SEC Filing | ALLETE, Inc.

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ale-20220630

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, 2022


☐			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,

57,071,967 shares outstanding

as of June 30, 2022

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	14
		Note 3. Acquisitions	16
		Note 4 . Equity Investments	17

		Note 5 . Fair Value	17
		Note 6 . Short-Term and Long-Term Debt	19
		Note 7 . Commitments, Guarantees and Contingencies	20
		Note 8 . Earnings Per Share and Common Stock	26
		Note 9 . Income Tax Expense	26

		Note 1 0 . Pension and Other Postretirement Benefit Plans	28
		Note 1 1 . Business Segments	28
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
		Comparison of the Quarters Ended	32
		Comparison of the Six Months Ended	36
		Critical Accounting Policies	39
		Outlook	40
		Liquidity and Capital Resources	42
		Other	44
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

	Item 4.	Controls and Procedures	45

Part II.	Other Information

	Item 1.	Legal Proceedings	46

	Item 1A.	Risk Factors	46

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

	Item 3.	Defaults Upon Senior Securities	46

	Item 4.	Mine Safety Disclosures	46

	Item 5.	Other Information	46

	Item 6.	Exhibits	47

Signatures			48

ALLETE, Inc. Second Quarter 2022 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


Cliffs			Cleveland-Cliffs Inc.

Company			ALLETE, Inc. and its subsidiaries

COVID-19			2019 novel coronavirus
CSAPR			Cross-State Air Pollution Rule
DC			Direct Current


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



Hibbing Taconite			Hibbing Taconite Co.

Invest Direct			ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
IRP			Integrated Resource Plan
Item ___			Item ___ of this Form 10-Q

kW / kWh			Kilowatt(s) / Kilowatt-hour(s)
Laskin			Laskin Energy Center
Lampert Capital Markets			Lampert Capital Markets, Inc.




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
MPUC			Minnesota Public Utilities Commission
MW / MWh			Megawatt(s) / Megawatt-hour(s)
NAAQS			National Ambient Air Quality Standards

New Energy			New Energy Equity LLC
Nobles 2			Nobles 2 Power Partners, LLC
NOL			Net Operating Loss

ALLETE, Inc. Second Quarter 2022 Form 10-Q


Abbreviation or Acronym			Term
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




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
ST Paper			ST Paper LLC
SWL&P			Superior Water, Light and Power Company
Taconite Harbor			Taconite Harbor Energy Center






U.S.			United States of America
USS Corporation			United States Steel Corporation

ALLETE, Inc. Second Quarter 2022 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 or changes in tax rates or policies;

•changes in rates of inflation or availability of key materials and supplies;

•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 deteriorate; 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 2021 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 2022 Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

ALLETE

CONSOLIDATED BALANCE SHEET

Unaudited


	June 30, 2022	December 31, 2021
Millions
Assets
Current Assets
Cash and Cash Equivalents	$74.6	$45.1
Accounts Receivable (Less Allowance of $1.8 and $1.8)	116.2	123.7
Inventories – Net	355.8	97.7
Prepayments and Other	113.4	24.8
Total Current Assets	660.0	291.3
Property, Plant and Equipment – Net	5,027.1	5,100.2
Regulatory Assets	470.9	511.8
Equity Investments	322.0	318.0

Goodwill and Intangible Assets – Net	151.1	0.8
Other Non-Current Assets	207.9	212.9
Total Assets	$6,839.0	$6,435.0
Liabilities and Equity
Liabilities
Current Liabilities
Accounts Payable	$134.8	$111.0
Accrued Taxes	52.7	65.1
Accrued Interest	20.3	20.1
Long-Term Debt Due Within One Year	390.5	214.2

Other	110.7	133.0
Total Current Liabilities	709.0	543.4
Long-Term Debt	1,595.6	1,763.2
Deferred Income Taxes	181.8	185.7
Regulatory Liabilities	532.6	536.1
Defined Benefit Pension and Other Postretirement Benefit Plans	174.6	179.5
Other Non-Current Liabilities	286.5	280.8
Total Liabilities	3,480.1	3,488.7
Commitments, Guarantees and Contingencies (Note 7)
Equity
ALLETE Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 57.1 and 53.2 Shares Issued and Outstanding	1,771.7	1,536.7

