SEC Filing | ALLETE, Inc.

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ale-20210630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2021


☐			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,

52,268,119 shares outstanding

as of June 30, 2021

Index




Definitions			3

Forward-Looking Statements			5

Part I.	Financial Information

	Item 1.	Consolidated Financial Statements - Unaudited	6

		Consolidated Balance Sheet	6


		Consolidated Statement of Income	7


		Consolidated Statement of Comprehensive Income	8


		Consolidated Statement of Cash Flows	9


		Consolidated Statement of Equity	10


		Notes to Consolidated Financial Statements	11

		Note 1. Operations and Significant Accounting Policies	11


		Note 2. Regulatory Matters	13
		Note 3. Equity Investments	16

		Note 4. Fair Value	17
		Note 5. Short-Term and Long-Term Debt	19
		Note 6. Commitments, Guarantees and Contingencies	20
		Note 7. Earnings Per Share and Common Stock	25
		Note 8. Income Tax Expense	25

		Note 9. Pension and Other Postretirement Benefit Plans	27
		Note 10. Business Segments	27
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

		Comparison of the Quarters Ended	31
		Comparison of the Six Months Ended	34
		Critical Accounting Policies	37
		Outlook	38
		Liquidity and Capital Resources	46
		Other	48
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

	Item 4.	Controls and Procedures	49

Part II.	Other Information

	Item 1.	Legal Proceedings	49

	Item 1A.	Risk Factors	50

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

	Item 3.	Defaults Upon Senior Securities	50

	Item 4.	Mine Safety Disclosures	50

	Item 5.	Other Information	51

	Item 6.	Exhibits	52

Signatures			53

ALLETE, Inc. Second Quarter 2021 Form 10-Q

Definitions

The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.


Abbreviation or Acronym			Term
AFUDC			Allowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods
ALLETE			ALLETE, Inc.
ALLETE Clean Energy			ALLETE Clean Energy, Inc. and its subsidiaries
ALLETE Properties			ALLETE Properties, LLC and its subsidiaries
ALLETE South Wind			ALLETE South Wind, LLC
ALLETE Transmission Holdings			ALLETE Transmission Holdings, Inc.

ArcelorMittal			ArcelorMittal S.A.
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

Cliffs			Cleveland-Cliffs Inc.

Company			ALLETE, Inc. and its subsidiaries

COVID-19			2019 novel coronavirus
CSAPR			Cross-State Air Pollution Rule
DC			Direct Current
EIS			Environmental Impact Statement

EPA			United States Environmental Protection Agency

ESOP			Employee Stock Ownership Plan

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


Hibbing Taconite			Hibbing Taconite Co.
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
Lampert Capital Markets			Lampert Capital Markets, Inc.

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

Moody’s			Moody’s Investors Service, Inc.
MPCA			Minnesota Pollution Control Agency

ALLETE, Inc. Second Quarter 2021 Form 10-Q


Abbreviation or Acronym			Term
MPUC			Minnesota Public Utilities Commission
MW / MWh			Megawatt(s) / Megawatt-hour(s)
NAAQS			National Ambient Air Quality Standards
NDPSC			North Dakota Public Service Commission
Nobles 2			Nobles 2 Power Partners, LLC
NOL			Net Operating Loss

NOX			Nitrogen Oxides

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

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




Town Center District			Town Center at Palm Coast Community Development District in Florida

U.S.			United States of America
USS Corporation			United States Steel Corporation
WTG			Wind Turbine Generator

ALLETE, Inc. Second Quarter 2021 Form 10-Q

Forward-Looking Statements

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

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

•our ability to successfully implement our strategic objectives;

•global and domestic economic conditions affecting us or our customers;

•changes in and compliance with laws and regulations;

•changes in tax rates or policies or in rates of inflation;

•the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;

•weather conditions, natural disasters and pandemic diseases, including the ongoing COVID-19 pandemic;

•our ability to access capital markets, bank financing and other financing sources;

•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;

•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 businesses of climate change and future regulation to restrict the emissions of GHG;

•effects of increased deployment of distributed low-carbon electricity generation resources;

•the impacts of laws and regulations related to renewable and distributed generation;

•pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;

•our current and potential industrial and municipal customers’ ability to execute announced expansion plans;

•real estate market conditions where our legacy Florida real estate investment is located may not improve; and

•the success of efforts to realize value from, invest in, and develop new opportunities.

