ALLETE
ALLETE INC (Form: 10-Q, Received: 11/04/2016 06:10:04)



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

FORM 10-Q

(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2016

or
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______________ to ______________

Commission File Number 1-3548

ALLETE, Inc.
(Exact name of registrant as specified in its charter)

Minnesota
 
41-0418150
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    x Yes    ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x
Accelerated Filer ¨
 
Non-Accelerated Filer ¨
Smaller Reporting Company  ¨
 

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

Common Stock, without par value,
49,462,700 shares outstanding
as of September 30, 2016





Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2016, and December 31, 2015
 
 
 
 
 
 
 
 
Quarter and Nine Months Ended September 30, 2016, and 2015
 
 
 
 
 
 
 
 
Quarter and Nine Months Ended September 30, 2016, and 2015
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016, and 2015
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ALLETE, Inc. Third Quarter 2016 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 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
Basin
Basin Electric Power Cooperative
BNI Energy
BNI Energy, Inc. and its subsidiary
Boswell
Boswell Energy Center
Cliffs
Cliffs Natural Resources Inc.
CO 2
Carbon Dioxide
Company
ALLETE, Inc. and its subsidiaries
CSAPR
Cross-State Air Pollution Rule
DC
Direct Current
EIS
Environmental Impact Statement
EPA
United States Environmental Protection Agency
ESOP
Employee Stock Ownership Plan
Essar
Essar Steel Minnesota LLC
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
IBEW
International Brotherhood of Electrical Workers
IRP
Integrated Resource Plan
Invest Direct
ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
Item ___
Item ___ of this Form 10-Q
kV
Kilovolt(s)
kW / kWh
Kilowatt(s) / Kilowatt-hour(s)
Laskin
Laskin Energy Center
MACT
Maximum Achievable Control Technology
Magnetation
Magnetation, LLC
Manitoba Hydro
Manitoba Hydro-Electric Board
MATS
Mercury and Air Toxics Standards
Minnesota Power
An operating division of ALLETE, Inc.
Minnkota Power
Minnkota Power Cooperative, Inc.
MISO
Midcontinent Independent System Operator, Inc.
Montana-Dakota Utilities
Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc.
MPCA
Minnesota Pollution Control Agency

ALLETE, Inc. Third Quarter 2016 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
NOL
Net Operating Loss
NO 2
Nitrogen Dioxide
NO X
Nitrogen Oxides
Northshore Mining
Northshore Mining Company, a wholly-owned subsidiary of Cliffs
Note ___
Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDES
National Pollutant Discharge Elimination System
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
Power Purchase Agreement
PPACA
Patient Protection and Affordable Care Act of 2010
PSCW
Public Service Commission of Wisconsin
SEC
Securities and Exchange Commission
Shell Energy
Shell Energy North America (US), L.P.
Silver Bay Power
Silver Bay Power Company, a wholly-owned subsidiary of Cliffs
SIP
State Implementation Plan
SO 2
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
Thomson
Thomson Energy Center
Town Center District
Town Center at Palm Coast Community Development District in Florida
United Taconite
United Taconite LLC, a wholly-owned subsidiary of Cliffs
U.S.
United States of America
U.S. Water Services
U.S. Water Services Holding Company and its subsidiaries
USS Corporation
United States Steel Corporation



ALLETE, Inc. Third Quarter 2016 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 sales price increases at our Energy Infrastructure and Related Services 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 cyber 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 greenhouse gases;
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 fluctuations in the volume of customer orders, 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. Third Quarter 2016 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 1, Item 1A, under the heading “Risk Factors” beginning on page 25 of our 2015 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. Third Quarter 2016 Form 10-Q
6




PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions – Unaudited
 
September 30,
2016
 
December 31,
2015
 
 
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents

$107.2

 

$97.0

Accounts Receivable (Less Allowance of $1.8 and $1.0)
108.1

 
121.2

Inventories
107.4

 
117.1

Prepayments and Other
38.9

 
35.7

Total Current Assets
361.6

 
371.0

Property, Plant and Equipment – Net
3,644.5

 
3,669.1

Regulatory Assets
358.9

 
372.0

Investment in ATC
133.8

 
124.5

Other Investments
58.1

 
74.6

Goodwill and Intangible Assets – Net
211.4

 
215.2

Other Non-Current Assets
106.5

 
68.1

Total Assets

$4,874.8

 

$4,894.5

Liabilities and Equity
 
 
 
Liabilities
 
 
 
Current Liabilities
 
 
 
Accounts Payable

$72.6

 

$88.8

Accrued Taxes
36.7

 
44.0

Accrued Interest
14.8

 
18.6

Long-Term Debt Due Within One Year
186.6

 
35.7

Notes Payable

 
1.6

Other
93.6

 
86.1

Total Current Liabilities
404.3

 
274.8

Long-Term Debt
1,358.9

 
1,556.7

Deferred Income Taxes
582.1

 
579.8

Regulatory Liabilities
122.9

 
105.0

Defined Benefit Pension and Other Postretirement Benefit Plans
197.7

 
206.8

Other Non-Current Liabilities
335.9

 
349.0

Total Liabilities
3,001.8

 
3,072.1

Commitments, Guarantees and Contingencies (Note 13)

 

Equity
 
 
 
ALLETE’s Equity
 
 
 
Common Stock Without Par Value, 80.0 Shares Authorized, 49.5 and 49.1 Shares Outstanding
1,289.4

 
1,271.4

Accumulated Other Comprehensive Loss
(23.7
)
 
(24.5
)
Retained Earnings
607.3

 
573.3

Total ALLETE Equity
1,873.0

 
1,820.2

Non-Controlling Interest in Subsidiaries

 
2.2

Total Equity
1,873.0

 
1,822.4

Total Liabilities and Equity

$4,874.8

 

$4,894.5

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
7




ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts – Unaudited
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
2015
 
2016
2015
 
 
 
 
 
 
Operating Revenue

$349.6


$462.5

 

$998.2


$1,105.8

Operating Expenses
 
 
 
 
 
Fuel and Purchased Power
91.0

76.8

 
246.0

242.9

Transmission Services
16.6

13.9

 
49.5

40.1

Cost of Sales
46.4

149.8

 
113.1

233.3

Operating and Maintenance
80.8

81.3

 
240.9

246.4

Depreciation and Amortization
48.9

43.2

 
145.7

123.5

Taxes Other than Income Taxes
12.5

12.3

 
40.6

38.5

Total Operating Expenses
296.2

377.3

 
835.8

924.7

Operating Income
53.4

85.2

 
162.4

181.1

Other Income (Expense)
 
 
 
 
 
Interest Expense
(18.7
)
(17.7
)
 
(53.0
)
(49.0
)
Equity Earnings in ATC
6.1

5.5

 
15.0

14.1

Other
1.2

1.7

 
2.8

3.5

Total Other Expense
(11.4
)
(10.5
)
 
(35.2
)
(31.4
)
Income Before Non-Controlling Interest and Income Taxes
42.0

74.7

 
127.2

149.7

Income Tax Expense
1.7

14.4

 
15.7

27.0

Net Income
40.3

60.3

 
111.5

122.7

Less: Non-Controlling Interest in Subsidiaries

(0.1
)
 
0.5

(0.1
)
Net Income Attributable to ALLETE

$40.3


$60.4

 

$111.0


$122.8

Average Shares of Common Stock
 
 
 
 
 
Basic
49.4

48.8

 
49.3

48.0

Diluted
49.5

48.9

 
49.4

48.1

Basic Earnings Per Share of Common Stock

$0.82


$1.24

 

$2.25


$2.56

Diluted Earnings Per Share of Common Stock

$0.81


$1.23

 

$2.25


$2.55

Dividends Per Share of Common Stock

$0.52


$0.505

 

$1.56


$1.515

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
8




ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Millions – Unaudited
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net Income
$40.3
 

$60.3

 

$111.5

 

$122.7

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Unrealized Gain (Loss) on Securities
 
 
 
 
 
 
 
Net of Income Tax Expense (Benefit) of $0.2, $(0.4), $0.2, and $(0.3)
0.3

 
(0.7
)
 
0.3

 
(0.6
)
Unrealized Gain on Derivatives
 
 
 
 


 


Net of Income Tax Expense of $–, $–, $–, and $0.1

 

 

 
0.1

Defined Benefit Pension and Other Postretirement Benefit Plans
 
 
 
 
 
 
 
Net of Income Tax Expense of $0.1, $0.3, $0.3, and $0.7
0.2

 
0.3

 
0.5

 
1.0

Total Other Comprehensive Income (Loss)
0.5

 
(0.4
)
 
0.8

 
0.5

Total Comprehensive Income
40.8

 
59.9

 
112.3

 
123.2

Less: Non-Controlling Interest in Subsidiaries

 
(0.1
)
 
0.5

 
(0.1
)
Total Comprehensive Income Attributable to ALLETE

$40.8

 

$60.0

 

$111.8

 

$123.3

The accompanying notes are an integral part of these statements.


