ALLETE(ALE) - 2020 Q1 - Quarterly Report

Forward-Looking Statements This report's forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from discussed content, with no obligation for updates Forward-Looking Statements This report's forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from discussed content, with no obligation for updates - The company has identified multiple significant factors that could cause actual results to differ materially from forward-looking statements, including strategic implementation, economic conditions, legal and regulatory changes, weather, capital market access, project delays, operating costs, commodity prices, talent retention, emerging technologies, war, terrorism, cyberattacks, expansion and integration, population growth, wholesale power markets, regulatory actions, competition, industry restructuring, climate change, distributed low-carbon generation, fuel and commodity pricing, customer expansion plans, and real estate market conditions[7] - The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of the statement or to reflect the occurrence of unanticipated events[8] PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS This section presents ALLETE's unaudited consolidated financial statements as of March 31, 2020, detailing operations, accounting policies, regulatory matters, equity investments, fair value, debt, commitments, contingencies, earnings per share, income taxes, and pension plans ALLETE CONSOLIDATED BALANCE SHEET Consolidated Balance Sheet (Millions) | Millions | 2020 | 2019 | |:-------------------------------|:---------|:---------| | Assets | | | | Current Assets | | | | Cash and Cash Equivalents | $67.0 | $69.3 | | Accounts Receivable | 99.4 | 96.4 | | Inventories – Net | 79.0 | 72.8 | | Prepayments and Other | 29.4 | 31.0 | | Total Current Assets | 274.8 | 269.5 | | Property, Plant and Equipment – Net | 4,496.3 | 4,377.0 | | Regulatory Assets | 423.8 | 420.5 | | Equity Investments | 225.7 | 197.6 | | Other Non-Current Assets | 198.9 | 218.2 | | Total Assets | $5,619.5 | $5,482.8 | | Liabilities and Equity | | | | Liabilities | | | | Current Liabilities | | | | Accounts Payable | $164.4 | $165.2 | | Accrued Taxes | 63.0 | 50.8 | | Accrued Interest | 15.1 | 18.1 | | Long-Term Debt Due Within One Year | 323.0 | 212.9 | | Other | 57.6 | 60.4 | | Total Current Liabilities | 623.1 | 507.4 | | Long-Term Debt | 1,399.9 | 1,400.9 | | Deferred Income Taxes | 207.0 | 212.8 | | Regulatory Liabilities | 566.4 | 560.3 | | Defined Benefit Pension and Other Postretirement Benefit Plans | 161.4 | 172.8 | | Other Non-Current Liabilities | 288.7 | 293.0 | | Total Liabilities | 3,246.5 | 3,147.2 | ALLETE CONSOLIDATED STATEMENT OF INCOME Consolidated Statement of Income (Millions, Except Per Share Amounts) | Millions Except Per Share Amounts | 2020 | 2019 | |:----------------------------------|:-------|:-------| | Operating Revenue | | | | Contracts with Customers – Utility | $265.3 | $282.2 | | Contracts with Customers – Non-utility | 43.5 | 72.1 | | Other – Non-utility | 2.8 | 2.9 | | Total Operating Revenue | 311.6 | 357.2 | | Operating Expenses | | | | Fuel, Purchased Power and Gas – Utility | 89.0 | 109.8 | | Transmission Services – Utility | 18.5 | 18.3 | | Cost of Sales – Non-utility | 16.9 | 30.6 | | Operating and Maintenance | 61.0 | 76.2 | | Depreciation and Amortization | 53.4 | 51.9 | | Taxes Other than Income Taxes | 12.6 | 13.6 | | Total Operating Expenses | 251.4 | 300.4 | | Operating Income | 60.2 | 56.8 | | Other Income (Expense) | | | | Interest Expense | (15.7) | (16.5) | | Equity Earnings | 5.2 | 5.6 | | Gain on Sale of U.S. Water Services | — | 20.1 | | Other | 1.0 | 7.4 | | Total Other Income (Expense) | (9.5) | 16.6 | | Income Before Income Taxes | 50.7 | 73.4 | | Income Tax Expense (Benefit) | (13.8) | 2.9 | | Net Income | 64.5 | 70.5 | | Net Loss Attributable to Non-Controlling Interest | (1.8) | — | | Net Income Attributable to ALLETE | $66.3 | $70.5 | | Average Shares of Common Stock | | | | Basic | 51.7 | 51.6 | | Diluted | 51.8 | 51.7 | | Basic Earnings Per Share of Common Stock | $1.28 | $1.37 | | Diluted Earnings Per Share of Common Stock | $1.28 | $1.37 | ALLETE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Consolidated Statement of Comprehensive Income (Millions) | Millions | 2020 | 2019 | |:----------------------------------------------------------------------------------|:------|:------| | Net Income | $64.5 | $70.5 | | Other Comprehensive Income (Loss) | | | | Unrealized Gain (Loss) on Securities | | | | Net of Income Tax Expense (Benefit) of $(0.1) and $– | (0.4) | 0.1 | | Defined Benefit Pension and Other Postretirement Benefit Plans | | | | Net of Income Tax Expense of $0.1 and $0.1 | 0.2 | — | | Total Other Comprehensive Income (Loss) | (0.2) | 0.1 | | Total Comprehensive Income | 64.3 | 70.6 | | Net Loss Attributable to Non-Controlling Interest | (1.8) | — | | Total Comprehensive Income Attributable to ALLETE | $66.1 | $70.6 | ALLETE CONSOLIDATED STATEMENT OF CASH FLOWS Consolidated Statement of Cash Flows (Millions) | Millions | 2020 | 2019 | |:----------------------------------------------------------------------------------|:----------|:---------| | Operating Activities | | | | Net Income | $64.5 | $70.5 | | Cash from Operating Activities | 88.8 | 79.1 | | Investing Activities | | | | Payments for Equity Investments | (27.8) | (0.5) | | Proceeds from Sale of U.S. Water Services – Net of Transaction Costs and Cash Retained | — | 264.7 | | Additions to Property, Plant and Equipment | (154.3) | (89.3) | | Cash from (for) Investing Activities | (182.5) | 185.1 | | Financing Activities | | | | Proceeds from Issuance of Common Stock | 3.3 | 0.8 | | Proceeds from Issuance of Long-Term Debt | 110.0 | 100.0 | | Repayments of Long-Term Debt | (1.4) | (43.8) | | Dividends on Common Stock | (31.9) | (30.3) | | Cash from Financing Activities | 80.1 | 22.0 | | Change in Cash, Cash Equivalents and Restricted Cash | (13.6) | 286.2 | | Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 92.5 | 79.0 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $78.9 | $365.2 | ALLETE CONSOLIDATED STATEMENT OF EQUITY Consolidated Statement of Equity (Millions, Except Per Share Amounts) | Millions Except Per Share Amounts | March 2020 | 31, 2019 |\n|:------------------------------------------------------------------|:-----------|:---------|\n| Common Stock | | |\n| Balance, Beginning of Period | $1,436.7 | $1,428.5 |\n| Common Stock Issued | 5.0 | 2.6 |\n| Balance, End of Period | 1,441.7 | 1,431.1 |\n| Accumulated Other Comprehensive Loss | | |\n| Balance, Beginning of Period | (23.6) | (27.3) |\n| Other Comprehensive Income - Net of Income Taxes | | |\n| Unrealized Gain (Loss) on Debt Securities | (0.4) | 0.1 |\n| Defined Benefit Pension and Other Postretirement Plans | 0.2 | — |\n| Balance, End of Period | (23.8) | (27.2) |\n| Retained Earnings | | |\n| Balance, Beginning of Period | 818.8 | 754.6 |\n| Net Income Attributable to ALLETE | 66.3 | 70.5 |\n| Common Stock Dividends | (31.9) | (30.3) |\n| Balance, End of Period | 853.2 | 794.8 |\n| Non-Controlling Interest in Subsidiaries | | |\n| Balance, Beginning of Period | 103.7 | — |\n| Net Loss Attributable to Non-Controlling Interest | (1.8) | — |\n| Balance, End of Period | 101.9 | — |\n| Total Equity | $2,373.0 | $2,198.7 |\n| Dividends Per Share of Common Stock | $0.6175 | $0.5875 | NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - The company considers all investments with original maturities of three months or less to be cash equivalents; as of March 31, 2020, restricted cash included collateral deposits required by ALLETE Clean Energy loan agreements[16] Cash, Cash Equivalents and Restricted Cash (Millions) | | March 31, 2020 | December 31, 2019 | |:------------------------------------------------------------------------------|:---------------|:------------------| | Cash and Cash Equivalents | $67.0 | $69.3 | | Restricted Cash included in Prepayments and Other | 6.1 | 2.8 | | Restricted Cash included in Other Non-Current Assets | 5.8 | 20.4 | | Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $78.9 | $92.5 | - Inventories are measured at the lower of cost or net realizable value; regulated operations inventories are measured using the average cost or first-in, first-out method, while ALLETE Clean Energy and Corporate and Other inventories use average cost, first-in, first-out, or specific identification methods[17] Inventories – Net (Millions) | Inventories – Net | March 31, 2020 | December 31, 2019 | |:-----------------------|:---------------|:------------------| | Fuel | $31.4 | $25.9 | | Materials and Supplies | 47.6 | 46.9 | | Total Inventories – Net | $79.0 | $72.8 | - On March 10, 2020, ALLETE Clean Energy acquired rights to the Caddo wind project in Oklahoma for approximately $8 million, with additional payments due upon reaching certain milestones; the fully developed project is expected to sell energy to corporate customers under long-term power sales agreements[25] - Non-controlling interests represent the portion of equity and earnings of subsidiaries not attributable to ALLETE's equity holders; as of March 31, 2020, these amounts relate to the tax equity financing structure for ALLETE Clean Energy's 106-megawatt Glen Ullin wind energy facility[26] - The new accounting standard "Credit Losses," effective January 1, 2020, was adopted by the company in the first quarter of 2020 with no material impact on the consolidated financial statements[28] NOTE 2. REGULATORY MATTERS - Minnesota Power filed a retail rate increase request with the MPUC on November 1, 2019, seeking an average retail customer rate increase of approximately 10.6%, projected to increase annual revenue by about $66 million; the MPUC approved an interim rate increase of $36.1 million annually effective January 1, 2020[31] - On April 23, 2020, Minnesota Power submitted a proposal to the MPUC to resolve the 2020 general rate case, including eliminating the current power marketing profit credit, reflecting actual power marketing profits in the fuel adjustment clause, and refunding approximately $12 million in interim rates to customers; the MPUC approved reducing the interim rate to 4.1% effective May 1, 2020[32] - On March 24, 2020, the PSCW authorized utilities, including SWL&P, to defer COVID-19 related expenditures incurred to comply with government orders and ensure service provision; Minnesota Power has also requested MPUC authorization to track and defer incremental COVID-19 costs as a regulatory asset[35] - The Nemadji Trail Energy Center (NTEC) project's total cost is estimated at approximately $700 million, with ALLETE's share projected to be about $350 million; as of March 31, 2020, ALLETE has incurred approximately $13 million in project costs, and the project continues to face legal challenges, with the Minnesota Court of Appeals having reversed and remanded related agreements for MPUC re-evaluation[37] Regulatory Assets and Liabilities (Millions) | Regulatory Assets and Liabilities | March 31, 2020 | December 31, 2019 | |:----------------------------------|:---------------|:------------------| | Non-Current Regulatory Assets | | | | Defined Benefit Pension and Other Postretirement Benefit Plans | $211.1 | $212.9 | | Income Taxes | 121.0 | 123.4 | | Cost Recovery Riders | 34.1 | 24.7 | | Total Non-Current Regulatory Assets | $423.8 | $420.5 | | Non-Current Regulatory Liabilities | | | | Income Taxes | 397.1 | 407.2 | | Wholesale and Retail Contra AFUDC | 84.2 | 79.3 | | Plant Removal Obligations | 37.4 | 35.5 | | Total Non-Current Regulatory Liabilities | 566.4 | 560.3 | | Total Regulatory Liabilities | $567.9 | $562.2 | NOTE 3. EQUITY INVESTMENTS - ALLETE, through its wholly-owned subsidiary ALLETE Transmission