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 September 30, 2021
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
(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 | ||||||
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.
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,
as of September 30, 2021
Index
ALLETE, Inc. Third Quarter 2021 Form 10-Q
2
Definitions
The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.
| Abbreviation or Acronym | Term | ||||
| AFUDC | Allowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods | ||||
| ALLETE | ALLETE, Inc. | ||||
| ALLETE Clean Energy | ALLETE Clean Energy, Inc. and its subsidiaries | ||||
| ALLETE Properties | ALLETE Properties, LLC and its subsidiaries | ||||
| ALLETE South Wind | ALLETE South Wind, LLC | ||||
| ALLETE Transmission Holdings | ALLETE Transmission Holdings, Inc. | ||||
| ArcelorMittal | ArcelorMittal S.A. | ||||
| ATC | American Transmission Company LLC | ||||
| Basin | Basin Electric Power Cooperative, a North Dakota cooperative corporation | ||||
| 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. | ||||
ALLETE, Inc. Third Quarter 2021 Form 10-Q
3
| Abbreviation or Acronym | Term | ||||
| MPCA | Minnesota Pollution Control Agency | ||||
| MPUC | Minnesota Public Utilities Commission | ||||
| MW / MWh | Megawatt(s) / Megawatt-hour(s) | ||||
| NAAQS | National Ambient Air Quality Standards | ||||
| NDPSC | North Dakota Public Service Commission | ||||
| Nobles 2 | Nobles 2 Power Partners, LLC | ||||
| NOL | Net Operating Loss | ||||
NOX | Nitrogen Oxides | ||||
| 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 | ||||
| South Shore Energy | South Shore Energy, LLC | ||||
| 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. Third Quarter 2021 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, 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. Third Quarter 2021 Form 10-Q
5
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
| September 30, 2021 | December 31, 2020 | ||||||||||
| Millions | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
| Accounts Receivable (Less Allowance of $2.1 and $2.5) | |||||||||||
| Inventories – Net | |||||||||||
| Prepayments and Other | |||||||||||
| Total Current Assets | |||||||||||
| Property, Plant and Equipment – Net | |||||||||||
| Regulatory Assets | |||||||||||
| Equity Investments | |||||||||||
| Other Non-Current Assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Equity | |||||||||||
| Liabilities | |||||||||||
| Current Liabilities | |||||||||||
| Accounts Payable | $ | $ | |||||||||
| Accrued Taxes | |||||||||||
| Accrued Interest | |||||||||||
| Long-Term Debt Due Within One Year | |||||||||||
| Other | |||||||||||
| Total Current Liabilities | |||||||||||
| Long-Term Debt | |||||||||||
| Deferred Income Taxes | |||||||||||
| Regulatory Liabilities | |||||||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | |||||||||||
| Other Non-Current Liabilities | |||||||||||
| Total Liabilities | |||||||||||
| Commitments, Guarantees and Contingencies (Note 6) | |||||||||||
| Equity | |||||||||||
| ALLETE Equity | |||||||||||
| Common Stock Without Par Value, 80.0 Shares Authorized, 52.6 and 52.1 Shares Issued and Outstanding | |||||||||||
| Accumulated Other Comprehensive Loss | ( | ( | |||||||||
| Retained Earnings | |||||||||||
| Total ALLETE Equity | |||||||||||
| Non-Controlling Interest in Subsidiaries | |||||||||||
| Total Equity | |||||||||||
| Total Liabilities and Equity | $ | $ | |||||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
6
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Millions Except Per Share Amounts | |||||||||||||||||
| Operating Revenue | |||||||||||||||||
| Contracts with Customers – Utility | $ | $ | $ | $ | |||||||||||||
| Contracts with Customers – Non-utility | |||||||||||||||||
| Other – Non-utility | |||||||||||||||||
| Total Operating Revenue | |||||||||||||||||
| Operating Expenses | |||||||||||||||||
| Fuel, Purchased Power and Gas – Utility | |||||||||||||||||
| Transmission Services – Utility | |||||||||||||||||
| Cost of Sales – Non-utility | |||||||||||||||||
| Operating and Maintenance | |||||||||||||||||
| Depreciation and Amortization | |||||||||||||||||
| Taxes Other than Income Taxes | |||||||||||||||||
