ALLETE(ALE) - 2019 Q4 - Annual Report

Part I Business Overview ALLETE, Inc. is an energy company with core operations in regulated utilities and renewable energy Consolidated Operating Revenue by Segment | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Regulated Operations | 84% | 71% | 75% | | ALLETE Clean Energy | 5% | 11% | 6% | | U.S. Water Services | 3% | 11% | 11% | | Corporate and Other | 8% | 7% | 8% | - On March 26, 2019, the company sold its U.S. Water Services segment for approximately $270 million in cash, net of costs[12][69] Regulated Operations This segment serves retail and industrial customers, with industrial sales representing 54% of total regulated utility kWh sales in 2019, and is transitioning to 50% renewable energy by 2021 Regulated Utility Kilowatt-hours Sold (Millions) | Customer Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Residential | 1,130 | 1,140 | 1,096 | | Commercial | 1,390 | 1,426 | 1,420 | | Industrial | 7,277 | 7,261 | 7,327 | | Municipal | 672 | 798 | 799 | | Other Power Suppliers | 3,185 | 3,953 | 4,039 | | Total | 13,654 | 14,578 | 14,681 | - Industrial customers, primarily in taconite mining, paper, and pipeline industries, accounted for 54% of total regulated utility kWh sales in 2019. Taconite customers alone represented 69% of industrial sales[16][17] - The company is constructing the Great Northern Transmission Line (GNTL), a 500-kV line to connect with Manitoba Hydro, expected to be in-service by mid-2020 with a total project cost of approximately $700 million[42][43] - Minnesota Power filed a retail rate increase request in November 2019 seeking an average increase of 10.6%, which would generate approximately $66 million in additional annual revenue. An interim increase of $36.1 million was authorized effective January 1, 2020[50] ALLETE Clean Energy This segment develops and operates renewable energy projects, owning 660 MW of wind capacity with an additional 380 MW under construction, all supported by long-term Power Sales Agreements - The segment owns and operates approximately 660 MW of wind energy and has another 380 MW under construction, all with long-term Power Sales Agreements (PSAs) in place[64] Operating Wind Energy Facilities (as of Dec 31, 2019) | Facility | Region | Capacity (MW) | PSA Expiration | | :--- | :--- | :--- | :--- | | Armenia Mountain | East | 101 | 2024 | | Chanarambie/Viking | Midwest | 98 | 2023 | | Condon | West | 50 | 2022 | | Glen Ullin | West | 106 | 2039 | | Lake Benton | Midwest | 104 | 2028 | | Storm Lake I | Midwest | 108 | 2027 | | Storm Lake II | Midwest | 77 | 2020 / 2032 | | Other | Midwest | 17 | 2028 | U.S. Water Services The U.S. Water Services segment, which provided integrated water management solutions, was sold on March 26, 2019, for $270 million in cash, resulting in a $13.2 million after-tax gain - The company completed the sale of U.S. Water Services on March 26, 2019, for approximately $270 million in cash, resulting in a $13.2 million after-tax gain[69] Corporate and Other This segment includes BNI Energy, a lignite coal supplier with long-term contracts, a 49% equity investment in the Nobles 2 wind project, and ALLETE Properties' real estate investments - BNI Energy produces about 4 million tons of lignite coal annually under cost-plus fixed fee agreements that extend through December 31, 2037[70] - The company holds a 49% equity interest in Nobles 2, a 250 MW wind energy facility under construction in Minnesota, with an expected completion in late 2020[71] - ALLETE Properties holds approximately 807 acres in its Town Center at Palm Coast project and an additional 600 acres of other land available for sale in Florida[72][73] Environmental Matters The company is subject to extensive environmental regulations and is reshaping its generation portfolio to reduce coal reliance, anticipating potentially material future environmental expenditures - The company is reshaping its generation portfolio to reduce reliance on coal and has installed cost-effective emission control technology to comply with environmental regulations[76] - Accruals for environmental matters are recorded when a liability is probable and reasonably estimable. The company anticipates that future environmental expenditures may be material and require significant capital investments[77][78] Employees As of December 31, 2019, ALLETE had 1,339 employees, with a significant portion at Minnesota Power, SWL&P, and BNI Energy represented by IBEW labor agreements - As of year-end 2019, ALLETE had 1,339 employees. 465 employees at Minnesota Power and SWL&P are represented by IBEW Local 31, and 133 employees at BNI Energy are represented by IBEW Local 1593[79][80] Risk Factors ALLETE faces entity-wide, operational, and business-specific risks, including capital market access, economic downturns, extensive regulation, cybersecurity threats, industrial customer reliance, and renewable energy variability - A significant risk is the concentration of revenue from eight Large Power Customers, which accounted for 28% of 2019 consolidated operating revenue. An economic downturn affecting these customers, particularly in the taconite industry, could negatively impact results[106][107] - The company is subject to extensive federal and state regulation regarding rates, capital structure, and environmental compliance. Future laws limiting GHG emissions could require significant capital expenditures or the closure of coal-fired facilities[110][119] - ALLETE Clean Energy's performance is highly dependent on suitable wind conditions, which are variable. Unfavorable weather could cause electricity generation