SEC Filing | ALLETE, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2019



☐	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. ☒ 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). ☒ 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 ☒ 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 ☒ No

Common Stock, without par value,

51,655,541 shares outstanding

as of June 30, 2019

ALLETE, Inc. Second Quarter 2019 Form 10-Q

Index




Definitions			3
Forward-Looking Statements			5
Part I.	Financial Information
	Item 1.	Consolidated Financial Statements - Unaudited	7
		Consolidated Balance Sheet	7
		Consolidated Statement of Income	8
		Consolidated Statement of Comprehensive Income	9
		Consolidated Statement of Cash Flows	10
		Consolidated Statement of Shareholders’ Equity	11
		Notes to Consolidated Financial Statements	12
		Note 1. Operations and Significant Accounting Policies	12
		Note 2. Regulatory Matters	16
		Note 3. Equity Investments	18
		Note 4. Goodwill and Intangible Assets	19
		Note 5. Fair Value	19
		Note 6. Short-Term and Long-Term Debt	21
		Note 7. Commitments, Guarantees and Contingencies	22
		Note 8. Earnings Per Share and Common Stock	27
		Note 9. Income Tax Expense	27
		Note 10. Pension and Other Postretirement Benefit Plans	29
		Note 11. Business Segments	29
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
		Comparison of Quarters Ended	32
		Comparison of the Six Months Ended	35
		Critical Accounting Policies	38
		Outlook	38
		Liquidity and Capital Resources	44
		Other	46
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
	Item 4.	Controls and Procedures	47
Part II.	Other Information
	Item 1.	Legal Proceedings	48
	Item 1A.	Risk Factors	48
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
	Item 3.	Defaults Upon Senior Securities	48
	Item 4.	Mine Safety Disclosures	48
	Item 5.	Other Information	48
	Item 6.	Exhibits	49
Signatures			50

ALLETE, Inc. Second Quarter 2019 Form 10-Q

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
BNI Energy	BNI Energy, Inc. and its subsidiary
Boswell	Boswell Energy Center
Camp Ripley	Camp Ripley Solar Array
CIP	Conservation Improvement Program
Cliffs	Cleveland-Cliffs Inc.
Company	ALLETE, Inc. and its subsidiaries
CSAPR	Cross-State Air Pollution Rule
DC	Direct Current
EIS	Environmental Impact Statement
EITE	Energy-Intensive Trade-Exposed
EPA	United States Environmental Protection Agency
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
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
Montana-Dakota Utilities	Montana-Dakota Utilities Co., a subsidiary of MDU Resources Group, Inc.
Moody’s	Moody’s Investors Service, Inc.
MPCA	Minnesota Pollution Control Agency

ALLETE, Inc. Second Quarter 2019 Form 10-Q



Abbreviation or Acronym	Term
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. Second Quarter 2019 Form 10-Q

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. Second Quarter 2019 Form 10-Q

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. Second Quarter 2019 Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ALLETE

CONSOLIDATED BALANCE SHEET

Unaudited



	June 30, 2019			December 31, 2018
Millions
Assets
Current Assets
Cash and Cash Equivalents		$203.1			$69.1
Accounts Receivable (Less Allowance of $1.1 and $1.7)	87.4			144.4
Inventories – Net	78.2			86.7
Prepayments and Other	28.6			34.1
Total Current Assets	397.3			334.3
Property, Plant and Equipment – Net	4,062.9			3,904.4
Regulatory Assets	391.2			389.5
Equity Investments	160.2			161.1
Goodwill and Intangible Assets – Net	1.1			223.3
Other Non-Current Assets	163.8			152.4
Total Assets		$5,176.5			$5,165.0
Liabilities and Shareholders’ Equity
Liabilities
Current Liabilities
Accounts Payable		$150.4			$149.8
Accrued Taxes	41.3			51.4
Accrued Interest	17.7			17.9
Long-Term Debt Due Within One Year	27.7			57.5
Other	59.5			128.5
Total Current Liabilities	296.6			405.1
Long-Term Debt	1,505.9			1,428.5
Deferred Income Taxes	213.5			223.6
Regulatory Liabilities	508.8			512.1
Defined Benefit Pension and Other Postretirement Benefit Plans	163.9			177.3
Other Non-Current Liabilities	282.8			262.6
Total Liabilities	2,971.5			3,009.2
Commitments, Guarantees and Contingencies (Note 7)
Shareholders’ Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 51.7 and 51.5 Shares Issued and Outstanding	1,433.3			1,428.5
Accumulated Other Comprehensive Loss	(26.9		)	(27.3		)
Retained Earnings	798.6			754.6
Total Shareholders’ Equity	2,205.0			2,155.8
Total Liabilities and Shareholders’ Equity		$5,176.5			$5,165.0