ALLETE, Inc. Third Quarter 2016 Form 10-Q
9




ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions – Unaudited
 
Nine Months Ended
 
September 30,
 
2016
 
2015
 
 
 
 
Operating Activities
 
 
 
Net Income

$111.5

 

$122.7

Allowance for Funds Used During Construction – Equity
(1.7
)
 
(2.6
)
Income from Equity Investments – Net of Dividends
(5.8
)
 
(3.7
)
Gain on Sales of Investments and Property, Plant and Equipment
(5.3
)
 
(0.2
)
Depreciation Expense
141.8

 
120.7

Amortization of Power Purchase Agreements
(16.7
)
 
(17.1
)
Amortization of Other Intangible Assets and Other Assets
8.1

 
5.0

Deferred Income Tax Expense
15.5

 
26.5

Share-Based Compensation Expense
2.0

 
2.1

ESOP Compensation Expense
1.6

 
7.3

Defined Benefit Pension and Postretirement Benefit Expense
3.9

 
11.5

Bad Debt Expense
2.5

 
0.8

Changes in Operating Assets and Liabilities
 
 
 
Accounts Receivable
10.6

 
11.6

Inventories
9.7

 
(24.1
)
Prepayments and Other
(0.7
)
 
(0.4
)
Accounts Payable
0.6

 

Other Current Liabilities
(23.0
)
 
(0.8
)
Cash Contributions to Defined Benefit Pension Plans
(6.3
)
 

Changes in Regulatory and Other Non-Current Assets
(18.3
)
 
(6.2
)
Changes in Regulatory and Other Non-Current Liabilities
7.8

 
1.5

Cash from Operating Activities
237.8

 
254.6

Investing Activities
 
 
 
Proceeds from Sale of Available-for-sale Securities
6.8

 
0.7

Payments for Purchase of Available-for-sale Securities
(7.2
)
 
(1.1
)
Acquisitions of Subsidiaries – Net of Cash Acquired

 
(324.8
)
Investment in ATC
(3.5
)
 
(1.2
)
Changes to Other Investments
2.5

 

Additions to Property, Plant and Equipment
(119.5
)
 
(208.2
)
Proceeds from Sale of Property, Plant and Equipment
0.2

 
0.3

Cash for Investing Activities
(120.7
)
 
(534.3
)
Financing Activities
 
 
 
Proceeds from Issuance of Common Stock
27.0

 
155.2

Proceeds from Issuance of Long-Term Debt
2.2

 
240.0

Changes in Restricted Cash
2.1

 
2.2

Changes in Notes Payable
(1.6
)
 
(3.7
)
Repayments of Long-Term Debt
(50.7
)
 
(81.8
)
Acquisition of Non-Controlling Interest
(8.0
)
 

Acquisition-Related Contingent Consideration Payments
(0.8
)
 

Debt Issuance Costs
(0.1
)
 
(1.0
)
Dividends on Common Stock
(77.0
)
 
(74.0
)
Cash from (for) Financing Activities
(106.9
)
 
236.9

Change in Cash and Cash Equivalents
10.2

 
(42.8
)
Cash and Cash Equivalents at Beginning of Period
97.0

 
145.8

Cash and Cash Equivalents at End of Period

$107.2

 

$103.0

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
10




ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Millions – Unaudited
 
Total
Equity
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Common
Stock
Non-Controlling Interest in Subsidiaries
 
 
 
 
 
 
Balance as of December 31, 2015

$1,822.4


$573.3

$(24.5)

$1,271.4


$2.2

Comprehensive Income
 
 
 
 
 
Net Income
111.5

111.0

 
 
0.5

Other Comprehensive Income – Net of Tax
 
 
 
 
 
Unrealized Gain on Securities
0.3

 
0.3

 
 
Defined Benefit Pension and Other Postretirement Plans
0.5

 
0.5

 
 
Total Comprehensive Income
112.3

 
 
 
 
Common Stock Issued
30.0

 
 
30.0

 
Common Stock Retired
(8.0
)
 
 
(8.0
)
 
Dividends Declared
(77.0
)
(77.0
)
 
 
 
Acquisition of Non-Controlling Interest
(6.7
)
 
 
(4.0
)
(2.7
)
Balance as of September 30, 2016

$1,873.0


$607.3

$(23.7)

$1,289.4


The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2016 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, 2015 , 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 nine months ended September 30, 2016 , are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2016 . For further information, refer to the Consolidated Financial Statements and notes included in our 2015 Form 10-K.

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Inventories. Inventories are stated at the lower of cost or market. Inventories in our Regulated Operations and ALLETE Clean Energy segments are carried at an average cost or first-in, first-out basis. Inventories in our U.S. Water Services and Corporate and Other segments are carried at an average cost, first-in, first-out or specific identification basis.
Inventories
September 30,
2016

 
December 31,
2015

Millions
 
 
 
Fuel (a)

$45.9

 

$58.1

Materials and Supplies
49.8

 
49.1

Raw Materials
3.3

 
2.7

Work in Progress
1.1

 

Finished Goods
7.8

 
7.5

Reserve for Obsolescence
(0.5
)
 
(0.3
)
Total Inventories

$107.4

 

$117.1

(a)
Fuel consists primarily of coal inventory at Minnesota Power.
Prepayments and Other Current Assets
September 30,
2016

 
December 31,
2015

Millions
 
 
 
Deferred Fuel Adjustment Clause

$16.8

 

$10.6

Restricted Cash (a)
7.0

 
5.6

Other
15.1

 
19.5

Total Prepayments and Other Current Assets

$38.9

 

$35.7

(a)
Restricted Cash includes collateral deposits required under ALLETE Clean Energy’s loan agreements and cash pledged as collateral for U.S. Water Services’ standby letters of credit.
Other Non-Current Assets
September 30,
2016

 
December 31,
2015

Millions
 
 
 
Contract Payment (a)

$30.1

 

Finance Receivable (b)
11.6

 

Restricted Cash (c)
4.6

 

$8.1

Other
60.2

 
60.0

Total Other Non-Current Assets

$106.5

 

$68.1

(a)
Contract Payment includes a $31.0 million payment made to Cliffs as part of a long-term power sales agreement between Minnesota Power and Silver Bay Power. The contract payment will be amortized over the term of the sales agreement. (See Note 13. Commitments, Guarantees and Contingencies.)
(b)
On September 22, 2016, ALLETE Properties sold its Ormond Crossings project and Lake Swamp wetland mitigation bank for consideration of approximately $21 million . The consideration included a down payment in the form of 0.1 million shares of ALLETE common stock with a value of $8.0 million . The remaining purchase price will be paid under the terms of a finance receivable due over a five-year period which bears interest at market rates and is collateralized by the property sold.
(c)
Restricted Cash includes collateral deposits required under ALLETE Clean Energy’s loan agreements and PPAs.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
12




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Current Liabilities
September 30,
2016

 
December 31,
2015

Millions
 
 
 
Customer Deposits

$9.0

 

$15.1

Power Purchase Agreements
24.3

 
23.3

Other
60.3

 
47.7

Total Other Current Liabilities

$93.6

 

$86.1

Other Non-Current Liabilities
September 30,
2016

 
December 31,
2015

Millions
 
 
 
Asset Retirement Obligation

$136.5

 

$131.4

Power Purchase Agreements
119.8

 
138.1

Contingent Consideration (a)
37.9

 
36.6

Other
41.7

 
42.9

Total Other Non-Current Liabilities

$335.9

 

$349.0

(a)
Contingent Consideration relates to the estimated fair value of the earnings-based payment resulting from the U.S. Water Services acquisition. (See Note 3. Acquisitions and Note 5. Fair Value.)