and revenue to be substantially below expectations[137] - The company is vulnerable to cybersecurity attacks which could disrupt utility service, compromise sensitive data, and negatively impact its reputation and financial results[99][101] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[147] Properties A discussion of the company's properties is included by reference in Item 1 of this report - The discussion of properties is incorporated by reference from Item 1. Business[148] Legal Proceedings The company is involved in routine litigation, but does not expect material effects on its financial position, results of operations, or cash flows - The company does not expect the outcome of litigation arising in the normal course of business to have a material effect on its financial condition[150] Mine Safety Disclosures Mine safety disclosures required by the Dodd-Frank Act are included in Exhibit 95 to this Form 10-K - Mine safety disclosures required by the Dodd-Frank Act are included in Exhibit 95 of the Form 10-K[151] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ALLETE's common stock is listed on the NYSE under ALE, has paid continuous dividends since 1948, and achieved a 74% cumulative total shareholder return over five years - The company has paid uninterrupted dividends on its common stock since 1948. A quarterly dividend of $0.6175 per share was declared payable on March 1, 2020[152] Cumulative Total Shareholder Return (2014-2019) | Year | ALLETE | S&P 500 Index | Philadelphia Utility Index | | :--- | :--- | :--- | :--- | | 2014 | $100 | $100 | $100 | | 2015 | $96 | $101 | $94 | | 2016 | $126 | $113 | $110 | | 2017 | $150 | $138 | $124 | | 2018 | $158 | $132 | $129 | | 2019 | $174 | $174 | $163 | Selected Financial Data This section summarizes five-year financial data, highlighting 2019 operating revenue of $1,240.5 million, net income of $185.6 million, and diluted EPS of $3.59 Five-Year Selected Financial Data (Millions, Except Per Share Amounts) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Revenue | $1,240.5 | $1,498.6 | $1,419.3 | $1,339.7 | $1,486.4 | | Net Income Attributable to ALLETE | $185.6 | $174.1 | $172.2 | $155.3 | $141.1 | | Diluted Earnings Per Share | $3.59 | $3.38 | $3.38 | $3.14 | $2.92 | | Total Assets | $5,482.8 | $5,165.0 | $5,080.0 | $4,876.9 | $4,864.4 | | Long-Term Debt | $1,400.9 | $1,428.5 | $1,439.2 | $1,370.4 | $1,556.7 | | Total Capital Expenditures | $626.6 | $318.6 | $266.5 | $247.8 | $251.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations ALLETE's 2019 net income was $185.6 million, with 5-7% EPS growth and $1.885 billion in capital expenditures projected 2019 vs. 2018 Financial Highlights | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income Attributable to ALLETE | $185.6M | $174.1M | | Diluted EPS | $3.59 | $3.38 | - The increase in 2019 net income was primarily driven by a $13.2 million after-tax gain from the sale of the U.S. Water Services segment[164][168] - The company has a long-term objective of achieving average annual earnings per share growth of 5% to 7%[218] - Projected capital expenditures for 2020-2024 total approximately $1.885 billion, with significant investments in Regulated Operations ($1.415 billion) and ALLETE Clean Energy ($370 million)[278] 2019 Compared to 2018 Net income increased to $185.6 million in 2019, driven by higher Regulated Operations income and the U.S. Water Services sale gain, despite a decline in ALLETE Clean Energy's net income Net Income Attributable to ALLETE by Segment (Millions) | Segment | 2019 | 2018 | | :--- | :--- | :--- | | Regulated Operations | $154.4 | $131.0 | | ALLETE Clean Energy | $12.4 | $33.7 | | U.S. Water Services | $(1.1) | $3.2 | | Corporate and Other | $19.9 | $6.2 | - Regulated Operations revenue decreased by $17.1 million primarily due to lower kWh sales, but operating income increased by $20.7 million due to lower operating & maintenance and property tax expenses[169][177] - ALLETE Clean Energy's revenue dropped by $100.3 million, largely because 2018 revenue included the sale of a wind energy facility. 2019 results were also impacted by lower wind resources and availability[180] 2018 Compared to 2017 Net income slightly increased in 2018 to $174.1 million, with Regulated Operations benefiting from tax reform, while ALLETE Clean Energy and U.S. Water Services saw declines due to the absence of prior year's one-time tax benefits Net Income Attributable to ALLETE by Segment (Millions) | Segment | 2018 | 2017 | | :--- | :--- | :--- | | Regulated Operations | $131.0 | $128.4 | | ALLETE Clean Energy | $33.7 | $41.5 | | U.S. Water Services | $3.2 | $10.7 | | Corporate and Other | $6.2 | $(8.4) | - The 2017 results for ALLETE Clean Energy, U.S. Water Services, and Corporate and Other included significant one-time impacts from the remeasurement of deferred tax assets and liabilities due to the Tax Cuts and Jobs Act (TCJA)[204][206][208] - Regulated Operations depreciation expense increased by $25.4 million in 2018, primarily due to modifications of the depreciable lives for the Boswell energy center[197] Critical Accounting Policies Critical accounting policies involve significant management judgment in Regulatory Accounting, Pension and Postretirement Benefit Assumptions, Impairment of Long-Lived Assets, and Taxation - Key critical accounting policies involve significant management judgment and include: Regulatory Accounting, Pension and Postretirement Benefit Assumptions, Impairment of Long-Lived Assets, and Taxation[211] Outlook ALLETE targets 5-7% average annual EPS growth, with Regulated Operations expected to