| Total Operating Expenses | |||||||||||||||||
| Operating Income | |||||||||||||||||
| Other Income (Expense) | |||||||||||||||||
| Interest Expense | ( | ( | ( | ( | |||||||||||||
| Equity Earnings | |||||||||||||||||
| Other | |||||||||||||||||
| Total Other Expense | ( | ( | ( | ( | |||||||||||||
| Income Before Income Taxes | |||||||||||||||||
| Income Tax Benefit | ( | ( | ( | ( | |||||||||||||
| Net Income | |||||||||||||||||
| Net Loss Attributable to Non-Controlling Interest | ( | ( | ( | ( | |||||||||||||
| Net Income Attributable to ALLETE | $ | $ | $ | $ | |||||||||||||
| Average Shares of Common Stock | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
| Basic Earnings Per Share of Common Stock | $ | $ | $ | $ | |||||||||||||
| Diluted Earnings Per Share of Common Stock | $ | $ | $ | $ | |||||||||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
7
ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Millions | |||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Other Comprehensive Income | |||||||||||||||||||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | |||||||||||||||||||||||
| Net of Income Tax Expense of $0.1, $0.1, $0.4 and $0.2 | |||||||||||||||||||||||
| Total Other Comprehensive Income | |||||||||||||||||||||||
| Total Comprehensive Income | |||||||||||||||||||||||
| Net Loss Attributable to Non-Controlling Interest | ( | ( | ( | ( | |||||||||||||||||||
| Total Comprehensive Income Attributable to ALLETE | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
8
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Millions | |||||||||||
| Operating Activities | |||||||||||
| Net Income | $ | $ | |||||||||
| AFUDC – Equity | ( | ( | |||||||||
| Income from Equity Investments – Net of Dividends | ( | ||||||||||
| Gain on Investments and Property, Plant and Equipment | ( | ||||||||||
| Depreciation Expense | |||||||||||
| Amortization of PSAs | ( | ( | |||||||||
| Amortization of Other Intangible Assets and Other Assets | |||||||||||
| Deferred Income Tax Benefit | ( | ( | |||||||||
| Share-Based and ESOP Compensation Expense | |||||||||||
| Defined Benefit Pension and Postretirement Benefit Expense | |||||||||||
| Provision for Interim Rate Refund | |||||||||||
| Payments for Tax Reform Refund | ( | ||||||||||
| Bad Debt Expense | |||||||||||
| Changes in Operating Assets and Liabilities | |||||||||||
| Accounts Receivable | |||||||||||
| Inventories | ( | ( | |||||||||
| Prepayments and Other | |||||||||||
| Accounts Payable | |||||||||||
| Other Current Liabilities | |||||||||||
| Cash Contributions to Defined Benefit Pension Plans | ( | ( | |||||||||
| Changes in Regulatory and Other Non-Current Assets | ( | ( | |||||||||
| Changes in Regulatory and Other Non-Current Liabilities | ( | ( | |||||||||
| Cash from Operating Activities | |||||||||||
| Investing Activities | |||||||||||
| Proceeds from Sale of Available-for-sale Securities | |||||||||||
| Payments for Purchase of Available-for-sale Securities | ( | ( | |||||||||
| Payments for Equity Method Investments | ( | ( | |||||||||
| Additions to Property, Plant and Equipment | ( | ( | |||||||||
| Other Investing Activities | |||||||||||
| Cash for Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Proceeds from Issuance of Common Stock | |||||||||||
| Proceeds from Issuance of Short-Term and Long-Term Debt | |||||||||||
| Repayments of Short-Term and Long-Term Debt | ( | ( | |||||||||
| Proceeds from Non-Controlling Interest in Subsidiaries | |||||||||||
| Dividends on Common Stock | ( | ( | |||||||||
| Other Financing Activities | ( | ( | |||||||||
| Cash from Financing Activities | |||||||||||
| Change in Cash, Cash Equivalents and Restricted Cash | ( | ||||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period | |||||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Period | $ | $ | |||||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
9
ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||
| Millions Except Per Share Amounts | |||||||||||||||||
| Common Stock | |||||||||||||||||
| Balance, Beginning of Period | $ | $ | $ | $ | |||||||||||||
| Common Stock Issued | |||||||||||||||||
| Balance, End of Period | |||||||||||||||||
| Accumulated Other Comprehensive Loss | |||||||||||||||||
| Balance, Beginning of Period | ( | ( | ( | ( | |||||||||||||
