ALLETE(ALE) - 2020 Q2 - Quarterly Report

Part I Consolidated Financial Statements (Unaudited) The unaudited consolidated financial statements for the period ended June 30, 2020, show a decrease in net income and earnings per share, with total assets increasing due to investments in property, plant, and equipment, and lower operating revenues due to reduced industrial demand Consolidated Balance Sheet ALLETE's total assets increased to $5.76 billion as of June 30, 2020, primarily driven by growth in Property, Plant and Equipment, while total liabilities also rose due to increased short-term debt Consolidated Balance Sheet Highlights (Millions) | Assets & Liabilities | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Current Assets | $223.0 | $269.5 | | Property, Plant and Equipment – Net | $4,644.5 | $4,377.0 | | Total Assets | $5,760.4 | $5,482.8 | | Total Current Liabilities | $727.7 | $507.4 | | Total Liabilities | $3,328.2 | $3,147.2 | | Total ALLETE Equity | $2,265.7 | $2,231.9 | | Total Liabilities and Equity | $5,760.4 | $5,482.8 | Consolidated Statement of Income ALLETE reported a significant decrease in net income and diluted earnings per share for Q2 and the six months ended June 30, 2020, primarily due to lower operating revenue from utility contracts Consolidated Statement of Income Highlights (Unaudited, Millions except per share) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenue | $243.2 | $290.4 | $554.8 | $647.6 | | Operating Income | $12.7 | $36.2 | $72.9 | $93.0 | | Net Income Attributable to ALLETE | $20.1 | $34.2 | $86.4 | $104.7 | | Diluted Earnings Per Share | $0.39 | $0.66 | $1.67 | $2.02 | Consolidated Statement of Cash Flows Cash from operating activities increased for the six months ended June 30, 2020, while investing activities saw a significant outflow for capital additions, contrasting with the prior year's proceeds from asset sales Cash Flow Summary (Six Months Ended June 30, Millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Cash from Operating Activities | $144.5 | $95.2 | | Cash from (for) Investing Activities | $(487.4) | $46.0 | | Cash from (for) Financing Activities | $287.8 | $(13.6) | | Change in Cash, Cash Equivalents and Restricted Cash | $(55.1) | $127.6 | Notes to Consolidated Financial Statements The notes detail regulatory matters, significant clean energy investments, new debt issuances, and segment performance, highlighting the impact of the U.S. Water Services sale and ALLETE Clean Energy's growth - In the 2020 Minnesota General Rate Case, the MPUC approved a resolution resulting in a 4.1% rate increase effective May 1, 2020, and a refund of $11.7 million in interim rates collected through April 2020[33] - ALLETE Clean Energy acquired the rights to the ~300 MW Caddo wind project in Oklahoma from Apex Clean Energy for approximately $8 million[26] - The company entered into two new unsecured term loan agreements in Q1 and Q2 2020, totaling $315 million, to fund construction-related expenditures and for general corporate purposes[56][58] Net Income by Business Segment (Six Months Ended June 30, Millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | Regulated Operations | $68.6 | $81.8 | | ALLETE Clean Energy | $15.7 | $7.7 | | U.S. Water Services | — | $(1.1) | | Corporate and Other | $2.1 | $16.3 | | Total Net Income | $86.4 | $104.7 | Management's Discussion and Analysis (MD&A) Management discusses the financial results, attributing a decrease in net income to lower industrial kWh sales, interim rate refunds, and the absence of prior year asset sale gains, while maintaining a long-term focus on regulated utility and clean energy growth - Net income for the first six months of 2020 was $86.4 million ($1.67/share), compared to $104.7 million ($2.02/share) in 2019, with 2019 results including an $11.1 million after-tax gain on the sale of U.S. Water Services[120] - Regulated Operations' net income fell to $68.6 million from $81.8 million in H1 2019, primarily due to lower kWh sales and an $8.3 million after-tax reserve for interim rate refunds[121] - ALLETE Clean Energy's net income grew to $15.7 million from $7.7 million in H1 2019, driven by new wind facilities and increased production tax credits[121] - The company maintains its long-term annual EPS growth objective of 5% to 7%, despite short-term negative impacts expected from the COVID-19 pandemic[160] Comparison of Quarters Ended June 30, 2020 and 2019 Q2 2020 saw a 20% decrease in Regulated Operations revenue due to reduced industrial kWh sales, while ALLETE Clean Energy's net income increased from new wind facilities and higher production tax credits Regulated Utility kWh Sold (Millions) | Customer Type | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Residential | 246 | 232 | 6.0% | | Commercial | 286 | 317 | (9.8)% | | Industrial | 1,235 | 1,773 | (30.3)% | | Total Regulated Utility | 2,604 | 3,206 | (18.8)% | - Regulated Operations revenue decreased by $49.0 million (20%) in Q2 2020, primarily due to lower kWh sales and a $5.5 million revenue reduction from reserves for interim rate refunds[124][127] - ALLETE Clean Energy's operating revenue increased by $2.2 million (14%) in Q2 2020, driven by the new Glen Ullin and South Peak wind facilities[132] Comparison of Six Months Ended June 30, 2020 and 2019 For the first six months of 2020, Regulated Operations revenue decreased due to lower industrial kWh sales, while ALLETE Clean Energy's net income more than doubled, and Corporate and Other net income fell sharply due to the absence of a prior year asset sale gain Regulated Utility kWh Sold (Millions) | Customer Type | Six Months 2020 | Six Months 2019 | % Change | | :--- | :--- | :--- | :--- | | Industrial | 3,137 | 3,587 | (12.5)% | | Total Regulated Utility | 6,157 | 6,760 | (8.9)% | - ALLETE Clean Energy's income tax benefit increased by $4.3 million in H1 2020, primarily due to production tax credits rising to $8.0 million from $4.2 million in H1 2019[150] - Corporate and Other net income dropped from $16.3 million in H1 2019 to $2.1 million in H1 2020, largely because the 2019 figure included an $11.1 million after-tax gain on the sale of U.S. Water Services[156] Outlook ALLETE anticipates short-term negative impacts from COVID-19 but maintains its long-term EPS growth target, continuing its 'EnergyForward' strategy with significant capital expenditures for clean energy projects - Industrial customers have been significantly impacted by COVID-19, with USS Corporation idling its Keetac plant and Verso Corporation idling its Duluth paper mill indefinitely[166][171][175] - The company's next Integrated Resource Plan (IRP) filing has been extended to February 1, 2021, and will evaluate the potential early retirement of Boswell Units 3 and 4[182] - ALLETE Clean Energy is advancing major wind projects, including the ~300 MW Diamond Spring project (completion late 2020) and the newly acquired ~300 MW Caddo project[202][203] - The company expects its 2020 effective tax rate to be a benefit of approximately 35% to 40%, primarily due to federal production tax credits from wind energy generation[209] Liquidity and Capital Resources As of June 30, 2020, ALLETE maintained solid liquidity with available cash and credit lines, but faced a credit rating downgrade due to debt coverage concerns and increased capital expenditures for 2020 Capital Structure (Millions) | Component | June 30, 2020 | % of Total | | :--- | :--- | :--- | | ALLETE Equity | $2,265.7 | 52% | | Non-Controlling Interest | $166.5 | 4% | | Short-Term and Long-Term Debt | $1,899.0 | 44% | | Total Capitalization | $4,331.2 | 100% | - Capital expenditures for 2020 are expected to be approximately $635 million, an increase primarily due to the Caddo wind project[224] - On April 22, 2020, S&P Global Ratings downgraded ALLETE's long-term issuer credit rating to BBB stable from BBB+ outlook negative[222] Quantitative and Qualitative Disclosures about Market Risk The company manages commodity price risk through regulatory recovery mechanisms, credit risk through policies, and interest rate risk by limiting variable rate debt, with a 100 basis point increase impacting pre-tax interest expense by $4.3 million - Exposure to price risk for coal, power, and natural gas is significantly mitigated by regulatory frameworks that allow for cost recovery from customers[230] - A hypothetical 100 basis point (1%) increase in interest rates would increase annual pre-tax interest expense by approximately $4.3 million based on variable rate debt outstanding at June 30, 2020[233] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[234] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[235] Part II. Other Information Risk Factors This section updates risk factors, primarily focusing on the uncertain and material adverse effects of the COVID-19 pandemic on sales, revenue, capital markets, and supply chains, which could jeopardize project completion and tax credit qualification - The primary updated risk is the material adverse effect of the ongoing COVID-19 pandemic, whose extent and duration are uncertain[237] - The pandemic has led to reduced sales and revenue from commercial and industrial customers, including the indefinite idling of the Keetac plant (USS Corp) and the Duluth paper mill (Verso Corp)[239] - Potential disruptions in capital markets could increase borrowing costs or limit access to financing, and supply chain disruptions could adversely impact operations and jeopardize the ability to complete capital projects in time to qualify for production tax credits[241]