Holdings, holds approximately 8% equity in ATC and accounts for it using the equity method; as of March 31, 2020, the company's equity investment in ATC was $142.3 million, with an anticipated additional investment of $1.6 million in 2020[42][43] - ALLETE, through its wholly-owned subsidiary ALLETE South Wind, holds a 49% equity interest in Nobles 2, which will own and operate a 250-megawatt wind energy facility in southwest Minnesota; as of March 31, 2020, the company's equity investment in Nobles 2 was $83.4 million, with an anticipated additional investment of approximately $65 million in 2020[43] NOTE 4. FAIR VALUE - The company primarily uses the market approach for recurring fair value measurements, prioritizing observable inputs, with a three-level hierarchy where Level 1 uses unadjusted quoted prices for identical assets or liabilities in active markets and Level 3 uses unobservable inputs[44] Recurring Fair Value Measures (Millions) | Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |:------------------------------|:--------|:--------|:--------|:------| | March 31, 2020 | | | | | | Assets | | | | | | Available-for-sale – Equity Securities | $8.4 | — | — | $8.4 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $9.3 | — | 9.3 | | Cash Equivalents | 0.8 | — | — | 0.8 | | Total Fair Value of Assets | $9.2 | $9.3 | — | $18.5 | | Liabilities | | | | | | Deferred Compensation | — | $19.3 | — | $19.3 | | Total Fair Value of Liabilities | — | $19.3 | — | $19.3 | | Total Net Fair Value of Assets (Liabilities) | $9.2 | $(10.0) | — | $(0.8) | | December 31, 2019 | | | | | | Assets | | | | | | Available-for-sale – Equity Securities | $11.1 | — | — | $11.1 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $9.7 | — | 9.7 | | Cash Equivalents | 0.9 | — | — | 0.9 | | Total Fair Value of Assets | $12.0 | $9.7 | — | $21.7 | | Liabilities | | | | | | Deferred Compensation | — | $21.2 | — | $21.2 | | Total Fair Value of Liabilities | — | $21.2 | — | $21.2 | | Total Net Fair Value of Assets (Liabilities) | $12.0 | $(11.5) | — | $0.5 | Fair Value of Financial Instruments (Millions) | Financial Instruments | Carrying Amount | Fair Value | |:----------------------------------------------------|:----------------|:-----------| | Long-Term Debt, Including Long-Term Debt Due Within One Year |\n| March 31, 2020 | $1,731.3 | $1,880.2 |\n| December 31, 2019 | $1,622.6 | $1,791.8 | - As of March 31, 2020, and December 31, 2019, there were no indicators of impairment for non-financial assets such as equity method investments, land inventory, and property, plant and equipment[47] NOTE 5. SHORT-TERM AND LONG-TERM DEBT Short-Term and Long-Term Debt (Millions) | | Principal | Unamortized Debt Issuance Costs | Total | |:-------------------|:----------|:--------------------------------|:---------| | March 31, 2020 | | | | | Short-Term Debt | $323.3 | $(0.3) | $323.0 | | Long-Term Debt | 1,408.0 | (8.1) | 1,399.9 | | Total Debt | $1,731.3 | $(8.4) | $1,722.9 | | December 31, 2019 | | | | | Short-Term Debt | $213.3 | $(0.4) | $212.9 | | Long-Term Debt | 1,409.3 | (8.4) | 1,400.9 | | Total Debt | $1,622.6 | $(8.8) | $1,613.8 | - As of March 31, 2020, the company had $66.3 million in outstanding letters of credit and $0.2 million in outstanding credit line draws[49] - On January 10, 2020, ALLETE entered into a $200 million unsecured term loan agreement, with $110 million borrowed as of March 31, 2020, for construction-related expenditures, maturing on February 10, 2021[50] - On March 26, 2020, ALLETE agreed to sell $140 million of first mortgage bonds to institutional purchasers, issued in two series maturing in 2030 and 2050, with interest rates of 2.50% and 3.30%, respectively[51] - On April 8, 2020, ALLETE entered into a $115 million unsecured term loan agreement and immediately borrowed $95 million for general corporate purposes, maturing on April 7, 2021[52] - The company's long-term debt agreements contain customary covenants, with the most restrictive financial covenant requiring a debt to total capitalization ratio not exceeding 0.65 to 1.00; as of March 31, 2020, this ratio was 0.43 to 1.00, and the company was in compliance with all financial covenants[53] NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES - Minnesota Power's cost of power purchased from Square Butte was $20.1 million in the first quarter of 2020, down from $20.5 million in the same period of 2019[56] - Minnesota Power has entered into multiple short-term power sales agreements to sell 300 megawatts of energy in 2020 and 2021, addressing potential customer energy demand uncertainty due to the COVID-19 pandemic[58] - The Great Northern Transmission Line (GNTL) project's total cost within the U.S. is estimated at approximately $700 million, with Minnesota Power's share projected to be about $325 million; as of March 31, 2020, $647.7 million in project costs have been incurred, with $344.6 million recovered from a Manitoba Hydro subsidiary, and GNTL is expected to be in service by mid-2020[62] - The company's operations are subject to environmental regulations by federal, state, and local authorities; Minnesota Power is adjusting its generation portfolio to reduce reliance on coal and has installed cost-effective emission control technologies[65] - Under the Affordable Clean Energy Rule, Minnesota Power will work with the MPCA and the Minnesota Department of Commerce to develop a state implementation plan to limit carbon dioxide emissions from coal-fired power plants, with compliance costs expected to be significant[74][75] - Compliance costs for coal ash management facilities are estimated to be between $65 million and $120 million over the next 15 years; compliance costs for the three unlined ash ponds at Boswell are currently unknown due to a court ruling[81][82] - As of March 31, 2020, the company has accrued approximately $7 million for remediation costs at a