| Other Comprehensive Income - Net of Income Taxes | |||||||||||||||||
| Defined Benefit Pension and Other Postretirement Plans | |||||||||||||||||
| Balance, End of Period | ( | ( | ( | ( | |||||||||||||
| Retained Earnings | |||||||||||||||||
| Balance, Beginning of Period | |||||||||||||||||
| Net Income Attributable to ALLETE | |||||||||||||||||
| Common Stock Dividends | ( | ( | ( | ( | |||||||||||||
| Balance, End of Period | |||||||||||||||||
| Non-Controlling Interest in Subsidiaries | |||||||||||||||||
| Balance, Beginning of Period | |||||||||||||||||
| Proceeds from Non-Controlling Interest in Subsidiaries | |||||||||||||||||
| Net Loss Attributable to Non-Controlling Interest | ( | ( | ( | ( | |||||||||||||
| Distributions to Non-Controlling Interest | ( | ( | |||||||||||||||
| Balance, End of Period | |||||||||||||||||
| Total Equity | $ | $ | $ | $ | |||||||||||||
| Dividends Per Share of Common Stock | $ | $ | $ | $ | |||||||||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
10
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 nine months ended September 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 September 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 | September 30, 2021 | December 31, 2020 | September 30, 2020 | December 31, 2019 | |||||||||||||||||||
| Millions | |||||||||||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Restricted Cash included in Prepayments and Other | |||||||||||||||||||||||
| Restricted Cash included in Other Non-Current Assets | |||||||||||||||||||||||
| Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $ | $ | $ | $ | |||||||||||||||||||
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 | September 30, 2021 | December 31, 2020 | |||||||||
| Millions | |||||||||||
Fuel (a) | $ | $ | |||||||||
| Materials and Supplies | |||||||||||
Construction of Wind Energy Facilities (b) | |||||||||||
| Total Inventories – Net | $ | $ | |||||||||
(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 Other Current Liabilities.)
ALLETE, Inc. Third Quarter 2021 Form 10-Q
11
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Other Non-Current Assets | September 30, 2021 | December 31, 2020 | |||||||||
| Millions | |||||||||||
Contract Assets (a) | $ | $ | |||||||||
| Operating Lease Right-of-use Assets | |||||||||||
| ALLETE Properties | |||||||||||
| Restricted Cash | |||||||||||
| Other Postretirement Benefit Plans | |||||||||||
| Other | |||||||||||
| Total Other Non-Current Assets | $ | $ | |||||||||
| Other Current Liabilities | September 30, 2021 | December 31, 2020 | |||||||||
| Millions | |||||||||||
Customer Deposits (a) | $ | $ | |||||||||
| PSAs | |||||||||||
| Fuel Adjustment Clause | |||||||||||
| Operating Lease Liabilities | |||||||||||
| Other | |||||||||||
| Total Other Current Liabilities | $ | $ | |||||||||
(a) Primarily related to deposits received by ALLETE Clean Energy for the Northern Wind and Red Barn wind projects which are expected be sold in late 2022. (See Inventories – Net.)
| Other Non-Current Liabilities | September 30, 2021 | December 31, 2020 | |||||||||
| Millions | |||||||||||
Asset Retirement Obligation (a) | $ | $ | |||||||||
| PSAs | |||||||||||
| Operating Lease Liabilities | |||||||||||
| Other | |||||||||||
| Total Other Non-Current Liabilities | $ | $ | |||||||||
| Other Income | ||||||||
| Nine Months Ended September 30, | 2021 | 2020 | ||||||
| Millions | ||||||||
Pension and Other Postretirement Benefit Plan Non-Service Credits (a) | $ | $ | ||||||
| Interest and Investment Income | ||||||||
| AFUDC - Equity | ||||||||
| Other | ( | |||||||
| Total Other Income | $ | $ | ||||||
ALLETE, Inc. Third Quarter 2021 Form 10-Q
12
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Supplemental Statement of Cash Flows Information.
| Nine Months Ended September 30, | 2021 | 2020 | |||||||||
| Millions | |||||||||||
| Cash Paid for Interest – Net of Amounts Capitalized | $ | $ | |||||||||
| Noncash Investing and Financing Activities | |||||||||||
| Increase in Accounts Payable for Capital Additions to Property, Plant and Equipment | $( | $( | |||||||||
| Capitalized Asset Retirement Costs | $ | $ | |||||||||
| AFUDC–Equity | $ | $ | |||||||||
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.
