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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______________ to ______________
Commission File Number 1-3548
ALLETE, Inc.
(Exact name of registrant as specified in its charter)
Minnesota
 
41-0418150
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

30 West Superior Street
Duluth, Minnesota 55802-2093
(Address of principal executive offices)
(Zip Code)

(218) 279-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, without par value
ALE
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   x Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer    x             Accelerated Filer    ¨
Non-Accelerated Filer    ¨         Smaller Reporting Company    ¨
Emerging Growth Company    ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes   x No

Common Stock, without par value,
51,624,422 shares outstanding
as of March 31, 2019

ALLETE, Inc. First Quarter 2019 Form 10-Q
1




Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ALLETE, Inc. First Quarter 2019 Form 10-Q
2




Definitions

The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.
Abbreviation or Acronym
Term
AFUDC
Allowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods
ALLETE
ALLETE, Inc.
ALLETE Clean Energy
ALLETE Clean Energy, Inc. and its subsidiaries
ALLETE Properties
ALLETE Properties, LLC and its subsidiaries
ALLETE Transmission Holdings
ALLETE Transmission Holdings, Inc.
ATC
American Transmission Company LLC
Bison
Bison Wind Energy Center
Blanchard
Blanchard Solar Energy Facility
BNI Energy
BNI Energy, Inc. and its subsidiary
Boswell
Boswell Energy Center
Camp Ripley
Camp Ripley Solar Array
CO2
Carbon Dioxide
Company
ALLETE, Inc. and its subsidiaries
Cliffs
Cleveland-Cliffs Inc.
CSAPR
Cross-State Air Pollution Rule
DC
Direct Current
EIS
Environmental Impact Statement
EITE
Energy-Intensive Trade-Exposed
EPA
United States Environmental Protection Agency
ERP Iron Ore
ERP Iron Ore, LLC
ESOP
Employee Stock Ownership Plan
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Form 10-K
ALLETE Annual Report on Form 10-K
Form 10-Q
ALLETE Quarterly Report on Form 10-Q
GAAP
Generally Accepted Accounting Principles in the United States of America
GHG
Greenhouse Gases
GNTL
Great Northern Transmission Line
Hibbard
Hibbard Renewable Energy Center
Husky Energy
Husky Energy Inc.
Invest Direct
ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
IRP
Integrated Resource Plan
Item ___
Item ___ of this Form 10-Q
kV
Kilovolt(s)
kW / kWh
Kilowatt(s) / Kilowatt-hour(s)
Laskin
Laskin Energy Center
Manitoba Hydro
Manitoba Hydro-Electric Board
Minnesota Power
An operating division of ALLETE, Inc.
Minnkota Power
Minnkota Power Cooperative, Inc.
MISO
Midcontinent Independent System Operator, Inc.
MMTP
Manitoba-Minnesota Transmission Project

ALLETE, Inc. First Quarter 2019 Form 10-Q
3




Abbreviation or Acronym
Term
Montana-Dakota Utilities
Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc.
Moody’s
Moody’s Investors Service, Inc.
MPCA
Minnesota Pollution Control Agency
MPUC
Minnesota Public Utilities Commission
MW / MWh
Megawatt(s) / Megawatt-hour(s)
NAAQS
National Ambient Air Quality Standards
NDPSC
North Dakota Public Service Commission
Nobles 2
Nobles 2 Power Partners, LLC
NOL
Net Operating Loss
NOX
Nitrogen Oxides
Northern States Power
Northern States Power Company, a subsidiary of Xcel Energy Inc.
Northshore Mining
Northshore Mining Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
Note ___
Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDES
National Pollutant Discharge Elimination System
NTEC
Nemadji Trail Energy Center
Oliver Wind I
Oliver Wind I Energy Center
Oliver Wind II
Oliver Wind II Energy Center
Palm Coast Park District
Palm Coast Park Community Development District in Florida
PolyMet
PolyMet Mining Corp.
PPA / PSA
Power Purchase Agreement / Power Sales Agreement
PPACA
Patient Protection and Affordable Care Act of 2010
PSCW
Public Service Commission of Wisconsin
SEC
Securities and Exchange Commission
Silver Bay Power
Silver Bay Power Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
SO2
Sulfur Dioxide
Square Butte
Square Butte Electric Cooperative, a North Dakota cooperative corporation
SWL&P
Superior Water, Light and Power Company
Taconite Harbor
Taconite Harbor Energy Center
TCJA
Tax Cuts and Job Act of 2017 (Public Law 115-97)
Town Center District
Town Center at Palm Coast Community Development District in Florida
U.S.
United States of America
U.S. Water Services
U.S. Water Services Holding Company and its subsidiaries
WTG
Wind Turbine Generator



ALLETE, Inc. First Quarter 2019 Form 10-Q
4




Forward-Looking Statements

Statements in this report that are not statements of historical facts are considered “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there can be no assurance that the expected results will be achieved. Any statements that express, or involve discussions as to, future expectations, risks, beliefs, plans, objectives, assumptions, events, uncertainties, financial performance, or growth strategies (often, but not always, through the use of words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “likely,” “will continue,” “could,” “may,” “potential,” “target,” “outlook” or words of similar meaning) are not statements of historical facts and may be forward-looking.