Accumulated Other Comprehensive Loss	(23.9)	(23.8)
Retained Earnings	932.6	900.2
Total ALLETE Equity	2,680.4	2,413.1
Non-Controlling Interest in Subsidiaries	678.5	533.2
Total Equity	3,358.9	2,946.3
Total Liabilities and Equity	$6,839.0	$6,435.0

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF INCOME

Unaudited


	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2022	2021	2022	2021
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility	$308.7	$290.4	$637.7	$583.4
Contracts with Customers – Non-utility	62.1	42.3	113.8	85.7
Other – Non-utility	2.3	2.9	5.1	5.7

Total Operating Revenue	373.1	335.6	756.6	674.8
Operating Expenses
Fuel, Purchased Power and Gas – Utility	143.2	128.9	280.6	249.3
Transmission Services – Utility	18.3	19.2	38.2	36.9
Cost of Sales – Non-utility	41.5	15.8	58.5	32.6
Operating and Maintenance	79.6	67.1	154.9	133.4
Depreciation and Amortization	61.0	57.9	122.7	115.9
Taxes Other than Income Taxes	15.8	18.5	34.6	36.5
Total Operating Expenses	359.4	307.4	689.5	604.6
Operating Income	13.7	28.2	67.1	70.2
Other Income (Expense)
Interest Expense	(18.6)	(17.4)	(36.9)	(34.5)
Equity Earnings	5.3	5.1	10.8	9.9

Other	12.1	1.8	14.1	5.1
Total Other Expense	(1.2)	(10.5)	(12.0)	(19.5)
Income Before Income Taxes	12.5	17.7	55.1	50.7
Income Tax Benefit	(8.3)	(4.0)	(12.2)	(14.4)
Net Income	20.8	21.7	67.3	65.1
Net Loss Attributable to Non-Controlling Interest	(16.8)	(6.2)	(36.6)	(14.6)
Net Income Attributable to ALLETE	$37.6	$27.9	$103.9	$79.7
Average Shares of Common Stock
Basic	56.1	52.2	54.9	52.2
Diluted	56.1	52.3	54.9	52.2
Basic Earnings Per Share of Common Stock	$0.67	$0.53	$1.89	$1.53
Diluted Earnings Per Share of Common Stock	$0.67	$0.53	$1.89	$1.53

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Unaudited


	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2022	2021	2022	2021
Millions
Net Income	$20.8	$21.7	$67.3	$65.1
Other Comprehensive Income (Loss)


Unrealized Loss on Securities
Net of Income Tax Expense of $(0.2), $–, $(0.2) and $–	(0.1)	—	(0.4)	—


Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense of $–, $0.2, $0.1 and $0.3	0.2	0.4	0.3	0.8
Total Other Comprehensive Income (Loss)	0.1	0.4	(0.1)	0.8
Total Comprehensive Income	20.9	22.1	67.2	65.9
Net Loss Attributable to Non-Controlling Interest	(16.8)	(6.2)	(36.6)	(14.6)
Total Comprehensive Income Attributable to ALLETE	$37.7	$28.3	$103.8	$80.5

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF CASH FLOWS

Unaudited


	Six Months Ended
	June 30,
	2022	2021
Millions
Operating Activities
Net Income	$67.3	$65.1
Adjustments to Reconcile Net Income to Cash (used in) provided by Operating Activities:
AFUDC – Equity	(1.7)	(1.1)
Income from Equity Investments – Net of Dividends	0.6	1.1
Loss (Gain) on Investments and Property, Plant and Equipment	1.4	(0.7)
Depreciation Expense	122.7	115.8
Amortization of PSAs	(5.1)	(5.7)
Amortization of Other Intangible Assets and Other Assets	4.3	5.1
Deferred Income Tax Benefit	(12.3)	(14.4)
Share-Based and ESOP Compensation Expense	2.7	3.1