former gas plant site in Superior, Wisconsin, with remediation expected to continue through 2023[83] - ALLETE Clean Energy's existing wind energy facilities have $59.6 million in outstanding letters of credit, primarily serving as collateral for power sales agreements[84] - BNI Energy has $67.7 million in performance bonds for mine reclamation obligations, which are not expected to be drawn upon[85] - ALLETE Properties has $4.1 million in performance bonds and letters of credit with governmental entities, primarily related to development and maintenance obligations[86] - The company does not anticipate that the outcome of existing litigation and audits will have a material impact on its financial position, results of operations, or cash flows[88] NOTE 7. EARNINGS PER SHARE AND COMMON STOCK - Basic earnings per share is calculated based on the weighted-average number of common shares outstanding for each period; any difference between basic and diluted earnings per share arises from unvested restricted stock units and performance share awards granted under executive long-term incentive compensation plans[89] Reconciliation of Basic and Diluted Earnings Per Share (Millions, Except Per Share Amounts) | Reconciliation of Basic and Diluted Earnings Per Share | Basic | 2020 Dilutive Securities | Diluted | Basic | 2019 Dilutive Securities | Diluted | |:-------------------------------------------------------|:------|:-------------------------|:--------|:------|:-------------------------|:--------| | Three Months Ended March 31, | | | | | | | | Net Income Attributable to ALLETE | $66.3 | | $66.3 | $70.5 | | $70.5 | | Average Common Shares | 51.7 | 0.1 | 51.8 | 51.6 | 0.1 | 51.7 | | Earnings Per Share | $1.28 | | $1.28 | $1.37 | | $1.37 | NOTE 8. INCOME TAX EXPENSE Income Tax Expense (Benefit) (Millions) | | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:--------------------------------------|:----------------------------------|:----------------------------------| | Current Income Tax Expense | | | | Federal | — | — | | State | — | $0.3 | | Total Current Income Tax Expense | — | $0.3 | | Deferred Income Tax Expense (Benefit) | | | | Federal | $(17.6) | $(9.7) | | State | 4.0 | 12.5 | | Investment Tax Credit Amortization | (0.2) | (0.2) | | Total Deferred Income Tax Expense (Benefit) | $(13.8) | $2.6 | | Total Income Tax Expense (Benefit) | $(13.8) | $2.9 | - For the first quarter of 2020, the effective tax rate was a 27.2% benefit (compared to a 4.0% expense in the prior-year period), primarily influenced by production tax credits[94] Reconciliation of Taxes from Federal Statutory Rate to Total Income Tax Expense (Millions) | Reconciliation of Taxes from Federal Statutory Rate to Total Income Tax Expense | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:--------------------------------------------------------------------------------|:----------------------------------|:----------------------------------| | Income Before Income Taxes | $50.7 | $73.4 | | Statutory Federal Income Tax Rate | 21% | 21% | | Income Taxes Computed at Statutory Federal Rate | $10.6 | $15.4 | | Increase (Decrease) in Income Tax Due to: | | |\n| State Income Taxes – Net of Federal Income Tax Benefit | 3.2 | 10.1 |\n| Production Tax Credits | (23.8) | (16.3) |\n| Regulatory Differences – Excess Deferred Tax | (4.4) | (3.2) |\n| U.S. Water Services Sale of Stock Basis Difference | — | 2.4 |\n| Share-Based Compensation | (0.1) | (0.9) |\n| Other | 0.7 | (4.6) |\n| Total Income Tax Expense (Benefit) | $(13.8) | $2.9 | - As of March 31, 2020, the company had $1.4 million in total unrecognized tax benefits, of which $0.6 million would favorably impact the effective income tax rate if recognized[95] - ALLETE and its subsidiaries file consolidated federal income tax returns and both consolidated and separate state income tax returns; the company has no open federal or state audits[96] NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Components of Net Periodic Benefit Cost (Credit) (Millions) | Components of Net Periodic Benefit Cost (Credit) | 2020 | 2019 | 2020 | 2019 | |:-------------------------------------------------|:-------|:-------|:-------|:------| | Three Months Ended March 31, | | | | | | Service Cost | $2.6 | $2.3 | $0.8 | $1.0 | | Non-Service Cost Components | | | | | | Interest Cost | 7.0 | 8.0 | 1.3 | 1.9 | | Expected Return on Plan Assets | (10.7) | (11.0) | (2.5) | (2.6) | | Amortization of Prior Service Credits | — | — | (2.0) | (0.4) | | Amortization of Net Loss | 3.2 | 1.8 | 0.3 | 0.1 | | Net Periodic Benefit Cost (Credit) | $2.1 | $1.1 | $(2.1) | — | - For the three months ended March 31, 2020, the company contributed $10.7 million in cash to its defined benefit pension plans, with no additional contributions expected in 2020; no contributions were made to other postretirement benefit plans during the same period, and none are expected in 2020[98] NOTE 10. BUSINESS SEGMENTS - The company reports three reportable segments: Regulated Operations, ALLETE Clean Energy, and U.S. Water Services; Regulated Operations includes Minnesota Power, SWL&P, and the investment in ATC; ALLETE Clean Energy focuses on developing, acquiring, and operating clean renewable energy projects; U.S. Water Services was sold in March 2019[99][100] Operating Revenue (Millions) | Operating Revenue | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:------------------------------|:----------------------------------|:----------------------------------| | Regulated Operations | $265.3 | $282.2 | | ALLETE Clean Energy | 20.1 | 17.5 | | U.S. Water Services | — | 33.4 | | Corporate and Other | 26.2 | 24.1 | | Total Operating Revenue | $311.6 | $357.2 | Net Income (Loss) Attributable to ALLETE (Millions) | Net Income (Loss) Attributable to ALLETE | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:-----------------------------------------|:----------------------------------|:----------------------------------| | Regulated