Supplemental Statement of Cash Flows Information.
Nine Months Ended September 30,
2016

 
2015

Millions
 
 
 
Cash Paid During the Period for Interest – Net of Amounts Capitalized

$54.9

 

$46.6

Cash Paid During the Period for Income Taxes

$0.5

 

$0.1

Noncash Investing and Financing Activities
 

 
 

Decrease in Accounts Payable for Capital Additions to Property, Plant and Equipment
$(19.5)
 
$(26.8)
Capitalized Asset Retirement Costs

$3.7

 

$7.8

AFUDC–Equity

$1.7

 

$2.6

Contingent Consideration

 

$35.7

ALLETE Common Stock Received for Land Inventory

$8.0

 

Long-Term Finance Receivable for Land Inventory

$12.0

 


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

New Accounting Standards.

Amendments to the Consolidation Analysis. In February 2015, the FASB issued revised guidance which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new standard affects (1) limited partnerships and similar legal entities, (2) evaluating fees paid to a decision maker or a service provider as a variable interest, (3) the effect of fee arrangements on the primary beneficiary determination, (4) the effect of related parties on the primary beneficiary determination, and (5) certain investment funds. This guidance was adopted in the first quarter of 2016 and did not have a material impact on our Consolidated Financial Statements.

Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). In May 2015, the FASB issued an accounting standard update which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share (or its equivalent) practical expedient. The guidance applies to investments for which there is not a readily determinable fair value (market quote) or the investment is in a mutual fund without a publicly available net asset value. This guidance was adopted in the first quarter of 2016 and did not have a material impact on our Consolidated Financial Statements.


ALLETE, Inc. Third Quarter 2016 Form 10-Q
13




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standards (Continued)

Presentation of Debt Issuance Costs. In April 2015, the FASB issued revised guidance addressing the presentation requirements for debt issuance costs. Under the revised guidance, all costs incurred to issue debt are to be presented on the Consolidated Balance Sheet as a direct deduction from the carrying amount of that debt liability. This guidance was adopted in the first quarter of 2016 resulting in the reclassification of unamortized debt issuance costs from Other Non-Current Assets to Long-Term Debt on the Consolidated Balance Sheet. The effect of the adoption decreased Total Assets and Total Liabilities on the Consolidated Balance Sheet by $12.6 million as of December 31, 2015 .

Revenue from Contracts with Customers. In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The guidance is effective for the Company beginning in the first quarter of 2018 with early adoption permitted. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s Consolidated Financial Statements.

Leases. In February 2016, the FASB issued an accounting standard update which revises the existing guidance for leases. Under the revised guidance, lessees will be required to recognize a “right-of-use” asset and a lease liability for all leases with a term greater than 12 months. The new standard also requires additional quantitative and qualitative 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 are not expected to significantly change as a result of the updated guidance. The revised guidance is effective for the Company beginning in the first quarter of 2019 with early adoption permitted. The Company is evaluating the impact of the amended lease guidance on the Company’s Consolidated Financial Statements.

Improvements to Employee Share-Based Payment Accounting.  In March 2016, the FASB issued guidance to simplify the accounting for share-based payment transactions by requiring all excess tax benefits and deficiencies to be recognized in income tax expense or benefit in earnings; thus, eliminating the requirement to classify the excess tax benefit and deficiencies as additional paid-in capital. Under the new guidance, an entity makes an accounting policy election to either estimate the expected forfeiture awards or account for forfeitures as they occur. This accounting guidance is effective for the Company beginning in the first quarter of 2017. The Company is evaluating the impact of the share-based payment guidance on the Company’s Consolidated Financial Statements.

Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued an accounting standard update which addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This accounting guidance is effective for the Company beginning in the first quarter of 2018. The Company does not believe the guidance will have a material impact on its Consolidated Financial Statements.



ALLETE, Inc. Third Quarter 2016 Form 10-Q
14




NOTE 2. INVESTMENTS

Investments. As of September 30, 2016 , the investment portfolio included the legacy real estate assets of ALLETE Properties, debt and equity securities consisting primarily of securities held in other postretirement plans to fund employee benefits, the cash equivalents within these plans, and other assets consisting primarily of land in Minnesota.
Other Investments
September 30,
2016

 
December 31,
2015

Millions
 
 
 
ALLETE Properties (a)

$32.9

 

$50.1

Available-for-sale Securities (b)
19.4

 
18.5

Cash Equivalents
2.0

 
2.0

Other
3.8

 
4.0

Total Other Investments

$58.1

 

$74.6

(a)
On September 22, 2016, ALLETE Properties sold its Ormond Crossings project and Lake Swamp wetland mitigation bank for consideration of approximately $21 million . The consideration included a down payment in the form of 0.1 million shares of ALLETE common stock with a value of $8.0 million , with the remaining purchase price to be paid under the terms of a finance receivable due over a five-year period which bears interest at market rates. The finance receivable is collateralized by the property sold.
(b)
As of September 30, 2016 , the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $0.2 million , in one year to less than three years was $2.7 million , in three years to less than five years was $5.5 million , and in five or more years was $3.3 million .

Land Inventory. Land inventory is accounted for as held for use and is recorded at cost, unless the carrying value is determined not to be recoverable in accordance with the accounting standards for property, plant and equipment, in which case the land inventory is written down to estimated fair value. Land values are reviewed for indicators of impairment on a quarterly basis and no impairments were recorded for the quarter and nine months ended September 30, 2016 .


NOTE 3. ACQUISITIONS

The following acquisitions are consistent with ALLETE’s stated strategy of investing in energy infrastructure and related services businesses to complement its regulated businesses, balance exposure to business cycles and changing demand, and provide potential long-term earnings growth. The pro forma impact of the following acquisitions was not significant , either individually or in the aggregate, to the results of the Company for the nine months ended September 30, 2016 and  2015 .

2016 Activity.

Acquisition of Non-Controlling Interest. On April 15, 2016 , ALLETE Clean Energy acquired the non-controlling interest in the limited liability company that owns its Condon wind energy facility for $8.0 million . This transaction was accounted for as an equity transaction, and no gain or loss was recognized in net income or other comprehensive income. As a result of the acquisition, the Condon wind energy facility is now a wholly-owned subsidiary of ALLETE Clean Energy.

WEST. On October 11, 2016 , U.S. Water Services acquired 100 percent of Water & Energy Systems Technology of Nevada, Inc. (WEST). Total consideration for the transaction was $6.5 million , subject to a working capital adjustment. Consideration of $5.9 million was paid in cash on the acquisition date and a $0.6 million payment is due in April 2018. WEST, similar to U.S. Water Services, is an integrated water management company and was acquired to expand U.S. Water Services’ regional footprint in the Southwestern United States. We are currently in the process of accounting for the acquisition; therefore, certain disclosures, including the allocation of the purchase price, will be included in the Form 10-K for the year ended December 31, 2016 .

