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 are not descriptions of historical facts or 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 put 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 Ali's conference call announcing third quarter 2022 financial results. Later in the call, we will have a Q&A session. Instructions will follow at that time. As a reminder, this call is being recorded. I would now like to hand the call over to Bethany Owen, Chair, President, and CEO. You may begin.

Thanks, Operator, and good morning, everyone, and thanks for joining us. With me are Elite's Senior Vice President and Chief Financial Officer Steve Morris, as well as Frank Fredrickson, Minnesota Power's Vice President of Customer Experience and Engineering Services, and Jeff Sissons, Elite Clean Energy's Chief Financial and Strategy Officer. Corresponding slides for this morning's call can be found on our website at Elite.com in the Investor section. To follow along, we'll call out each slide number as we go through today's presentation. This morning, Elite reported third quarter 2022 earnings of 59 cents per share. These results were in line with our expectations and support our view that our full year results will be near the midpoint of our $3.60 to $3.90 per share guidance range provided earlier this year. Steve will be sharing more details from the quarter and comments on 2022 guidance in a moment. I'll start with important updates on our key strategic initiatives. In exciting news we announced and filed on Monday, Minnesota Power reached a proposed agreement with a broad coalition of stakeholder groups on its integrated resource plan. If the agreement is approved by the Minnesota Public Utilities Commission, Minnesota Power would significantly increase the amount of renewable energy it provides over the next 15 years. In the proposed settlement, Minnesota Power outlined its plans to add up to 400 megawatts of wind energy and 300 megawatts of regional solar energy. That's nearly twice the amount the company proposed in its initial IRP filing in early 2021. Also included in the proposed settlement is energy storage to support our renewable investments. In addition, Minnesota Power will continue to evaluate the transition of Boswell IV as the company commits to cease coal operations by the end of 2029 at Boswell III and 2035 at Boswell IV. Under the agreement, the Nemadji Trail Energy Center and important grid reliability projects, including those set forth in the MISO Long Range Transmission Plan, would be deferred to future regulatory filings. Minnesota Power's Integrative Resource Plan and this latest agreement reflect our commitment to the climate, our customers, and our communities, as well as our employees. Our team has done a tremendous job of listening to our many stakeholders, including our customers, community leaders, and organizations, and prioritizing their feedback. I'm very pleased that this coalition of diverse stakeholders came to an agreement that allows us to continue on our path to provide 100% carbon-free energy by 2050. In hearings over the next two weeks, the Commission will consider the next steps in Minnesota Power's Energy Forward Plan with a decision on the company's IRP expected on November 22nd. Moving to ELITE's capital investment plan on slide three, we've updated this table to reflect a significant increase in capital expenditures over the next five years. The additions include transmission and clean energy projects as part of our sustainability in action growth strategy. It's important to note that this update does not yet include the additional renewables and energy storage from the proposed IRP agreement filed with the Commission on Monday. so we're confident there is more to come. In addition to renewable generation, a key part of this CapEx plan is significant transmission investments to support reliability throughout our region. These investments include expanding and modernizing Minnesota Power's existing 550-megawatt HVDC transmission line and investment in MISO's long-range transmission plan, Tranche 1 projects. Next, please refer to slides four through six. As we look beyond 2027, we believe there are significant investment opportunities in addition to those reflected in this five-year CapEx plan. Specifically, the additional wind, solar, and storage just mentioned in connection with the IRP as well as additional investments in generation