Operations | $57.5 | $51.5 | | ALLETE Clean Energy | 11.7 | 5.8 |\n| U.S. Water Services | — | (1.1) |\n| Corporate and Other | (2.9) | 14.3 |\n| Total Net Income Attributable to ALLETE | $66.3 | $70.5 | Assets (Millions) | Assets | March 31, 2020 | December 31, 2019 | |:------------------------|:---------------|:------------------| | Regulated Operations | $4,145.5 | $4,130.8 | | ALLETE Clean Energy | 1,099.6 | 1,001.5 | | Corporate and Other | 374.4 | 350.5 | | Total Assets | $5,619.5 | $5,482.8 | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses ALLETE's financial condition and operating results as of March 31, 2020, comparing them to the prior year, highlighting COVID-19 impacts, segment performance, strategic goals, accounting policies, outlook, and liquidity OVERVIEW - For the three months ended March 31, 2020, the COVID-19 pandemic had no material impact on the company's financial position, results of operations, or cash flows, but first-quarter trends and results may not be indicative of full-year performance due to ongoing uncertainty[104] - The company's operations are segmented into Regulated Operations (including Minnesota Power, SWL&P, and the investment in ATC), ALLETE Clean Energy (focused on clean renewable energy projects), and Corporate and Other (including BNI Energy, the investment in Nobles 2, ALLETE Properties, etc.); U.S. Water Services was sold in March 2019[105][106][107] Financial Overview Net Income Attributable to ALLETE and Diluted Earnings Per Share (Millions, Except Per Share Amounts) | Indicator | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:------------------------------------|:----------------------|:----------------------| | Net Income Attributable to ALLETE | $66.3 | $70.5 | | Diluted Earnings Per Share | $1.28 | $1.37 | - 2019 net income included a $9.9 million after-tax gain ($0.19 per share) from the sale of U.S. Water Services, and a $1.1 million operating loss ($0.02 per share) from U.S. Water Services[109] - Net income from Regulated Operations increased from $51.5 million in 2019 to $57.5 million in 2020, primarily due to the implementation of interim rates, increased cost recovery rider revenue, and the timing of fuel adjustment clause recoveries[110] - ALLETE Clean Energy's net income increased from $5.8 million in 2019 to $11.7 million in 2020, primarily driven by additional production tax credits, higher wind resources and availability, and earnings from the Glen Ullin wind energy facility[111] - Net income from Corporate and Other decreased from $14.3 million in 2019 to a $2.9 million loss in 2020, primarily due to the 2019 gain on the sale of U.S. Water Services, reduced gains on available-for-sale equity securities, and additional income tax expense in 2020[113] COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 Regulated Operations Regulated Operations Financial Performance (Millions) | Three Months Ended March 31, | 2020 | 2019 | |:--------------------------------------------|:-------|:-------| | Operating Revenue – Utility | $265.3 | $282.2 | | Fuel, Purchased Power and Gas – Utility | 89.0 | 109.8 | | Transmission Services – Utility | 18.5 | 18.3 | | Operating and Maintenance | 49.3 | 47.7 | | Depreciation and Amortization | 41.7 | 39.8 | | Taxes Other than Income Taxes | 11.3 | 12.3 | | Operating Income | 55.5 | 54.3 | | Interest Expense | (14.6) | (15.5) | | Equity Earnings | 5.2 | 5.6 | | Other Income | 3.4 | 4.3 | | Income Before Income Taxes | 49.5 | 48.7 | | Income Tax Expense (Benefit) | (8.0) | (2.8) | | Net Income Attributable to ALLETE | $57.5 | $51.5 | - Utility operating revenue decreased by $16.9 million year-over-year, primarily due to reduced fuel adjustment clause recoveries, lower kilowatt-hour sales revenue, and decreased energy conservation improvement program recoveries, partially offset by interim rates implemented January 1, 2020, and increased cost recovery rider revenue[115] - Fuel adjustment clause revenue decreased by $12.2 million, primarily due to lower fuel and purchased power costs for retail and municipal customers; kilowatt-hour sales revenue decreased by $9 million, mainly due to lower residential, commercial, and municipal sales, partially offset by increased industrial sales[116] Kilowatt-hours Sold (Million kWh) | Kilowatt-hours Sold | 2020 | 2019 | Quantity Variance | % Variance | |:--------------------|:------|:------|:------------------|:-----------| | Residential | 321 | 349 | (28) | (8.0)% | | Commercial | 352 | 366 | (14) | (3.8)% | | Industrial | 1,902 | 1,814 | 88 | 4.9% | | Municipal | 156 | 203 | (47) | (23.2)% | | Total Retail and Municipal | 2,731 | 2,732 | (1) | — | | Other Power Suppliers | 822 | 822 | — | — | | Total Regulated Utility Kilowatt-hours Sold | 3,553 | 3,554 | (1) | — | - Operating expenses decreased by $18.1 million, or 8%, year-over-year; fuel, purchased power, and gas expenses decreased by $20.8 million, or 19%, primarily due to lower purchased power prices and fuel costs; operating and maintenance expenses increased by $1.6 million, or 3%, mainly due to higher contract and professional services and increased material purchases for generation facilities; depreciation and amortization expenses increased by $1.9 million, or 5%; taxes other than income taxes decreased by $1 million, or 8%; income tax benefit increased by $5.2 million, primarily due to higher production tax credits[119][120][121][122] ALLETE Clean Energy ALLETE Clean Energy Financial Performance (Millions) | Millions | 2020 | 2019 | |:----------------------------------------|:------|:------| | Operating Revenue | | | | Contracts with Customers – Non-utility | $17.3 | $14.6 | | Other – Non-utility | 2.8 | 2.9 | | Operating and Maintenance | 8.2 | 7.2 | | Depreciation and Amortization | 8.2 | 6.5 | | Taxes and Other | 0.7 | 0.6 | | Operating Income | 3.0 | 