ALLETE(ALE) - 2019 Q3 - Quarterly Report

Forward-Looking Statements This report contains forward-looking statements, qualified by identified risk factors, where actual results may materially differ from expectations - The report contains forward-looking statements involving risks and uncertainties, which could cause actual results to differ materially from expectations, qualified by factors identified in the report and 2018 Form 10-K[6][7][8] - Key factors impacting actual results include strategic objectives, economic conditions, regulatory changes, tax rates, legal proceedings, weather, capital markets, interest rates, project delays, operating expenses, commodity prices, personnel retention, emerging technology, geopolitical risks, acquisitions, population growth, power market conditions, regulatory actions, competition, climate change, renewable energy deployment, fuel pricing, customer expansion, real estate, and Energy Infrastructure business factors[7] Part I. Financial Information This section presents ALLETE, Inc.'s unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Consolidated Financial Statements - Unaudited This section presents ALLETE, Inc.'s unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and equity, along with detailed notes on operations, accounting policies, and segment performance Consolidated Balance Sheet This section presents ALLETE, Inc.'s consolidated balance sheet, detailing assets, liabilities, and equity as of September 30, 2019, and December 31, 2018 Consolidated Balance Sheet (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------|:-------------|:-------------| | Assets | | | | Total Current Assets | $296.1 | $334.3 | | Property, Plant & Equipment| $4,210.7 | $3,904.4 | | Regulatory Assets | $393.1 | $389.5 | | Equity Investments | $183.3 | $161.1 | | Goodwill & Intangible Assets| $1.0 | $223.3 | | Total Assets | $5,275.8 | $5,165.0 | | Liabilities & Equity | | | | Total Current Liabilities | $483.3 | $405.1 | | Long-Term Debt | $1,404.9 | $1,428.5 | | Total Liabilities | $3,068.0 | $3,009.2 | | Total Shareholders' Equity | $2,207.8 | $2,155.8 | | Total Liabilities & Equity | $5,275.8 | $5,165.0 | - Total assets increased by $110.8 million (2.1%) from December 31, 2018, to September 30, 2019, primarily driven by an increase in Property, Plant and Equipment, partially offset by a significant decrease in Goodwill and Intangible Assets due to the sale of U.S. Water Services[9][50] - Goodwill and Intangible Assets decreased from $223.3 million to $1.0 million, primarily due to the sale of U.S. Water Services on March 26, 2019[9][50] Consolidated Statement of Income This section presents ALLETE, Inc.'s consolidated statement of income, detailing revenues, expenses, and net income for the periods ended September 30, 2019, and 2018 Consolidated Statement of Income (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:----------------------------------|:--------|:--------|:--------|:--------| | Total Operating Revenue | $288.3 | $348.0 | $935.9 | $1,050.3| | Total Operating Expenses | $251.3 | $304.7 | $805.9 | $913.1 | | Operating Income | $37.0 | $43.3 | $130.0 | $137.2 | | Income Before Income Taxes | $28.8 | $31.1 | $131.6 | $104.3 | | Income Tax Expense (Benefit) | $(2.4) | $0.4 | $(4.3) | $(8.7) | | Net Income | $31.2 | $30.7 | $135.9 | $113.0 | | Basic EPS | $0.60 | $0.59 | $2.63 | $2.20 | | Diluted EPS | $0.60 | $0.59 | $2.63 | $2.19 | - Net income for the nine months ended September 30, 2019, increased to $135.9 million from $113.0 million in the prior year, primarily driven by a gain on the sale of U.S. Water Services and higher income tax benefits[10][120][124] - Total operating revenue for the nine months decreased by $114.4 million (10.9%) due to lower non-utility contracts, largely from the sale of U.S. Water Services[10][111][156] Consolidated Statement of Comprehensive Income This section presents ALLETE, Inc.'s consolidated statement of comprehensive income, detailing net income and other comprehensive income components for the periods ended September 30, 2019, and 2018 Consolidated Statement of Comprehensive Income (Millions) | Millions | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:---------------------------------------------|:--------|:--------|:--------|:--------| | Net Income | $31.2 | $30.7 | $135.9 | $113.0 | | Other Comprehensive Income (Loss) | | | | | | Unrealized Gain (Loss) on Securities | — | — | $0.2 | $(0.1) | | Defined Benefit Pension & Other Postretirement Benefit Plans | $0.1 | $0.3 | $0.3 | $1.0 | | Total