On September 22, 2021, South Shore Energy, ALLETE’s non-rate regulated, Wisconsin subsidiary, entered into an agreement with a wholly-owned subsidiary of Basin pursuant to which South Shore Energy agreed to sell to Basin a portion of its interest in NTEC for approximately $20 million representing reimbursement of current costs plus a fee for prior development costs and risks incurred. Pursuant to this transaction, which closed on October 1, 2021, South Shore Energy sold a portion of its undivided ownership interest in NTEC to Basin, such that, South Shore Energy now owns a 20 percent undivided ownership interest in NTEC, Basin owns a 30 percent undivided ownership interest in NTEC and Dairyland Power Cooperative continues to own a 50 percent undivided ownership interest in NTEC. The closing of the transaction resulted in the recognition of an approximately $8.5 million after-tax gain recorded in Corporate and Other in the fourth quarter of 2021, related to prior development costs and risks incurred. NTEC is an approximately 600 MW proposed combined-cycle natural gas-fired generating facility to be built in Superior, Wisconsin. 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 South Shore Energy’s portion is expected to be approximately $140 million. South Shore Energy’s portion of NTEC project costs incurred through September 30, 2021, is approximately $15 million of which approximately $8 million related to development costs sold to Basin.
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 $29.2 million for the nine months ended September 30, 2021 ($22.6 million for the nine months ended September 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.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
13
NOTE 2. REGULATORY MATTERS (Continued)
Electric Rates (Continued)
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.
2022 Minnesota General Rate Case. On November 1, 2021, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 18 percent for retail customers. The rate filing seeks a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $108 million in additional revenue. Once the filing is accepted as complete, an annual interim rate increase of approximately $87 million, subject to refund, which would be an average increase of approximately 14 percent for retail customers, is 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.
Minnesota Power Land Sales. In August 2020, Minnesota Power filed a petition with the MPUC for approval to sell land that surrounds several reservoirs on its hydroelectric system and is no longer required to maintain its operations. The land has an estimated value of approximately $100 million, and Minnesota Power proposed to credit ratepayers the net proceeds from the sales in a future rate case or through its renewable resources rider to mitigate future rate increases. At a hearing on October 14, 2021, the MPUC decided to allow the land sales to occur and the proceeds refunded to ratepayers subject to certain conditions and required compliance filings.
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.
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. On October 21, 2021, Minnesota Power submitted its 2022 solar factor filing. Upon approval of the filing, Minnesota Power will be authorized to include updated billing rates on customer bills.
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. In an order dated October 22, 2021, the MPUC approved Minnesota Power’s petition.
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 September 30, 2021, Minnesota Power has not deferred any costs or lost revenue, and SWL&P has deferred an immaterial amount of costs.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
14
NOTE 2. REGULATORY MATTERS (Continued)
Electric Rates (Continued)
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 (ALJ) for a contested case hearing to recommend to the MPUC if any of those costs should be returned to customers. On August 11, 2021, the ALJ recommended that Minnesota Power refund approximately $5 million to ratepayers; the ALJ’s recommendation is not binding on the MPUC. Minnesota Power submitted exceptions to the ALJ’s report to the MPUC stating that it disagreed with the ALJ’s recommendation and that no refund should be made as the Company operated its facilities in accordance with good utility practice. A decision from the MPUC is expected in the fourth quarter of 2021.
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, which was recognized in the third quarter of 2021 upon approval by the MPUC in an order dated September 7, 2021. In 2020, a CIP financial incentive of $2.4 million was recognized in the third quarter upon approval by the MPUC of Minnesota Power’s 2019 CIP consolidated filing. 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 mid-2022.
Nemadji Trail Energy Center. In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of a natural gas capacity dedication and other affiliated-interest agreements for NTEC, an approximately 600 MW proposed combined-cycle natural gas-fired generating facility to be built in Superior, Wisconsin, which will be jointly owned by Dairyland Power Cooperative, Basin and South Shore Energy, ALLETE’s non-rate regulated, Wisconsin subsidiary. Minnesota Power is expected to purchase approximately 20 percent of the facility's output starting in 2025 pursuant to the capacity dedication agreement. (See Note 1. Operations and Significant Accounting Policies – Subsequent Events.) 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. 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. On August 23, 2021, the Minnesota Court of Appeals affirmed the decision by the MPUC to approve certain affiliated-interest agreements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
15
NOTE 2. REGULATORY MATTERS (Continued)
Verso Corporation Electric Service Agreement. On August 2, 2021, Minnesota Power filed a petition with the MPUC requesting the MPUC to interpret the electric service agreement (ESA) between Minnesota Power and Verso Corporation finding that Verso Corporation has tariff obligations and owes minimum firm demand payments during the term of the ESA. Minnesota Power filed this petition in response to Verso Corporation ceasing to make its minimum firm demand payments under the ESA. At a hearing on October 14, 2021, the MPUC agreed with Minnesota Power’s petition and concluded that the MPUC has jurisdiction to interpret the relevant provisions of the ESA, and the ESA requires Verso Corporation to continue full minimum firm demand payments for a period of two years from the January 29, 2021, notice of termination, regardless of Minnesota Power’s electricity sales to a new customer at the former Verso Corporation facility. Minnesota Power has a receivable related to the ESA of approximately $1.2 million as of September 30, 2021. In addition, Verso Corporation owes Minnesota Power payments under a steam agreement, which is proceeding through arbitration. Minnesota Power has a receivable under the steam agreement of approximately $2.4 million as of September 30, 2021. Minnesota Power expects to fully collect these outstanding account receivable balances as well as Verso Corporation’s remaining obligations under the ESA.
