ALLETE(ALE) - 2022 Q2 - Quarterly Report

Part I. Financial Information This section presents unaudited financial statements, management's analysis, market risk disclosures, and internal controls Item 1. Consolidated Financial Statements - Unaudited This section presents ALLETE's unaudited consolidated financial statements, including balance sheet, income, and cash flows, highlighting asset growth and increased net income Consolidated Balance Sheet ALLETE's total assets grew to $6.84 billion by June 30, 2022, driven by the New Energy acquisition, with total equity increasing to $3.36 billion Consolidated Balance Sheet Highlights (Millions) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $660.0 | $291.3 | | Property, Plant and Equipment – Net | $5,027.1 | $5,100.2 | | Goodwill and Intangible Assets – Net | $151.1 | $0.8 | | Total Assets | $6,839.0 | $6,435.0 | | Total Current Liabilities | $709.0 | $543.4 | | Total Liabilities | $3,480.1 | $3,488.7 | | Total Equity | $3,358.9 | $2,946.3 | | Total Liabilities and Equity | $6,839.0 | $6,435.0 | Consolidated Statement of Income Net income attributable to ALLETE increased to $37.6 million in Q2 2022 and $103.9 million for the six-month period, driven by higher operating revenues Statement of Income Highlights (Millions, Except Per Share) | Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenue | $373.1 | $335.6 | $756.6 | $674.8 | | Operating Income | $13.7 | $28.2 | $67.1 | $70.2 | | Net Income Attributable to ALLETE | $37.6 | $27.9 | $103.9 | $79.7 | | Diluted Earnings Per Share | $0.67 | $0.53 | $1.89 | $1.53 | Consolidated Statement of Cash Flows Cash used in operating activities totaled $7.9 million for the six months ended June 30, 2022, while financing activities provided $289.1 million Cash Flow Summary (Millions) | Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Cash (used in) provided by Operating Activities | $(7.9) | $105.7 | | Cash used in Investing Activities | $(247.2) | $(305.7) | | Cash provided by Financing Activities | $289.1 | $202.1 | | Change in Cash, Cash Equivalents and Restricted Cash | $34.0 | $2.1 | Notes to Consolidated Financial Statements Notes detail significant accounting policies, the New Energy acquisition, regulatory rate cases, environmental compliance costs, and segment performance - On April 15, 2022, ALLETE acquired New Energy for $165.5 million in cash and assumed debt[40] - Minnesota Power filed for an 18% retail rate increase in Minnesota, with an interim increase effective January 1, 2022, while SWL&P sought a 3.6% increase in Wisconsin[30][31] - Compliance costs for Coal Combustion Residuals (CCR) are estimated between $65 million and $120 million over the next 15 years[82] Net Income Attributable to ALLETE by Segment (Millions) | Segment | Six Months 2022 | Six Months 2021 | | :--- | :--- | :--- | | Regulated Operations | $81.1 | $66.5 | | ALLETE Clean Energy | $22.3 | $12.5 | | Corporate and Other | $0.5 | $0.7 | | Total | $103.9 | $79.7 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting increased net income per diluted share to $1.89, driven by interim rates and improved clean energy performance, alongside strategic acquisitions and capital plans Comparison of the Quarters Ended June 30, 2022 and 2021 Q2 2022 saw increased net income across Regulated Operations, ALLETE Clean Energy, and Corporate and Other segments, driven by interim rates and strategic gains - Regulated Operations utility revenue increased by $18.3 million in Q2 2022, primarily due to $21.4 million from Minnesota Power's interim rates[118][119] - Regulated utility kWh sales to industrial customers decreased 9.0% in Q2 2022 due to the temporary idling of Cliffs' Northshore mine[119][121] - ALLETE Clean Energy's Other Income increased by $10.2 million due to a gain from removing a PSA liability for the Northern Wind project[127] Comparison of the Six Months Ended June 30, 2022 and 2021 Six-month net income increased for Regulated Operations and ALLETE Clean Energy, driven by interim rates and higher wind resources, while Corporate and Other saw a slight decline due to acquisition costs - Regulated Operations utility revenue increased by $54.3 million for the six-month period, primarily from $45.7 million in Minnesota Power interim rates[133][134] - ALLETE Clean Energy's operating revenue increased by $6.9 