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are providing this cautionary statement to identify important factors that could cause our actual results to differ materially from those indicated in forward-looking statements made by or on behalf of ALLETE in this Form 10-Q, in presentations, on our website, in response to questions or otherwise. These statements are qualified in their entirety by reference to, and are accompanied by, the following important factors, in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements that could cause our actual results to differ materially from those indicated in the forward-looking statements:

our ability to successfully implement our strategic objectives;
global and domestic economic conditions affecting us or our customers;
changes in and compliance with laws and regulations;
changes in tax rates or policies or in rates of inflation;
the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;
weather conditions, natural disasters and pandemic diseases;
our ability to access capital markets and bank financing;
changes in interest rates and the performance of the financial markets;
project delays or changes in project costs;
changes in operating expenses and capital expenditures and our ability to raise revenues from our customers in regulated rates or contract price increases at our Energy Infrastructure and Related Services and other businesses;
the impacts of commodity prices on ALLETE and our customers;
our ability to attract and retain qualified, skilled and experienced personnel;
effects of emerging technology;
war, acts of terrorism and cybersecurity attacks;
our ability to manage expansion and integrate acquisitions;
population growth rates and demographic patterns;
wholesale power market conditions;
federal and state regulatory and legislative actions that impact regulated utility economics, including our allowed rates of return, capital structure, ability to secure financing, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities and utility infrastructure, recovery of purchased power, capital investments and other expenses, including present or prospective environmental matters;
effects of competition, including competition for retail and wholesale customers;
effects of restructuring initiatives in the electric industry;
the impacts on our Regulated Operations segment of climate change and future regulation to restrict the emissions of GHG;
effects of increased deployment of distributed low-carbon electricity generation resources;
the impacts of laws and regulations related to renewable and distributed generation;
pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;
our current and potential industrial and municipal customers’ ability to execute announced expansion plans;
real estate market conditions where our legacy Florida real estate investment is located may not improve;
the success of efforts to realize value from, invest in, and develop new opportunities in, our Energy Infrastructure and Related Services businesses; and
factors affecting our Energy Infrastructure and Related Services businesses, including unanticipated cost increases, changes in legislation and regulations impacting the industries in which the customers served operate, the effects of weather, creditworthiness of customers, ability to obtain materials required to perform services, and changing market conditions.



ALLETE, Inc. First Quarter 2019 Form 10-Q
5




Forward-Looking Statements (Continued)

Additional disclosures regarding factors that could cause our results or performance to differ from those anticipated by this report are discussed in Part I, Item 1A. Risk Factors of ALLETE’s 2018 Form 10-K. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can it assess the impact of each of these factors on the businesses of ALLETE or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by ALLETE in this Form 10-Q and in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.

ALLETE, Inc. First Quarter 2019 Form 10-Q
6




PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
 
March 31,
2019

 
December 31,
2018

Millions
 
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents

$353.3

 

$69.1

Accounts Receivable (Less Allowance of $1.0 and $1.7)
98.9

 
144.4

Inventories – Net
73.8

 
86.7

Prepayments and Other
30.4

 
34.1

Total Current Assets
556.4

 
334.3

Property, Plant and Equipment – Net
3,940.5

 
3,904.4

Regulatory Assets
385.1

 
389.5

Equity Investments
154.8

 
161.1

Goodwill and Intangible Assets – Net
1.1

 
223.3

Other Non-Current Assets
180.9

 
152.4

Total Assets

$5,218.8

 

$5,165.0

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Current Liabilities
 
 
 
Accounts Payable

$134.4

 

$149.8

Accrued Taxes
60.3

 
51.4

Accrued Interest
14.9

 
17.9

Long-Term Debt Due Within One Year
14.3

 
57.5

Other
98.5

 
128.5

Total Current Liabilities
322.4

 
405.1

Long-Term Debt
1,525.0

 
1,428.5

Deferred Income Taxes
215.5

 
223.6

Regulatory Liabilities
504.1

 
512.1

Defined Benefit Pension and Other Postretirement Benefit Plans
165.2

 
177.3

Other Non-Current Liabilities
287.9

 
262.6

Total Liabilities
3,020.1

 
3,009.2

Commitments, Guarantees and Contingencies (Note 7)

 

Shareholders’ Equity
 
 
 
Common Stock Without Par Value, 80.0 Shares Authorized, 51.6 and 51.5 Shares Issued and Outstanding
1,431.1

 
1,428.5

Accumulated Other Comprehensive Loss
(27.2
)
 
(27.3
)
Retained Earnings
794.8

 
754.6

Total Shareholders’ Equity
2,198.7

 
2,155.8

Total Liabilities and Shareholders’ Equity

$5,218.8

 