2015 Activity.

U.S. Water Services. In February 2015 , ALLETE acquired U.S. Water Services . Total consideration for the transaction was $202.3 million , which included payment of $166.6 million in cash and an estimated fair value of earnings-based contingent consideration of $35.7 million , as estimated at the date of acquisition, to be paid through 2019. The contingent consideration is presented within Other Non-Current Liabilities on the Consolidated Balance Sheet. The Consolidated Statement of Income reflects 100  percent of the results of operations for U.S. Water Services since the acquisition date as the Company has acquired 100  percent of U.S. Water Services.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
15




NOTE 3. ACQUISITIONS (Continued)
2015 Activity (Continued)

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair value measurements were valued primarily using the discounted cash flow method.
Millions
 
Assets Acquired
 
Cash and Cash Equivalents

$0.9

Accounts Receivable
16.8

Inventories (a)
13.4

Other Current Assets (b)
5.3

Property, Plant and Equipment
10.6

Intangible Assets (c)
83.0

Goodwill (d)
122.9

Other Non-Current Assets
0.2

Total Assets Acquired

$253.1

Liabilities Assumed
 
Current Liabilities

$19.2

Non-Current Liabilities
31.6

Total Liabilities Assumed

$50.8

Net Identifiable Assets Acquired

$202.3

(a)
Included in Inventories was $2.7 million of fair value adjustments relating to work in progress and finished goods inventories which were recognized as Cost of Sales within one year from the acquisition date.
(b)
Included in Other Current Assets was $1.6 million relating to the fair value of sales backlog. Sales backlog was recognized as Cost of Sales within one year from the acquisition date. Also included in Other Current Assets was restricted cash of $2.1 million relating to cash pledged as collateral for standby letters of credit.
(c)
Intangible Assets include customer relationships, patents, non-compete agreements, and trademarks and trade names. (See Note 4. Goodwill and Intangible Assets.)
(d)
For tax purposes, the purchase price allocation resulted in $2.9 million of deductible goodwill.

Acquisition-related costs of $3.0 million after-tax were expensed as incurred during the first quarter of 2015 and recorded in Operating and Maintenance on the Consolidated Statement of Income.

Chanarambie/Viking. In April 2015 , ALLETE Clean Energy acquired 100 percent of wind energy facilities in southern Minnesota ( Chanarambie/Viking ) from EDF Renewable Energy, Inc. for $48.0 million .

The facilities have 97.5 MW of generating capability and are located near ALLETE Clean Energy’s Lake Benton facility. The wind energy facilities began commercial operations in 2003 and have PPAs in place for their entire output, which expire in 2018 ( 12 MW) and 2023 ( 85.5  MW).

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair value measurements were valued primarily using the discounted cash flow method.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
16




NOTE 3. ACQUISITIONS (Continued)
2015 Activity (Continued)
Millions
 
Assets Acquired
 
Current Assets

$4.8

Property, Plant and Equipment
103.0

Other Non-Current Assets (a)
1.0

Total Assets Acquired

$108.8

Liabilities Assumed
 
Current Liabilities (b)

$6.7

Power Purchase Agreements
49.0

Non-Current Liabilities
5.1

Total Liabilities Assumed

$60.8

Net Identifiable Assets Acquired

$48.0

(a)
Included in Other Non-Current Assets was $0.3 million of goodwill. For tax purposes, the purchase price allocation resulted in no allocation to goodwill.
(b)
Current Liabilities included $5.9 million related to the current portion of PPAs.

Acquisition-related costs of $0.2 million after-tax were expensed as incurred during the second quarter of 2015 and recorded in Operating and Maintenance on the Consolidated Statement of Income.

Armenia Mountain. In July 2015 , ALLETE Clean Energy acquired 100 percent of a wind energy facility located near Troy, Pennsylvania ( Armenia Mountain ) from The AES Corporation (AES) and a minority shareholder for $111.1 million , plus the assumption of existing debt.

The facility has 100.5 MW of generating capability, began commercial operations in 2009, and has PPAs in place for its entire output, which expire in 2024.

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair value measurements were valued primarily using the discounted cash flow method.
Millions
 
Assets Acquired
 
Current Assets (a)
$9.0
Property, Plant and Equipment
156.2

Other Non-Current Assets (b)
14.4

Total Assets Acquired

$179.6

Liabilities Assumed
 
Current Liabilities

$2.9

Long-Term Debt Due Within One Year
5.9

Long-Term Debt
55.0

Other Non-Current Liabilities
4.7

Total Liabilities Assumed
$68.5
Net Identifiable Assets Acquired

$111.1

(a)
Included in Current Assets was $1.0 million related to the current portion of PPAs and $6.0 million of restricted cash related to collateral deposits required under its loan agreement.
(b)
Included in Other Non-Current Assets was $8.2 million related to the non-current portion of PPAs, $6.1 million of restricted cash related to collateral deposits required under its loan agreements, and an immaterial amount of goodwill. For tax purposes, the purchase price allocation resulted in no allocation to goodwill.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
17




NOTE 3. ACQUISITIONS (Continued)
2015 Activity (Continued)

Acquisition-related costs of $1.6 million after-tax were expensed as incurred throughout the second and third quarters of 2015, and recorded in Operating and Maintenance on the Consolidated Statement of Income.

A and W Technologies. In November 2015 , U.S. Water Services acquired 100 percent of A and W Technologies, Inc. (AWT). Total consideration for the transaction was $9.3 million , which included payment of $8.3 million in cash and a $1.0 million payment due in April 2017. AWT, similar to U.S. Water Services, is an integrated water management company and was acquired to expand U.S. Water Services’ regional footprint in the Southeastern United States.

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. The purchase price accounting, which was finalized in 2015, is reflected in the following table. Fair value measurements were valued primarily using the discounted cash flow method.
Millions
 
Assets Acquired
 
Current Assets
$1.0
Property, Plant and Equipment
0.1
Intangible Assets (a)
3.9

Goodwill (b)
4.4

Total Assets Acquired

$9.4

Liabilities Assumed
 
Current Liabilities

$0.1

Total Liabilities Assumed
$0.1
Net Identifiable Assets Acquired

$9.3

(a)
Intangible Assets include customer relationships and non-compete agreements. (See Note 4. Goodwill and Intangible Assets.)
(b)
For tax purposes, the purchase price allocation resulted in $4.4 million of deductible goodwill.

Acquisition-related costs were immaterial, expensed as incurred during the fourth quarter of 2015 and recorded in Operating and Maintenance on the Consolidated Statement of Income.


NOTE 4. GOODWILL AND INTANGIBLE ASSETS

The aggregate carrying amount of goodwill was $130.6 million as of September 30, 2016 , and December 31, 2015 . There have been no changes to goodwill by reportable segment for the nine months ended September 30, 2016 .

Balances of intangible assets, net, excluding goodwill as of September 30, 2016 , are as follows:
 
December 31,
2015

 
 Amortization
 
September 30,
2016

Millions
 
 
 
 
 
Intangible Assets
 
 
 
 
 
Definite-Lived Intangible Assets
 
 
 
 
 
Customer Relationships
$60.8
 
$(3.2)
 

$57.6

Developed Technology and Other (a)
7.2
 
(0.6)
 
6.6

Total Definite-Lived Intangible Assets
68.0

 
(3.8)
 
64.2

Indefinite-Lived Intangible Assets
 
 
 
 
 
Trademarks and Trade Names
16.6

 
n/a
 
16.6

Total Intangible Assets

$84.6

 
$(3.8)
 

$80.8

(a)
Developed Technology and Other includes patents, non-compete agreements and land easements.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
18




NOTE 4. GOODWILL AND INTANGIBLE ASSETS (Continued)

Customer relationships have a remaining useful life of approximately 21 years, and developed technology and other have remaining useful lives ranging from approximately 2 years to approximately 12 years (weighted average of approximately 8 years). The weighted average remaining useful life of all definite-lived intangible assets as of September 30, 2016 , is approximately 20 years.