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 our 2020 Form 10-K and Part II, Item 1A. Risk Factors of this Form 10-Q. 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 2021 Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ALLETE

CONSOLIDATED BALANCE SHEET

Unaudited


	June 30, 2021	December 31, 2020
Millions
Assets
Current Assets
Cash and Cash Equivalents	$62.5	$44.3
Accounts Receivable (Less Allowance of $2.7 and $2.5)	105.2	111.9
Inventories – Net	88.1	74.2
Prepayments and Other	23.5	24.5
Total Current Assets	279.3	254.9
Property, Plant and Equipment – Net	5,021.6	4,840.8
Regulatory Assets	491.9	480.9
Equity Investments	317.8	301.2


Other Non-Current Assets	182.7	206.8
Total Assets	$6,293.3	$6,084.6
Liabilities and Equity
Liabilities
Current Liabilities
Accounts Payable	$100.0	$110.0
Accrued Taxes	53.0	59.4
Accrued Interest	19.5	19.8
Long-Term Debt Due Within One Year	362.6	203.7

Other	60.4	66.7
Total Current Liabilities	595.5	459.6
Long-Term Debt	1,664.6	1,593.2
Deferred Income Taxes	188.7	195.7
Regulatory Liabilities	514.9	524.8
Defined Benefit Pension and Other Postretirement Benefit Plans	210.7	225.8
Other Non-Current Liabilities	277.0	285.3
Total Liabilities	3,451.4	3,284.4
Commitments, Guarantees and Contingencies (Note 6)
Equity
ALLETE Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 52.3 and 52.1 Shares Issued and Outstanding	1,474.1	1,460.9

Accumulated Other Comprehensive Loss	(30.3)	(31.1)
Retained Earnings	878.8	864.8
Total ALLETE Equity	2,322.6	2,294.6
Non-Controlling Interest in Subsidiaries	519.3	505.6
Total Equity	2,841.9	2,800.2
Total Liabilities and Equity	$6,293.3	$6,084.6

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF INCOME

Unaudited


	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2021	2020	2021	2020
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility	$290.4	$200.8	$583.4	$466.1
Contracts with Customers – Non-utility	42.3	39.6	85.7	83.1
Other – Non-utility	2.9	2.8	5.7	5.6

Total Operating Revenue	335.6	243.2	674.8	554.8
Operating Expenses
Fuel, Purchased Power and Gas – Utility	128.9	69.3	249.3	158.3
Transmission Services – Utility	19.2	16.4	36.9	34.9
Cost of Sales – Non-utility	15.8	16.3	32.6	33.2
Operating and Maintenance	67.1	59.0	133.4	120.0
Depreciation and Amortization	57.9	54.5	115.9	107.9
Taxes Other than Income Taxes	18.5	15.0	36.5	27.6
Total Operating Expenses	307.4	230.5	604.6	481.9
Operating Income	28.2	12.7	70.2	72.9
Other Income (Expense)
Interest Expense	(17.4)	(15.9)	(34.5)	(31.6)
Equity Earnings	5.1	6.4	9.9	11.6