$5,165.0

The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2019 Form 10-Q
7




ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
 
Three Months Ended
 
March 31,
 
2019
2018
Millions Except Per Share Amounts
 
 
Operating Revenue
 
 
Contracts with Customers – Utility

$282.2


$270.2

Contracts with Customers – Non-utility
72.1

82.0

Other – Non-utility
2.9

6.0

Total Operating Revenue
357.2

358.2

Operating Expenses
 
 
Fuel, Purchased Power and Gas – Utility
109.8

100.9

Transmission Services – Utility
18.3

18.4

Cost of Sales – Non-utility
30.6

32.9

Operating and Maintenance
76.2

86.5

Depreciation and Amortization
51.9

45.8

Taxes Other than Income Taxes
13.6

16.3

Total Operating Expenses
300.4

300.8

Operating Income
56.8

57.4

Other Income (Expense)
 
 
Interest Expense
(16.5
)
(16.9
)
Equity Earnings
5.6

4.7

Gain on Sale of U.S. Water Services
20.1


Other
7.4

2.1

Total Other Income (Expense)
16.6

(10.1
)
Income Before Income Taxes
73.4

47.3

Income Tax Expense (Benefit)
2.9

(3.7
)
Net Income

$70.5


$51.0

Average Shares of Common Stock
 
 
Basic
51.6

51.2

Diluted
51.7

51.4

Basic Earnings Per Share of Common Stock

$1.37


$1.00

Diluted Earnings Per Share of Common Stock

$1.37


$0.99

The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2019 Form 10-Q
8




ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
 
Three Months Ended
 
March 31,
 
2019
 
2018
Millions
 
 
 
Net Income

$70.5

 

$51.0

Other Comprehensive Income (Loss)
 
 
 
Unrealized Gain (Loss) on Securities
 
 
 
Net of Income Tax Expense of $– and $–
0.1

 
(0.1
)
Defined Benefit Pension and Other Postretirement Benefit Plans
 
 
 
Net of Income Tax Expense of $0.1 and $0.1

 
0.4

Total Other Comprehensive Income
0.1

 
0.3

Total Comprehensive Income

$70.6

 

$51.3

The accompanying notes are an integral part of these statements.


ALLETE, Inc. First Quarter 2019 Form 10-Q
9




ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
 
Three Months Ended
 
March 31,
 
2019
 
2018
Millions
 
 
 
Operating Activities
 
 
 
Net Income

$70.5

 

$51.0

AFUDC – Equity
(0.6
)
 
(0.3
)
Income from Equity Investments – Net of Dividends
(1.2
)
 
(0.5
)
Gain on Sales of Investments and Property, Plant and Equipment
(1.7
)
 
(0.1
)
Depreciation Expense
50.7

 
44.5

Amortization of PSAs
(2.9
)
 
(6.0
)
Amortization of Other Intangible Assets and Other Assets
1.9

 
2.8

Deferred Income Tax Expense (Benefit)
2.6

 
(4.4
)
Share-Based and ESOP Compensation Expense
1.8

 
1.7

Defined Benefit Pension and Postretirement Benefit Expense
1.1

 
2.2

Provision for Interim Rate Refund
0.6

 
4.4

Payments / Provision for Tax Reform Refund
(10.2
)
 
7.5

Bad Debt Expense
0.4

 
0.3

Gain on Sale of U.S. Water Services
(20.1
)
 

Changes in Operating Assets and Liabilities
 
 
 
Accounts Receivable
20.9

 
6.3

Inventories
(5.1
)
 
(0.3
)
Prepayments and Other
2.9

 
(1.2
)
Accounts Payable
(5.5
)
 
(0.1
)
Other Current Liabilities
(9.9
)
 
17.3

Cash Contributions to Defined Benefit Pension Plans
(10.4
)
 
(15.0
)
Changes in Regulatory and Other Non-Current Assets
0.3

 
3.8

Changes in Regulatory and Other Non-Current Liabilities
(7.0
)
 
7.4

Cash from Operating Activities
79.1

 
121.3

Investing Activities
 
 
 
Proceeds from Sale of Available-for-sale Securities
2.7

 
3.3

Payments for Purchase of Available-for-sale Securities
(2.6
)
 
(5.3
)
Payments for Equity Investments
(0.5
)
 
(1.6
)
Return of Capital from Equity Investments
8.3

 

Proceeds from Sale of U.S. Water Services – Net of Transaction Costs and Cash Retained
264.7

 

Additions to Property, Plant and Equipment
(89.3
)
 
(88.1
)
Other Investing Activities
1.8

 
2.7

Cash from (for) Investing Activities
185.1

 
(89.0
)
Financing Activities
 
 
 
Proceeds from Issuance of Common Stock
0.8

 
4.3

Proceeds from Issuance of Long-Term Debt
100.0

 