and infrastructure needed as we responsibly and reliably transition our Boswell Units 3 and 4. We also expect to participate in MISO's Tranche 2 transmission projects and as part of our high voltage transmission strategy to leverage our strategic geographical position to advance inter-regional transmission projects that support reliability, and the clean energy transformation. As we execute in the near term, we are always planning for the future, and these very important parts of our transformational long-term investment strategy are already in motion. Turning to slide seven, we're also very excited about the Inflation Reduction Act, and we believe all of Elite's businesses are well-positioned to benefit from this important legislation. The production tax and investment tax credit extensions provide new options for investment, and the transferability of tax credits provides monetization options for elite businesses, improving cash flow and credit metrics as we continue to be a market leader in clean energy investments. The IRA will also benefit Elite's customers as the new solar production tax credit makes company-owned projects more affordable than the solar investment tax credit. For our newest business, New Energy Equity, the IRA has potential locational, domestic material, and low to moderate income subscription adders that could provide an up to 50% upside on the ITC. On the rate case front, Superior Water, Light, and Powers rate case is proceeding with a decision expected from the Public Service Commission of Wisconsin later this year. And Minnesota Powers rate case is also moving forward. Please refer to slides 8 and 9. The Administrative Law Judge recommendation in September was constructive and addressed key areas of our filing. While there are parts of the ALJ report we strongly disagree with, we continue to have confidence in our Minnesota Commission and in the regulatory process to deliver a rate case outcome that supports a financially healthy Minnesota Power, enabling us to continue our clean energy transition while providing safe, resilient, reliable, and affordable service to our customers. The Commission's current rate case hearing timeline has been extended to January of 2023 with a final order expected by the end of February. Also, some exciting news on the Minnesota Power industrial customer outlook. This summer, U.S. Steel announced plans to invest approximately $150 million in its Kewatt and Taconite facility to enable production of direct reduced or DR-grade pellets. These pellets will be feedstock for direct reduced iron or hot briquetted iron processes to support the growing demand for steelmaking in electric arc furnaces. Construction began this fall and upon completion, KeTAC will be able to produce DR grade pellets while retaining the optionality to produce blast furnace grade pellets. U.S. Steel's KeTAC facility has the capability of producing approximately 5 million tons annually. Moving to our newest elite company, New Energy Equity, we expect a solid fourth quarter. New Energy is on track with our original projections for the year and has increased its total pipeline of prospective projects well above 2,000 megawatts. Along with the IRA benefits mentioned earlier that could provide investment tax credit upside of up to 50%, the New Energy's The new energy team's solid execution and strong pipeline of future projects have only enhanced our confidence in the resiliency and strength of this business. Please see slide 10 for details. Finally, Elite Clean Energy's earnings this quarter were impacted by congestion at its Caddo Wind Energy Facility, and our priority is to address the ramifications of these congestion issues in the Southwest Power Pool for both the Diamond Spring and Caddo projects. These sites are operating well and the wind resources are strong, and we firmly believe that Elite Clean Energy is well-positioned to accelerate the clean energy transition in our country. The Inflation Reduction Act will also provide increased incentives and flexibility for structuring and financing of new projects and for maximizing the value of the company's legacy fleet where more than 400 megawatts have strong potential for redevelopment. Please see slide 11 for more information on the opportunities we see at Elite Clean Energy. Now I'll turn it over to Steve for additional details on our third quarter financial results and our full year earnings guidance. Steve?