million, or 16%, due to higher wind resources and no prior-year winter storm impact[140] - Corporate and Other net income included a $1.1 million net loss from New Energy, incorporating $4.0 million in accounting adjustments and $3.0 million in transaction costs[145] Critical Accounting Policies Management identifies critical accounting policies, including regulatory accounting and impairment, adding 'Valuation of Business Combinations and Resulting Goodwill' post-acquisition - The New Energy acquisition on April 15, 2022, made valuation of business combinations and goodwill a critical accounting policy[147] - Goodwill impairment testing is performed annually in Q4 or when impairment is indicated, requiring significant fair value estimates based on projected cash flows[149] Outlook ALLETE targets 5-7% annual EPS growth, focusing on regulated utility operations, clean energy expansion, and a major transmission line project - The company targets 5% to 7% average annual earnings per share growth long-term[150] - Minnesota Power and Great River Energy plan a $970 million, 150-mile, 345-kV transmission line, with ALLETE's share at approximately 50%, in service by 2030[161] - The New Energy acquisition adds a development pipeline of over 2,000 MW of renewable projects across 26 states[166] Liquidity and Capital Resources ALLETE maintains strong liquidity with $74.6 million cash and $377.3 million available credit, projecting $210 million in 2022 capital expenditures and holding investment-grade credit ratings Liquidity Position as of June 30, 2022 | Metric | Amount | | :--- | :--- | | Cash and cash equivalents | $74.6 million | | Available consolidated lines of credit | $377.3 million | | Debt-to-capital ratio | 37% | - Capital expenditures for 2022 are projected at approximately $210 million, with $94.0 million incurred through June 30, 2022[177] Credit Ratings | Agency | Issuer Credit Rating | | :--- | :--- | | S&P Global Ratings | BBB | | Moody's | Baa1 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages commodity price, power marketing credit, and interest rate risks, with regulatory mechanisms mitigating commodity exposure and limited variable rate debt - Commodity price risk in regulated operations is significantly mitigated by regulatory cost recovery frameworks[182] - A 100 basis point increase in interest rates would raise annual pre-tax interest expense by approximately $3.0 million based on June 30, 2022, variable rate debt[184] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal control over financial reporting - Disclosure controls and procedures were deemed effective by management as of June 30, 2022[185] - No material changes to internal control over financial reporting occurred during Q2 2022[186] Part II. Other Information This section provides updates on legal proceedings, risk factors, equity sales, mine safety disclosures, and a list of exhibits Item 1. Legal Proceedings The company refers to Notes 2 and 7 for information on material legal and regulatory proceedings, with no new material disclosures in this section - Material legal and regulatory proceedings are referenced in Note 2 and Note 7 of the Consolidated Financial Statements[188] Item 1A. Risk Factors This section updates risk factors, highlighting new concerns regarding volatile electricity prices impacting ALLETE Clean Energy's wind facilities with contracts for differences - A new risk factor addresses volatile electricity prices impacting ALLETE Clean Energy's wind facilities with commercial and industrial customer contracts[189] - Diamond Spring and Caddo facilities' contracts for differences expose them to adverse financial impacts from market price volatility and settlement differences[190] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None Item 4. Mine Safety Disclosures Mine safety violations and regulatory matters, as required by the Dodd-Frank Act, are detailed in Exhibit 95 of this Form 10-Q - Mine safety violation information, as required by the Dodd-Frank Act, is included in Exhibit 95 to this Form 10-Q[192] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications, mine safety disclosures, earnings release, and XBRL data - Required certifications by the CEO and CFO, mine safety disclosures, the Q2 2022 earnings news release, and XBRL data files are included as exhibits[193]