Amortization expense of intangible assets for the nine months ended September 30, 2016 , was $3.8 million . Accumulated amortization was $7.9 million as of September 30, 2016 ( $4.1 million as of December 31, 2015 ). The estimated amortization expense for definite-lived intangible assets for the remainder of 2016 is $1.3 million . Estimated annual amortization expense for definite-lived intangible assets is $5.0 million in 2017 , $4.7 million in 2018 , $4.4 million in 2019 , $4.2 million in 2020 and $44.6 million thereafter .


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 10. Fair Value to the Consolidated Financial Statements in our 2015 Form 10-K.

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 September 30, 2016 , and December 31, 2015 . Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.
 
Fair Value as of September 30, 2016
Recurring Fair Value Measures
Level 1

 
Level 2

 
Level 3

 
Total

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

$7.7

 

 

 

$7.7

Available-for-sale – Corporate and Governmental Debt Securities

 

$11.7

 

 
11.7

Cash Equivalents
2.0

 

 

 
2.0

Total Fair Value of Assets

$9.7

 

$11.7

 

 

$21.4

 
 
 
 
 
 
 
 
Liabilities (b)
 
 
 
 
 
 
 
Deferred Compensation

 

$16.0

 

 

$16.0

U.S. Water Services Contingent Consideration

 

 

$37.9

 
37.9

Total Fair Value of Liabilities

 

$16.0

 

$37.9

 

$53.9

Total Net Fair Value of Assets (Liabilities)

$9.7

 
$(4.3)
 
$(37.9)
 
$(32.5)
(a)
Included in Other Investments on the Consolidated Balance Sheet.
(b)
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.

ALLETE, Inc. Third Quarter 2016 Form 10-Q
19




NOTE 5. FAIR VALUE (Continued)
 
Fair Value as of December 31, 2015
Recurring Fair Value Measures
Level 1

 
Level 2

 
Level 3

 
Total

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

$7.6

 

 

 

$7.6

Available-for-sale – Corporate Debt Securities

 

$10.9

 

 
10.9

Cash Equivalents
2.0

 

 

 
2.0

Total Fair Value of Assets

$9.6

 

$10.9

 

 

$20.5

 
 
 
 
 
 
 
 
Liabilities (b)
 
 
 
 
 
 
 
Deferred Compensation

 

$16.1

 

 

$16.1

U.S. Water Services Contingent Consideration

 

 

$36.6

 
36.6

Total Fair Value of Liabilities

 

$16.1

 

$36.6

 

$52.7

Total Net Fair Value of Assets (Liabilities)

$9.6

 
$(5.2)
 
$(36.6)
 
$(32.2)
(a)
Included in Other Investments on the Consolidated Balance Sheet.
(b)
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.

The Level 3 liability in the preceding tables is the result of the February 2015 acquisition of U.S. Water Services. Changes in the U.S. Water Services Contingent Consideration can result from changes in discount rates, timing of milestones that trigger payment, and the timing and amount of earnings estimates. Changes in the fair value of U.S. Water Services’ Contingent Consideration for the nine months ended September 30, 2016 , are primarily due to accretion expense. Management analyzes the fair value of the contingent liability on a quarterly basis and makes adjustments as appropriate.

For the nine months ended September 30, 2016 , and the year ended December 31, 2015 , there were no transfers in or out of Levels 1, 2 or 3.

Fair Value of Financial Instruments. With the exception of the item listed in the table below, the estimated fair value of all financial instruments approximates the carrying amount. The fair value for the item listed below was based on quoted market prices for the same or similar instruments (Level 2).
Financial Instruments
Carrying Amount
 
Fair Value
Millions
 
 
 
Long-Term Debt, Including Long-Term Debt Due Within One Year
 
 
 
September 30, 2016
$1,556.9
 
$1,721.8
December 31, 2015
$1,605.0
 
$1,676.0

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, goodwill, intangible assets, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the nine months ended September 30, 2016 , and the year ended December 31, 2015 , there were no indicators of impairment for these non-financial assets.



ALLETE, Inc. Third Quarter 2016 Form 10-Q
20




NOTE 6. REGULATORY MATTERS

Regulatory matters are summarized in Note 5. Regulatory Matters to our Consolidated Financial Statements in our 2015 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, the FERC or the PSCW.

2010 Minnesota Rate Case. Minnesota Power’s current retail rates are based on a 2011 MPUC retail rate order that allows for a 10.38 percent return on common equity and a 54.29 percent equity ratio. Subsequent to this order, and as authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for environmental, renewable and transmission investments. (See Transmission Cost Recovery Rider, Renewable Cost Recovery Rider and Environmental Improvement Rider .) Revenue from cost recovery riders was $73.9 million for the nine months ended September 30, 2016 ( $67.8 million for the nine months ended September 30, 2015 ).

2016 Minnesota Rate Case. On November 2, 2016, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 9 percent for retail customers. The rate filing seeks a return on equity of 10.25 percent , and a capital structure consisting of 53.8 percent equity and 46.2 percent debt. On an annualized basis, the requested rate increase would generate approximately $55 million in additional revenue. Once the filing is accepted as complete, interim rates of approximately $49 million are expected to be implemented within 60 days, subject to MPUC adjustment and authorization. We cannot predict the level of interim or final rates that may be authorized by the MPUC.

Energy-Intensive Trade-Exposed (EITE) Customer Rates. The state of Minnesota enacted an EITE customer ratemaking law in June 2015 which established that it is the energy policy of the state to have competitive rates for certain industries such as mining and forest products. In November 2015, Minnesota Power filed a rate schedule petition for EITE customers and a corresponding rider for EITE cost recovery with the MPUC. The rate proposal was revenue and cash flow neutral to Minnesota Power. In an order dated March 23, 2016, the MPUC dismissed the petition without prejudice, providing Minnesota Power the option to refile the petition with additional information or file a new petition. On June 30, 2016, Minnesota Power filed a revised EITE petition with the MPUC, which includes additional information on the net benefits analysis, limits on eligible customers and term lengths for the EITE discount. On September 15, 2016, the MPUC approved a reduction in rates for EITE customers and determined that cost recovery will be addressed in a subsequent proceeding. Minnesota Power provided additional information on cost recovery allocation alternatives in a compliance filing made on October 13, 2016.

FERC-Approved Wholesale Rates. Minnesota Power has 16 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. All of the wholesale contracts include a termination clause requiring a three -year notice to terminate.

In April 2015, Minnesota Power amended its formula-based wholesale electric sales contract with the Nashwauk Public Utilities Commission, extending the term through June 30, 2028. The electric service agreements with SWL&P and one other municipal customer are effective through June 30, 2019. The rates included in these three contracts are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate of return that is equal to Minnesota Power’s authorized rate of return for Minnesota retail customers (currently 10.38 percent ). The formula-based rate methodology also provides for a yearly true-up calculation for actual costs incurred.

In September 2015, Minnesota Power amended its wholesale electric contracts with 14 municipal customers, extending the contract terms through December 31, 2024. These contracts include fixed capacity charges through 2018; beginning in 2019, the capacity charge will not increase by more than two percent or decrease by more than one percent from the previous year’s capacity charge and will be determined using a cost-based formula methodology. The base energy charge for each year of the contract term will be set each January 1, subject to monthly adjustment, and will also be determined using a cost-based formula methodology.

In January 2016, one of Minnesota Power’s municipal customers provided notice of its intent to terminate its contract effective June 30, 2019. Minnesota Power currently provides approximately 29 MW of average monthly demand to this customer. Under the Nashwauk Public Utilities Commission agreement, no termination notice may be given prior to June 30, 2025. Under the agreement with SWL&P, no termination notice may be given prior to October 31, 2016. The remaining 14 municipal customers may not give termination notices prior to December 31, 2021.


