ALLETE(US:ALE)2021-08-03 16:00Part I. Financial Information Item 1. Consolidated Financial Statements This section presents unaudited consolidated financial statements, showing total assets increased to $6.3 billion, Q2 net income rose to $27.9 million, while six-month net income decreased to $79.7 million, and cash from operations declined Consolidated Balance Sheet Summary (Millions) | Account | June 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $6,293.3 | $6,084.6 | | Total Current Assets | $279.3 | $254.9 | | Property, Plant and Equipment – Net | $5,021.6 | $4,840.8 | | Total Liabilities | $3,451.4 | $3,284.4 | | Total Current Liabilities | $595.5 | $459.6 | | Long-Term Debt | $1,664.6 | $1,593.2 | | Total Equity | $2,841.9 | $2,800.2 | Consolidated Statement of Income Summary (Millions, Except Per Share) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenue | $335.6 | $243.2 | $674.8 | $554.8 | | Operating Income | $28.2 | $12.7 | $70.2 | $72.9 | | Net Income Attributable to ALLETE | $27.9 | $20.1 | $79.7 | $86.4 | | Diluted EPS | $0.53 | $0.39 | $1.53 | $1.67 | Consolidated Statement of Cash Flows Summary (Six Months Ended June 30, Millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Cash from Operating Activities | $105.7 | $143.3 | | Cash for Investing Activities | $(305.7) | $(486.2) | | Cash from Financing Activities | $202.1 | $287.8 | | Change in Cash, Cash Equivalents and Restricted Cash | $2.1 | $(55.1) | Notes to Consolidated Financial Statements This section details regulatory matters, debt activities, environmental contingencies, and segment contributions to net income - Regulatory Matters: In June 2020, the MPUC approved a resolution to Minnesota Power's 2020 general rate case, setting a 4.1% rate increase effective May 1, 2020, and requiring a refund of $11.7 million in interim rates collected28 - Debt: On March 25, 2021, ALLETE entered into a $150 million unsecured term loan, drawing the full amount plus an additional $35 million. On April 21, 2021, ALLETE agreed to sell $100 million of First Mortgage Bonds4950 - Environmental Contingencies: Costs for compliance with the EPA's Coal Combustion Residuals (CCR) rule at the Boswell and Laskin facilities are expected to be between $65 million and $120 million over the next 15 years73 - Business Segments: For the six months ended June 30, 2021, Regulated Operations contributed $66.5 million to net income, ALLETE Clean Energy contributed $12.5 million, and Corporate and Other contributed $0.7 million94 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a decrease in six-month net income, impacted by a winter storm and a power sales agreement expiration, while reaffirming long-term EPS growth targets and outlining its carbon-free energy strategy - Net income for the first six months of 2021 was $79.7 million ($1.53/share), down from $86.4 million ($1.67/share) in 2020. The decrease was influenced by a ~$5 million after-tax loss at the Diamond Spring wind facility due to a winter storm and the expiration of a 100 MW PSA in April 2020104 - The company maintains a long-term objective of 5% to 7% average annual EPS growth. For 2021, Regulated Operations are expected to contribute approximately 80% of total consolidated net income139141 - Minnesota Power filed its 2021 Integrated Resource Plan, which outlines a transition to 70% renewable energy by 2030 and 100% carbon-free energy by 2050. This includes adding 400 MW of wind and solar and making its Boswell plant coal-free by 2035159158 - The company is well-positioned for liquidity with $62.5 million in cash, $349.5 million in available credit lines, and a debt-to-capital ratio of 42% as of June 30, 2021183184 Comparison of the Quarters Ended June 30, 2021 and 2020 This section compares Q2 2021 and Q2 2020 financial performance, highlighting segment contributions and revenue drivers Net Income Attributable to ALLETE by Segment (Q2, Millions) | Segment | Q2 2021 | Q2 2020 | Change | | :--- | :--- | :--- | :--- | | Regulated Operations | $21.5 | $11.1 | +$10.4 | | ALLETE Clean Energy | $5.1 | $4.0 | +$1.1 | | Corporate and Other | $1.3 | $5.0 | -$3.7 | | Total | $27.9 | $20.1 | +$7.8 | - Regulated Operations revenue increased by $89.6 million, driven by higher fuel adjustment clause recoveries ($38.6 million) and a 41% increase in kWh sold, reflecting improved business conditions post-COVID-19 shutdowns in 2020108109110 - ALLETE Clean Energy's revenue increased due to the new Diamond Spring facility, which commenced operations in December 2020, contributing to a 44% increase in total kWh production117 Comparison of the Six Months Ended June 30, 2021 and 2020 This section compares six-month financial performance, detailing segment net income changes and key factors influencing results Net Income Attributable to ALLETE by Segment (Six Months, Millions) | Segment | H1 2021 | H1 2020 | Change | | :--- | :--- | :--- | :--- | | Regulated Operations | $66.5 | $68.6 | -$2.1 | | ALLETE Clean Energy | $12.5 | $15.7 | -$3.2 | | Corporate and Other | $0.7 | $2.1 | -$1.4 | | Total | $79.7 | $86.4 | -$6.7 | - Regulated