Other Comprehensive Income | $0.1 | $0.3 | $0.5 | $0.9 | | Total Comprehensive Income | $31.3 | $31.0 | $136.4 | $113.9 | - Total comprehensive income for the nine months ended September 30, 2019, increased to $136.4 million from $113.9 million in the prior year, primarily reflecting the increase in net income[11] Consolidated Statement of Cash Flows This section presents ALLETE, Inc.'s consolidated statement of cash flows, detailing cash movements from operating, investing, and financing activities for the periods ended September 30, 2019, and 2018 Consolidated Statement of Cash Flows (Millions) | Millions | 9M 2019 | 9M 2018 | |:---------------------------------------------|:--------|:--------| | Cash from Operating Activities | $176.4 | $298.1 | | Cash for Investing Activities | $(160.0)| $(207.8)| | Cash from (for) Financing Activities | $39.8 | $(58.9) | | Change in Cash, Cash Equivalents & Restricted Cash | $56.2 | $31.4 | | Cash, Cash Equivalents & Restricted Cash at End of Period | $135.2 | $141.5 | - Cash from operating activities decreased to $176.4 million in 9M 2019 from $298.1 million in 9M 2018, primarily due to refunds of tax reform and interim rates to customers, fewer customer deposits, and lower cost recovery rider recoveries, partially offset by timing of accounts receivable collections[12][212] - Cash used for investing activities decreased to $160.0 million in 9M 2019 from $207.8 million in 9M 2018, mainly due to proceeds from the sale of U.S. Water Services, partially offset by higher additions to property, plant and equipment[12][213] - Cash from financing activities significantly improved to $39.8 million in 9M 2019 from a use of $58.9 million in 9M 2018, primarily due to higher proceeds from the issuance of long-term debt[12][213] Consolidated Statement of Shareholders' Equity This section presents ALLETE, Inc.'s consolidated statement of shareholders' equity, detailing changes in equity components for the periods ended September 30, 2019, and 2018 Consolidated Statement of Shareholders' Equity (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | Sep 30, 2019 | Sep 30, 2018 | |:----------------------------------|:-------------|:-------------| | Common Stock, End of Period | $1,435.1 | $1,421.1 | | Accumulated Other Comprehensive Loss, End of Period | $(26.8) | $(27.3) | | Retained Earnings, End of Period | $799.5 | $722.3 | | Total Shareholders' Equity | $2,207.8 | $2,116.1 | | Dividends Per Share of Common Stock | $1.7625 | $1.68 | - Total Shareholders' Equity increased to $2,207.8 million as of September 30, 2019, from $2,116.1 million as of September 30, 2018, driven by an increase in retained earnings and common stock issued[14] - Dividends per share of common stock increased to $1.7625 for the nine months ended September 30, 2019, from $1.68 for the same period in 2018[14] Notes to Consolidated Financial Statements This section provides detailed notes to ALLETE, Inc.'s consolidated financial statements, explaining significant accounting policies, regulatory matters, and specific financial accounts Note 1. Operations and Significant Accounting Policies This note details ALLETE's significant accounting policies, including cash and restricted cash, inventory valuation, and the impact of new accounting pronouncements, particularly the adoption of new lease accounting guidance. It also covers the sale of U.S. Water Services and the acquisition of the Diamond Spring wind project Cash, Cash Equivalents and Restricted Cash (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------------------------|:-------------|:-------------| | Cash and Cash Equivalents | $100.3 | $69.1 | | Restricted Cash (Prepayments and Other) | $3.4 | $1.3 | | Restricted Cash (Other Non-Current Assets) | $31.5 | $8.6 | | Total Cash, Cash Equivalents and Restricted Cash | $135.2 | $79.0 | - ALLETE adopted new lease accounting guidance in Q1 2019, recognizing right-of-use assets and lease liabilities for leases over 12 months, with total operating lease right-of-use assets and liabilities at $30.4 million as of September 30, 2019[24][29] - ALLETE completed the sale of U.S. Water Services on March 26, 2019, receiving approximately $265 million in cash and recognizing an after-tax gain of $11.1 million, resulting in the removal of related inventory, goodwill, and intangible assets from the balance sheet[18][30][50] - ALLETE Clean Energy acquired the Diamond Spring wind project (300 MW) in Oklahoma on May 3, 2019, with construction expected to begin in late 2019 and complete in late 