Defined Benefit Pension and Postretirement Benefit Expense (Benefit)	(1.4)	2.2



Bad Debt Expense	0.8	0.6

Fuel Adjustment Clause	(18.8)	(18.3)
Residential Interim Rate Adjustment	(3.8)	—
Changes in Operating Assets and Liabilities
Accounts Receivable	8.2	5.7
Inventories	(168.2)	(13.9)
Prepayments and Other	(8.7)	1.7
Accounts Payable	17.8	(1.2)
Other Current Liabilities	(27.7)	(13.0)
Cash Contributions to Defined Benefit Pension Plans	—	(10.3)
Changes in Regulatory and Other Non-Current Assets	16.9	(7.3)
Changes in Regulatory and Other Non-Current Liabilities	(2.9)	(8.8)
Cash (used in) provided by Operating Activities	(7.9)	105.7
Investing Activities
Proceeds from Sale of Available-for-sale Securities	1.2	2.6
Payments for Purchase of Available-for-sale Securities	(1.2)	(2.0)
Acquisition of Subsidiaries - Net of Cash & Restricted Cash Acquired	(155.0)	—
Payments for Equity Method Investments	(3.9)	(17.1)


Additions to Property, Plant and Equipment	(89.5)	(293.4)


Other Investing Activities	1.2	4.2
Cash used in Investing Activities	(247.2)	(305.7)
Financing Activities
Proceeds from Issuance of Common Stock	240.4	10.1
Equity Issuance Costs	(8.1)	—
Proceeds from Issuance of Short-Term and Long-Term Debt	475.3	379.0

Repayments of Short-Term and Long-Term Debt	(501.6)	(149.3)
Proceeds from Non-Controlling Interest in Subsidiaries - Net	155.7	28.9


Dividends on Common Stock	(71.5)	(65.7)
Other Financing Activities	(1.1)	(0.9)
Cash provided by Financing Activities	289.1	202.1
Change in Cash, Cash Equivalents and Restricted Cash	34.0	2.1
Cash, Cash Equivalents and Restricted Cash at Beginning of Period	47.7	65.2
Cash, Cash Equivalents and Restricted Cash at End of Period	$81.7	$67.3

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF EQUITY

Unaudited


	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2022	2021	2022	2021
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period	$1,541.3	$1,467.6	$1,536.7	$1,460.9
Common Stock Issued	230.4	6.5	235.0	13.2

Balance, End of Period	1,771.7	1,474.1	1,771.7	1,474.1

Accumulated Other Comprehensive Loss
Balance, Beginning of Period	(24.0)	(30.7)	(23.8)	(31.1)
Other Comprehensive Income - Net of Income Taxes
Unrealized Loss on Debt Securities	(0.1)	—	(0.4)	—
Defined Benefit Pension and Other Postretirement Plans	0.2	0.4	0.3	0.8
Balance, End of Period	(23.9)	(30.3)	(23.9)	(30.3)

Retained Earnings
Balance, Beginning of Period	932.0	883.8	900.2	864.8
Net Income Attributable to ALLETE	37.6	27.9	103.9	79.7
Common Stock Dividends	(37.0)	(32.9)	(71.5)	(65.7)

Balance, End of Period	932.6	878.8	932.6	878.8

Non-Controlling Interest in Subsidiaries
Balance, Beginning of Period	694.2	525.7	533.2	505.6
Proceeds from Non-Controlling Interest in Subsidiaries - Net	1.7	—	182.9	28.9
Net Loss Attributable to Non-Controlling Interest	(16.8)	(6.2)	(36.6)	(14.6)

Distributions to Non-Controlling Interest	(0.6)	(0.2)	(1.0)	(0.6)
Balance, End of Period	678.5	519.3	678.5	519.3

Total Equity	$3,358.9	$2,841.9	$3,358.9	$2,841.9

Dividends Per Share of Common Stock	$0.65	$0.63	$1.30	$1.26

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2022 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, 2021, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. The presentation of certain prior period amounts on the Consolidated Financial Statements have been adjusted for comparative purposes. 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, 2022, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2022. For further information, refer to the Consolidated Financial Statements and notes included in our 2021 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, 2022, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under ALLETE Clean Energy loan and tax equity financing agreements. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under an ALLETE Clean Energy loan agreement 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, 2022	December 31, 2021	June 30, 2021	December 31, 2020
Millions
Cash and Cash Equivalents	$74.6	$45.1	$62.5	$44.3
Restricted Cash included in Prepayments and Other	0.8	0.3	1.6	0.8
Restricted Cash included in Other Non-Current Assets	6.3	2.3	3.2	20.1
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows	$81.7	$47.7	$67.3	$65.2