ALLETE, Inc. Third Quarter 2016 Form 10-Q
21




NOTE 6. REGULATORY MATTERS (Continued)

Transmission Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In an order dated February 3, 2016, the MPUC approved Minnesota Power’s updated billing factor which allows 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. As a result of the MPUC approval of the certificate of need for the GNTL in June 2015, the project is eligible for cost recovery under the existing transmission cost recovery rider. Minnesota Power anticipates including its portion of the investments and expenditures for the GNTL in future transmission factor filings to include updated billing rates on customer bills.

Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for investments and expenditures related to the 497 MW Bison Wind Energy Center in North Dakota and the restoration and repair of Thomson. Updated customer billing rates for the renewable cost recovery rider were approved by the MPUC in an order dated March 9, 2016, allowing Minnesota Power to charge retail customers on a current basis for the costs of constructing certain renewable investments plus a return on the capital invested. While approving the updated customer billing rates for the renewable cost recovery rider, the MPUC also allowed Minnesota Power additional time to submit support for its position on its utilization of North Dakota investment tax credits.

Minnesota Power accounts for North Dakota investment tax credits based on long-standing regulatory precedents of stand-alone allocation methodology of accounting for income taxes. The stand-alone method provides that income taxes (and credits) are calculated as if Minnesota Power was the only entity included in ALLETE’s consolidated federal and unitary state income tax returns. Minnesota Power has recorded a regulatory liability for North Dakota investment tax credits generated by its jurisdictional activity and expected to be realized in the future. North Dakota investment tax credits attributable to ALLETE’s apportionment and income of ALLETE’s other subsidiaries are included in the ALLETE consolidated group. The Minnesota Department of Commerce (Department) has inquired about our use of the North Dakota investment tax credits, taking the position that all North Dakota investment tax credits realized from the Bison Wind Energy Center should be credited to Minnesota Power regulated retail customers. The MPUC did not come to a decision on this issue in its order dated March 9, 2016, but requested that Minnesota Power provide further support on its position which was submitted on April 8, 2016.

On October 18, 2016, the MPUC held a hearing in which it decided Minnesota Power should attribute all North Dakota investment tax credits realized from the Bison Wind Energy Center to Minnesota Power regulated retail customers. As a result of the adverse regulatory outcome, Minnesota Power has created a regulatory liability, and recorded a reduction in operating revenue for $15.0 million . The North Dakota investment tax credits previously recognized as income tax credits in Corporate and Other were reversed in the third quarter of 2016 resulting in an $8.8 million charge to net income. Minnesota Power will seek reconsideration with the MPUC, and if not successful, will consider all available avenues of appeal.

Minnesota Power also has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard. (See Minnesota Solar Energy Standard. ) Currently, there is no approved customer billing rate for solar costs, but Minnesota Power expects to file its first solar factor filing in 2017 for recovery of costs related to the Camp Ripley solar project and community solar garden project.

Environmental Improvement Rider . Minnesota Power has an approved environmental improvement rider in place for investments and expenditures related to the implementation of the Boswell Unit 4 mercury emissions reduction plan completed in 2015. Customer billing rates for the environmental improvement rider were approved by the MPUC in August 2015. In September 2015, Minnesota Power filed an updated environmental improvement factor filing which included updated costs associated with Boswell Unit 4. Upon approval of the filing, Minnesota Power will be authorized to include updated billing rates on customer bills.

Boswell Remaining Life Petition. In November 2015, Minnesota Power filed a petition with the MPUC for approval to extend Boswell’s remaining life to 2050 for all units and utilize the existing environmental improvement rider to credit a portion of the depreciation expense savings to customers. The extension request was based on the significant multi-emissions retrofit work done at Boswell Unit 3 and Boswell Unit 4. In an order dated September 23, 2016, the MPUC approved Minnesota Power’s request to withdraw the petition. Minnesota Power intends to address Boswell’s remaining life and the environmental improvement rider in the upcoming general rate case. (See 2016 Minnesota Rate Case. )


ALLETE, Inc. Third Quarter 2016 Form 10-Q
22




NOTE 6. REGULATORY MATTERS (Continued)

Annual Automatic Adjustment (AAA) of Charges. In an order dated June 2, 2016, the MPUC approved Minnesota Power’s AAA filings made in 2012 and 2013. The MPUC deferred action for 90 days on the AAA filing made in 2014 to review and confirm coal transportation costs and terms of service, which was subsequently completed on September 6, 2016, resulting in final approval of the filing.

2016 Wisconsin Rate Case.   SWL&P’s current retail rates are based on a 2012 PSCW retail rate order that allows for a 10.9 percent return on common equity. On June 28, 2016, SWL&P filed a rate increase request with the PSCW requesting an average overall increase of 3.1 percent for retail customers (a 3.5 percent increase in electric rates, a 1.3 percent decrease in natural gas rates and a 7.8 percent increase in water rates). The rate filing seeks an overall return on equity of 10.9 percent , based on a capital structure consisting of approximately 55 percent equity and 45 percent debt. On an annualized basis, the requested rate increase would generate approximately $2.7 million in additional revenue. Hearings are expected to be scheduled in late 2016. The Company anticipates new rates will take effect during the first quarter of 2017. We cannot predict the level of rates that may be approved by the PSCW.

Integrated Resource Plan (IRP). In a November 2013 order, the MPUC approved Minnesota Power’s 2013 IRP which detailed its EnergyForward strategic plan. Significant elements of the EnergyForward plan include major wind investments in North Dakota completed in 2014, the installation of emissions control technology at Boswell Unit 4 completed in December 2015, planning for the proposed GNTL, the conversion of Laskin from coal to natural gas completed in June 2015 and the retirement of Taconite Harbor Unit 3 completed in May 2015. In September 2015, Minnesota Power filed its 2015 IRP with the MPUC which included an analysis of a variety of existing and future energy resource alternatives and a projection of customer cost impact by class. The 2015 IRP also contained the next steps in Minnesota Power’s EnergyForward plan including the economic idling of Taconite Harbor Units 1 and 2 which was completed in September 2016, the ceasing of coal-fired operations at Taconite Harbor in 2020, and the addition of between 200 MW and 300 MW of natural gas-fired generation in the next decade.

In an order dated July 18, 2016, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The order accepts Minnesota Power’s plans for Taconite Harbor, directs Minnesota Power to retire Boswell Units 1 and 2 no later than 2022, requires an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal and requires Minnesota Power to conduct request for proposals for additional wind, solar and demand response resource additions subject to further MPUC approvals. On October 19, 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018 as the latest step in its EnergyForward strategic plan. Minnesota Power’s next IRP must be filed by February 1, 2018.

Great Northern Transmission Line (GNTL) . Minnesota Power and Manitoba Hydro have proposed construction of the GNTL, an approximately 220 -mile 500 -kV transmission line between Manitoba and Minnesota’s Iron Range. The GNTL is subject to various federal and state regulatory approvals. In October 2013, a certificate of need application was filed with the MPUC which was approved in a June 2015 order. Based on this order, Minnesota Power’s portion of the investments and expenditures for the project are eligible for cost recovery under its existing transmission cost recovery rider and are anticipated to be included in future transmission factor filings. In a December 2015 order, the FERC approved our request to recover on construction work in progress related to the GNTL from Minnesota Power’s wholesale customers. In April 2014, Minnesota Power filed a route permit application with the MPUC and a request for a presidential permit to cross the U.S.-Canadian border with the U.S. Department of Energy. In an order dated April 11, 2016, the MPUC approved the route permit which largely follows Minnesota Power’s preferred route, including the international border crossing. Manitoba Hydro must obtain regulatory and governmental approvals related to a new transmission line in Canada. In September 2015, Manitoba Hydro submitted the final preferred route and EIS for the transmission line in Canada to the Manitoba Conservation and Water Stewardship for regulatory approval. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in 2014. Upon receipt of all applicable permits and approvals, construction of the GNTL is expected to begin by 2017 and to be completed in 2020.

