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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2019
or
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☐ | 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
1
Index
ALLETE, Inc. Second 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 |
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
3
|
| |
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
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; |
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• | real estate market conditions where our legacy Florida real estate investment is located may not improve; |
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• | 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
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. Second Quarter 2019 Form 10-Q
6
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
7
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
8
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
9
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
10
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
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 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 |
|
ALLETE, Inc. Second Quarter 2019 Form 10-Q
12
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 |
|
|
| | | | | | | |
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 |
|
|
| | | | | | | |
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 |
|
ALLETE, Inc. Second Quarter 2019 Form 10-Q
13
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 |
|
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
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 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
15
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
16
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
17
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 |
|
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
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 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 |
|
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
19
NOTE 5. FAIR VALUE (Continued)