Repayments of Long-Term Debt
(43.8
)
 
(1.9
)
Acquisition-Related Contingent Consideration Payments
(3.8
)
 

Dividends on Common Stock
(30.3
)
 
(28.7
)
Other Financing Activities
(0.9
)
 
(0.2
)
Cash from (for) Financing Activities
22.0

 
(26.5
)
Change in Cash, Cash Equivalents and Restricted Cash
286.2

 
5.8

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
79.0

 
110.1

Cash, Cash Equivalents and Restricted Cash at End of Period

$365.2

 

$115.9

The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2019 Form 10-Q
10




ALLETE
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Unaudited
 
Three Months Ended
 
March 31,
 
2019
2018
Millions Except Per Share Amounts
 
 
Common Stock
 
 
Balance, Beginning of Period

$1,428.5


$1,401.4

Common Stock Issued
2.6

6.0

Balance, End of Period
1,431.1

1,407.4

 
 
 
Accumulated Other Comprehensive Loss
 
 
Balance, Beginning of Period
(27.3
)
(28.2
)
Other Comprehensive Income - Net of Income Taxes
 
 
Unrealized Gain (Loss) on Debt Securities
0.1

(0.1
)
Defined Benefit Pension and Other Postretirement Plans

0.4

Balance, End of Period
(27.2
)
(27.9
)
 
 
 
Retained Earnings
 
 
Balance, Beginning of Period
754.6

695.5

Net Income
70.5

51.0

Common Stock Dividends
(30.3
)
(28.7
)
Balance, End of Period
794.8

717.8

 
 
 
Total Shareholders’ Equity

$2,198.7


$2,097.3

 
 
 
Dividends Per Share of Common Stock

$0.5875


$0.56


The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2019 Form 10-Q
11




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2018, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the three months ended March 31, 2019, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2019. For further information, refer to the Consolidated Financial Statements and notes included in our 2018 Form 10-K.

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of March 31, 2019, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement. In prior periods presented, the amounts also include U.S. Water Service’s standby letters of credit. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under an ALLETE Clean Energy loan agreement and PSAs, and deposits from a SWL&P customer in aid of future capital expenditures. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.
Cash, Cash Equivalents and Restricted Cash
March 31,
2019

 
December 31,
2018

 
March 31,
2018

 
December 31,
2017

Millions
 
 
 
 
 
 
 
Cash and Cash Equivalents

$353.3

 

$69.1

 

$98.5

 

$98.9

Restricted Cash included in Prepayments and Other
7.2

 
1.3

 
8.8

 
2.6

Restricted Cash included in Other Non-Current Assets
4.7

 
8.6

 
8.6

 
8.6

Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows

$365.2

 

$79.0

 

$115.9

 

$110.1



Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations segment are carried at an average cost or first-in, first-out basis. Inventories in our ALLETE Clean Energy segment and Corporate and Other businesses are carried at an average cost, first-in, first-out or specific identification basis.
Inventories – Net
March 31,
2019

 
December 31,
2018

Millions
 
 
 
Fuel (a)

$29.4

 

$26.0

Materials and Supplies
44.4

 
44.2

Raw Materials (b)

 
2.8

Work in Progress (b)

 
6.1

Finished Goods (b)

 
8.4

Reserve for Obsolescence (b)

 
(0.8
)
Total Inventories – Net

$73.8

 

$86.7


(a)
Fuel consists primarily of coal inventory at Minnesota Power.
(b)
On March 26, 2019, ALLETE completed the sale of U.S. Water Services which resulted in the removal of the related inventory items from the Consolidated Balance Sheet.


ALLETE, Inc. First Quarter 2019 Form 10-Q
12




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Non-Current Assets
March 31,
2019

 
December 31,
2018

Millions
 
 
 
Contract Assets (a)

$29.8

 

$30.7

Finance Receivable
10.4

 
10.4

Operating Lease Right-of-use Assets (b)
34.0

 

ALLETE Properties
24.0

 
24.4

Other
82.7

 
86.9

Total Other Non-Current Assets

$180.9

 

$152.4


(a)
Contract Assets include payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.
(b)
See Leases.    
Other Current Liabilities
March 31,
2019

 
December 31,
2018

Millions
 
 
 
Provision for Interim Rate Refund (a)

$40.6

 

$40.0

PSAs
12.4

 
12.6

Contract Liabilities (b)
0.4

 
7.6

Provision for Tax Reform Refund (c)
0.5

 
10.7

Contingent Consideration (d)

 
3.8

Operating Lease Liabilities (e)
8.4

 

Other
36.2

 
53.8

Total Other Current Liabilities

$98.5

 

$128.5


(a)
Provision for Interim Rate Refund is expected to be refunded to Minnesota Power’s regulated retail customers in the second quarter of 2019.
(b)
Contract Liabilities include deposits received as a result of entering into contracts with our customers prior to completing our performance obligations.
(c)
Provision for Tax Reform Refund related to the income tax benefits of the TCJA in 2018 was refunded to Minnesota Power customers in the first quarter of 2019 and will be refunded to SWL&P customers in 2019 and 2020.
(d)
Contingent Consideration related to the earnings-based payment resulting from the U.S. Water Services acquisition was paid in the first quarter of 2019.
(e)
See Leases.
Other Non-Current Liabilities
March 31,
2019

 
December 31,
2018

Millions
 
 
 
Asset Retirement Obligation

$142.0

 

$138.6

PSAs
73.9

 
76.9

Operating Lease Liabilities (a)
25.6

 

Other
46.4

 
47.1

Total Other Non-Current Liabilities

$287.9

 

$262.6


(a)
See Leases.