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.
| Regulatory Assets and Liabilities | September 30, 2021 | December 31, 2020 | |||||||||
| Millions | |||||||||||
| Non-Current Regulatory Assets | |||||||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | $ | $ | |||||||||
| Income Taxes | |||||||||||
| Cost Recovery Riders | |||||||||||
| Asset Retirement Obligations | |||||||||||
| Fuel Adjustment Clause | |||||||||||
Manufactured Gas Plant | |||||||||||
| PPACA Income Tax Deferral | |||||||||||
| Boswell Units 1 and 2 Net Plant and Equipment | |||||||||||
| Other | |||||||||||
| Total Non-Current Regulatory Assets | $ | $ | |||||||||
Current Regulatory Liabilities (a) | |||||||||||
| Fuel Adjustment Clause | $ | $ | |||||||||
| Transmission Formula Rates Refund | |||||||||||
| Other | |||||||||||
| Total Current Regulatory Liabilities | |||||||||||
| Non-Current Regulatory Liabilities | |||||||||||
| Income Taxes | |||||||||||
| Wholesale and Retail Contra AFUDC | |||||||||||
| Plant Removal Obligations | |||||||||||
| North Dakota Investment Tax Credits | |||||||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | |||||||||||
| Conservation Improvement Program | |||||||||||
| Other | |||||||||||
| Total Non-Current Regulatory Liabilities | |||||||||||
| Total Regulatory Liabilities | $ | $ | |||||||||
(a)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet .
ALLETE, Inc. Third Quarter 2021 Form 10-Q
16
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.
| ALLETE’s Investment in ATC | |||||
| Millions | |||||
| Equity Investment Balance as of December 31, 2020 | $ | ||||
| Equity in ATC Earnings | |||||
| Distributed ATC Earnings | ( | ||||
| Amortization of the Remeasurement of Deferred Income Taxes | |||||
| Equity Investment Balance as of September 30, 2021 | $ | ||||
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. These FERC orders are subject to various outstanding legal challenges related to the refund period ordered by the FERC. If these legal challenges are successful, ATC may be required to provide refunds to its customers of up to approximately $66 million of which our share would be approximately $5 million pre-tax.
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 | $ | ||||
| Cash Investments | |||||
Equity in Nobles 2 Earnings (a) | ( | ||||
| Distributed Nobles 2 Earnings | ( | ||||
| Equity Investment Balance as of September 30, 2021 | $ | ||||
(a)The Company also recorded net loss attributable to non-controlling interest of $4.4 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 September 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. Third Quarter 2021 Form 10-Q
17
NOTE 4. FAIR VALUE (Continued)
| Fair Value as of September 30, 2021 | |||||||||||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Millions | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Investments (a) | |||||||||||||||||||||||
| Available-for-sale – Equity Securities | $ | $ | |||||||||||||||||||||
Available-for-sale – Corporate and Governmental Debt Securities (b) | $ | ||||||||||||||||||||||
| Cash Equivalents | |||||||||||||||||||||||
| Total Fair Value of Assets | $ | $ | $ | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Deferred Compensation (c) | $ | $ | |||||||||||||||||||||
| Total Fair Value of Liabilities | $ | $ | |||||||||||||||||||||
| Total Net Fair Value of Assets (Liabilities) | $ | $( | $( | ||||||||||||||||||||
| 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 | $ | $ | |||||||||||||||||||||
| Available-for-sale – Corporate and Governmental Debt Securities | $ | ||||||||||||||||||||||
| Cash Equivalents | |||||||||||||||||||||||
| Total Fair Value of Assets | $ | $ | $ | ||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Deferred Compensation (c) | $ | $ | |||||||||||||||||||||