Thanks, Bethany, 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. Please refer to slides 12 and 13 for significant variances and other items for comparison consideration. Today, Elite reported third quarter 2022 earnings of 59 cents per share on net income of $33.7 million. Earnings in 2021 were 53 cents per share on net income of $27.6 million. Results for the quarter reflect higher net income for the regulated operations segment, primarily due to interim rate revenue at Minnesota Power. This increase was partially offset by a reserve of $2.9 million after tax, or 5 cents per share, for an anticipated loss on the sale of Elite Clean Energy's Northern Wind project, a negative impact of $1.7 million after tax, or 3 cents per share, to reflect changes in the American Transmission Company's estimate of a refund liability related to the ongoing MISO return on equity complaints. A few details from our business segments. LEAP's regulated operations segment recorded third quarter 2022 net income of $38.3 million, compared to $32.9 million in 2021. Earnings reflect higher net income at Minnesota Power, primarily due to the implementation of interim rates at the beginning of the year. This increase was partially offset by lower kilowatt-hour sales to retail customers and higher costs under a 250-megawatt purchase power agreement. Elite's earnings in the American Transmission Company were lower due to period-over-period changes in ATC's estimate of a refund liability related to MISO return on equity complaints mentioned earlier. Elite Clean Energy recorded a third quarter 2022 net loss of $7.3 million compared to a net loss of $800,000 in 2021. The net loss reflects a reserve of $2.9 million after tax for anticipated loss on the sale of this Northern Wind project. Losses under the CATA Wind Energy Facility's power sales agreements resulting from market volatility and transmission congestion in the Southwest Power Pool and lower wind resources compared to 2021. Our corporate and other businesses, which include New Energy, BNI Energy and our investment in the Nobles II Wind Energy Facility, recorded net income of $2.7 million compared to a net loss of $4.5 million in 2021. Results in 2022 reflect higher earnings from our investment in the Nobles II wind energy facility, reflecting higher wind resources, net income of $1.3 million from new energy, which included purchase price accounting adjustments of $1.7 million after tax, as well as the benefit from the timing of income taxes. Earnings per share dilution in the third quarter was approximately 5 cents due to additional shares of common stock outstanding. Next, I'll turn to our 2022 earnings guidance. We are updating our earnings guidance and expect earnings to be near the midpoint of our guidance range of $3.60 to $3.90 per share. This reflects year-to-date results and the timing of a portion of a solar project that has shifted into 2023 in part due to timing of solar panel deliveries. However, we now expect to take advantage of the IRA for this project. We also expect strong fourth quarter earnings from New Energy, with growing momentum in the project pipeline and significant project closings in October and into the end of the year. Keep in mind that under Elite's ownership, New Energy's partial year financial results for 2022 will be affected by transaction costs and purchase price accounting. Excluding these items, new energy is expected to be accretive this year, and we do anticipate meaningful accretion in the first full year of our ownership in 2023. Turning to elite clean energy, despite inflationary increases and significant cost pressures resulting in the reserve taken in the third quarter, the Northern Wind Project and the Rock Aetna Project both continue to progress, and they are expected to be completed by the end of this year and early 2023, respectively. Elite Clean Energy also continues to advance the 92-megawatt Red Barn build transfer project and is on track for a 2023 closing. As Bethany mentioned earlier, we have updated our five-year capital expenditure plan through 2027, which can be seen on slide three. This update reflects additional transmission for Minnesota Power's participation in MISO's Tranche 1 projects as well as 400 megawatts of additional wind and solar reflected in Minnesota Power's initial IRP. Minnesota Power and Great River Energy intend to build a transmission line from northern Minnesota to central Minnesota as part of MISOS TRANS-1 projects. We filed a notice of intent with the Minnesota Public Utilities Commission on August 1st, and a combined certificate of need and route permit filing will follow within the next 18 months. The transmission line is expected to be in service in 2030, supporting and strengthening the reliability and resilience of the grid in the Upper Midwest as we continue our clean energy transition. With Minnesota Power's approximate 50% share of the $970 million project and additional capital investments of 200 megawatts of solar and 200 megawatts of a wind partnership, Elite now expects capital expenditures of approximately $2.7 billion through 2027. These clean energy supporting investments will provide additional optionality, resiliency, and reliability benefits for our customers while delivering rate-based growth of approximately 8% using 2022 as a base year. We also expect to update our capital expenditure plan once the integrated resource plan has been approved by the Commission later this month. In addition, the American Transmission Company recently updated its 10-year capital investment forecast, which calls for approximately $5 to $6 billion in system improvements, which would result in additional investment for Elite. Finally, Elite's financial position is supported by a strong balance sheet that includes cash and cash equivalents of $42 million, $387 million in available consolidated lines of credit, and a debt-to-capital ratio of 37% as of September 30th. 2022. I'll now turn it back to Bethany for her closing remarks. Bethany?