Other	1.8	5.2	5.1	6.2
Total Other Expense	(10.5)	(4.3)	(19.5)	(13.8)
Income Before Income Taxes	17.7	8.4	50.7	59.1
Income Tax Benefit	(4.0)	(8.5)	(14.4)	(22.3)
Net Income	21.7	16.9	65.1	81.4
Net Loss Attributable to Non-Controlling Interest	(6.2)	(3.2)	(14.6)	(5.0)
Net Income Attributable to ALLETE	$27.9	$20.1	$79.7	$86.4
Average Shares of Common Stock
Basic	52.2	51.8	52.2	51.8
Diluted	52.3	51.9	52.2	51.8
Basic Earnings Per Share of Common Stock	$0.53	$0.39	$1.53	$1.67
Diluted Earnings Per Share of Common Stock	$0.53	$0.39	$1.53	$1.67

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Unaudited


	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2021	2020	2021	2020
Millions
Net Income	$21.7	$16.9	$65.1	$81.4
Other Comprehensive Income


Unrealized Gain on Securities
Net of Income Tax Expense of $–, $0.1, $– and $–	—	0.4	—	—


Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense of $0.2, $–, $0.3 and $0.1	0.4	0.1	0.8	0.3
Total Other Comprehensive Income	0.4	0.5	0.8	0.3
Total Comprehensive Income	22.1	17.4	65.9	81.7
Net Loss Attributable to Non-Controlling Interest	(6.2)	(3.2)	(14.6)	(5.0)
Total Comprehensive Income Attributable to ALLETE	$28.3	$20.6	$80.5	$86.7

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited


	Six Months Ended
	June 30,
	2021	2020
Millions
Operating Activities
Net Income	$65.1	$81.4
AFUDC – Equity	(1.1)	(1.4)
Income from Equity Investments – Net of Dividends	1.1	(2.2)

Realized and Unrealized (Gain) Loss on Investments and Property, Plant and Equipment	(0.7)	1.1
Depreciation Expense	115.8	107.9
Amortization of PSAs	(5.7)	(5.6)
Amortization of Other Intangible Assets and Other Assets	5.1	4.6
Deferred Income Tax Benefit	(14.4)	(22.3)
Share-Based and ESOP Compensation Expense	3.1	3.1

Defined Benefit Pension and Postretirement Benefit Expense	2.2	—
Provision for Interim Rate Refund	—	11.7
Payments for Tax Reform Refund	—	(0.1)

Bad Debt Expense	0.6	1.1

Changes in Operating Assets and Liabilities
Accounts Receivable	5.7	9.5
Inventories	(13.9)	(9.3)
Prepayments and Other	1.7	3.3
Accounts Payable	(1.2)	(11.6)
Other Current Liabilities	(13.0)	(8.5)
Cash Contributions to Defined Benefit Pension Plans	(10.3)	(10.7)
Changes in Regulatory and Other Non-Current Assets	(25.6)	(16.8)
Changes in Regulatory and Other Non-Current Liabilities	(8.8)	8.1
Cash from Operating Activities	105.7	143.3
Investing Activities
Proceeds from Sale of Available-for-sale Securities	2.6	2.1
Payments for Purchase of Available-for-sale Securities	(2.0)	(2.3)
Payments for Equity Method Investments	(17.1)	(66.6)


Additions to Property, Plant and Equipment	(293.4)	(419.9)


Other Investing Activities	4.2	0.5
Cash for Investing Activities	(305.7)	(486.2)
Financing Activities
Proceeds from Issuance of Common Stock	10.1	7.9
Proceeds from Issuance of Short-Term and Long-Term Debt	379.0	297.4

Repayments of Short-Term and Long-Term Debt	(149.3)	(20.9)
Proceeds from Non-Controlling Interest in Subsidiaries	28.9	67.8


Dividends on Common Stock	(65.7)	(63.9)
Other Financing Activities	(0.9)	(0.5)
Cash from Financing Activities	202.1	287.8
Change in Cash, Cash Equivalents and Restricted Cash	2.1	(55.1)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period	65.2	92.5
Cash, Cash Equivalents and Restricted Cash at End of Period	$67.3	$37.4

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF EQUITY

Unaudited


	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2021	2020	2021	2020
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period	$1,467.6	$1,441.7	$1,460.9	$1,436.7
Common Stock Issued	6.5	6.0	13.2	11.0