contribute 80% of 2020 net income, and significant investments planned for renewable energy expansion - The company's long-term objective is to achieve average annual earnings per share growth of 5% to 7%[218] - Minnesota Power's 'EnergyForward' strategy is targeting approximately 50% of its energy to be supplied by renewable sources by 2021[237] - ALLETE Clean Energy is developing new projects, including the ~300 MW Diamond Spring wind project in Oklahoma, expected to be completed in late 2020[249][360] - The company expects its effective tax rate for 2020 to be a benefit of approximately 15% to 20%, primarily due to federal production tax credits from wind energy generation[254] Liquidity and Capital Resources ALLETE maintains strong liquidity with $69.3 million cash and $345.0 million available credit, projecting $1.885 billion in capital expenditures for 2020-2024, funded by internal funds, debt, and equity Capital Structure (as of Dec 31) | Component | 2019 | 2018 | | :--- | :--- | :--- | | ALLETE Equity | 56% | 59% | | Non-Controlling Interest | 3% | 0% | | Long-Term Debt | 41% | 41% | Projected Capital Expenditures (2020-2024, Millions) | Segment | 2020-2024 Total | | :--- | :--- | | Regulated Operations | $1,415 | | ALLETE Clean Energy | $370 | | Corporate and Other | $100 | | Total | $1,885 | - Cash from operating activities decreased from $433.1 million in 2018 to $249.5 million in 2019, primarily due to the refund of provisions for tax reform and interim rates to customers[257] Quantitative and Qualitative Disclosures about Market Risk This section refers to Item 7 for market risk disclosures, covering interest rate and commodity price risks managed through debt mix and regulatory recovery mechanisms - Information related to market risk is provided in Item 7 of the report[286] Financial Statements and Supplementary Data This item refers to the Consolidated Financial Statements and supplementary data, indexed in Item 15(a) of this report - Refers to the Consolidated Financial Statements indexed under Item 15(a)[287] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, confirmed by PricewaterhouseCoopers LLP - Management concluded that disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 31, 2019[288][289] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement and Part I of this Form 10-K - Most information required by this item is incorporated by reference from the 2020 Proxy Statement[292] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[296] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement, with 857,656 securities available for future issuance under approved equity plans Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Approved by Security Holders | 150,181 | 857,656 | | Not Approved by Security Holders | — | — | Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[299] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[301] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including Consolidated Financial Statements, auditor reports, and various exhibits - Lists all financial statements, schedules, and exhibits filed with the Form 10-K[302] Form 10-K Summary The company reports that there is no Form 10-K summary - None[310] Consolidated Financial Statements Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on ALLETE's financial statements and internal controls, identifying regulatory accounting as a critical audit matter due to judgment in cost recoverability - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting[315] - A critical audit matter was identified related to the accounting for regulatory matters, specifically the significant judgment required by management to determine the recoverability of deferred costs (regulatory assets)[324][325] Consolidated Financial Statements - Audited Audited financial statements show $5.48 billion total assets, $3.15 billion total liabilities, and $185.6 million net income Consolidated Balance Sheet Highlights (Millions) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $269.5 | $334.3 | | Property, Plant and Equipment – Net | $4,377.0 | $3,904.4 | | Total Assets | $5,482.8 | $5,165.0 | | Total Current Liabilities | $507.4 | $405.1 | | Long-Term Debt | $1,400.9 | $1,428.5 | | Total Liabilities | $3,147.2 | $3,009.2 | | Total ALLETE Equity | $2,231.9 | $2,155.8 | Consolidated Statement of Income Highlights (Millions) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Operating Revenue | $1,240.5 | $1,498.6 | $1,419.3 | | Operating Income | $179.8 | $201.2 | $225.9 | | Net Income Attributable to ALLETE | $185.6 | $174.1 | $172.2 | | Diluted EPS | $3.59 | $3.38 | $3.38 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, segment information, regulatory matters, debt, commitments, and employee benefit plans, including the U.S. Water Services sale and rate case specifics - Note 1: Details the sale of U.S. Water Services on March 26, 2019, for approximately $270 million in cash[345] - Note 4: Outlines the 2020 Minnesota General Rate Case, seeking a 10.6% retail rate increase, and details various cost recovery riders for transmission, renewable, and environmental investments[417][422][423] - Note 9: Describes major commitments, including the Square Butte PPA through 2026 and multiple PPAs with Manitoba Hydro. It also estimates coal ash (CCR) compliance costs at the Boswell facility to be between $65 million and $120 million over the next 15 years[469][498] - Note 12: Reports the funded status of benefit plans as of year-end 2019, with the pension plan being underfunded by $154.4 million and the postretirement health and life plan being overfunded by $23.9 million[527][534]