3.2 | | Interest Expense | (0.5) | (0.8) | | Other Income | 0.2 | 1.8 | | Income Before Income Taxes | 2.7 | 4.2 | | Income Tax Expense (Benefit) | (7.2) | (1.6) | | Net Income | 9.9 | 5.8 | | Net Loss Attributable to Non-Controlling Interest | (1.8) | — | | Net Income Attributable to ALLETE | $11.7 | $5.8 | - Operating revenue increased by $2.6 million, or 15%, year-over-year, primarily due to revenue from the Glen Ullin wind energy facility (placed in service December 2019) and higher wind resources and availability[123] Wind Energy Production and Operating Revenue (Million kWh/Millions) | Production and Operating Revenue | 2020 kWh | 2020 Revenue | 2019 kWh | 2019 Revenue | |:---------------------------------|:---------|:-------------|:---------|:-------------| | Wind Energy Regions | | | | | | East | 78.6 | $7.1 | 80.4 | $7.4 | | Midwest | 244.4 | 8.5 | 212.9 | 9.0 | | West | 141.8 | 4.5 | 13.4 | 1.1 | | Total Production and Operating Revenue | 464.8 | $20.1 | 306.7 | $17.5 | - Operating and maintenance expenses increased by $1 million, or 14%, year-over-year, primarily due to operating and maintenance expenses for the Glen Ullin wind energy facility; depreciation and amortization expenses increased by $1.7 million, or 26%; income tax benefit increased by $5.6 million, primarily due to additional production tax credits generated in 2020[125][126][127] - Net loss attributable to non-controlling interest increased by $1.8 million year-over-year, reflecting the net loss from the Glen Ullin wind energy facility[128] U.S. Water Services U.S. Water Services Financial Performance (Millions) | Three Months Ended March 31, | 2020 | 2019 | |:--------------------------------|:------|:-------| | Operating Revenue | — | $33.4 | | Net Loss Attributable to ALLETE | — | $(1.1) | - ALLETE completed the sale of U.S. Water Services in the first quarter of 2019, resulting in no related operating revenue or net loss in 2020[129][130] Corporate and Other - Operating revenue increased by $2.1 million, or 9%, year-over-year, primarily due to increased revenue at BNI Energy, which operates under a cost-plus fixed fee contract and benefited from higher fees and tons sold[131] - Net loss attributable to ALLETE was $2.9 million (compared to net income of $14.3 million in the prior-year period), primarily due to the 2019 after-tax gain of $9.9 million from the sale of U.S. Water Services, reduced gains on available-for-sale equity securities, and additional income tax expense in 2020[132] Income Taxes – Consolidated - For the three months ended March 31, 2020, the effective tax rate was a 27.2% benefit (compared to a 4.0% expense in the prior-year period), primarily due to a higher tax rate and higher income before income taxes resulting from the 2019 sale of U.S. Water Services[133] - The annual effective tax rate for 2020 is expected to be higher than 2019, primarily due to increased production tax credits generated by ALLETE Clean Energy in 2020 and lower income before income taxes[134] CRITICAL ACCOUNTING POLICIES - The company considers the most critical accounting measurements to its reported results of operations and financial position to include: regulatory accounting, actuarial assumptions for pension and postretirement health and life, impairment of long-lived assets, and income taxes[134] OUTLOOK - ALLETE's long-term goal is to achieve average annual earnings per share growth of 5% to 7% and provide an industry-competitive dividend payout; Regulated Operations is projected to achieve long-term average annual earnings growth of 4% to 5%, while ALLETE Clean Energy and Corporate and Other businesses are expected to achieve long-term average annual earnings growth of at least 15%[136] - Net income from Regulated Operations is expected to comprise approximately 80% of total consolidated net income in 2020; the contribution to net income from ALLETE Clean Energy and Corporate and Other businesses is projected to increase in future years[136] Regulated Operations - Minnesota Power's long-term strategy is to be the leading electric provider in northeastern Minnesota by delivering safe, reliable, and cost-competitive electric energy while adhering to environmental permit conditions and renewable energy requirements[137] - Minnesota Power filed a retail rate increase request on November 1, 2019, seeking an average retail customer rate increase of approximately 10.6%, and was approved for an interim rate increase of $36.1 million annually effective January 1, 2020[139] - SWL&P's current retail electric rates are based on a December 2018 PSCW order allowing a 10.4% return on equity and a 55.0% equity ratio; the PSCW has requested SWL&P to file a general rate case in 2020[141] - The COVID-19 pandemic is expected to result in reduced sales and revenue from commercial, municipal, and industrial customers, and increased bad debt from residential and commercial customers; Cliffs, Hibbing Taconite, and USS Corporation have idled portions of their mining operations temporarily or indefinitely[142] - There is a historical correlation between U.S. steel production and Minnesota iron ore production; the American Iron and Steel Institute reported that U.S. raw steel production for the last week of April 2020 had fallen to approximately 51% of capacity[144] - Minnesota Power is executing its EnergyForward strategic plan to ensure reliability, preserve affordability, and further improve environmental performance, including investments in wind, solar, natural gas, and hydro generation, and the construction of additional transmission capacity[156] - The Nemadji Trail Energy Center (NTEC) project's total cost is estimated at approximately $700 million, with ALLETE's share projected to be about $350 million; the project continues to face legal challenges, with the Minnesota Supreme Court having accepted review[157] - Minnesota Power anticipates that approximately 