the Minnesota Department of Commerce requested a three-month extension on initial IRP comments, and assuming the MPUC approves, comments will be due March 1st of next year. Throughout this process, we will continue our close and transparent engagement with our many stakeholders, and we anticipate the Commission's decision later in 2022. These important milestones are a key part of Minnesota Power's Energy Forward initiative, a journey of thoughtful positioning in a transforming energy landscape to ensure safe, reliable, and affordable service to our customers. We know that this service comes at a cost, and to achieve the best outcomes for all, we've worked closely with our regulators and other stakeholders, emphasizing that a constructive rate review environment is critical to our ability to continue our energy transformation. Throughout its clean energy transition, Minnesota Power has maintained residential electric rates that are among the lowest in the state of Minnesota. Our Minnesota Power team has worked thoughtfully with low-income customer advocates to provide affordability discounts through our CARE program, energy efficiency support through our Energy Partners program, and a special rate for qualified low-income customers that will continue to support our most economically vulnerable customers with some of the lowest monthly bills in the state. While we advance our vision of a carbon-free energy supply by 2050, we will continue to make affordability a priority. At the same time, a reasonable rate of return is essential to keeping our company financially healthy and ensuring value for our shareholders. To that end, on November 1st, Minnesota Power filed a general rate case supporting an increase in base retail electric rates. This request is important to Minnesota Power's financial health and ability to continue its clean energy transformation while delivering the safe, resilient, and reliable service that powers people's lives and businesses throughout northeastern Minnesota. Minnesota Power has completed only three rate cases in the past 25 years, with our last completed rate case back in 2016, five years ago. The core of our current request is simple, recovery of prudent costs and investments that support our clean energy transition, a more resilient grid, and our customers' desire to control their energy use. Our request also reflects the risk and volatility that come with our unique customer mix and allows the opportunity for our investors to earn a reasonable rate of return. Steve will share more details on the rate case filing in a moment. In a creative effort to help customers, Minnesota Power filed a petition with the Minnesota Public Utilities Commission for approval to sell land surrounding several reservoirs on its hydroelectric system. The land is not required to maintain operations and has an estimated value of approximately $100 million. So Minnesota Power proposed to give the net proceeds from the land sales to our customers, either through a credit in a future rate case or through the renewable resources rider to help mitigate future rate increases. At a hearing last month, the MPUC approved the methodology to allow the land sales to begin with certain conditions and required compliance filings. We're pleased to offer this innovative and meaningful rate mitigation for our customers, and we appreciate the MPUC's approval. The MPUC also recently approved a new demand response product for Minnesota Power's large industrial customers that facilitates those customers making their capacity available in exchange for fare compensation. The additional capacity these large customers make available can be critical to maximizing the efficiency and ensuring the resiliency of our overall system during extreme weather events such as the polar vortex earlier this year. Turning to our second largest business in the Elite family, Elite Clean Energy with 100% renewable generation is making progress on its multifaceted strategy focused on portfolio optimization, new projects, and plans for expanding service offerings beyond wind to include solar and storage solutions. In addition, the company is executing on plans to optimize its existing PTC safe harbor turbine inventory and enhancing the returns of its existing projects. The renewables industry continues to grow rapidly, attracting significant capital and investor interest, as well as strong bipartisan policy support in Congress. Elite Clean Energy is well positioned to capitalize on customers' desire to expand renewable energy as the economy decarbonizes and the focus on sustainability accelerates. The Elite Clean Energy team is deep into the evaluation of avenues to add renewable capabilities beyond wind, and we anticipate sharing more information on our expansion into solar and storage in the coming quarters. Now I'll turn it over to Steve and Bob for additional details on our 2021 third quarter financial results, 2021 rate case, and Elite's growth outlook. Steve?

