Allete, Inc.

Good day, and welcome to Elite Fourth Quarter 2023 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 risk 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 Elite's conference call announcing fourth quarter 2023 financial results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. As a reminder, this call is being recorded. I would now like to turn the call over to Bethany Owen, Chair, President, and CEO. You may begin.

Thank you. Good morning, everyone, and thanks for joining us. With me today are Elite Senior Vice President and Chief Financial Officer Steve Morris, Jeff Sissons, Elite Corporate Development and Elite Clean Energy Strategy Officer, and Frank Fredrickson, Minnesota Power Vice President of Customer Experience and Engineering Services. Corresponding slides for this morning's call are available on our website at Elite.com in the investor section. We'll refer to each page number as we go through today's presentation. I'm pleased that this morning Elite reported full year 2023 earnings of $4.30 per share on net income of $247.1 million, compared to 2022 earnings of $3.38 per share on net income of $189.3 million. These financial results were in line with our higher revised 2023 earnings guidance range, which we provided in November. In a few minutes, Steve will give more details on these financial results, as well as our 2024 earnings guidance. Throughout 2023, driven by Elite's talented and committed employees, we achieved significant operational and financial successes, as together we're creating the clean energy future through Elite's sustainability in action strategy. We're building on these successes in 2024 and in years to come, providing meaningful value to our customers, our communities, and our shareholders, and exciting opportunities for our employees. We're committed to Elite's long-term financial objective of achieving consolidated earnings per share growth of 5% to 7%, and given our strong multi-year CapEx outlook, I'm confident in our ability to achieve this for our investors. Our Elite Board of Directors shares our confidence, as demonstrated by the Board's recent approval of a dividend increase of more than 4%. This adds to Elite's track record of more than 74 consecutive years of dividends paid to our shareholders. Our execution of significant strategic initiatives is paving the way for even greater success at Elite, now and into the future. Our capital investment plan on slide three illustrates the clear path, with real projects representing an increase of $1 billion for a total of $4.3 billion in regulated investments over the next five years. I'd like to share some details on a few of those exciting projects. First, Minnesota Power is making great progress in transforming its energy mix. In November, MP issued an RFP for up to 300 megawatts of regional solar, and bids have been received and are being evaluated. The solar RFP emphasizes investment in our host communities, the use of local labor, and advancing supplier and workforce diversity. All of this will help ensure these solar projects deliver the best overall value to customers while strengthening the communities we are privileged to serve. And just last week, we issued an RFP for up to 400 megawatts of wind energy. This RFP seeks new wind generation that maximizes the use of regional transmission assets for delivery to our customers. This will increase Minnesota Power's current wind portfolio of 870 megawatts of owned and contracted capacity by nearly 50%. Taken together, our portfolio of diverse renewable energy resources, including wind, solar, hydro, and biomass, helps ensure we meet our customers' energy demands around the clock, while we also work to meet the state's carbon-free energy goals. In addition to adding more renewable generation, a key part of our CAPEX plan includes significant transmission investments to support grid reliability in our region and throughout the Upper Midwest. Our team continues to make great progress on two 345 kV MISO long-range transmission plan projects, the Northland Reliability Project, a 180-mile line from the Iron Range in northern Minnesota to central Minnesota, which we'll jointly own with Great River Energy, and the Big Stone South Project, a 150-mile line jointly owned by five utilities, including Minnesota Power, which will improve reliability in North Dakota and South Dakota, as well as Western and Central Minnesota. The Northland Reliability Project is estimated to cost a total of $970 million to $1.3 billion, representing another important investment in the reliability and resiliency of the transmission system. A combined certificate of need and route permit application was filed with the Minnesota Public Utilities Commission in August and we're working through the regulatory approval process. We anticipate the line to be in service in 2030. Minnesota Power's share of the Big Stone South project is expected to be $20 million. A certificate of need and route permit application was filed with the MPUC in September, and subject to regulatory approvals, this line is expected to be in service in 2027. Next highlighted in our significant transmission plans is the HVDC modernization project. This project will replace aging infrastructure and modernize the terminal stations for our 465 mile DC transmission line running from center North Dakota to Duluth, Minnesota. The existing line already provides Minnesota Power customers direct access to some of the best wind resources in the country. And this modernization project will also enhance the reliability and resiliency of the grid across the Upper Midwest. Our team has worked extremely hard to advance this important project while keeping costs as low as possible. To that end, we applied for and received a $50 million grant from the U.S. Department of Energy, which will be used to prepare the HVDC transmission