2020, fully contracted under long-term power sales agreements[31] Note 2. Regulatory Matters This note outlines key regulatory developments affecting ALLETE's Regulated Operations segment, including electric rate cases, cost recovery riders, and the Integrated Resource Plan. It also details changes in regulatory assets and liabilities - Minnesota Power filed a retail rate increase request with the MPUC on November 1, 2019, seeking an average increase of approximately 10.6% for retail customers, aiming for a 10.05% return on equity and a 53.81% equity ratio, with an annual interim rate increase of approximately $48 million expected within 60 days of filing acceptance[36] - The PSCW approved a rate increase for SWL&P effective January 1, 2019, including a 10.4% return on equity and a 55.0% equity ratio, expected to generate approximately $1.3 million in additional annualized revenue[37] - Minnesota Power's 2015 Integrated Resource Plan (IRP) was approved with modifications, including the retirement of Boswell Units 1 and 2 in Q4 2018 and plans to cease coal-fired operations at Taconite Harbor in 2020, with the next IRP filing due by October 1, 2020[41][182] Regulatory Assets and Liabilities (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------------------------|:-------------|:-------------| | Total Non-Current Regulatory Assets | $393.1 | $389.5 | | Total Current Regulatory Liabilities | $2.7 | $55.1 | | Total Non-Current Regulatory Liabilities | $510.4 | $512.1 | | Total Regulatory Liabilities | $513.1 | $567.2 | - Current regulatory liabilities decreased significantly from $55.1 million to $2.7 million, primarily due to the refund of the provision for interim rate refund ($40.0 million) and tax reform refund ($10.4 million) to Minnesota Power's customers in Q1 and Q2 2019[20][45][212] Note 3. Equity Investments This note details ALLETE's equity investments in American Transmission Company LLC (ATC) and Nobles 2, outlining investment balances, earnings, and future investment plans Equity Investments (Millions) | Millions | Sep 30, 2019 | |:---------------------------------------------|:-------------| | ALLETE's Investment in ATC | $136.9 | | Equity Investment in Nobles 2 | $46.4 | - ALLETE's equity investment in ATC increased to $136.9 million as of September 30, 2019, from $128.1 million at December 31, 2018, with $4.7 million invested in 9M 2019 and an additional $1.9 million in October 2019[46][47][193] - The equity investment in Nobles 2 increased to $46.4 million as of September 30, 2019, from $33.0 million at December 31, 2018, with Nobles 2 returning $8.3 million in capital in Q1 2019, and ALLETE expecting to make approximately $12 million in additional investments in 2019[49][207] Note 4. Goodwill and Intangible Assets This note details the changes in goodwill and intangible assets, primarily driven by the sale of U.S. Water Services, which resulted in the removal of associated goodwill and a significant portion of intangible assets - Goodwill was eliminated as of September 30, 2019, due to the sale of U.S. Water Services, compared to $148.5 million at December 31, 2018[50] Intangible Assets (Millions) | Millions | Dec 31, 2018 | Amortization | Other (b) | Sep 30, 2019 | |:-----------------------------|:-------------|:-------------|:----------|:-------------| | Total Definite-Lived Intangible Assets | $58.2 | $(1.5) | $(55.7) | $1.0 | | Total Indefinite-Lived Intangible Assets | $16.6 | — | $(16.6) | — | | Total Intangible Assets | $74.8 | $(1.5) | $(72.3) | $1.0 | - The sale of U.S. Water Services resulted in the removal of $72.3 million in intangible assets, including customer relationships and trademarks/trade names, with amortization expense for intangible assets at $1.5 million for the nine months ended September 30, 2019[50][51] Note 5. Fair Value This note describes ALLETE's fair value measurements for assets and liabilities, categorizing them into a three-level hierarchy based on input observability. It also provides fair value information for financial instruments and non-recurring measurements Fair Value of Assets and Liabilities (Millions) | Millions | Level 1 | Level 2 | Level 3 | Total | |:---------------------------------------------|:--------|:--------|:--------|:------| | Assets (Sep 30, 2019) | | | | | | Available-for-sale – Equity Securities | $10.6 | — | — | $10.6 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $9.6 | — | $9.6 | | Cash Equivalents | $1.2 | — | — | $1.2 | | Total Fair Value of Assets | $11.8 | $9.6 | — | $21.4 | | Liabilities (Sep 30, 