ALLETE(ALE) - 2022 Q3 - Quarterly Report

Part I. Financial Information This section provides a comprehensive overview of the company's financial performance, condition, market risks, and internal controls Item 1. Consolidated Financial Statements Total assets increased to $6.86 billion from $6.44 billion at year-end 2021, with nine-month operating revenue rising to $1.14 billion and net income attributable to ALLETE reaching $137.6 million Consolidated Balance Sheet Highlights (Unaudited) | Account | Sep 30, 2022 (Millions USD) | Dec 31, 2021 (Millions USD) | | :--- | :--- | :--- | | Total Current Assets | $722.2 | $291.3 | | Total Assets | $6,858.0 | $6,435.0 | | Total Current Liabilities | $706.0 | $543.4 | | Total Liabilities | $3,504.1 | $3,488.7 | | Total ALLETE Equity | $2,682.6 | $2,413.1 | | Total Liabilities and Equity | $6,858.0 | $6,435.0 | Consolidated Income Statement Highlights (Unaudited) | Account | Nine Months Ended Sep 30, 2022 (Millions USD) | Nine Months Ended Sep 30, 2021 (Millions USD) | | :--- | :--- | :--- | | Total Operating Revenue | $1,144.9 | $1,020.2 | | Operating Income | $100.5 | $101.3 | | Net Income | $94.1 | $89.2 | | Net Income Attributable to ALLETE | $137.6 | $107.3 | | Diluted EPS | $2.48 | $2.05 | Consolidated Cash Flow Highlights (Unaudited) | Activity | Nine Months Ended Sep 30, 2022 (Millions USD) | Nine Months Ended Sep 30, 2021 (Millions USD) | | :--- | :--- | :--- | | Cash from Operating Activities | $81.2 | $209.2 | | Cash used in Investing Activities | $(311.1) | $(397.1) | | Cash from Financing Activities | $230.8 | $188.1 | | Change in Cash | $0.9 | $0.2 | Note 2. Regulatory Matters Key regulatory activities include a pending 2022 Minnesota general rate case seeking an approximate 18% increase, with interim rates effective January 1, 2022, and a final MPUC decision expected in early 2023 - Minnesota Power filed for an 18% retail rate increase with the MPUC, projected to generate approximately $108 million in additional annual revenue, with an interim rate increase of about $80 million annually effective January 1, 2022[27] - An administrative law judge recommended a rate increase of approximately $76 million, with Minnesota Power filing exceptions and a final MPUC decision expected in early 2023[28] - The company recognized a regulatory asset of approximately $23 million as of September 30, 2022, due to higher fuel and purchased power costs, with higher rates implemented in August 2022 to recover this expected under-collection, pending final MPUC approval[32] Note 3. Acquisitions ALLETE acquired New Energy for $165.5 million on April 15, 2022, recording $155.1 million in goodwill, as part of its strategy to expand renewable energy investments New Energy Acquisition Details | Item | Amount (Millions USD) | | :--- | :--- | | Purchase Price | $165.5 | | Cash Paid (Net) | $158.8 | | Goodwill Recorded | $155.1 | | Total Assets Acquired | $216.8 | | Total Liabilities Assumed | $58.0 | - The acquisition aligns with ALLETE's strategy of investing in renewable energy to support its sustainability-in-action goals and drive long-term earnings growth[37] Note 7. Commitments, Guarantees and Contingencies The company faces environmental compliance costs of $65 million to $120 million for the EPA's CCR rule and has $227.6 million in outstanding letters of credit for operational and development security - Compliance costs for the EPA's CCR rule at the Boswell and Laskin facilities are estimated to be between $65 million and $120 million over the next 15 years[84] - The EPA's proposed Good Neighbor Plan to address ozone transport could have a material cost impact on Minnesota Power, which would seek recovery through rate proceedings, with a final rule expected in early 2023[68] - As of September 30, 2022, the company had $227.6 million in outstanding letters of credit, primarily to provide security for Power Sales Agreements (PSAs) at ALLETE Clean Energy and for MISO requirements[88] Note 11. Business Segments Regulated Operations drove earnings with net income increasing to $119.4 million, while ALLETE Clean Energy and Corporate and Other segments also showed improved net income for the first nine months of 2022 Operating Revenue by Segment (Nine Months Ended Sep 30) | Segment | 2022 (Millions USD) | 2021 (Millions USD) | | :--- | :--- | :--- | | Regulated Operations | $960.3 | $888.2 | | ALLETE Clean Energy | $65.0 | $59.4 | | Corporate and Other | $119.6 | $72.6 | | Total Operating Revenue | $1,144.9 | $1,020.2 | Net Income (Loss) Attributable to ALLETE by Segment (Nine Months Ended Sep 30) | Segment | 2022 (Millions USD) | 2021 (Millions USD) | | :--- | :--- | :--- | | Regulated Operations | $119.4 | $99.4 | | ALLETE Clean Energy | $15.0 | $11.7 | | Corporate and Other | $3.2 | $(3.8) | | Total Net Income | $137.6 | $107.3 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Nine-month net income grew to $137.6 million due to interim rates and improved clean energy performance, supporting a long-term target of 5-7% consolidated EPS growth - Net income for the first nine months of 2022 was $137.6 million ($2.48/share), up from $107.3 million ($2.05/share) in 2021, including $2.6 million in after-tax transaction costs for the New Energy acquisition[116] - The company has a long-term objective of achieving 5% to 7% consolidated EPS growth and expects Regulated Operations to contribute approximately 80% of total consolidated net income in 2022[155][156] - The Inflation Reduction Act of 2022 is expected to benefit the company's businesses through the extension and transferability of production and investment tax credits[157] Comparison of the Quarters Ended September 30, 2022 and 2021 Q3 2022 saw Regulated Operations net income rise to $38.3 million due to interim rates, while ALLETE Clean Energy reported a wider net loss of $7.3 million due to pricing and project sale impacts - Regulated Operations revenue increased by $17.8 million, primarily due to $24.9 million from interim retail rates, partially offset by a $4.1 million revenue reduction from lower kWh sales, especially to industrial customers[119][120] - ALLETE Clean Energy's results were negatively impacted by lower realized pricing at its Caddo and Diamond Spring facilities and a $4.0 million reserve for an anticipated loss on the sale of its Northern Wind project[126][127] Comparison of the Nine Months Ended September 30, 2022 and 2021 Nine-month Regulated Operations net income increased by $20.0 million due to interim rates, with ALLETE Clean Energy and Corporate and Other segments also showing improved performance - Regulated Operations revenue increased by $72.1 million, primarily driven by $70.5 million from the implementation of interim rates at Minnesota Power[135][136] - ALLETE Clean Energy's Cost of Sales included a $14.2 million increase, reflecting a reserve for an anticipated loss on the sale of the Northern Wind project, partially offset by a gain on the removal of the related PSA liability[143] - Corporate and Other net income in 2022 reflects contributions from the New Energy acquisition ($0.2 million net income, after a $5.7 million purchase accounting expense), higher earnings from Nobles 2, and $2.6 million in transaction costs[149] Outlook ALLETE focuses on regulated utility growth and clean energy expansion, including a $970 million transmission line and a 2,000 MW renewable project pipeline from the New Energy acquisition - A final decision by the MPUC on Minnesota Power's general rate case is expected in early 2023[160] - Minnesota Power and Great River Energy intend to build a $970 million, 150-mile, 345-kV transmission line as part of MISO's Long Range Transmission Plan, with an expected in-service date of 2030[168] - The acquisition of New Energy brings a development pipeline of over 2,000 MW of renewable projects across 26 states, supporting ALLETE's growth strategy in clean energy[174] Liquidity and Capital Resources As of September 30, 2022, ALLETE maintained $42.1 million in cash and $400.1 million in available credit, with planned capital expenditures of approximately $2.93 billion through 2027 Capital Structure | Component | Sep 30, 2022 (%) | Dec 31, 2021 (%) | | :--- | :--- | :--- | | ALLETE Equity | 50 | 49 | | Non-Controlling Interest | 13 | 11 | | Debt | 37 | 40 | - On April 5, 2022, ALLETE issued approximately 3.7 million shares of common stock, raising net proceeds of about $224 million to fund the New Energy acquisition and other capital investments[183] - ALLETE updated its capital expenditure forecast, now expecting to spend approximately $2.93 billion between 2022 and 2027, with significant increases in 2024 and 2025, driven by projects like the new transmission line[188] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from commodity prices, power marketing, and interest rates, with a 100 basis point interest rate increase impacting pre-tax interest expense by $2.8 million - Exposure to fuel and natural gas price risk in regulated operations is significantly mitigated by ratemaking processes that allow for cost recovery from customers[194] - Based on variable rate debt outstanding as of September 30, 2022, a 100 basis point increase in interest rates would increase annual pre-tax interest expense by $2.8 million[197] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, 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 the end of the period[198] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[199] Part II. Other Information This section details updated risk factors that could impact the company's operations and financial performance Item 1A. Risk Factors Updated risk factors highlight the adverse impact of volatile electricity market prices on ALLETE Clean Energy and the potential negative effects of changes in renewable energy incentives or tariffs - ALLETE Clean Energy faces financial risk from volatile electricity market prices, as its contracts for differences at the Diamond Spring and Caddo facilities can result in adverse impacts when market prices fluctuate[201][202] - Changes to or elimination of government incentives for renewable energy, or the imposition of new tariffs on equipment, could negatively impact the market for new projects and reduce returns on both current and future investments[203][204]