system for future expansion. and a $15 million grant as part of the energy bill passed by the Minnesota legislature in 2023. We're grateful for this meaningful support from the state of Minnesota and the Department of Energy, helping to make this important project even more affordable for customers. Pending regulatory approvals in North Dakota and Minnesota, construction could begin on this $800 to $900 million project as early as this year, with an in-service date expected later this decade. Turning to slide four, as we look beyond 2028, there is much more ahead at Elite. We have significant regulated investment opportunities in addition to those reflected in our current $4.3 billion five-year CapEx plan. These include projects that will be part of Minnesota Power's next IRP, planned for March of 2025, as we responsibly transition our two remaining coal units at Boswell Energy Center. We also expect to participate in MISO's tranche two transmission projects and as part of our high voltage transmission strategy to leverage our strategic geographical position and assets to advance inter-regional transmission projects that support reliability, resiliency, and the clean energy transformation. In addition to the exciting progress on the Minnesota power front, in December, Elite and Grid United signed development agreements for the North Plains Connector project with plans for Elite to pursue 35% ownership and oversee the transmission lines operations. North Plains Connector is a 400-mile HVDC transmission line planned to extend from North Dakota to Coal Strip, Montana. This will be the first transmission connection of three regional U.S. electric energy markets, MISO, SPP, and the Western Interconnect, to help ease congestion, increase resiliency and reliability in these markets, and enable delivery of energy across a vast area of diverse terrain and weather patterns. It's a truly transformative project, and we're proud to be a part of it and look forward to other utilities in the region joining us. Please see slides five and six. Late last year, Minnesota Power received the Minnesota Public Utilities Commission approval to begin charging interim rates of approximately $64 million at the beginning of this year. Although there's more to play out during the year, this important approval was a constructive outcome that supports Minnesota Power's financial health and ability to continue our clean energy transformation while we deliver safe, resilient, reliable, and affordable services to our customers. As the state of Minnesota has enacted some of the most ambitious climate legislation in the country, we must ensure we have the people and resources to execute this public policy while ensuring reliability. This includes adding employees to serve our customers and to ensure projects are done safely, on time, and on budget. We're not alone in experiencing inflationary cost pressures and increased cost of capital given the highest interest rates in decades. And a unique feature requested in Minnesota Power's current rate filing is a rate stabilization mechanism designed to help protect us and our customers from volatility associated with the business cycles tied to our unique customer mix. We're confident that our regulators understand the importance of a constructive outcome in this consequential rate case to help ensure Minnesota Power's ability to continue our clean energy transformation, meeting the state's carbon-free energy goals while safeguarding the reliable service that powers people's lives and businesses throughout northeastern Minnesota. Similarly, Superior Water, Light, and Power is preparing to file a rate case this year. This filing will support important infrastructure upgrades and help ensure that the company continues to provide safe, reliable, and resilient electric, water, and gas services for its customers. As we execute our strategy in the near term, we are always focused on our customers and always planning for the future. And Elite's future is very bright, with important aspects of our long-term investment strategy already well underway. Turning briefly to our non-regulated businesses, first, Elite Clean Energy. While it was great to receive the positive arbitration outcome last year, the company's earnings in 2023 were affected by congestion and market volatility at Caddo and Diamond Spring, as well as a third-party substation's forced network outage. Addressing the effects of these issues is our priority, and we're evaluating all alternatives to improve the economics of these projects. Elite Clean Energy, with its talented team, is an important strategic contributor to Elite, and as we move forward into 2024, we're focused on maximizing the value of the company's fleet. We look forward to updating you on progress on all of that throughout the year. New energy equity exceeded our original projections for 2023 and has continued to increase its total pipeline of prospective renewable energy projects. The team's solid execution and strong pipeline have only enhanced our confidence in the resiliency and strength of this business and the value the company brings to our shareholders. Elite's New Energy Equity is currently a leading community solar developer in Illinois, Minnesota, New Mexico, New York, and Virginia, with promising markets in many other states throughout the country. As you can see, we've made tremendous progress throughout this year and I'm grateful to our entire team across our family of businesses for their dedication, expertise, resiliency, innovation, and always their integrity. At Elite, we honor our commitments and we're committed to serving our customers and our communities with excellence every single day while we provide value to our shareholders now and well into the future. Now I'll turn it to Steve for additional details on our 2023 financial results and 2024 guidance. Steve?