Conservation Improvement Program (CIP). Minnesota requires electric utilities to spend a minimum of 1.5 percent of net gross operating revenues from service provided in the state on energy CIPs each year. On June 1, 2016, Minnesota Power submitted its CIP triennial filing for 2017 through 2019 with the Minnesota Department of Commerce, which outlines Minnesota Power’s CIP spending and energy-saving goals for 2017 through 2019. A decision on the CIP triennial filing by the Minnesota Department of Commerce is expected in the fourth quarter of 2016.


ALLETE, Inc. Third Quarter 2016 Form 10-Q
23




NOTE 6. REGULATORY MATTERS (Continued)

On April 1, 2016, Minnesota Power submitted its 2015 CIP consolidated filing, which detailed Minnesota Power’s CIP program results and requested a CIP financial incentive of $7.5 million based upon MPUC procedures. In an order dated July 19, 2016, the MPUC approved Minnesota Power’s CIP consolidated filing, including the requested CIP financial incentive which was recorded as revenue and as a regulatory asset. The approved financial incentive will be recovered through customer billing rates in 2016 and 2017. In 2015, the CIP financial incentive of $6.2 million was also recognized in the third quarter. CIP financial incentives are recognized in the period in which the MPUC approves the filing.

MISO Return on Equity Complaints. In November 2013, several customer groups located within the MISO service area filed complaints with the FERC requesting, among other things, a reduction in the base return on equity used by MISO transmission owners, including ALLETE and ATC, to 9.15 percent . In December 2015, a federal administrative law judge ruled on the November 2013 complaint proposing a reduction in the base return on equity to 10.32 percent . On September 28, 2016, the FERC issued an order affirming the administrative law judge’s recommendation.

In February 2015, an additional complaint was filed with the FERC seeking an order to further reduce the base return on equity to 8.67 percent . On June 30, 2016, a federal administrative law judge ruled on the February 2015 complaint proposing a further reduction in the base return on equity to 9.70 percent , subject to approval or adjustment by the FERC. A final decision from the FERC on the administrative law judge’s recommendation is expected in 2017.

In January 2015, the FERC approved an incentive adder of up to 50 basis points on the allowed base return on equity for our participation in a regional transmission organization upon the resolution of each individual return on equity complaint.

Minnesota Solar Energy Standard. In 2013, legislation was enacted by the state of Minnesota requiring at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generated by solar energy by the end of 2020. At least 10  percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 20 kW or less. Minnesota Power has two solar projects under development. In August 2015, Minnesota Power filed for MPUC approval of a 10 MW utility scale solar project at Camp Ripley, a Minnesota Army National Guard base and training facility near Little Falls, Minnesota. In an order dated February 24, 2016, the MPUC approved the Camp Ripley solar project as eligible to meet the solar energy standard and for current cost recovery, subject to certain compliance requirements. In September 2015, Minnesota Power filed for MPUC approval of a community solar garden project in Duluth, Minnesota, which is comprised of a 1 MW solar array to be owned and operated by a third party with the output purchased by Minnesota Power and a 40 kW solar array that will be owned and operated by Minnesota Power. In an order dated July 27, 2016, the MPUC approved the community solar garden project and cost recovery, subject to certain compliance requirements. Minnesota Power believes these projects will meet approximately one-third of the overall mandate. Additionally, on June 1, 2016, Minnesota Power filed a proposal with the MPUC to increase the amount of solar rebates available for customer-sited solar installations and recover costs of the program through Minnesota Power’s renewable cost recovery rider. If approved, the Minnesota Power projects would meet part of the mandate related to solar photovoltaic devices with a nameplate capacity of 20 kW or less.

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 of 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. No regulatory assets or liabilities 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. Third Quarter 2016 Form 10-Q
24




NOTE 6. REGULATORY MATTERS (Continued)
Regulatory Assets and Liabilities
September 30,
2016

 
December 31,
2015

Millions
 
 
 
Current Regulatory Assets (a)
 
 
 
Deferred Fuel Adjustment Clause

$16.8

 

$10.6

Total Current Regulatory Assets
16.8

 
10.6

Non-Current Regulatory Assets
 
 
 
Defined Benefit Pension and Other Postretirement Benefit Plans (b)
213.9

 
219.3

Income Taxes (c)
65.1

 
64.2

Cost Recovery Riders (d)
39.9

 
58.0

Asset Retirement Obligations (e)
24.8

 
21.6

PPACA Income Tax Deferral
5.0

 
5.0

Other
10.2

 
3.9

Total Non-Current Regulatory Assets
358.9

 
372.0

Total Regulatory Assets

$375.7

 

$382.6

 
 
 
 
Non-Current Regulatory Liabilities
 
 
 
Wholesale and Retail Contra AFUDC (f)

$56.9

 

$58.0

North Dakota Investment Tax Credits (g)
27.9

 
12.8

Income Taxes (c)
20.0

 
6.1

Plant Removal Obligations
15.6

 
22.1

Defined Benefit Pension and Other Postretirement Benefit Plans (b)

 
0.9

Other
2.5

 
5.1

Total Non-Current Regulatory Liabilities

$122.9

 

$105.0

(a)
Current regulatory assets are included in Prepayments and Other on the Consolidated Balance Sheet.
(b)
Defined benefit pension and other postretirement items included in our Regulated Operations, which are otherwise required to be recognized in accumulated other comprehensive income as actuarial gains and losses as well as prior service costs and credits, are recognized as regulatory assets or regulatory liabilities on the Consolidated Balance Sheet. The asset or liability will decrease as the deferred items are amortized and recognized as components of net periodic benefit cost. (See Note 12. Pension and Other Postretirement Benefit Plans.)
(c)
These assets and liabilities are offsets to deferred income taxes recognized on certain regulatory temporary differences, which will reverse over the remaining lives of those temporary differences.
(d)
The cost recovery rider regulatory assets are revenues not yet collected from our customers primarily due to capital expenditures related to the Bison Wind Energy Center, investment in CapX2020 projects, and the Boswell Unit 4 environmental upgrade and are recognized in accordance with the accounting standards for alternative revenue programs. The cost recovery rider regulatory assets as of September 30, 2016 , will be recovered over the next two years.
(e)
Asset retirement obligations will accrete and be amortized over the lives of the related property with asset retirement obligations.
(f)
Wholesale and Retail Contra AFUDC represents the regulatory offset to AFUDC Equity and Debt recorded during the construction period of our cost recovery rider projects prior to placing the projects in service. The regulatory liability will decrease over the remaining depreciable lives of the related assets.
(g)
North Dakota investment tax credits expected to be realized from the Bison Wind Energy Center that will be credited to Minnesota Power’s regulated retail customers over the remaining life of the Bison Wind Energy Center through future renewable cost recovery rider filings.


NOTE 7. 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 parts of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. As of September 30, 2016 , our equity investment in ATC was $133.8 million ( $124.5 million at December 31, 2015 ). In the first nine months of 2016 , we invested $3.5 million in ATC, and on October 28, 2016 , we invested an additional $1.9 million . We do not expect to make any additional investments in 2016 .
ALLETE’s Investment in ATC
 
Millions
 
Equity Investment Balance as of December 31, 2015

$124.5

Cash Investments
3.5

Equity in ATC Earnings
15.0

Distributed ATC Earnings
(9.2
)
Equity Investment Balance as of September 30, 2016

$133.8


ALLETE, Inc. Third Quarter 2016 Form 10-Q
25




NOTE 7. INVESTMENT IN ATC (Continued)

On September 28, 2016, the FERC issued an order reducing ATC’s authorized return on equity to 10.82 percent , including an incentive adder for participation in a regional transmission organization. Prior to this order, ATC had been allowed a return on equity of 12.2 percent which had been impacted by reductions for estimated refunds related to complaints filed with the FERC by several customers located within the MISO service area.

