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, 2022
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, 2022
Index
ALLETE, Inc. Third Quarter 2022 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 | ||||
| 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 | ||||
| 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 | ||||
| kWh | 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. | ||||
| Moody’s | Moody’s Investors Service, Inc. | ||||
| MPCA | Minnesota Pollution Control Agency | ||||
| MPUC | Minnesota Public Utilities Commission | ||||
| MW | Megawatt(s) | ||||
| NAAQS | National Ambient Air Quality Standards | ||||
| New Energy | New Energy Equity LLC | ||||
| Nobles 2 | Nobles 2 Power Partners, LLC | ||||
| NOL | Net Operating Loss | ||||
NOX | Nitrogen Oxides | ||||
ALLETE, Inc. Third Quarter 2022 Form 10-Q
3
| Abbreviation or Acronym | Term | ||||
| 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. Third Quarter 2022 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 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. Third Quarter 2022 Form 10-Q
5
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
| September 30, 2022 | December 31, 2021 | ||||||||||
| Millions | |||||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
| Accounts Receivable (Less Allowance of $1.5 and $1.8) | |||||||||||
| Inventories – Net | |||||||||||
| Prepayments and Other | |||||||||||
| Total Current Assets | |||||||||||
| Property, Plant and Equipment – Net | |||||||||||
| Regulatory Assets | |||||||||||
| Equity Investments | |||||||||||
| Goodwill and Intangible Assets – Net | |||||||||||
| 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 7) | |||||||||||
| Equity | |||||||||||
| ALLETE Equity | |||||||||||
| Common Stock Without Par Value, 80.0 Shares Authorized, 57.2 and 53.2 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 2022 Form 10-Q
6
ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| 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 2022 Form 10-Q
7
ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Millions | |||||||||||||||||||||||
| Net Income | $ | $ | $ | $ | |||||||||||||||||||
| Other Comprehensive Income (Loss) | |||||||||||||||||||||||
| Unrealized Loss on Securities | |||||||||||||||||||||||
| Net of Income Tax Expense of $–, $–, $(0.2) and $– | ( | ||||||||||||||||||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | |||||||||||||||||||||||
| Net of Income Tax Expense of $0.1, $0.1, $0.2 and $0.4 | |||||||||||||||||||||||
| 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 2022 Form 10-Q
8
ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Millions | |||||||||||
| Operating Activities | |||||||||||
| Net Income | $ | $ | |||||||||
| Adjustments to Reconcile Net Income to Cash provided by Operating Activities: | |||||||||||
| AFUDC – Equity | ( | ( | |||||||||
| Income from Equity Investments – Net of Dividends | |||||||||||
| Loss (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 (Benefit) | ( | ||||||||||
| Fuel Adjustment Clause | ( | ( | |||||||||
| Bad Debt Expense | |||||||||||
| Residential Interim Rate Adjustment | ( | ||||||||||
| 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 provided by Operating Activities | |||||||||||
| Investing Activities | |||||||||||
| Proceeds from Sale of Available-for-sale Securities | |||||||||||
| Payments for Purchase of Available-for-sale Securities | ( | ( | |||||||||
| Acquisition of Subsidiaries - Net of Cash & Restricted Cash Acquired | ( | ||||||||||
| Payments for Equity Method Investments | ( | ( | |||||||||
| Additions to Property, Plant and Equipment | ( | ( | |||||||||
| Other Investing Activities | |||||||||||
| Cash used in Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Proceeds from Issuance of Common Stock | |||||||||||
| Equity Issuance Costs | ( | ||||||||||
| 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 - Net | |||||||||||
| Dividends on Common Stock | ( | ( | |||||||||
| Other Financing Activities | ( | ( | |||||||||
| Cash provided by 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 2022 Form 10-Q
9
ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||
| 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 | |||||||||||||||||
| Unrealized Loss on Debt Securities | ( | ||||||||||||||||
| 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 | |||||||||||||||||
| 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 2022 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, 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 nine months ended September 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 September 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 | September 30, 2022 | December 31, 2021 | September 30, 2021 | December 31, 2020 | |||||||||||||||||||
| 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, 2022 | December 31, 2021 | |||||||||
| Millions | |||||||||||
Fuel (a) | $ | $ | |||||||||
| Materials and Supplies | |||||||||||
Renewable Energy Facilities Under Development (b) | |||||||||||
| Total Inventories – Net | $ | $ | |||||||||
(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. Third Quarter 2022 Form 10-Q
11
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Other Non-Current Assets | September 30, 2022 | December 31, 2021 | |||||||||
| 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, 2022 | December 31, 2021 | |||||||||
| Millions | |||||||||||
Customer Deposits (a) | $ | $ | |||||||||
| PSAs | |||||||||||
Manufactured Gas Plant (b) | |||||||||||
| Fuel Adjustment Clause | |||||||||||
| Operating Lease Liabilities | |||||||||||
Redeemable Non-Controlling Interest (c) | |||||||||||
| Other | |||||||||||
| Total Other Current Liabilities | $ | $ | |||||||||
(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 | September 30, 2022 | December 31, 2021 | |||||||||
| Millions | |||||||||||
Asset Retirement Obligation (a) | $ | $ | |||||||||
| PSAs | |||||||||||
Manufactured Gas Plant (b) | |||||||||||
| Operating Lease Liabilities | |||||||||||
| Other | |||||||||||
| Total Other Non-Current Liabilities | $ | $ | |||||||||
(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 September 30, 2022, ($28.5 million as of December 31, 2021).