Thanks, Bethany, and good morning, everyone. I would like to remind you that we filed our 10-K this morning along with an 8-K that provides details of our 2024 earnings guidance. Please refer to slides 7 through 9 for the quarter and year-end and 2023 segment income statements, as well as our 2024 earnings guidance. Today Elite reported 2023 earnings of $4.30 per share on net income of $247.1 million. Earnings in 2022 were $3.38 per share on net income of $189.3 million. These financial results were in line with our updated 2023 earnings guidance range and also reflects $0.05 per share of negative weather impacts in the fourth quarter. If you recall, we raised our full year 2023 earnings guidance in November to a range of $4.30 to $4.40 per share to reflect several items, including a $0.71 per share after-tax gain recognized for a favorable arbitration award involving a subsidiary of Elite Clean Energy. Our estimates also assumed normal weather conditions in the fourth quarter. Turning now to the fourth quarter of 2023 for additional details from our business segments. Elite's regulated operations segment recorded fourth quarter net income of $34.8 million compared to $30.5 million in 2022. Earnings were higher in the fourth quarter of 2023, reflecting the timing of interim rate reserves at Minnesota Power. As you recall, the entire 2022 interim rate reserve of approximately $12 million after tax was recorded in the fourth quarter of 2022, which resulted in timing differences each quarter throughout 2023. There were also higher transmission and depreciation expenses, and warmer weather negatively impacted residential and commercial sales. These decreases were partially offset by lower property tax expense as compared to 2022. Elite Clean Energy recorded fourth quarter 2023 net income of $5.3 million compared to $1.3 million in 2022. Net income this quarter reflected lower operations and maintenance expense. However, earnings at our Cato Wind Energy Facility were negatively impacted in the fourth quarter of 2023 due to a forced network outage. 2022 included a reserve of $4.2 million after tax for the anticipated loss on the sale of the Northern Wind Project. Our corporate and other businesses, which includes New Energy, BNI Energy, and our investments in renewable energy facilities recorded net income of $11.4 million compared to net income of $19.9 million in 2022. Net income this quarter reflects higher consolidated income tax expense and lower earnings from Minnesota solar projects. New Energy's earnings this quarter were strong, but slightly below 2022 as expected. as New Energy had a record fourth quarter of project closings in 2022. I'll now provide a few details on our 2024 earnings guidance, which are summarized on slide nine. Today, we initiated 2024 earnings guidance of $3.60 to $3.90 per share on an income of $210 million to $225 million. This guidance range is comprised of our regulated operations segment, within a range of $2.65 to $2.85 per share, and Elite Clean Energy, New Energy, and our other businesses within a range of $0.95 to $1.05 per share. Beginning in 2025, we anticipate annual earnings growth will align with our long-term 5% to 7% growth objective using 2023 earnings per share, excluding the arbitration award, of $3.60 as a base. Our regulated capital expenditure plan will be an essential element in driving growth for Elite, along with financial contributions from our other businesses. As Bethany shared, we have made substantial progress on key initiatives in 2023, and 2024 will be a year of significant and consequential regulatory approvals. Regulatory approvals and proposals in 2024 include the Minnesota Power Rate Case and a rate stabilization mechanism proposal. projects that result from renewable RFPs, transmission certificates of need, and current cost recovery riders that will set the stage for further advancement of Minnesota Power's energy-forward clean energy transformation and related earnings growth. We will share with you procedural updates on material development throughout the year. Minnesota Power's renewable energy and transmission investments will drive renewed earnings growth over the next several years and are detailed as part of our $4.3 billion five-year capital expenditure plan. As we do every year, this plan was updated as part of our 10-K filing and now extends through 2028, which added approximately $1 billion in capital expenditures over our forecast period. This plan reflects the 2028 investments in renewable and transmission projects and also considers the timing of anticipated regulatory approvals and construction activities to better align with our latest timeline on the RFP process. Consequently, our expected capital projects related to the RFP outcomes have now shifted from 2024 to 2025 to align with this updated timeline, and the related earnings growth will largely be driven by these capital investments. Elite has unique liquidity options driven by several initiatives completed and underway. These include last year's arbitration award, monetization of renewable tax credits, pursuit of a holding company structure, and opportunistic sales of assets. These initiatives will further benefit our financing activities related to our capital investments, maintaining our well-disciplined capital structure, and support strong credit ratings as we deploy significant capital into regulated investment opportunities. Ali's financial position is also supported by a strong balance sheet that includes cash and cash equivalents of approximately $72 million, $370 million in available lines of credits, and a debt-to-capital ratio of 35% at the end of the year. Next, some details from our business segments on 2024 expectations, starting with our regulated operations outlook. Overall, our regulated operations earnings are expected to be slightly above 2023, reflecting several key assumptions that are also included in Minnesota Power's recent rate case filing. Our guidance includes $64 million for interim rates approved by the Minnesota Public Utilities Commission that went into effect January 1, 2024, as filed. Industrial sales reflect anticipated production from our taconite customers of approximately 35 million tons. We expect higher operating and maintenance expense, reflecting increased staff for large project development and inflationary cost increases. Depreciation and property tax expenses will also be higher due to increased plant and service. Regulated Operations Guidance for 2024 also assumes that we will achieve constructive outcomes in regulatory proceedings. Our Elite Clean Energy guidance expects total wind generation of approximately 3.7 million megawatt hours in 2024 with the expectation of normal wind resources. Actual megawatt hours in 2023 are 3.2 million. Our guidance also reflects the sale of Project Whitetail in 2024, and we anticipate some continued negative earnings impact at the Caddo Wind Energy Facility, primarily due to a forced substation network outage near the facility. Regarding corporate and other for 2024, we expect similar earnings from B&I Energy and our investment in the Nobles II Wind Energy Facility and slightly lower earnings at Elite Properties. Earnings from a lease investment in Minnesota Solar Projects are expected to be approximately 10 cents per share lower in 2025. In 2023, earnings reflected approximately $5 million in investment tax credits when these assets were placed in service. New Energy's strong growth momentum will continue into this year, and we expect net income of approximately $19 million to $21 million in 2024, or approximately a 14 percent increase over 2023 results. New Energy's healthy pipeline of projects, continued expansion in current key markets, and entry into robust new markets will provide continued consistent growth and increased earnings over our forecast period. And I'll turn it back to Bethany for additional comments. Bethany?