Balance, End of Period	1,474.1	1,447.7	1,474.1	1,447.7

Accumulated Other Comprehensive Loss
Balance, Beginning of Period	(30.7)	(23.8)	(31.1)	(23.6)
Other Comprehensive Income - Net of Income Taxes
Unrealized Gain on Debt Securities	—	0.4	—	—
Defined Benefit Pension and Other Postretirement Plans	0.4	0.1	0.8	0.3
Balance, End of Period	(30.3)	(23.3)	(30.3)	(23.3)

Retained Earnings
Balance, Beginning of Period	883.8	853.2	864.8	818.8
Net Income Attributable to ALLETE	27.9	20.1	79.7	86.4
Common Stock Dividends	(32.9)	(32.0)	(65.7)	(63.9)

Balance, End of Period	878.8	841.3	878.8	841.3

Non-Controlling Interest in Subsidiaries
Balance, Beginning of Period	525.7	101.9	505.6	103.7
Proceeds from Non-Controlling Interest in Subsidiaries	—	67.8	28.9	67.8
Net Loss Attributable to Non-Controlling Interest	(6.2)	(3.2)	(14.6)	(5.0)

Distributions to Non-Controlling Interest	(0.2)	—	(0.6)	—
Balance, End of Period	519.3	166.5	519.3	166.5

Total Equity	$2,841.9	$2,432.2	$2,841.9	$2,432.2

Dividends Per Share of Common Stock	$0.63	$0.6175	$1.26	$1.235

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2020, 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, 2021, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2021. For further information, refer to the Consolidated Financial Statements and notes included in our 2020 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, 2021, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under ALLETE Clean Energy loan and tax equity financing agreements as well as PSAs. 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, 2021	December 31, 2020	June 30, 2020	December 31, 2019
Millions
Cash and Cash Equivalents	$62.5	$44.3	$25.7	$69.3
Restricted Cash included in Prepayments and Other	1.6	0.8	7.3	2.8
Restricted Cash included in Other Non-Current Assets	3.2	20.1	4.4	20.4
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows	$67.3	$65.2	$37.4	$92.5

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, 2021	December 31, 2020
Millions
Fuel (a)	$17.2	$23.1
Materials and Supplies	53.7	51.1
Construction of Wind Energy Facilities (b)	17.2	—



Total Inventories – Net	$88.1	$74.2

(a) Fuel consists primarily of coal inventory at Minnesota Power.

(b) Project costs related to ALLETE Clean Energy’s Northern Wind and Red Barn wind projects which are expected be sold in late 2022. (See Outlook – ALLETE Clean Energy.)

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)


Other Non-Current Assets	June 30, 2021	December 31, 2020
Millions
Contract Assets (a)	$24.1	$25.5

Operating Lease Right-of-use Assets	18.9	22.4
ALLETE Properties	18.3	18.2
Restricted Cash	3.2	20.1
Other Postretirement Benefit Plans	35.2	34.2
Other	83.0	86.4
Total Other Non-Current Assets	$182.7	$206.8

(a) Contract Assets consist of payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.


Other Current Liabilities	June 30, 2021	December 31, 2020
Millions

PSAs	$12.6	$12.5



Fuel Adjustment Clause	3.7	3.7
Operating Lease Liabilities	5.6	5.9
Other	38.5	44.6
Total Other Current Liabilities	$60.4	$66.7


Other Non-Current Liabilities	June 30, 2021	December 31, 2020
Millions
Asset Retirement Obligation (a)	$170.6	$166.6
PSAs	45.8	52.1

Operating Lease Liabilities	13.4	16.5
Other	47.2	50.1
Total Other Non-Current Liabilities	$277.0	$285.3

(a)The asset retirement obligation is primarily related to our Regulated Operations and is funded through customer rates over the life of the related assets. Additionally, BNI Energy funds its obligation through its cost-plus coal supply agreements for which BNI Energy has recorded a receivable of $25.0 million in Other Non-Current Assets on the Consolidated Balance Sheet as of June 30, 2021 and December 31, 2020.