2019) | | | | | | Deferred Compensation | — | $21.6 | — | $21.6 | | Total Fair Value of Liabilities | — | $21.6 | — | $21.6 | - The Level 3 contingent consideration liability related to the U.S. Water Services acquisition was fully paid out in the first quarter of 2019, amounting to $3.8 million[55][56] Long-Term Debt Fair Value (Millions) | Millions | Carrying Amount | Fair Value | |:---------------------------------------------|:----------------|:-----------| | Long-Term Debt (Sep 30, 2019) | $1,626.7 | $1,814.1 | | Long-Term Debt (Dec 31, 2018) | $1,495.2 | $1,534.6 | Note 6. Short-Term and Long-Term Debt This note provides a breakdown of ALLETE's short-term and long-term debt, details recent financing activities including a new credit agreement and bond issuance, and confirms compliance with financial covenants Short-Term and Long-Term Debt (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:-----------------------|:-------------|:-------------| | Short-Term Debt | $212.7 | $57.5 | | Long-Term Debt | $1,404.9 | $1,428.5 | | Total Debt | $1,617.6 | $1,486.0 | - ALLETE entered into an amended $400 million unsecured credit agreement in January 2019, expiring in January 2024, for general corporate purposes, commercial paper support, and letters of credit[60][216] - In March 2019, ALLETE issued $100 million in First Mortgage Bonds ($70 million at 4.08% due 2029, $30 million at 4.47% due 2049) to fund utility capital investment and general corporate purposes[61][62] - As of September 30, 2019, ALLETE's ratio of indebtedness to total capitalization was approximately 0.43 to 1.00, well within the covenant limit of 0.65 to 1.00, indicating compliance with financial covenants[64] Note 7. Commitments, Guarantees and Contingencies This note details ALLETE's various commitments, guarantees, and contingencies, including power purchase agreements (PPAs), transmission projects like the Great Northern Transmission Line (GNTL), and environmental matters such as air, water, and solid waste regulations. It also covers legal proceedings and other business-specific obligations - Minnesota Power's cost of power purchased from Square Butte for the nine months ended September 30, 2019, was $61.3 million, an increase from $57.9 million in the same period of 2018[67] - The Great Northern Transmission Line (GNTL) project, with an estimated total cost of $700 million (ALLETE's portion $325 million), has incurred $581.6 million in costs through September 30, 2019, with $310.4 million recovered from a Manitoba Hydro subsidiary, and completion expected by mid-2020[72][193] - ALLETE's businesses are subject to extensive environmental regulations (Clean Air Act, Clean Water Act, waste management), with potential material expenditures for future environmental matters, particularly related to coal ash management and water discharge, for which the company would seek recovery through rate proceedings[76][77][91][95] - As of September 30, 2019, BNI Energy had $67.7 million in surety bonds for reclamation liability, and ALLETE Properties had $4.8 million in surety bonds and letters of credit for development obligations[98][99] Note 8. Earnings Per Share and Common Stock This note provides a reconciliation of basic and diluted earnings per share, highlighting the impact of non-vested restricted stock units and performance share awards Earnings Per Share (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | Q3 2019 Basic | Q3 2019 Diluted | Q3 2018 Basic | Q3 2018 Diluted | |:----------------------------------|:--------------|:----------------|:--------------|:----------------| | Net Income | $31.2 | $31.2 | $30.7 | $30.7 | | Average Common Shares | 51.7 | 51.8 | 51.4 | 51.6 | | Earnings Per Share | $0.60 | $0.60 | $0.59 | $0.59 | | | 9M 2019 Basic | 9M 2019 Diluted | 9M 2018 Basic | 9M 2018 Diluted | | Net Income | $135.9 | $135.9 | $113.0 | $113.0 | | Average Common Shares | 51.6 | 51.7 | 51.3 | 51.5 | | Earnings Per Share | $2.63 | $2.63 | $2.20 | $2.19 | - Diluted earnings per share for the nine months ended September 30, 2019, increased to $2.63 from $2.19 in the prior year, reflecting higher net income[103] Note 9. Income Tax Expense This note details ALLETE's income tax expense, including current and deferred components, and reconciles the federal statutory rate to the effective tax rate. It also discusses the impact of production tax credits and the sale of U.S. Water Services on the effective tax rate Income Tax Expense (Benefit) (Millions) | Millions | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:---------------------------------------------|:--------|:--------|:--------|:--------| | Total Current Income Tax Expense | — | — | $0.2 | $0.4 | | Total Deferred Income Tax Expense (Benefit) | $(2.4) | $0.4 | $(4.5) | $(9.1) | | Total Income Tax Expense (Benefit) | $(2.4) | $0.4 | $(4.3) | $(8.7) | - For the nine months ended September 30, 2019, ALLETE reported an income tax benefit of $4.3 million, compared to a benefit of $8.7 million in the prior year, with the effective tax rate being a benefit of 3.3% in 9M 2019 (8.3% in 9M 2018), primarily due to a higher tax rate on the gain from the sale of U.S. Water Services[104][105][159] - Production tax credits significantly reduced the effective tax rate, contributing a $35.7 million decrease in income tax for the nine months ended September 30, 2019[105] - As of September 30, 2019, gross unrecognized tax benefits were $1.3 million, with $0.6 million potentially favorably impacting the effective income tax rate if recognized[106] Note 10. Pension and Other Postretirement Benefit Plans This note provides details on ALLETE's defined benefit pension and other postretirement benefit plans, including service and non-service cost components, and employer contributions Pension and Postretirement Benefit Costs (Millions) | Millions | 9M 2019 Pension | 9M 2018 Pension | 9M 2019 Postretirement | 9M 2018 Postretirement | |:---------------------------------------------|:----------------|:----------------|:-----------------------|:-----------------------| | Service Cost | $7.0 | $8.2 | $2.8 | $3.7 | | Net Periodic Benefit Cost (Credit) | $2.5 | $6.2 | $(0.7) | $0.2 | - ALLETE contributed $10.4 million in cash to defined benefit pension plans for the nine months ended September 30, 2019, a decrease from $15.0 million in the same period of 2018, with no contributions made to other postretirement benefit plans in either period[108] Note 11. Business Segments This note provides a detailed breakdown of ALLETE's financial performance by its three reportable segments: Regulated Operations, ALLETE Clean Energy, and U.S. Water Services (until its sale), along with Corporate and Other. It presents operating revenue, net income (loss), and assets for each segment - ALLETE's reportable segments are Regulated Operations (Minnesota Power, SWL&P, ATC), ALLETE Clean Energy (clean and renewable energy projects), and U.S. Water Services (integrated water management, sold March 26, 2019), with Corporate and Other including BNI Energy, ALLETE Properties, Nobles 2, and other corporate activities[109][110] Segment Operating Revenue (Millions) | Millions | 9M 2019 Operating Revenue | 9M 2018 Operating Revenue | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $786.1 | $789.3 | | ALLETE Clean Energy | $43.3 | $57.9 | | U.S. Water Services | $33.4 | $124.7 | | Corporate and Other | $73.1 | $78.4 | | Total Operating Revenue | $935.9 | $1,050.3 | Segment Net Income (Loss) (Millions) | Millions | 9M 2019 Net Income (Loss) | 9M 2018 Net Income (Loss) | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $114.2 | $99.7 | | ALLETE Clean Energy | $6.5 | $15.9 | | U.S. Water Services | $(1.1) | $0.5 | | Corporate and Other | $16.3 | $(3.1) | | Total Net Income | $135.9 | $113.0 | Segment Assets (Millions) | Millions | Sep 30, 2019 Assets | Dec 31, 2018 Assets | |:---------------------------------------------|:--------------------|:--------------------| | Regulated Operations | $4,045.2 | $3,952.5 | | ALLETE Clean Energy | $839.8 | $606.6 | | U.S. Water Services | — | $295.8 | | Corporate and Other | $390.8 | $310.1 | | Total Assets | $5,275.8 | $5,165.0 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on ALLETE's financial condition and results of operations, offering a detailed comparison of performance for the quarter and nine months ended September 30, 2019, versus 2018. It also includes an overview of critical accounting policies, the company's outlook, and an analysis of liquidity and capital resources Overview This section provides an overview of ALLETE's core business segments, including Regulated Operations, ALLETE Clean Energy, and Corporate and Other activities, highlighting their primary functions and recent developments - ALLETE's core business is Regulated Operations, including Minnesota Power and SWL&P, and an investment in ATC, with Minnesota Power serving approximately 145,000 retail customers and 15 municipal customers in northeastern Minnesota, and SWL&P serving about 15,000 electric, 13,000 natural gas, and 10,000 water customers in northwestern Wisconsin[114] - ALLETE