50% of its energy will be supplied by renewable sources by 2021[158] - The Great Northern Transmission Line (GNTL) project is expected to be in service by mid-2020; the total project cost within the U.S. is estimated at approximately $700 million, with Minnesota Power's share projected to be about $325 million[168][169] - ALLETE plans additional investments in ATC through general capital calls, with ATC's 10-year transmission assessment (2019-2028) identifying $2.9 billion to $3.6 billion in required transmission system investments[171] ALLETE Clean Energy - ALLETE Clean Energy currently owns and operates approximately 740 megawatts of wind generation capacity across six states, with about 300 megawatts of wind facilities under construction; the company's strategy includes safe, reliable, optimized, and profitable operation of existing facilities, and growth through acquisitions or project development[172][174][175] - The company has invested in equipment to meet production tax credit safe harbor provisions, providing an opportunity to develop approximately 1,000 megawatts of qualifying wind projects by 2022; the company will also invest approximately $80 million for production tax credit recertification of existing wind energy facilities[176] - These projects are expected to generate approximately $20 million in production tax credits annually in 2020, $17 million to $22 million annually from 2021 through 2027, and gradually decline thereafter through 2030[176] - On March 10, 2020, ALLETE Clean Energy acquired rights to the Caddo wind project in Oklahoma for approximately $8 million, which, when fully developed, will involve selling energy to corporate customers[178] Corporate and Other - BNI Energy expects to sell 4.6 million tons of lignite in 2020 (compared to 4.1 million tons sold in 2019), with 1.2 million tons sold as of March 31, 2020; BNI Energy operates under a cost-plus fixed fee agreement effective through December 31, 2037[181] - ALLETE's investment in Nobles 2 is $83.4 million, with an anticipated additional investment of approximately $65 million in 2020; the Nobles 2 wind energy facility is expected to be completed by late 2020, with total project costs estimated between $350 million and $400 million[182] - ALLETE Properties represents the company's real estate investments in Florida, with its primary project being the Town Center in Palm Coast, holding approximately 800 acres of land available for sale; the company's strategy includes selling the entire ALLETE Properties portfolio in bulk, with proceeds supporting growth initiatives in Regulated Operations and ALLETE Clean Energy[183][184] Income Taxes - ALLETE's combined federal and multi-state statutory tax rate is approximately 28%; the effective tax rate for 2020 is expected to be a benefit of approximately 25% to 30%, primarily due to federal production tax credits generated from wind energy production[185] - The effective tax rate is expected to be below the combined statutory rate for the next 10 years due to production tax credits generated from wind energy production[185] LIQUIDITY AND CAPITAL RESOURCES - ALLETE's liquidity position is strong, but the company is closely monitoring capital markets and other financing sources in response to the COVID-19 pandemic; as of March 31, 2020, the company had $67 million in cash and cash equivalents, $340.5 million in available consolidated credit, and 2.9 million shares of common stock available for issuance[186][187] - The company has agreed to sell $140 million of first mortgage bonds and entered into a $115 million term loan agreement on April 8, 2020; on April 29, 2020, the company received approximately $70 million in cash from third-party investors as part of a tax equity financing for ALLETE Clean Energy's South Peak wind energy facility[187] ALLETE Capital Structure (Millions) | | March 31, 2020 | % | December 31, 2019 | % | |:--------------------------------------------------------------|:---------------|:----|:------------------|:----| | ALLETE Equity | $2,271.1 | 55 | $2,231.9 | 56 | | Non-Controlling Interest | 101.9 | 3 | 103.7 | 3 | | Long-Term Debt (Including Long-Term Debt Due Within One Year) | 1,731.3 | 42 | 1,622.6 | 41 | | Total | $4,104.3 | 100 | $3,958.2 | 100 | Selected Cash Flow Statement Information (Millions) | For the Three Months Ended March 31, | 2020 | 2019 | |:--------------------------------------------------------------------|:----------|:---------| | Cash, Cash Equivalents and Restricted Cash at Beginning of Period | $92.5 | $79.0 | | Cash Flows from (used for) Operating Activities | 88.8 | 79.1 | | Cash Flows from (for) Investing Activities | (182.5) | 185.1 | | Cash Flows from Financing Activities | 80.1 | 22.0 | | Change in Cash, Cash Equivalents and Restricted Cash | (13.6) | 286.2 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $78.9 | $365.2 | - Cash flows from operating activities in 2020 were slightly higher than 2019, with increased cash outflows from investing activities and increased cash outflows from financing activities[190][191][192] - As of March 31, 2020, the company had $407 million in consolidated bank credit facilities, with the majority maturing in January 2024; the company also had 3.6 million shares of common stock available for issuance, and 2.9 million shares available through a distribution agreement[193] - In the first quarter of 2020, the company issued 0.1 million shares of common stock, generating net proceeds of $3.3 million[194] - The company's long-term debt agreements contain customary covenants, with the most restrictive financial covenant requiring a debt to total capitalization ratio not exceeding 0.65 to 1.00; as of March 31, 2020, this ratio was 0.43 to 1.00, and the company was in compliance with all financial covenants[195] Credit Ratings | Credit Ratings | S&P Global Ratings | Moody's | |:-----------------------|:-------------------|:--------| | Issuer