ALLETE, Inc. First Quarter 2019 Form 10-Q
13




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.
Three Months Ended March 31,
2019

 
2018

Millions
 
 
 
Cash Paid for Interest – Net of Amounts Capitalized

$19.7

 

$19.3

Noncash Investing and Financing Activities
 

 
 

Decrease in Accounts Payable for Capital Additions to Property, Plant and Equipment
$(1.1)
 
$(48.1)
Reclassification of Property, Plant and Equipment to Inventory (a)

 

$46.9

Recognition of Right-of-use Assets and Lease Liabilities (b)
$34.0
 

Capitalized Asset Retirement Costs

$1.6

 

$0.8

AFUDC–Equity

$0.6

 

$0.3


(a)
In February 2018, Montana-Dakota Utilities exercised its option to purchase the Thunder Spirit II wind energy facility upon completion, resulting in a reclassification from Property, Plant and Equipment – Net to Inventories – Net for project costs incurred in the prior year.
(b)
See Leases.

New Accounting Pronouncements.

Recently Adopted Pronouncements

Disclosure Update and Simplification. In November 2018, the SEC adopted amendments to certain disclosure requirements. The amendments adopted include requirements that interim financial statements should include comparative statements for the same period in the prior financial year, except that the requirement for comparative balance sheet information may be satisfied by presenting the year-end balance sheet. It further includes a requirement analyzing the changes in each caption of shareholders’ equity either separately in a note or on the face of the financial statement. These amendments were effective for ALLETE in the first quarter of 2019. We have included the presentation of our Statement of Shareholders’ Equity to meet these requirements.

Leases. In 2016, the FASB issued an accounting standard update which revised the existing guidance for leases. Under the revised guidance, lessees will be required to recognize right-of-use assets and lease liabilities on the Consolidated Balance Sheet for leases with terms greater than 12 months. The new standard also requires additional qualitative and quantitative disclosures by lessees and lessors to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The accounting for leases by lessors and the recognition, measurement and presentation of expenses and cash flows from leases is not expected to significantly change as a result of the new guidance. The Company adopted this guidance in the first quarter of 2019 using the optional transition method and the package of practical expedients, which allowed for the adoption of the standard as of January 1, 2019 without restating previously disclosed information. Management elected the optional transition method of adoption due to the overall immateriality of the balance sheet gross up in the period of adoption. The package of practical expedients allowed management to not reassess the lease classification for leases, including those that had expired during the periods presented or that still existed at the time of adoption. We have included additional disclosures in the notes to the consolidated financial statements including additional information about the Company’s leases. (See Leases.)

Leases. We determine if a contract is or contains a lease at inception and recognize a right-of-use asset and lease liability for all leases with a term greater than 12 months. Our right-of-use assets and lease liabilities for operating leases are included in Other Non-Current Assets, Other Current Liabilities and Other Non-Current Liabilities, respectively, in our Consolidated Balance Sheet. We currently do not have any finance leases.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the estimated present value of lease payments over the lease term. As our leases do not provide an explicit rate, we determine the present value of future lease payments based on our estimated incremental borrowing rate using information available at the lease commencement date. The operating lease right-of-use asset includes lease payments to be made during the lease term and any lease incentives, as applicable.

ALLETE, Inc. First Quarter 2019 Form 10-Q
14




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leases (Continued)

Our leases may include options to extend or buy out the lease at certain points throughout the term, and if it is reasonably certain that we will exercise that option at lease commencement, we include those rental payments in our calculation of the right-of-use asset and lease liability. Lease and rent expense is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less are not recorded on the Consolidated Balance Sheet.

The majority of our operating leases are for heavy equipment, vehicles and land with fixed monthly payments which we group into two categories: Vehicles and Equipment; and Land and Other. Our largest operating lease is for the dragline at BNI Energy which includes a termination payment at the end of the lease term if we do not exercise our purchase option. The amount of this payment is $3 million and is included in our calculation of the right-of-use asset and lease liability recorded. None of our other leases contain residual value guarantees.