Other Income
Six Months Ended June 30,	2021	2020
Millions
Pension and Other Postretirement Benefit Plan Non-Service Credits (a)	$2.8	$4.8
Interest and Investment Income (Loss)	1.8	(0.5)
AFUDC - Equity	1.1	1.4

Other	(0.6)	0.5
Total Other Income	$5.1	$6.2

(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 9. Pension and Other Postretirement Benefit Plans.)

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.


Six Months Ended June 30,	2021	2020
Millions
Cash Paid for Interest – Net of Amounts Capitalized	$33.8	$30.9

Noncash Investing and Financing Activities

Increase in Accounts Payable for Capital Additions to Property, Plant and Equipment	$(8.8)	$(67.5)

Capitalized Asset Retirement Costs	$3.5	$2.1
AFUDC–Equity	$1.1	$1.4

Non-Controlling Interest in Subsidiaries. Non-controlling interest in subsidiaries on the Consolidated Balance Sheet and net loss attributable to non-controlling interest on the Consolidated Statement of Income represent the portion of equity ownership and earnings, respectively, of subsidiaries that are not attributable to equity holders of ALLETE. These amounts are primarily related to the tax equity financing structures for ALLETE Clean Energy’s 106 MW Glen Ullin, 80 MW South Peak and 303 MW Diamond Spring wind energy facilities as well as ALLETE’s equity investment in the 250 MW Nobles 2 wind energy facility.

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 2020 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 $22.1 million for the six months ended June 30, 2021 ($14.9 million for the six months ended June 30, 2020).

2020 Minnesota General Rate Case. In November 2019, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 10.6 percent for retail customers. The rate filing sought a return on equity of 10.05 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would have generated approximately $66 million in additional revenue. In December 2019 orders, the MPUC accepted the filing as complete and authorized an annual interim rate increase of $36.1 million beginning January 1, 2020.

In April 2020, Minnesota Power filed a request with the MPUC that proposed a resolution of Minnesota Power’s 2020 general rate case. Key components of our proposal included removing the power marketing margin credit in base rates and reflecting actual power marketing margins in the fuel adjustment clause effective May 1, 2020; refunding to customers interim rates collected through April 2020; increasing customer rates 4.1 percent compared to the 5.8 percent increase reflected in interim rates; and a provision that Minnesota Power would not file another rate case until at least November 1, 2021, unless certain events occur. In a June 2020 order, the MPUC approved Minnesota Power’s petition and proposal to resolve and withdraw the general rate case. Effective May 1, 2020, customer rates were set at an increase of 4.1 percent with the removal of the power marketing margin credit from base rates. Actual power marketing margins will be reflected in the fuel adjustment clause. Reserves for interim rates of $11.7 million were recorded in the second quarter of 2020 and refunded in the third and fourth quarters of 2020.

Environmental Improvement Rider. Minnesota Power has an approved environmental improvement rider for investments and expenditures related to the implementation of the Boswell Unit 4 mercury emissions reduction plan completed in 2015. Updated customer billing rates for the environmental improvement rider were approved by the MPUC in a November 2018 order. On January 19, 2021, Minnesota Power filed a petition seeking MPUC approval to end the environmental improvement rider, which was approved in an order dated April 20, 2021.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTE 2. REGULATORY MATTERS (Continued)

Electric Rates (Continued)

Solar Cost Recovery Rider. In June 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard, which was approved by the MPUC in an order dated April 20, 2021. New customer billing rates for the solar cost recovery rider were implemented on June 1, 2021.

Electric Vehicle Charging Infrastructure Petition. On April 8, 2021, Minnesota Power filed a petition seeking approval to install and own DC fast charger stations for electric vehicles across its service territory, implement accompanying rates for those stations, and track and recover investments and expenses for the project.