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, 2022	December 31, 2021
Millions
Fuel (a)	$35.5	$18.7
Materials and Supplies	67.6	56.1
Renewable Energy Facilities Under Development (b)	252.7	22.9



Total Inventories – Net	$355.8	$97.7

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

(b) Renewable Energy Facilities Under Development consists primarily of project costs related to ALLETE Clean Energy’s Northern Wind, Rock Aetna, and Red Barn wind projects which are expected to be sold in late 2022 and early 2023, respectively. (See Other Current Liabilities.)

ALLETE, Inc. Second Quarter 2022 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)


Other Non-Current Assets	June 30, 2022	December 31, 2021
Millions
Contract Assets (a)	$22.1	$23.3

Operating Lease Right-of-use Assets	15.1	16.4
ALLETE Properties	18.1	19.4
Restricted Cash	6.3	2.3
Other Postretirement Benefit Plans	66.0	64.8
Other	80.3	86.7
Total Other Non-Current Assets	$207.9	$212.9

(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, 2022	December 31, 2021
Millions

Customer Deposits (a)	$28.5	$27.2
PSAs	6.1	12.6



Manufactured Gas Plant (b)	1.9	12.8
Fuel Adjustment Clause	—	5.0
Operating Lease Liabilities	4.3	4.8
Redeemable Non-Controlling Interest (c)	—	30.6
Other	69.9	40.0
Total Other Current Liabilities	$110.7	$133.0

(a) Primarily related to deposits received by ALLETE Clean Energy for the Northern Wind, Rock Aetna and Red Barn wind projects which are expected to be sold in late 2022 and early 2023, respectively. (See Inventories – Net.)

(b) The manufactured gas plant represents the current liability for remediation of a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P.

(c) Amount reclassified from Non-Controlling Interest in Subsidiaries resulting from the exercise of an option to buy out a non-controlling interest, which was paid in the first quarter of 2022.


Other Non-Current Liabilities	June 30, 2022	December 31, 2021
Millions
Asset Retirement Obligation (a)	$196.5	$184.5
PSAs	30.0	39.5

Manufactured Gas Plant (b)	16.1	5.2
Operating Lease Liabilities	10.7	11.6
Other	33.2	40.0
Total Other Non-Current Liabilities	$286.5	$280.8

(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 $28.5 million in Other Non-Current Assets on the Consolidated Balance Sheet as of June 30, 2022, ($28.5 million as of December 31, 2021).

(b)The manufactured gas plant represents the non-current liability for remediation of a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)


Other Income
Six Months Ended June 30,	2022	2021
Millions
Pension and Other Postretirement Benefit Plan Non-Service Credits (a)	$5.3	$2.8
Interest and Investment Income (Loss)	(0.9)	1.8
AFUDC - Equity	1.7	1.1
PSA Liability (b)	10.2	—
Other	(2.2)	(0.6)
Total Other Income	$14.1	$5.1

(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 10. Pension and Other Postretirement Benefit Plans.)

(b)The gain on removal of the PSA liability for the Northern Wind project upon decommissioning of the legacy wind energy facility assets, which was fully offset by a reserve for an anticipated loss on the sale of the Northern Wind project.

Supplemental Statement of Cash Flows Information.


Six Months Ended June 30,	2022	2021
Millions
Cash Paid for Interest – Net of Amounts Capitalized	$35.6	$33.8

Noncash Investing and Financing Activities

Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment	$3.1	$(8.8)
Reclassification of Property, Plant and Equipment to Inventory (a)	$78.6	—
Capitalized Asset Retirement Costs	$8.8	$3.5
AFUDC–Equity	$1.7	$1.1

(a)The decommissioning of the existing Northern Wind assets resulted in a reclassification from Property, Plant and Equipment – Net to Inventories – Net in the second quarter of 2022 as they are being sold to a subsidiary of Xcel Energy Inc.