The components of lease cost were as follows:
Three Months Ended March 31,
 
2019
Millions
 
 
Operating Lease Cost
 

$2.9

 
 
 
Other Information:
 
 
Operating Cash Flows From Operating Leases
 

$2.9

 
 
 
Balance Sheet Information Related to Leases:
 
 
Other Non-Current Assets
 

$34.0

Total Operating Lease Right-of-use Assets
 

$34.0

 
 
 
Other Current Liabilities
 

$8.4

Other Non-Current Liabilities
 
25.6

Total Operating Lease Liabilities
 

$34.0

 
 
 
Weighted Average Remaining Lease Term (Years):
 
 
Operating Leases - Vehicles and Equipment
 
4

Operating Leases - Land and Other
 
29

 
 
 
Weighted Average Discount Rate:
 
 
Operating Leases - Vehicles and Equipment
 
3.6
%
Operating Leases - Land and Other
 
4.5
%


ALLETE, Inc. First Quarter 2019 Form 10-Q
15




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leases (Continued)

Maturities of lease liabilities were as follows:
 
March 31, 2019
Millions
 
2019

$9.9

2020
7.9

2021
6.1

2022
4.9

2023
3.1

Thereafter
9.4

Total Lease Payments Due
41.3

Less: Imputed Interest
7.3

Total Lease Obligations
34.0

Less: Current Lease Obligations
8.4

Long-term Lease Obligations

$25.6



Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the date of the financial statements issuance.

Sale of U.S. Water Services. On February 8, 2019, the Company entered into a stock purchase agreement providing for the sale of U.S. Water Services to a subsidiary of Kurita Water Industries Ltd. for a cash purchase price of $270 million. On March 26, 2019, ALLETE completed the sale and received approximately $265 million in cash at closing, net of transaction costs and cash retained. This amount is subject to adjustment for finalization of such items as estimated working capital. The Company recognized a gain on the sale of U.S. Water Services of approximately $10 million after-tax during the three months ended March 31, 2019.


NOTE 2. REGULATORY MATTERS

Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2018 Form 10‑K, with additional disclosure provided in the following paragraphs.

Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable, and environmental investments and expenditures. Revenue from cost recovery riders was $7.4 million for the three months ended March 31, 2019 ($24.1 million for three months ended March 31, 2018). With the implementation of final rates in Minnesota Power’s general rate case, certain revenue previously recognized under cost recovery riders was incorporated into base rates. (See 2016 Minnesota General Rate Case.)

2016 Minnesota General Rate Case. The MPUC issued an order dated March 12, 2018, in Minnesota Power’s general rate case approving a return on common equity of 9.25 percent and a 53.81 percent equity ratio. Final rates went into effect on December 1, 2018, which is expected to result in additional revenue of approximately $13 million on an annualized basis. Interim rates were collected from January 1, 2017, through November 30, 2018, which were fully offset by the recognition of a corresponding reserve. Minnesota Power has recorded a reserve for an interim rate refund, net of discounts provided to EITE customers, of $40.6 million as of March 31, 2019 ($40.0 million as of December 31, 2018), which is expected to be refunded in the second quarter of 2019.

2018 Wisconsin General Rate Case. In an order dated December 20, 2018, the PSCW approved a rate increase for SWL&P including a return on equity of 10.4 percent and a 55.0 percent equity ratio. Final rates went into effect January 1, 2019, which is expected to result in additional revenue of approximately $1.3 million on an annualized basis.

ALLETE, Inc. First Quarter 2019 Form 10-Q
16




NOTE 2. REGULATORY MATTERS (Continued)

Integrated Resource Plan. In a 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for the economic idling of Taconite Harbor Units 1 and 2 and the ceasing of coal-fired operations at Taconite Harbor in 2020, directed Minnesota Power to retire Boswell Units 1 and 2 no later than 2022, required an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal, and required Minnesota Power to conduct request for proposals for additional wind, solar and demand response resource additions subject to further MPUC approvals. Minnesota Power retired Boswell Units 1 and 2 in the fourth quarter of 2018. Minnesota Power’s next IRP filing is due October 1, 2020.

In 2017, Minnesota Power submitted a resource package to the MPUC requesting approval of PPAs for the output of a 250 MW wind energy facility and a 10 MW solar energy facility as well as approval of a 250 MW natural gas capacity dedication agreement. These agreements were subject to MPUC approval of the construction of NTEC, a 525 MW to 550 MW combined-cycle natural gas‑fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. In an order dated January 24, 2019, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication agreement. Separately, the MPUC required a baseload retirement evaluation in Minnesota Power’s next IRP filing analyzing its existing fleet, including potential early retirement scenarios of Boswell Units 3 and 4, as well as a securitization plan. On January 8, 2019, an application for a certificate of public convenience and necessity for NTEC was submitted to the PSCW. A decision on the application is expected in 2020.

Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidance for the effect of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. With the exception of the regulatory asset for Boswell Units 1 and 2 net plant and equipment, no other regulatory assets are currently earning a return. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.