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF INCOME

Unaudited



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility		$249.8			$257.8			$532.0			$528.0
Contracts with Customers – Non-utility	37.7			80.4			109.8			162.4
Other – Non-utility	2.9			5.9			5.8			11.9
Total Operating Revenue	290.4			344.1			647.6			702.3
Operating Expenses
Fuel, Purchased Power and Gas – Utility	87.9			96.5			197.7			197.4
Transmission Services – Utility	19.2			16.8			37.5			35.2
Cost of Sales – Non-utility	16.5			37.0			47.1			69.9
Operating and Maintenance	66.7			86.8			142.9			173.3
Depreciation and Amortization	50.2			56.1			102.1			101.9
Taxes Other than Income Taxes	13.7			14.4			27.3			30.7
Total Operating Expenses	254.2			307.6			554.6			608.4
Operating Income	36.2			36.5			93.0			93.9
Other Income (Expense)
Interest Expense	(16.3		)	(17.1		)	(32.8		)	(34.0		)
Equity Earnings	4.8			4.3			10.4			9.0
Gain on Sale of U.S. Water Services	0.5			—			20.6			—
Other	4.2			2.2			11.6			4.3
Total Other Income (Expense)	(6.8		)	(10.6		)	9.8			(20.7		)
Income Before Income Taxes	29.4			25.9			102.8			73.2
Income Tax Benefit	(4.8		)	(5.4		)	(1.9		)	(9.1		)
Net Income		$34.2			$31.3			$104.7			$82.3
Average Shares of Common Stock
Basic	51.6			51.3			51.6			51.2
Diluted	51.7			51.5			51.7			51.4
Basic Earnings Per Share of Common Stock		$0.66			$0.61			$2.03			$1.61
Diluted Earnings Per Share of Common Stock		$0.66			$0.61			$2.02			$1.60

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Unaudited



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Millions
Net Income		$34.2		$31.3		$104.7		$82.3
Other Comprehensive Income (Loss)
Unrealized Gain (Loss) on Securities
Net of Income Tax Expense of $0.1, $–, $0.1 and $–	0.1		—		0.2		(0.1		)
Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense of $–, $0.1, $0.1 and $0.2	0.2		0.3		0.2		0.7
Total Other Comprehensive Income	0.3		0.3		0.4		0.6
Total Comprehensive Income		$34.5		$31.6		$105.1		$82.9