Clean Energy develops, acquires, and operates clean and renewable energy projects, currently owning and operating approximately 555 MW of wind energy generation, with an additional 480 MW under construction[114] - U.S. Water Services, an integrated water management company, was sold on March 26, 2019, for approximately $265 million in cash[115] - Corporate and Other segment includes BNI Energy (coal mining), ALLETE Properties (Florida real estate), investment in Nobles 2, and other corporate activities[116] Financial Overview This section provides a high-level summary of ALLETE's financial performance, focusing on net income and diluted earnings per share for the nine months ended September 30, 2019, compared to the prior year, and segment contributions Net Income and Diluted EPS (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | 9M 2019 | 9M 2018 | |:----------------------------------|:--------|:--------| | Net Income | $135.9 | $113.0 | | Diluted EPS | $2.63 | $2.19 | - Net income for the nine months ended September 30, 2019, increased by $22.9 million (20.3%) to $135.9 million, or $2.63 per diluted share, compared to $113.0 million, or $2.19 per diluted share, in 2018, including an $11.1 million after-tax gain ($0.22 per share) from the sale of U.S. Water Services[120] - Regulated Operations net income increased to $114.2 million (9M 2019) from $99.7 million (9M 2018), driven by lower operating and maintenance expenses, increased cost recovery rider revenue, and timing of fuel adjustment clause recoveries at Minnesota Power, and higher rates at SWL&P[121] - ALLETE Clean Energy net income decreased to $6.5 million (9M 2019) from $15.9 million (9M 2018), primarily due to lower revenue from wind resources and availability, and higher depreciation, partially offset by increased production tax credits[122] - Corporate and Other net income was $16.3 million (9M 2019) compared to a net loss of $3.1 million (9M 2018), benefiting from the U.S. Water Services sale gain and higher earnings on cash and short-term investments[124] Comparison of the Quarters Ended September 30, 2019 and 2018 This section provides a detailed comparison of ALLETE's financial performance for the third quarter of 2019 versus 2018, broken down by segment, highlighting changes in operating revenue, expenses, and net income, along with the underlying drivers for these changes Segment Operating Revenue (Millions) | Millions | Q3 2019 Operating Revenue | Q3 2018 Operating Revenue | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $254.1 | $261.3 | | ALLETE Clean Energy | $10.4 | $15.0 | | U.S. Water Services | — | $45.0 | | Corporate and Other | $23.8 | $26.7 | | Total Operating Revenue | $288.3 | $348.0 | Segment Net Income (Loss) (Millions) | Millions | Q3 2019 Net Income (Loss) | Q3 2018 Net Income (Loss) | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $32.4 | $29.8 | | ALLETE Clean Energy | $(1.2) | $1.0 | | U.S. Water Services | — | $1.7 | | Corporate and Other | — | $(1.8) | | Total Net Income | $31.2 | $30.7 | - Regulated Operations' operating revenue decreased by $7.2 million (3%) in Q3 2019, primarily due to lower kWh sales to residential, commercial, municipal, and other power suppliers, partially offset by higher transmission revenue[126][127] - ALLETE Clean Energy's operating revenue decreased by $4.6 million (31%) in Q3 2019, mainly due to lower non-cash amortization from expired power sales agreements and reduced kWh sales from lower wind resources and availability[134] - U.S. Water Services reported no operating revenue or net income in Q3 2019 due to its sale in Q1 2019, compared to $45.0 million revenue and $1.7 million net income in Q3 2018[136] Comparison of the Nine Months Ended September 30, 2019 and 2018 This section provides a detailed comparison of ALLETE's financial performance for the nine months ended September 30, 2019, versus 2018, broken down by segment. It highlights significant changes in operating revenue, expenses, and net income, along with the factors influencing these changes Segment Operating Revenue (Millions) | Millions | 9M 2019 Operating Revenue | 9M 2018 Operating Revenue | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $786.1 | $789.3 | | ALLETE Clean Energy | $43.3 | $57.9 | | U.S. Water Services | $33.4 | $124.7 | | Corporate and Other | $73.1 | $78.4 | | Total Operating Revenue | $935.9 | $1,050.3 | Segment Net Income (Loss) (Millions) | Millions | 9M 2019 Net Income (Loss) | 9M 2018 Net Income (Loss) | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $114.2 | $99.7 | | ALLETE Clean Energy | $6.5 | $15.9 | | U.S. Water Services | $(1.1) | $0.5 | | Corporate and Other | $16.3 | $(3.1) | | Total Net Income | $135.9 | $113.0 | - Regulated Operations' operating revenue decreased by $3.2 million in 9M 2019, primarily due to lower kWh sales, largely offset by higher fuel adjustment clause recoveries, increased cost recovery rider revenue, and higher FERC formula-based rates[141] - ALLETE Clean Energy's operating revenue decreased by $14.6 million (25%) in 9M 2019, mainly due to lower non-cash amortization from expired power sales agreements ($9.2 million) and reduced kWh sales from lower wind resources and availability[152] - Corporate and Other net income increased to $16.3 million in 9M 2019 from a net loss of $3.1 million in 9M 2018, primarily due to the $11.1 million after-tax gain on the sale of U.S. Water Services and additional income tax benefits[158] Critical Accounting Policies This section outlines ALLETE's critical accounting policies, which involve significant management judgment and estimates, including regulatory accounting, pensions, asset impairment, and taxation - ALLETE's critical accounting policies, which involve significant management judgment and estimates, include regulatory accounting, pension and postretirement health and life actuarial assumptions, impairment of long-lived assets, and taxation, and are reviewed regularly with the Audit Committee[160] Outlook This section provides ALLETE's strategic outlook, including earnings per share growth targets, segment contributions, and planned capital investments in clean energy and infrastructure - ALLETE aims for average annual earnings per share growth of 5% to 7% and a competitive dividend payout, with Regulated Operations projected for 4% to 5% annual earnings growth and Energy Infrastructure and Related Services targeting at least 15% annual growth[162] - Regulated Operations are expected to contribute approximately 80% of total consolidated net income in 2019, with the contribution from Energy Infrastructure and Related Services and other businesses expected to increase in future years[163] - Minnesota Power is executing its EnergyForward strategic plan, including investments in wind, solar, natural gas, and hydroelectric power, transmission capacity, and emissions control technology, aiming for approximately 50% renewable energy supply by 2021[180][182] - ALLETE Clean Energy is targeting acquisitions and development of new wind or solar facilities up to 200 MW each, with long-term PSAs or for sale, and plans to invest approximately $80 million through 2020 for production tax credit requalification of up to 468 WTGs, anticipating annual production tax credits of $12 million in 2019 and $17 million to $22 million annually from 2020-2027[198][199] - ALLETE expects its effective tax rate to be a benefit of approximately 5% for 2019, primarily due to federal production tax credits from wind energy generation, and anticipates a lower effective tax rate than the combined statutory rate over the next 10 years due to these credits[210] Liquidity and Capital Resources This section analyzes ALLETE's liquidity and capital resources, including cash position, credit availability, debt structure, capital expenditures, and credit ratings - As of September 30, 2019, ALLETE had $100.3 million in cash and cash equivalents, $346.9 million in available consolidated lines of credit, and a debt-to-capital ratio of 42%[211] Total Capitalization and Debt-to-Capital Ratio (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------------------------|:-------------|:-------------| | Shareholders' Equity | $2,207.8 | $2,155.8 | | Long-Term Debt (incl. current portion) | $1,626.7 | $1,495.2 | | Total Capitalization | $3,834.5 | $3,651.0 | | Debt-to-Capital Ratio | 42% | 41% | - Cash from operating activities decreased in 2019 compared to 2018, primarily due to customer refunds for tax reform and interim rates, and lower cost recovery rider recoveries, while cash used for investing activities decreased due to proceeds from the U.S. Water Services sale, and cash from financing activities increased due to higher long-term debt issuance[212][213] - ALLETE's capital expenditures for 2019 and 2020 are projected at approximately $695 million and $495 million, respectively, an increase from prior projections mainly due to the Diamond Spring wind energy facility acquisition[221] - Moody's downgraded ALLETE's long-term issuer rating to Baa1 from A3 on March 26, 2019, with a stable outlook, citing