ALLETE, Inc. First Quarter 2019 Form 10-Q
17




NOTE 2. REGULATORY MATTERS (Continued)
Regulatory Assets and Liabilities
March 31,
2019

 
December 31,
2018

Millions
 
 
 
Non-Current Regulatory Assets
 
 
 
Defined Benefit Pension and Other Postretirement Benefit Plans

$218.0

 

$218.5

Income Taxes
103.2

 
105.5

Asset Retirement Obligations
32.4

 
32.6

Boswell 1 and 2 Net Plant and Equipment
14.8

 
16.3

Manufactured Gas Plant 
8.1

 
8.0

PPACA Income Tax Deferral
4.9

 
5.0

Other
3.7

 
3.6

Total Non-Current Regulatory Assets

$385.1

 

$389.5

 
 
 
 
Current Regulatory Liabilities (a)
 
 
 
Provision for Interim Rate Refund (b)

$40.6

 

$40.0

Transmission Formula Rates Refund
3.3

 
4.4

Provision for Tax Reform Refund (c)
0.5

 
10.7

Total Current Regulatory Liabilities
44.4

 
55.1

Non-Current Regulatory Liabilities
 
 
 
Income Taxes
389.4

 
396.4

Wholesale and Retail Contra AFUDC
67.3

 
64.4

Plant Removal Obligations
26.8

 
25.1

North Dakota Investment Tax Credits
12.3

 
14.7

Conservation Improvement Program
5.2

 
1.5

Transmission Formula Rates Refund
1.6

 
1.6

Cost Recovery Riders 

 
6.9

Other
1.5

 
1.5

Total Non-Current Regulatory Liabilities
504.1

 
512.1

Total Regulatory Liabilities

$548.5

 

$567.2


(a)
Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
(b)
This amount is expected to be refunded to Minnesota Power’s regulated retail customers in the second quarter of 2019.
(c)
Provision for Tax Reform Refund related to the income tax benefits of the TCJA in 2018 was refunded to Minnesota Power customers in the first quarter of 2019 and will be refunded to SWL&P customers in 2019 and 2020.


NOTE 3. EQUITY INVESTMENTS

Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. In the three months ended March 31, 2019, we invested $0.4 million in ATC, and on April 30, 2019, we invested an additional $2.3 million. We expect to make $5.8 million in additional investments in 2019.
ALLETE’s Investment in ATC
 
Millions
 
Equity Investment Balance as of December 31, 2018

$128.1

Cash Investments
0.4

Equity in ATC Earnings
5.6

Distributed ATC Earnings
(4.4
)
Amortization of the Remeasurement of Deferred Income Taxes
0.3

Equity Investment Balance as of March 31, 2019

$130.0



ATC’s authorized return on equity is 10.32 percent, or 10.82 percent including an incentive adder for participation in a regional transmission organization.

ALLETE, Inc. First Quarter 2019 Form 10-Q
18




NOTE 3. EQUITY INVESTMENTS (Continued)
Investment in ATC (Continued)

In 2016, a federal administrative law judge ruled on a complaint proposing a reduction in the base return on equity to 9.70 percent, or 10.20 percent including an incentive adder for participation in a regional transmission organization, subject to approval or adjustment by the FERC. A final decision from the FERC on the administrative law judge’s recommendation is pending.

Investment in Nobles 2. Our wholly-owned subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that will own and operate a 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. We account for our investment in Nobles 2 under the equity method of accounting. As of March 31, 2019, our equity investment in Nobles 2 was $24.8 million ($33.0 million at December 31, 2018). In the first quarter of 2019, Nobles 2 returned capital of $8.3 million based on its cash needs.


NOTE 4. GOODWILL AND INTANGIBLE ASSETS

As a result of completing the sale of U.S. Water Services on March 26, 2019, there was no goodwill recorded as of March 31, 2019 ($148.5 million at December 31, 2018).

The balance of intangible assets, net, as of March 31, 2019, is as follows:
 
December 31,
2018

 
 Amortization
 
Other (b)
 
March 31,
2019

Millions
 
 
 
 
 
 
 
Intangible Assets
 
 
 
 
 
 
 
Definite-Lived Intangible Assets
 
 
 
 
 
 
 
Customer Relationships

$50.7

 
$(1.1)
 
$(49.6)
 

Developed Technology and Other (a)
7.5

 
(0.3)
 
(6.1)
 

$1.1

Total Definite-Lived Intangible Assets
58.2

 
(1.4)
 
(55.7)
 
1.1

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
Trademarks and Trade Names
16.6

 
n/a
 
(16.6)
 

Total Intangible Assets

$74.8

 
$(1.4)
 
$(72.3)
 

$1.1


(a)
Developed Technology and Other includes patents, non-compete agreements, land easements and trade names with finite lives.
(b)
On March 26, 2019, ALLETE completed the sale of U.S. Water Services which resulted in the removal of the related intangible assets from the Consolidated Balance Sheet.