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited



	Six Months Ended
	June 30,
	2019			2018
Millions
Operating Activities
Net Income		$104.7			$82.3
AFUDC – Equity	(1.3		)	(0.5		)
Income from Equity Investments – Net of Dividends	(2.2		)	(0.4		)
Depreciation Expense	100.8			99.2
Amortization of PSAs	(5.8		)	(11.9		)
Amortization of Other Intangible Assets and Other Assets	3.2			5.0
Deferred Income Tax Benefit	(2.1		)	(9.5		)
Share-Based and ESOP Compensation Expense	3.3			3.3
Defined Benefit Pension and Postretirement Benefit Expense	2.1			4.3
Payments / Provision for Interim Rate Refund	(40.0		)	8.8
Payments / Provision for Tax Reform Refund	(10.3		)	6.7
Bad Debt Expense	(0.6		)	0.7
Gain on Sale of U.S. Water Services	(20.6		)	—
Changes in Operating Assets and Liabilities
Accounts Receivable	34.0			1.7
Inventories	(9.5		)	(3.2		)
Prepayments and Other	3.3			2.8
Accounts Payable	(11.2		)	8.1
Other Current Liabilities	(23.9		)	(1.3		)
Cash Contributions to Defined Benefit Pension Plans	(10.4		)	(15.0		)
Changes in Regulatory and Other Non-Current Assets	(11.9		)	5.8
Changes in Regulatory and Other Non-Current Liabilities	(6.4		)	7.5
Cash from Operating Activities	95.2			194.4
Investing Activities
Proceeds from Sale of Available-for-sale Securities	6.0			7.2
Payments for Purchase of Available-for-sale Securities	(5.9		)	(9.8		)
Payments for Equity Investments	(4.6		)	(3.9		)
Return of Capital from Equity Investments	8.3			—
Proceeds from Sale of U.S. Water Services – Net of Transaction Costs and Cash Retained	264.2			—
Additions to Property, Plant and Equipment	(236.0		)	(133.4		)
Other Investing Activities	14.0			1.4
Cash from (for) Investing Activities	46.0			(138.5		)
Financing Activities
Proceeds from Issuance of Common Stock	1.5			10.7
Proceeds from Issuance of Long-Term Debt	100.0			72.0
Repayments of Long-Term Debt	(49.8		)	(57.9		)
Acquisition-Related Contingent Consideration Payments	(3.8		)	—
Dividends on Common Stock	(60.7		)	(57.4		)
Other Financing Activities	(0.8		)	(0.6		)
Cash for Financing Activities	(13.6		)	(33.2		)
Change in Cash, Cash Equivalents and Restricted Cash	127.6			22.7
Cash, Cash Equivalents and Restricted Cash at Beginning of Period	79.0			110.1
Cash, Cash Equivalents and Restricted Cash at End of Period		$206.6			$132.8

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Unaudited



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2019			2018			2019			2018
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period		$1,431.1			$1,407.4			$1,428.5			$1,401.4
Common Stock Issued	2.2			8.0			4.8			14.0
Balance, End of Period	1,433.3			1,415.4			1,433.3			1,415.4

Accumulated Other Comprehensive Loss
Balance, Beginning of Period	(27.2		)	(27.9		)	(27.3		)	(28.2		)
Other Comprehensive Income - Net of Income Taxes
Unrealized Gain (Loss) on Debt Securities	0.1			—			0.2			(0.1		)
Defined Benefit Pension and Other Postretirement Plans	0.2			0.3			0.2			0.7
Balance, End of Period	(26.9		)	(27.6		)	(26.9		)	(27.6		)

Retained Earnings
Balance, Beginning of Period	794.8			717.8			754.6			695.5
Net Income	34.2			31.3			104.7			82.3
Common Stock Dividends	(30.4		)	(28.7		)	(60.7		)	(57.4		)
Balance, End of Period	798.6			720.4			798.6			720.4

Total Shareholders’ Equity		$2,205.0			$2,108.2			$2,205.0			$2,108.2

Dividends Per Share of Common Stock		$0.5875			$0.56			$1.175			$1.12

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

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 six months ended June 30, 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 June 30, 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 Services' 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. In prior periods presented, the amounts also include 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	June 30, 2019		December 31, 2018		June 30, 2018		December 31, 2017
Millions
Cash and Cash Equivalents		$203.1		$69.1		$121.9		$98.9
Restricted Cash included in Prepayments and Other	0.9		1.3		2.3		2.6
Restricted Cash included in Other Non-Current Assets	2.6		8.6		8.6		8.6
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows		$206.6		$79.0		$132.8		$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	June 30, 2019		December 31, 2018
Millions
Fuel (a)		$33.4		$26.0
Materials and Supplies	44.8		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		$78.2		$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. Second Quarter 2019 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)



Other Non-Current Assets	June 30, 2019		December 31, 2018
Millions
Contract Assets (a)		$29.2		$30.7
Finance Receivable (b)	—		10.4
Operating Lease Right-of-use Assets (c)	31.2		—
ALLETE Properties	22.6		24.4
Other	80.8		86.9
Total Other Non-Current Assets		$163.8		$152.4


(a)	Contract Assets consist of 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)	Finance Receivable related to the 2016 sale of Ormond Crossings and Lake Swamp, which was collected in the second quarter of 2019.