COVID-19 Related Deferred Accounting. In an order dated March 24, 2020, the PSCW authorized public utilities, including SWL&P, to defer expenditures incurred by the utility resulting from its compliance with state government or regulator orders during Wisconsin’s declared public health emergency for COVID-19. On April 20, 2020, Minnesota Power along with other regulated electric and natural gas service providers in Minnesota filed a joint petition to request MPUC authorization to track incremental costs and expenses incurred as a result of the COVID-19 pandemic, and to defer and record such costs as a regulatory asset, subject to recovery in a future proceeding. In an order dated May 22, 2020, the MPUC approved the joint petition requiring the joint petitioners to track cost and revenue impacts resulting from the COVID-19 pandemic with review for recovery in a future rate proceeding. As of June 30, 2021, Minnesota Power has not deferred any costs or lost revenue, and SWL&P has deferred an immaterial amount of costs.

Minnesota Power submitted a petition in November 2020 to the MPUC requesting authority to track and record as a regulatory asset lost large industrial customer revenue resulting from the idling of USS Corporation’s Keetac plant and Verso Corporation’s paper mill in Duluth, Minnesota. Keetac and Verso Corporation represent revenue of approximately $30 million annually, net of associated expense savings such as fuel costs. Minnesota Power proposed in this petition to defer any lost revenue related to the idling of the Keetac facility and the Verso Corporation paper mill to its next general rate case or other proceeding for review for recovery by the MPUC. In an order dated May 13, 2021, the MPUC denied Minnesota Power’s request.

Fuel Adjustment Clause. In March 2020, Minnesota Power filed its fuel adjustment clause report covering the period July 2018 through December 2019. In a September 2020 order, the MPUC referred the review of Minnesota Power’s forced outage costs during the period of the report, which totaled approximately $8 million, to an administrative law judge for a contested case hearing to recommend to the MPUC if any of those costs should be returned to customers. A recommendation by the administrative law judge is expected in the third quarter of 2021. We cannot predict the outcome of this proceeding.

Conservation Improvement Program. On April 1, 2021, Minnesota Power submitted its 2020 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $2.4 million based upon MPUC procedures. CIP financial incentives are recognized in the period in which the MPUC approves the filing.

2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in early 2022.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTE 2. REGULATORY MATTERS (Continued)

Nemadji Trail Energy Center. In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of a 250 MW natural gas capacity dedication and other affiliated-interest agreements for NTEC, a proposed 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 a January 2019 order, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication and other affiliated-interest agreements. In 2019, the Minnesota Court of Appeals reversed and remanded the MPUC’s decision to approve certain affiliated-interest agreements. The MPUC was ordered to determine whether NTEC may have the potential for significant environmental effects and, if so, to prepare an environmental assessment before reassessing the agreements. On January 22, 2020, Minnesota Power filed a petition for further review with the Minnesota Supreme Court requesting that it review and overturn the Minnesota Court of Appeals decision. On April 21, 2021, the Minnesota Supreme Court reversed the Minnesota Court of Appeal’s decision by ruling that the MPUC is not required to conduct a review under the Minnesota Environmental Policy Act before approving affiliated-interest agreements that govern construction and operation of a Wisconsin power plant by a Minnesota utility, and remanded the case back to the Minnesota Court of Appeals for review of remaining issues on appeal. In January 2019, an application for a certificate of public convenience and necessity for NTEC was submitted to the PSCW, which was approved by the PSCW at a hearing in January 2020. Construction of NTEC is subject to obtaining additional permits from local, state and federal authorities. The total project cost is estimated to be approximately $700 million, of which ALLETE’s portion is expected to be approximately $350 million. ALLETE’s portion of NTEC project costs incurred through June 30, 2021, is approximately $15 million.