the adverse 2018 Minnesota Power general rate case outcome and future debt coverage ratios[219] Other This section provides additional information regarding ALLETE's employee count and labor agreement expiration dates - ALLETE had 1,349 employees as of September 30, 2019, with labor agreements for IBEW Local 31 (Minnesota Power and SWL&P) expiring April 30, 2020, and February 1, 2021, respectively, and for IBEW Local 1593 (BNI Energy) expiring March 31, 2023[223][224] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses ALLETE's exposure to various market risks, including securities investment risk, commodity price risk, and interest rate risk, and outlines the strategies employed to manage these risks - ALLETE's available-for-sale securities portfolio primarily consists of securities held in postretirement plans, and the company's regulated utility operations mitigate commodity price risk (power, fuel, natural gas) through ratemaking processes that allow for cost recovery or savings distribution to ratepayers[226][227] - Minnesota Power's power marketing activities involve purchasing and selling energy in the wholesale market, exposing it to credit risk, which is managed through credit policies and monitoring counterparty limits[228][229] - ALLETE is exposed to interest rate risk from variable rate debt, where a hypothetical 100 basis point increase in interest rates would impact pre-tax interest expense by $1.5 million based on variable rate debt outstanding as of September 30, 2019[230] Item 4. Controls and Procedures This section confirms the effectiveness of ALLETE's disclosure controls and procedures as of September 30, 2019, and states that there have been no material changes in internal control over financial reporting during the most recent fiscal quarter - ALLETE's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2019, ensuring timely and accurate reporting of information required under the Exchange Act[231] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[232] Part II. Other Information This section provides additional information not covered in Part I, including legal proceedings, risk factors, sales of equity securities, defaults, mine safety disclosures, and a list of exhibits Item 1. Legal Proceedings This section refers to disclosures in the 2018 Form 10-K and current report regarding legal and regulatory proceedings, stating that the outcome of these matters is not expected to have a material effect on the company's financial position, results of operations, or cash flows - ALLETE is involved in litigation, tax, regulatory, and other governmental audits in the normal course of business, but does not expect these matters to materially affect its financial position, results of operations, or cash flows[101][233] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in Part I, Item 1A of ALLETE's 2018 Form 10-K - No material changes have occurred from the risk factors disclosed in ALLETE's 2018 Form 10-K[234] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities and no use of proceeds to report - There were no unregistered sales of equity securities and no use of proceeds to report[234] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report - There were no defaults upon senior securities to report[234] Item 4. Mine Safety Disclosures This section notes that information regarding mine safety violations, as required by the Dodd-Frank Act, is included in Exhibit 95 to this Form 10-Q - Mine safety disclosures, as required by the Dodd-Frank Act, are provided in Exhibit 95 of this Form 10-Q[235] Item 5. Other Information This section states that there is no other information to report - There is no other information to report[236] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including legal agreements, certifications, mine safety disclosures, news releases, and XBRL interactive data files - Exhibits include an Amended and Restated Term Loan Agreement, Rule 13a-14(a)/15d-14(a) Certifications by CEO and CFO, Section 1350 Certification, Mine Safety disclosures, ALLETE News Release dated November 6, 2019, and various XBRL interactive data files[236] Signatures This section contains the official signatures of ALLETE's executive officers, certifying the accuracy and compliance of the report - The report is signed by Robert J. Adams, Senior Vice President and Chief Financial Officer, and Steven W. Morris, Vice President, Controller and Chief Accounting Officer, on November 6, 2019, certifying compliance with Securities Exchange Act of 1934 requirements[237]