(c)	See Leases.



Other Current Liabilities	June 30, 2019		December 31, 2018
Millions
Provision for Interim Rate Refund (a)	—			$40.0
PSAs		$12.4	12.6
Contract Liabilities (b)	—		7.6
Provision for Tax Reform Refund (c)	0.4		10.7
Contingent Consideration (d)	—		3.8
Operating Lease Liabilities (e)	7.2		—
Other	39.5		53.8
Total Other Current Liabilities		$59.5		$128.5


(a)	Provision for Interim Rate Refund was refunded to Minnesota Power’s retail customers in the second quarter of 2019.


(b)	Contract Liabilities consist of 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	June 30, 2019		December 31, 2018
Millions
Asset Retirement Obligation		$142.7		$138.6
PSAs	70.7		76.9
Operating Lease Liabilities (a)	24.0		—
Other	45.4		47.1
Total Other Non-Current Liabilities		$282.8		$262.6


(a)	See Leases.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.



Six Months Ended June 30,	2019		2018
Millions
Cash Paid for Interest – Net of Amounts Capitalized		$33.8		$33.0
Noncash Investing and Financing Activities
Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment	$21.1		$(39.4)
Reclassification of Property, Plant and Equipment to Inventory (a)	—			$46.3
Recognition of Right-of-use Assets and Lease Liabilities (b)	$31.2		—
Capitalized Asset Retirement Costs		$1.4		$20.8
AFUDC–Equity		$1.3		$0.5


(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 are 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. (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. Second Quarter 2019 Form 10-Q

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 recognized 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.

Additional information on the components of lease cost and presentation of cash flows were as follows:



	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2019		2019
Millions
Operating Lease Cost		$2.8		$5.7

Other Information:
Operating Cash Flows From Operating Leases		$2.8		$5.7

Additional information related to leases was as follows:



	June 30,
	2019
Millions
Balance Sheet Information Related to Leases:
Other Non-Current Assets		$31.2
Total Operating Lease Right-of-use Assets		$31.2

Other Current Liabilities		$7.2
Other Non-Current Liabilities	24.0
Total Operating Lease Liabilities		$31.2

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	3.2		%
Operating Leases - Land and Other	4.5		%

ALLETE, Inc. Second Quarter 2019 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leases (Continued)

Maturities of lease liabilities were as follows:



	June 30, 2019
Millions
2019		$4.2
2020	7.9
2021	6.1
2022	4.9
2023	3.1
Thereafter	9.4
Total Lease Payments Due	35.6
Less: Imputed Interest	4.4
Total Lease Obligations	31.2
Less: Current Lease Obligations	7.2
Long-term Lease Obligations		$24.0

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. The Company recognized a gain on the sale of U.S. Water Services of $11.1 million after-tax in 2019.

ALLETE Clean Energy Asset Acquisition. On May 3, 2019, ALLETE Clean Energy acquired the Diamond Spring wind project in Oklahoma from Apex Clean Energy. ALLETE Clean Energy will build, own and operate the approximately 300 MW wind energy facility. The Diamond Spring wind project is fully contracted to sell wind power to Walmart Inc., Smithfield Foods, Inc. and Starbucks Corporation under long-term power sales agreements. Construction is expected to begin in late 2019 and be completed in the second half of 2020.

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

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 $17.4 million for the six months ended June 30, 2019 ($52.1 million for six months ended June 30, 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 recorded a reserve for an interim rate refund, net of discounts provided to EITE customers, of $40.0 million as of December 31, 2018, which was refunded in the second quarter of 2019.

ALLETE, Inc. Second Quarter 2019 Form 10-Q

NOTE 2. REGULATORY MATTERS (Continued)

Electric Rates (Continued)

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.