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 2021 Form 10-Q

NOTE 2. REGULATORY MATTERS (Continued)

Regulatory Assets and Liabilities (Continued)


Regulatory Assets and Liabilities	June 30, 2021	December 31, 2020
Millions



Non-Current Regulatory Assets
Defined Benefit Pension and Other Postretirement Benefit Plans	$252.0	$259.7
Income Taxes	109.4	113.7
Cost Recovery Riders	63.2	54.0
Asset Retirement Obligations	31.4	31.6
Manufactured Gas Plant	6.0	8.8
Fuel Adjustment Clause	18.3	—
PPACA Income Tax Deferral	4.5	4.5
Boswell Units 1 and 2 Net Plant and Equipment	2.2	5.0
Other	4.9	3.6
Total Non-Current Regulatory Assets	$491.9	$480.9


Current Regulatory Liabilities (a)
Fuel Adjustment Clause	$3.7	$3.7

Transmission Formula Rates Refund	2.4	2.9
Other	0.1	1.0
Total Current Regulatory Liabilities	6.2	7.6
Non-Current Regulatory Liabilities
Income Taxes	364.5	375.3
Wholesale and Retail Contra AFUDC	85.1	86.6
Plant Removal Obligations	45.5	41.2
Defined Benefit Pension and Other Postretirement Benefit Plans	2.4	4.4
North Dakota Investment Tax Credits	12.4	12.0

Conservation Improvement Program	1.3	1.5

Other	3.7	3.8
Total Non-Current Regulatory Liabilities	514.9	524.8
Total Regulatory Liabilities	$521.1	$532.4

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

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. We expect to make cash investments of approximately $2.0 million in 2021.


ALLETE’s Investment in ATC
Millions
Equity Investment Balance as of December 31, 2020			$149.0

Equity in ATC Earnings			10.5
Distributed ATC Earnings			(8.5)
Amortization of the Remeasurement of Deferred Income Taxes			0.6
Equity Investment Balance as of June 30, 2021			$151.6

ATC’s authorized return on equity is 10.02 percent, or 10.52 percent including an incentive adder for participation in a regional transmission organization, based on a May 2020 FERC order that granted rehearing of a 2019 FERC order.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTE 3. EQUITY INVESTMENTS (Continued)

Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that owns and operates the 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.


ALLETE’s Investment in Nobles 2
Millions
Equity Investment Balance as of December 31, 2020			$152.2
Cash Investments			17.1
Equity in Nobles 2 Earnings (a)			(0.6)
Distributed Nobles 2 Earnings			(2.5)
Equity Investment Balance as of June 30, 2021			$166.2

(a)The Company also recorded net loss attributable to non-controlling interest of $3.4 million related to its investment in Nobles 2.

NOTE 4. 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 6. Fair Value to the Consolidated Financial Statements in our 2020 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 June 30, 2021, and December 31, 2020. 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.

ALLETE, Inc. Second Quarter 2021 Form 10-Q

NOTE 4. FAIR VALUE (Continued)


	Fair Value as of June 30, 2021
Recurring Fair Value Measures	Level 1	Level 2	Level 3	Total
Millions
Assets
Investments (a)
Available-for-sale – Equity Securities	$9.1	—	—	$9.1
Available-for-sale – Corporate and Governmental Debt Securities (b)	—	$8.5	—	8.5
Cash Equivalents	1.9	—	—	1.9
Total Fair Value of Assets	$11.0	$8.5	—	$19.5

Liabilities
Deferred Compensation (c)	—	$22.1	—	$22.1


Total Fair Value of Liabilities	—	$22.1	—	$22.1
Total Net Fair Value of Assets (Liabilities)	$11.0	$(13.6)	—	$(2.6)


	Fair Value as of December 31, 2020
Recurring Fair Value Measures	Level 1	Level 2	Level 3	Total
Millions
Assets
Investments (a)
Available-for-sale – Equity Securities	$7.2	—	—	$7.2
Available-for-sale – Corporate and Governmental Debt Securities	—	$10.4	—	10.4
Cash Equivalents	5.5	—	—	5.5
Total Fair Value of Assets	$