Credit Rating | BBB | Baa1 | | Commercial Paper | A-2 | P-2 | | First Mortgage Bonds | (a) | A2 | - On April 22, 2020, S&P Global Ratings lowered ALLETE's long-term issuer credit rating from BBB+ (negative outlook) to BBB (stable) and affirmed its short-term rating of A-2[198] - Capital expenditures for 2020 are projected to be approximately $535 million, but the company is evaluating and may adjust them to mitigate the impact of the COVID-19 pandemic; as of March 31, 2020, total capital expenditures were $161.8 million[200] OTHER - The company's operations are subject to environmental regulations by federal, state, and local authorities; Minnesota Power is adjusting its generation portfolio to reduce reliance on coal and has installed cost-effective emission control technologies[201] - As of March 31, 2020, ALLETE had 1,352 employees, with 1,328 being full-time; labor agreements for Minnesota Power and SWL&P expire on April 30, 2023, and February 1, 2021, respectively, while BNI Energy's labor agreement expires on March 31, 2023[202][203] NEW ACCOUNTING PRONOUNCEMENTS - New accounting pronouncements are discussed in Note 1, "Operations and Significant Accounting Policies"[204] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discloses ALLETE's market risks, including securities investment, commodity price, power marketing, and interest rate risks, managed through regulatory frameworks, diverse contracts, and market monitoring SECURITIES INVESTMENTS - As of March 31, 2020, the company's available-for-sale securities portfolio primarily consisted of securities held in other postretirement plans to fund employee benefits[205] COMMODITY PRICE RISK - The price risk associated with electricity and fuel (primarily coal and related transportation) costs incurred by the company's regulated utility operations, and purchased power and natural gas costs within its Wisconsin regulated service territory, is significantly mitigated through current rate-making processes and regulatory frameworks[206] - The company prudently manages customer price risk by entering into power, coal and related transportation costs (Minnesota Power), and natural gas (SWL&P) purchase contracts with varying terms and durations[206] POWER MARKETING - Minnesota Power's power marketing activities involve purchasing energy in the wholesale market to meet its regulated service territory's energy requirements and selling excess available energy and purchased power; the company manages credit risk by establishing credit approval processes and monitoring counterparty limits[207][208] INTEREST RATE RISK - The company manages its exposure to changes in interest rates by structuring the issuance and maturities of fixed-rate debt, limiting the amount of variable-rate debt, and continuously monitoring changes in market interest rates; the company may also use derivative financial instruments, such as interest rate swaps, to hedge interest rate risk[209] - As of March 31, 2020, based on outstanding variable-rate debt, a 100-basis point increase in interest rates would increase pre-tax interest expense by $2.6 million[209] ITEM 4. CONTROLS AND PROCEDURES This section assesses ALLETE's disclosure controls and procedures effectiveness as of March 31, 2020, and states no material changes occurred in internal controls during the reporting period Evaluation of Disclosure Controls and Procedures - As of March 31, 2020, the company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that disclosure controls and procedures were effective in ensuring information required for reports filed under the Securities Exchange Act is timely recorded, processed, summarized, and reported[210] Changes in Internal Controls - There were no changes in the company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[211] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section refers to Notes 4 and 9 in the 2019 10-K, and Notes 2 and 6 in this report, for information on significant legal and regulatory proceedings - For information regarding significant legal and regulatory proceedings, refer to Note 4, "Regulatory Matters," and Note 9, "Commitments, Guarantees and Contingencies," in the company's 2019 Form 10-K, and Note 2, "Regulatory Matters," and Note 6, "Commitments, Guarantees and Contingencies," in this report[212] ITEM 1A. RISK FACTORS This section updates 2019 10-K risk factors, emphasizing potential significant adverse impacts of the COVID-19 pandemic on business, including economic disruption, reduced sales, increased bad debt, limited capital access, and supply chain interruptions - The company may be materially adversely affected by the ongoing COVID-19 pandemic, whose ultimate impact is unpredictable due to the uncertain scope and duration of the outbreak[213] - The COVID-19 pandemic has caused widespread impacts on the global economy, the company's employees, customers, contractors, and suppliers, and could lead to prolonged disruptions in economic activity, reducing sales and revenue from commercial, municipal, and industrial customers, and increasing bad debt from residential and commercial customers[214][215] - The pandemic could increase borrowing costs in capital markets or affect the company's ability to access capital markets or other financing sources; capital market performance also impacts the value of pension and other postretirement benefit plan trust assets, with declining market values increasing funding requirements for benefit plans[216] - Supply chain disruptions or a lack of available financing could jeopardize the company's ability to timely complete certain capital projects to qualify for production tax credits[216] - The company cannot predict the ultimate impact of the COVID-19 pandemic or whether it will materially affect its liquidity, financial position, results of operations, and cash flows[217] [ITEM 2. UNREGISTERED