Operations net income was slightly lower due to the expiration of a PSA and higher operating expenses, which were partially offset by a 22.6% increase in kWh sales105127 - ALLETE Clean Energy's net income decreased primarily due to a ~$5 million after-tax negative impact at its Diamond Spring facility from an extreme winter storm in February 2021105132 Outlook This section outlines the company's projected EPS growth, strategic initiatives for carbon-free energy, and future project developments - The company projects an average annual EPS growth rate of 5% to 7% using 2019 as a base year, with Regulated Operations growing ~3% and ALLETE Clean Energy/Corporate growing 30% to 40%139 - Minnesota Power plans to file a general rate case in November 2021 and is executing its 'EnergyForward' strategy to deliver 100% carbon-free energy by 2050142158 - ALLETE Clean Energy is pursuing growth through acquisitions and development, including the ~300 MW Caddo wind project (under construction) and agreements to sell the repowered Northern Wind (~120 MW) and Red Barn (~92 MW) projects174176177 - The company expects its 2021 effective tax rate to be a benefit of approximately 25% to 30%, primarily due to federal production tax credits from wind energy generation182 Liquidity and Capital Resources This section details the company's capital structure, projected capital expenditures, and available liquidity through credit lines Capital Structure (Millions) | Component | June 30, 2021 | % of Total | | :--- | :--- | :--- | | ALLETE Equity | $2,322.6 | 47% | | Non-Controlling Interest | $519.3 | 11% | | Short-Term and Long-Term Debt | $2,036.1 | 42% | | Total Capitalization | $4,878.0 | 100% | - Capital expenditures for 2021 are expected to be approximately $500 million. For the first six months of 2021, capital expenditures totaled $288.3 million191 - The company has $432.0 million in consolidated bank lines of credit, with $349.5 million available as of June 30, 2021183187 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's commodity price risk is mitigated by regulatory mechanisms, while interest rate risk is managed by limiting variable rate debt, with a 100 basis point increase impacting pre-tax interest by $3.8 million - Exposure to price risk for coal, power, and natural gas in regulated operations is significantly mitigated by the ratemaking process, which allows for the recovery of these costs from customers196 - Based on variable rate debt outstanding as of June 30, 2021, a 100 basis point increase in interest rates would result in a $3.8 million increase in pre-tax interest expense199 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes in internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the period200 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls201 Part II. Other Information Item 1. Legal Proceedings The company is involved in normal course litigation, not expecting material financial impact, with details on material proceedings referenced in regulatory notes - The company does not expect the outcome of legal proceedings arising in the normal course of business to have a material effect on its financial condition or results of operations83202 Item 1A. Risk Factors This section updates risk factors, emphasizing electricity market price volatility and its adverse impact, exemplified by a ~$5 million after-tax loss from a winter storm - A new risk factor was added concerning the volatility of electricity prices, which can adversely affect results at ALLETE Clean Energy facilities with contracts for differences with commercial and industrial customers203 - An extreme winter storm in February 2021 led to a ~$5 million after-tax negative impact at the Diamond Spring facility due to large differences between day-ahead and real-time market prices under a specific power sales agreement204 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during the period - None reported205 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None reported205 Item 4. Mine Safety Disclosures Information on mine safety violations and regulatory matters, as required by the Dodd-Frank Act, is included in Exhibit 95 of this Form 10-Q - Information regarding mine safety violations required by Section 1503(a) of the Dodd-Frank Act is included in Exhibit 95 to this Form 10-Q206 Item 5. Other Information This section corrects typographical errors from the 2021 proxy statement, updating deadlines for 2022 shareholder proposals and notice periods for other business - Corrects the deadline for shareholder proposals (under SEC Rule 14a-8) for the 2022 Annual Meeting to November 25, 2021207208 - Corrects the notice window for other shareholder proposals or nominations for the 2022 Annual Meeting to be between January 11, 2022, and February 10, 2022209 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including certifications, supplemental indentures, mine safety disclosures, and the earnings news release - A list of all exhibits filed with the Form 10-Q is provided, including certifications, supplemental indentures, and the earnings release211