Amortization expense for intangible assets was $1.4 million for the three months ended March 31, 2019, and 2018. The remaining definite-lived intangible assets will continue to be amortized ratably through 2028.


NOTE 5. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 9. Fair Value to the Consolidated Financial Statements in our 2018 Form 10-K.

ALLETE, Inc. First Quarter 2019 Form 10-Q
19




NOTE 5. FAIR VALUE (Continued)

The following tables set forth, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2019, and December 31, 2018. Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.
 
Fair Value as of March 31, 2019
Recurring Fair Value Measures
Level 1

 
Level 2

 
Level 3

 
Total

Millions
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Investments (a)
 
 
 
 
 
 
 
Available-for-sale – Equity Securities

$12.3

 

 

 

$12.3

Available-for-sale – Corporate and Governmental Debt Securities (b)

 

$8.3

 

 
8.3

Cash Equivalents
1.0

 

 

 
1.0

Total Fair Value of Assets

$13.3

 

$8.3

 

 

$21.6

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deferred Compensation (c)

 

$21.6

 

 

$21.6

Total Fair Value of Liabilities

 

$21.6

 

 

$21.6

Total Net Fair Value of Assets (Liabilities)

$13.3

 
$(13.3)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value as of December 31, 2018
Recurring Fair Value Measures
Level 1

 
Level 2

 
Level 3

 
Total

Millions
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Investments (a)
 
 
 
 
 
 
 
Available-for-sale – Equity Securities

$12.2

 

 

 

$12.2

Available-for-sale – Corporate and Governmental Debt Securities

 

$8.0

 

 
8.0

Cash Equivalents
1.0

 

 

 
1.0

Total Fair Value of Assets

$13.2

 

$8.0

 

 

$21.2

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deferred Compensation (c)

 

$19.8

 

 

$19.8

U.S. Water Services Contingent Consideration (d)

 

 

$3.8

 
3.8

Total Fair Value of Liabilities

 

$19.8

 

$3.8

 

$23.6

Total Net Fair Value of Assets (Liabilities)

$13.2

 
$(11.8)
 
$(3.8)
 
$(2.4)
(a)
Included in Other Investments on the Consolidated Balance Sheet.
(b)
As of March 31, 2019, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $1.7 million, in one year to less than three years was $4.0 million, in three years to less than five years was $1.8 million and in five or more years was $0.8 million.
(c)
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
(d)
Included in Other Current Liabilities on the Consolidated Balance Sheet.

The Level 3 liability in the preceding table is related to the contingent consideration liability that resulted from the 2015 acquisition of U.S. Water Services. Based on the terms and conditions of the acquisition agreement, a final payout of $3.8 million was made in the first quarter of 2019 for the remaining outstanding shares.

ALLETE, Inc. First Quarter 2019 Form 10-Q
20




NOTE 5. FAIR VALUE (Continued)

Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instruments approximates the carrying amount. The fair value for the item listed in the following table was based on quoted market prices for the same or similar instruments (Level 2).
Financial Instruments
Carrying Amount
 
Fair Value
Millions
 
 
 
Long-Term Debt, Including Long-Term Debt Due Within One Year
 
 
 
March 31, 2019
$1,549.0
 
$1,639.5
December 31, 2018
$1,495.2
 
$1,534.6


Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, land inventory, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the three months ended March 31, 2019, and the year ended December 31, 2018, there were no triggering events or indicators of impairment for these non-financial assets.


NOTE 6. SHORT-TERM AND LONG-TERM DEBT

The following tables present the Company’s short-term and long-term debt as of March 31, 2019, and December 31, 2018:
March 31, 2019
Principal

 
Unamortized Debt Issuance Costs
 
Total

Millions
 
 
 
 
 
Short-Term Debt

$14.7

 
$(0.4)
 

$14.3

Long-Term Debt
1,534.3

 
(9.3)
 
1,525.0

Total Debt

$1,549.0

 
$(9.7)
 

$1,539.3


December 31, 2018
Principal

 
Unamortized Debt Issuance Costs
 
Total

Millions
 
 
 
 
 
Short-Term Debt

$57.9

 
$(0.4)
 

$57.5

Long-Term Debt
1,437.3

 
(8.8)
 
1,428.5

Total Debt

$1,495.2

 
$(9.2)
 

$1,486.0



On January 10, 2019, ALLETE entered into an amended and restated $400 million credit agreement (Credit Agreement). The Credit Agreement is unsecured, has a variable interest rate and will expire in January 2024. At ALLETE’s request and subject to certain conditions, the Credit Agreement may be increased by up to $150 million and ALLETE may make two requests to extend the maturity date, each for a one-year extension. Advances may be used by ALLETE for general corporate purposes, to provide liquidity in support of ALLETE’s commercial paper program and to issue up to $60 million in letters of credit.

On March 1, 2019, ALLETE issued and sold the following First Mortgage Bonds (the Bonds):
Maturity Date
Principal Amount
Interest Rate
March 1, 2029
$70 Million