On June 30, 2016, a federal administrative law judge ruled on an additional complaint proposing a further reduction in the base return on equity to 9.70 percent , subject to approval or adjustment by the FERC. A final decision from the FERC on the administrative law judge’s recommendation is expected in 2017. (See Note 6. Regulatory Matters.) We own approximately 8 percent of ATC and estimate that for every 50  basis point reduction in ATC’s allowed return on equity our equity earnings in ATC would be impacted annually by approximately $0.5 million after-tax ( $0.9 million pre-tax).


NOTE 8. SHORT-TERM AND LONG-TERM DEBT

The following tables present ALLETE’s short-term and long-term debt as of September 30, 2016 and December 31, 2015 .
September 30, 2016
Principal

 
Unamortized Debt Issuance Costs
 
Total

Millions
 
 
 
 
 
Short-Term Debt (a)

$187.2

 
$(0.6)
 

$186.6

Long-Term Debt
1,369.7

 
(10.8)
 
1,358.9

Total Debt

$1,556.9

 
$(11.4)
 

$1,545.5

(a)
Consisted of long-term debt due within one year.
December 31, 2015
Principal

 
Unamortized Debt Issuance Costs
 
Total

Millions
 
 
 
 
 
Short-Term Debt (a)

$37.9

 
$(0.6)
 

$37.3

Long-Term Debt
1,568.7

 
(12.0)
 
1,556.7

Total Debt

$1,606.6

 
$(12.6)
 

$1,594.0

(a)
Consisted of long-term debt due within one year and notes payable.

No material long-term debt was issued in the first nine months of 2016 .

Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00 , measured quarterly. As of September 30, 2016 , our ratio was approximately 0.45 to 1.00 . Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. As of September 30, 2016 , ALLETE was in compliance with its financial covenants.



ALLETE, Inc. Third Quarter 2016 Form 10-Q
26




NOTE 9. INCOME TAX EXPENSE
 
 
Quarter Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Millions
 
 
 
 
 
 
 
 
Current Tax Expense (a)
 
 
 
 
 
 
 
 
Federal
 

 

 

 

State
 

 
$0.2
 

$0.2

 
$0.5
Total Current Tax Expense
 

 
$0.2
 

$0.2

 
$0.5
Deferred Tax Expense
 
 
 
 
 
 
 
 
Federal
 
$0.4
 

$14.8

 
$7.1
 

$23.5

State
 
1.4

 
(0.4
)
 
8.9

 
3.6

Investment Tax Credit Amortization
 
(0.1
)
 
(0.2
)
 
(0.5
)
 
(0.6
)
Total Deferred Tax Expense
 
$1.7
 

$14.2

 
$15.5
 

$26.5

Total Income Tax Expense
 
$1.7
 

$14.4

 
$15.7
 

$27.0

(a)
For the nine months ended September 30, 2016, and 2015 , the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of the Protecting Americans from Tax Hikes Act of 2015, the Tax Increase Prevention Act of 2014 and the American Taxpayer Relief Act of 2012.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.
 
Quarter Ended
Nine Months Ended
Reconciliation of Taxes from Federal Statutory
September 30,
September 30,
Rate to Total Income Tax Expense
2016
 
2015
2016

 
2015

Millions
 
 
 
 
 
 
Income Before Non-Controlling Interest and Income Taxes

$42.0

 

$74.7


$127.2

 

$149.7

Statutory Federal Income Tax Rate
35
%
 
35
%
35
%
 
35
%
Income Taxes Computed at 35 percent Statutory Federal Rate

$14.7

 

$26.1


$44.5

 

$52.4

Increase (Decrease) in Tax Due to:
 
 
 
 
 
 
State Income Taxes – Net of Federal Income Tax Benefit
0.9

 
(0.2
)
5.9

 
2.6

Production Tax Credits
(14.0
)
 
(11.0
)
(34.5
)
 
(31.8
)
Regulatory Differences for Utility Plant

 
(0.3
)
(0.1
)
 
(0.7
)
Other
0.1

 
(0.2
)
(0.1
)
 
4.5

Total Income Tax Expense

$1.7

 

$14.4


$15.7

 

$27.0


For the nine months ended September 30, 2016 , the effective tax rate was 12.3 percent ( 18.0 percent for the nine months ended September 30, 2015 ).

Uncertain Tax Positions. As of September 30, 2016 , we had gross unrecognized tax benefits of $2.0 million ( $2.4 million as of December 31, 2015 ). Of the total gross unrecognized tax benefits, $0.6 million represents the amount of unrecognized tax benefits included on the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.

ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE is no longer subject to federal examination for years before 2013, or state examination for years before 2012.



ALLETE, Inc. Third Quarter 2016 Form 10-Q
27




NOTE 10. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in Accumulated Other Comprehensive Loss. Comprehensive income (loss) is the change in shareholders’ equity during a period from transactions and events from non-owner sources, including net income. The amounts recorded to accumulated other comprehensive loss include unrealized gains and losses on available-for-sale securities, defined benefit pension and other postretirement items, consisting of deferred actuarial gains or losses and prior service costs or credits, and gains and losses on derivatives accounted for as cash flow hedges.

For the quarter and nine months ended September 30, 2016 and 2015, reclassifications out of accumulated other comprehensive income for the Company were not material. Changes in accumulated other comprehensive loss for the nine months ended September 30, 2016 , are presented on the Consolidated Statement of Equity.


NOTE 11. EARNINGS PER SHARE AND COMMON STOCK

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from outstanding stock options, non-vested restricted stock units, performance share awards granted under our Executive Long-Term Incentive Compensation Plan and common shares under the forward sale agreement entered into in 2014, a portion of which were issued in 2015. For the nine months ended September 30, 2016, and 2015 , no options to purchase shares of common stock were excluded from the computation of diluted earnings per share.
 
 
 
2016
 
 
 
 
 
2015
 
 
Reconciliation of Basic and Diluted
 
 
Dilutive
 
 
 
 
 
Dilutive
 
 
Earnings Per Share
Basic
 
Securities
 
Diluted
 
Basic
 
Securities
 
Diluted
Millions Except Per Share Amounts
 
 
 
 
 
 
 
 
 
 
 
Quarter ended September 30,
 
 
 
 
 
 
 
 
 
 
 
Net Income Attributable to ALLETE

$40.3

 
 
 

$40.3

 

$60.4

 
 
 

$60.4

Average Common Shares
49.4

 
0.1

 
49.5

 
48.8

 
0.1

 
48.9

Earnings Per Share

$0.82

 
 
 

$0.81

 

$1.24

 
 
 

$1.23

Nine Months Ended September 30,
 

 
 
 
 

 
 
 
 
 
 
Net Income Attributable to ALLETE

$111.0

 
 
 

$111.0

 

$122.8

 
 
 

$122.8

Average Common Shares
49.3

 
0.1

 
49.4

 
48.0

 
0.1

 
48.1

Earnings Per Share

$2.25

 
 
 

$2.25

 

$2.56

 
 
 

$2.55



NOTE 12. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 
Pension
 
Other
Postretirement
Components of Net Periodic Benefit Expense (Income)
2016
 
2015
 
2016
 
2015
Millions
 
 
 
 
 
 
 
Quarter Ended September 30,
 
 
 
 
 
 
 
Service Cost

$2.0

 

$2.6

 

$1.0

 

$1.0

Interest Cost
8.2

 
7.5

 
1.9

 
1.8

Expected Return on Plan Assets
(10.7
)
 
(10.2
)
 
(2.8
)
 
(2.7
)
Amortization of Prior Service Credits

 

 
(0.7
)
 
(0.7
)
Amortization of Net Loss
2.4

 
4.4

 

 
0.1

Net Periodic Benefit Expense (Income)

$1.9

 

$4.3

 
$(0.6)
 
$(0.5)
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
 
Service Cost

$6.1

 

$7.6

 

$3.0

 

$3.2

Interest Cost
24.4

 
22.4

 
5.6

 
5.4

Expected Return on Plan Assets
(32.0
)
 
(30.5
)
 
(8.4
)