Thanks, Bethany, and good morning, everyone. I would like to remind you that we filed our 10Q this morning, and I encourage you to refer to it for more details. Please refer to slides four and five for significant variances and other items for comparison considerations. Today, Elite reported third quarter 2021 earnings of 53 cents per share on net income of $27.6 million. Earnings in 2020 were 78 cents per share on net income of $40.7 million. The third quarter results for 2021 did exceed our internal expectations by approximately 25%. The third quarter is typically the lowest quarter for consolidated earnings. A few details from our business segments. Elite's regulated operations segment, which includes Minnesota Power, Superior Water, Light, and Power, and the company's investment in the American Transmission Company recorded net income of $32.9 million, compared to $42.4 million in the third quarter of 2020. Third quarter 2021 earnings reflected lower net income at Minnesota Power primarily due to increased operating and maintenance and property tax expenses. In addition, the recording of income tax expense resulted in a negative impact of approximately $5 million or 10 cents per share for the quarter as compared to 2020. The accounting for income taxes varies quarter to quarter based on an estimated annual effective tax rate. Results in 2021 reflected higher kilowatt-hour sales to residential, commercial, and municipal customers and higher industrial sales, partially offset by lower sales to the idle Verso paper facility. Elite Clean Energy recorded a net loss of $800,000 in the third quarter of 2021 compared to net income of $1.1 million in 2020. Net income in 2021 reflected lower wind resources and availability than our internal expectations. As foreshadowed in the second quarter disclosures, Elite Clean Energy's wind facilities continued to be impacted by lower wind resources than expected and were 7% below expectations for the quarter. The impact of lower wind resources was partially offset by lower operating costs resulting from Elite Clean Energy's expense management efforts. Keep in mind that although seasonal wind patterns can vary throughout the year, wind production is typically the lowest in the third quarter and at the highest in the first and fourth quarters of the year. Our corporate and other businesses, which includes B&I Energy and Elite Properties, recorded a third quarter net loss of $4.5 million in 2021 compared to a net loss of $2.8 million in 2020. The increased net loss is primarily due to higher expenses. I'll now turn to our 2021 earnings guidance, which remains unchanged from our original range of $3 to $3.30 per share. Consistent with our disclosures in the second quarter, we anticipate our regulated operations segment will be at the higher end of our guidance range of $2.30 to $2.50 per share. This is primarily driven by Minnesota Power's Taconite customers operating at higher levels than our original projections, and is expected to remain at near full production levels throughout the fourth quarter. We continue to expect that Elite Clean Energy and our corporate and other businesses to be at the lower end of our guidance range of 70 cents to 80 cents per share. This is primarily due to the negative impacts of the extreme winter weather event in the first quarter of 2021 at the Diamond Spring Wind Energy Facility of approximately 10 cents per share and lower than expected wind resources and availability throughout 2021. These negative impacts are partially offset by a 16% after-tax gain recorded in the fourth quarter of 2021 for the sale of a portion of the Nemadji Trail Energy Center by South Shore Energy, Elite's non-rate-regulated Wisconsin subsidiary. The sale, which closed on October 1, 2021, was reflected in our second quarter guidance as we had anticipated the closing of the transaction in the second half of the year. As noted in previous quarters, the timing of income tax expense has negatively impacted year-to-date results compared to internal expectations. We estimate that approximately $3 million, or six cents per share, is expected to reverse in the fourth quarter. Turning to the Minnesota Power rate case filing, Please refer to slides six and seven. On November 1st, Minnesota Power filed a retail rate increase request with the MPUC seeking an increase of $108 million in total additional annual revenue. The filing seeks a return on equity of 10.25% and a 53.81% equity ratio. Interim rates of $87 million would begin January 1st, 2022 with approval by the MPUC. interim rates are subject to refund. At this time, we anticipate final rates would be implemented sometime in late 2023. The rate case assumes taconite production of approximately 34 million tons, which is in alignment with the long-term average production levels for taconite. In addition, Minnesota Power has included a proposal to address and mitigate the financial impacts related to operational volatility of its large power customers. This proposal includes a sales true-up mechanism, offering a simple and balanced method to align risks and benefits of large power load volatility that can occur between rate cases. We will share procedural updates as the filing progresses in future quarterly updates. I'll now turn it over to Bob for comments on our longer-term growth outlook.