Transmission Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In a 2016 order, the MPUC approved Minnesota Power’s updated customer billing rates allowing Minnesota Power to charge retail customers on a current basis for the costs of constructing certain transmission facilities plus a return on the capital invested. On July 9, 2019, Minnesota Power filed a petition seeking MPUC approval to update the customer billing factor to include investments made for the GNTL.

Fuel Adjustment Clause Reform. In a December 2017 order, the MPUC adopted a program to implement certain procedural reforms to Minnesota utilities’ automatic fuel adjustment clause (FAC) for fuel and purchased power. With this order, the method of accounting for all Minnesota electric utilities changed to a monthly budgeted, forward-looking FAC with annual prudence review and true-up to actual allowed costs. On May 1, 2019, Minnesota Power filed its fuel adjustment forecast for 2020 with the MPUC.

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 requests for proposal for additional wind, solar and demand response resource additions. 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. The natural gas capacity dedication agreement was 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.

Conservation Improvement Program. On April 1, 2019, Minnesota Power submitted its 2018 consolidated filing, which detailed Minnesota Power’s CIP program results and requested a CIP financial incentive of $2.8 million based upon MPUC procedures, which was approved by the MPUC in an order dated July 19, 2019. In 2018, the CIP financial incentive of $3.0 million was recognized in the third quarter upon approval by the MPUC of Minnesota Power’s 2017 CIP consolidated filing. CIP financial incentives are recognized in the period in which the MPUC approves the filing.

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. Second Quarter 2019 Form 10-Q

NOTE 2. REGULATORY MATTERS (Continued)



Regulatory Assets and Liabilities	June 30, 2019		December 31, 2018
Millions
Non-Current Regulatory Assets
Defined Benefit Pension and Other Postretirement Benefit Plans		$216.5		$218.5
Income Taxes	102.2		105.5
Asset Retirement Obligations	32.3		32.6
Boswell 1 and 2 Net Plant and Equipment	13.5		16.3
Cost Recovery Riders	10.0		—
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		$391.2		$389.5

Current Regulatory Liabilities (a)
Provision for Interim Rate Refund (b)	—			$40.0
Transmission Formula Rates Refund		$3.1	4.4
Provision for Tax Reform Refund (c)	0.4		10.7
Total Current Regulatory Liabilities	3.5		55.1
Non-Current Regulatory Liabilities
Income Taxes	386.2		396.4
Wholesale and Retail Contra AFUDC	70.6		64.4
Plant Removal Obligations	29.3		25.1
North Dakota Investment Tax Credits	12.3		14.7
Conservation Improvement Program	7.0		1.5
Transmission Formula Rates Refund	0.8		1.6
Cost Recovery Riders	—		6.9
Other	2.6		1.5
Total Non-Current Regulatory Liabilities	508.8		512.1
Total Regulatory Liabilities		$512.3		$567.2


(a)	Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.


(b)	This amount was 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 six months ended June 30, 2019, we invested $2.7 million in ATC, and on July 31, 2019, we invested an additional $1.9 million. We expect to make approximately $4 million in additional investments in 2019.



ALLETE’s Investment in ATC
Millions
Equity Investment Balance as of December 31, 2018		$128.1
Cash Investments	2.7
Equity in ATC Earnings	10.4
Distributed ATC Earnings	(8.2		)
Amortization of the Remeasurement of Deferred Income Taxes	0.6
Equity Investment Balance as of June 30, 2019		$133.6

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. Second Quarter 2019 Form 10-Q

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 June 30, 2019, our equity investment in Nobles 2 was $26.6 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. We expect to make approximately $33 million in additional investments in 2019.

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 June 30, 2019 ($148.5 million at December 31, 2018).

The balance of intangible assets, net, as of June 30, 2019, is as follows:



	December 31, 2018		Amortization	Other (b)	June 30, 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 six months ended June 30, 2019 ($2.7 million for the six months ended June 30, 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. Second Quarter 2019 Form 10-Q

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 June 30, 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.