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, 303 MW Diamond Spring and 303 MW Caddo 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.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

NOTE 2. REGULATORY MATTERS

Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2021 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 $11.9 million for the six months ended June 30, 2022 ($22.1 million for the six months ended June 30, 2021).

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. In orders dated December 30, 2021, the MPUC accepted the filing as complete and authorized an annual interim rate increase beginning January 1, 2022, with approximately $80 million expected to be collected in cash and approximately $8 million of interim rates for residential customers deferred with a final determination on recovery at the end of the rate case. We cannot predict the level of final rates that may be authorized by the MPUC.

2022 Wisconsin General Rate Case. On June 1, 2022, SWL&P refiled its rate increase request with the PSCW seeking an average increase of 3.6 percent for retail customers. The filing seeks an overall return on equity of 10.4 percent and a 55 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $4.3 million in additional revenue.

Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place to charge retail customers on a current basis for the costs of certain renewable investments and expenditures, including a return on the capital invested. Current customer billing rates for the renewable cost recovery rider were approved by the MPUC in a 2020 order. On February 2, 2022, Minnesota Power submitted its 2022 renewable factor filing, which included a request to recover a regulatory asset of $3.8 million related to the recognition of production tax credits due to a metering error at Bison. If the filing is approved, Minnesota Power would be authorized to include updated billing rates on customer bills; any portion disallowed would be charged to earnings.

Fuel Adjustment Clause. In 2020, Minnesota Power filed its fuel adjustment forecast for 2021, which was approved by the MPUC in a December 2020 order, subject to the annual prudence review and true-up filing in 2022. During 2021, Minnesota Power incurred higher fuel and purchased power costs than those forecasted in its May 2020 filing, which resulted in the recognition of an approximately $56 million regulatory asset through December 31, 2021. Minnesota Power submitted its annual true-up filing and a significant events filing in March 2022 requesting recovery of these under-collected fuel adjustment clause recoveries. No parties objected to the request; recovery of the regulatory asset began in April 2022 and will continue through mid-2023. The MPUC approved recovery of the regulatory asset in an order dated July 5, 2022.

Minnesota Power has also incurred higher fuel and purchased power costs in 2022 than those factored in its fuel adjustment forecast filed in May 2021 for 2022, which resulted in the recognition of an approximately $28 million regulatory asset as of June 30, 2022. Minnesota Power filed a significant events filing in June 2022 requesting recovery of the under-collected fuel adjustment clause recoveries that are expected for 2022 from August 2022 through December 2022. No parties objected to the request and higher rates were implemented in August 2022 to recover the expected under-collection of fuel adjustment clause recoveries, subject to final approval by the MPUC which is expected in 2023.

Conservation Improvement Program. On April 1, 2022, Minnesota Power submitted its 2021 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $1.9 million based upon MPUC procedures, which was recognized in the second quarter of 2022 upon approval by the MPUC at a hearing on June 30, 2022. In 2021, a CIP financial incentive of $2.4 million was recognized in the third quarter upon approval by the MPUC of Minnesota Power’s 2020 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 the second half of 2022.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

NOTE 2. REGULATORY MATTERS (Continued)

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	June 30, 2022	December 31, 2021
Millions
Current Regulatory Assets (a)
Fuel Adjustment Clause	$39.8	—
Total Current Regulatory Assets	39.8	—
Non-Current Regulatory Assets
Defined Benefit Pension and Other Postretirement Benefit Plans	220.1	$226.4
Income Taxes	100.7	104.7
Cost Recovery Riders	49.9	63.2
Asset Retirement Obligations	34.2	33.1
Fuel Adjustment Clause	34.7	56.4
Manufactured Gas Plant	17.6	17.0
PPACA Income Tax Deferral	4.2	4.3


Residential Customer Interim Rate Adjustment	3.8	—
Other	5.7	6.7
Total Non-Current Regulatory Assets	470.9	511.8
Total Regulatory Assets	$510.7	$511.8