ALLETE, Inc. Third Quarter 2022 Form 10-Q
12
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Quarter Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| Other Income | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Millions | |||||||||||||||||
Pension and Other Postretirement Benefit Plan Non-Service Credits (a) | $ | $ | $ | $ | |||||||||||||
| Interest and Investment Income (Loss) | ( | ( | ( | ||||||||||||||
| AFUDC - Equity | |||||||||||||||||
PSA Liability (b) | |||||||||||||||||
| Other | ( | ( | ( | ||||||||||||||
| Total Other Income | $ | $ | $ | $ | |||||||||||||
(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.
| Nine Months Ended September 30, | 2022 | 2021 | |||||||||
| Millions | |||||||||||
| Cash Paid for Interest – Net of Amounts Capitalized | $ | $ | |||||||||
| Noncash Investing and Financing Activities | |||||||||||
| Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment | $ | $( | |||||||||
Reclassification of Property, Plant and Equipment to Inventory (a) | $ | ||||||||||
| 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, 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.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
13
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 $19.5 million for the nine months ended September 30, 2022 ($29.2 million for the nine months ended September 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.
On September 1, 2022, the administrative law judge (ALJ) issued a report containing recommendations that if adopted in whole by the MPUC would result in an increase in rates of approximately $76 million on an annualized basis. On September 23, 2022, Minnesota Power filed exceptions totaling approximately $30 million to the ALJ’s report contesting certain recommendations. A final decision by the MPUC is expected in early 2023. Management has evaluated the need for a reserve for interim rate refunds and concluded that a reserve is not necessary as of September 30, 2022. 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 $23 million regulatory asset as of September 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.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
14
NOTE 2. REGULATORY MATTERS (Continued)
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 fourth quarter of 2022.
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. 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, 2022 | December 31, 2021 | |||||||||
| Millions | |||||||||||
Current Regulatory Assets (a) | |||||||||||
| Fuel Adjustment Clause | $ | ||||||||||
| Total Current Regulatory Assets | |||||||||||
| 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 | |||||||||||
| Residential Customer Interim Rate Adjustment | |||||||||||
| Other | |||||||||||
| Total Non-Current Regulatory Assets | |||||||||||
| Total Regulatory Assets | $ | $ | |||||||||
Current Regulatory Liabilities (b) | |||||||||||
| 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 | |||||||||||
| Boswell Units 1 and 2 Net Plant and Equipment | |||||||||||
| Regulated Land Sales | |||||||||||
| Other | |||||||||||
| Total Non-Current Regulatory Liabilities | |||||||||||
| Total Regulatory Liabilities | $ | $ | |||||||||
(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. Third Quarter 2022 Form 10-Q
15
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.
Since the acquisition in April 2022, aggregate revenue was $39.9 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 | $ | ||||
| Accounts Receivable | |||||
Inventory (a) | |||||
| Other Current Assets | |||||
| Property, Plant and Equipment - Net | |||||
Goodwill (b) | |||||
| Other Non-Current Assets | |||||
| Total Assets Acquired | $ | ||||
| Liabilities Assumed | |||||
| Current Liabilities | $ | ||||
| Long-Term Debt Due Within One Year | |||||
| Long-Term Debt | |||||
| Other Non-Current Liabilities | |||||
| Total Liabilities Assumed | $ | ||||
| Net Identifiable Assets Acquired | $ | ||||
(a)Includes $11.6 million of purchase price accounting for certain projects under development at the time of acquisition.
(b)For tax purpose, the purchase price allocation resulted in $155.1 million of deductible goodwill .
During the third quarter of 2022, the Company recorded purchase accounting adjustments related to the acquisition of New Energy which resulted in an increase to net liabilities of $6.2 million, current assets increased by $1.4 million and goodwill increased by $4.8 million.
Acquisition-related costs were $2.6 million after-tax, expensed as incurred during 2022 and recorded in Operating and Maintenance on the Consolidated Statement of Income.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
16
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 | $ | ||||
| Cash Investments | |||||
| Equity in ATC Earnings | |||||
| Distributed ATC Earnings | ( | ||||
| Amortization of the Remeasurement of Deferred Income Taxes | |||||
| Equity Investment Balance as of September 30, 2022 | $ | ||||
ATC’s authorized return on equity was 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 was subject to various outstanding legal challenges related to the return on equity calculation and refund period ordered by the FERC. On August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded the 2020 FERC order back to FERC. As a result of this decision, ATC recorded a reserve in the third quarter of 2022 for anticipated refunds to its customers for approximately $31 million of which our s