Current Regulatory Liabilities (b)
Fuel Adjustment Clause	—	$5.0

Transmission Formula Rates Refund	$4.5	3.1
Other	1.1	0.5
Total Current Regulatory Liabilities	5.6	8.6
Non-Current Regulatory Liabilities
Income Taxes	341.7	353.4
Wholesale and Retail Contra AFUDC	82.2	83.7
Plant Removal Obligations	56.9	52.6
North Dakota Investment Tax Credits	13.6	12.2
Defined Benefit Pension and Other Postretirement Benefit Plans	25.0	28.1




Boswell Units 1 and 2 Net Plant and Equipment	2.8	0.4
Other	10.4	5.7
Total Non-Current Regulatory Liabilities	532.6	536.1
Total Regulatory Liabilities	$538.2	$544.7

(a)Current regulatory assets are presented within Prepayments and Other on the Consolidated Balance Sheet.

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

ALLETE, Inc. Second Quarter 2022 Form 10-Q

NOTE 3. ACQUISITIONS

2022 Activity

New Energy. On April 15, 2022, a wholly-owned subsidiary of ALLETE acquired 100 percent of the membership interests of New Energy for a purchase price of $165.5 million. Total consideration of approximately $158.8 million was paid in cash on the acquisition date, which is net of cash acquired and debt assumed. New Energy, which is headquartered in Annapolis, Maryland, is a renewable energy development company with a primary focus on solar and storage facilities while also offering comprehensive operations, maintenance and asset management services. The acquisition of New Energy is consistent with ALLETE’s stated strategy of additional investment in renewable energy and related infrastructure across North America to support the Company’s sustainability-in-action strategy while providing potential long-term earnings growth.

The acquisition was accounted for as a business combination and the purchase price was allocated based on the preliminary estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition, as shown in the following table. The allocation of the purchase price is subject to judgment and the preliminary estimated fair value of the assets acquired and the liabilities assumed may be adjusted when the valuation analysis is complete in subsequent periods. Preliminary estimates subject to adjustment in subsequent periods relate primarily to working capital; subsequent adjustments could impact the amount of goodwill recorded. Fair value measurements were valued primarily using the discounted cash flow method and replacement cost basis. The goodwill recorded is primarily attributable to the highly skilled workforce of New Energy and synergies expected to arise as a result of the acquisition.

Since the acquisition in April 2022, aggregate revenue was $16.8 million. The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and New Energy since the beginning of 2021, as the results of operations for New Energy are not material to the Company's consolidated financials.


Millions
Assets Acquired
Cash and Cash Equivalents												$3.9
Accounts Receivable												1.4
Inventory												23.2
Other Current Assets												13.2
Property, Plant and Equipment - Net												16.4
Goodwill (a)												150.3
Other Non-Current Assets												2.2
Total Assets Acquired												$210.6
Liabilities Assumed
Current Liabilities												$17.4
Long-Term Debt Due Within One Year												28.3
Long-Term Debt												5.9
Other Non-Current Liabilities												0.2
Total Liabilities Assumed												$51.8
Net Identifiable Assets Acquired												$158.8

(a)For tax purpose, the purchase price allocation resulted in $150.3 million of deductible goodwill.

Acquisition-related costs were approximately $3 million after-tax, expensed as incurred during 2022 and recorded in Operating and Maintenance on the Consolidated Statement of Income.

ALLETE, Inc. Second Quarter 2022 Form 10-Q

NOTE 4. 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, 2021			$154.5
Cash Investments			3.9
Equity in ATC Earnings			10.7
Distributed ATC Earnings			(8.6)
Amortization of the Remeasurement of Deferred Income Taxes			0.7
Equity Investment Balance as of June 30, 2022			$161.2

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 2020 FERC order which is 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. In addition, the FERC issued a Notice of Proposed Rulemaking in April 2021 proposing to limit the 50 basis point incentive adder for participation in a regional transmission organization to only the first three years of membership in such an organization. If this proposal is adopted, our equity in earnings from ATC would be reduced by approximately $1 million pre-tax annually.

Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns