ALLETE(ALE) - 2023 Q2 - Quarterly Report

Forward-Looking Statements This section outlines the nature of forward-looking statements, emphasizing that actual results may differ due to risks and uncertainties - Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations[5] - Key risk factors include the ability to implement strategic objectives, global and domestic economic conditions, regulatory changes, inflation, legal proceedings, weather, access to capital markets, interest rates, project delays, operating expenses, commodity prices, personnel retention, emerging technology, geopolitical events, cybersecurity, acquisition integration, population trends, wholesale power market conditions, and climate change impacts[6] PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements - Unaudited This section presents ALLETE's unaudited consolidated financial statements and detailed notes on operations, policies, and segments Consolidated Balance Sheet Consolidated Balance Sheet Highlights (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | Change (2023 vs 2022) | | :------------------------ | :------------ | :----------- | :-------------------- | | Total Current Assets | $446.2 | $718.0 | $(271.8) | | Property, Plant & Equipment – Net | $4,973.9 | $5,004.0 | $(30.1) | | Total Assets | $6,567.9 | $6,845.6 | $(277.7) | | Total Current Liabilities | $380.3 | $716.2 | $(335.9) | | Total Liabilities | $3,199.4 | $3,497.3 | $(297.9) | | Total Equity | $3,368.5 | $3,348.3 | $20.2 | Consolidated Statement of Income Consolidated Statement of Income Highlights (Millions USD, Except Per Share) | Item | Q2 2023 | Q2 2022 | Change (QoQ) | 6M 2023 | 6M 2022 | Change (YoY) | | :---------------------------------- | :-------- | :-------- | :----------- | :---------- | :---------- | :----------- | | Total Operating Revenue | $533.4 | $373.1 | $160.3 | $1,098.3 | $756.6 | $341.7 | | Operating Income | $53.5 | $13.7 | $39.8 | $101.8 | $67.1 | $34.7 | | Net Income Attributable to ALLETE | $51.5 | $37.6 | $13.9 | $109.7 | $103.9 | $5.8 | | Basic Earnings Per Share of Common Stock | $0.90 | $0.67 | $0.23 | $1.91 | $1.89 | $0.02 | | Diluted Earnings Per Share of Common Stock | $0.90 | $0.67 | $0.23 | $1.91 | $1.89 | $0.02 | Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Highlights (Millions USD) | Item | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :---------------------------------------- | :------ | :------ | :------ | :------ | | Net Income | $40.7 | $20.8 | $78.3 | $67.3 | | Total Other Comprehensive Income (Loss) | $(0.1) | $0.1 | $— | $(0.1) | | Total Comprehensive Income | $40.6 | $20.9 | $78.3 | $67.2 | | Total Comprehensive Income Attributable to ALLETE | $51.4 | $37.7 | $109.7 | $103.8 | Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Highlights (Millions USD) | Item | 6M 2023 | 6M 2022 | | :---------------------------------------- | :-------- | :-------- | | Cash provided by (used in) Operating Activities | $331.6 | $(7.9) | | Cash used in Investing Activities | $(131.3) | $(247.2) | | Cash provided by (used in) Financing Activities | $(189.4) | $289.1 | | Change in Cash, Cash Equivalents and Restricted Cash | $10.9 | $34.0 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $51.1 | $81.7 | Consolidated Statement of Equity Consolidated Statement of Equity Highlights (Millions USD, Except Per Share) | Item | 6M 2023 | 6M 2022 | | :----------------------------------------- | :-------- | :-------- | | Common Stock Balance, End of Period | $1,791.6 | $1,771.7 | | Retained Earnings Balance, End of Period | $966.9 | $932.6 | | Non-Controlling Interest in Subsidiaries Balance, End of Period | $634.4 | $678.5 | | Total Equity | $3,368.5 | $3,358.9 | | Dividends Per Share of Common Stock | $1.355 | $1.30 | Note 1. Operations and Significant Accounting Policies Cash, Cash Equivalents and Restricted Cash (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | | :---------------------------------------------------------------- | :------------ | :----------- | | Cash and Cash Equivalents | $47.9 | $36.4 | | Restricted Cash included in Prepayments and Other | $0.8 | $1.5 | | Restricted Cash included in Other Non-Current Assets | $2.4 | $2.3 | | Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $51.1 | $40.2 | Inventories – Net (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | | :------------------------------------ | :------------ | :----------- | | Fuel | $37.7 | $33.4 | | Materials and Supplies | $122.3 | $75.1 | | Renewable Energy Facilities Under Development | $34.3 | $347.4 | | Total Inventories – Net | $194.3 | $455.9 | - Goodwill remained stable at $154.9 million as of June 30, 2023, with no changes by reportable segment[20] Other Non-Current Assets (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :------------ | :----------- | | Contract Assets | $19.7 | $21.0 | | Operating Lease Right-of-use Assets | $11.1 | $12.7 | | ALLETE Properties | $19.4 | $19.1 | | Restricted Cash | $2.4 | $2.3 | | Other Postretirement Benefit Plans | $60.4 | $58.8 | | Other | $97.3 | $90.4 | | Total Other Non-Current Assets | $210.3 | $204.3 | Other Current Liabilities (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :------------ | :----------- | | Customer Deposits | $9.6 | $150.7 | | PSAs | $6.0 | $6.1 | | Provision for Interim Rate Refund | $31.8 | $18.4 | | Manufactured Gas Plant | $9.1 | $14.7 | | Operating Lease Liabilities | $3.0 | $3.2 | | Other | $53.1 | $57.9 | | Total Other Current Liabilities | $112.6 | $251.0 | Other Non-Current Liabilities (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | | :---------------------------------- | :------------ | :----------- | | Asset Retirement Obligation | $203.6 | $200.4 | | PSAs | $23.9 | $26.9 | | Operating Lease Liabilities | $8.1 | $9.3 | | Other | $32.4 | $32.4 | | Total Other Non-Current Liabilities | $268.0 | $269.0 | Note 2. Regulatory Matters - Minnesota Power's 2022 General Rate Case resulted in an MPUC order allowing a 9.65% return on common equity and a 52.50% equity ratio, expected to generate approximately $70 million in additional annualized revenue ($60M base rates, $10M cost recovery riders)[31] - Minnesota Power recorded a pre-tax interim rate refund reserve of $31.8 million as of June 30, 2023, subject to MPUC approval[32] - Minnesota Power appealed specific aspects of the MPUC's rate case orders to the Minnesota Court of Appeals, challenging the ratemaking treatment of Taconite Harbor and its prepaid pension asset[32] - A regulatory liability of $17.8 million was recognized as of June 30, 2023, due to lower fuel and purchased power costs in 2023 compared to forecast[34] - Minnesota Power recognized $2.2 million in revenue for the approved 2022 Energy Conservation and Optimization (ECO) financial incentive in Q3 2023[35] Regulatory Assets and Liabilities (Millions USD) | Item | June 30, 2023 | Dec 31, 2022 | | :----------------------------------------- | :------------ | :----------- | | Total Current Regulatory Assets | $15.7 | $25.6 | | Total Non-Current Regulatory Assets | $454.5 | $441.0 | | Total Current Regulatory Liabilities | $36.4 | $23.4 | | Total Non-Current Regulatory Liabilities | $538.0 | $526.1 | Note 3. Equity Investments ALLETE's Investment in ATC (Millions USD) | Item | Amount | | :----------------------------------------- | :----------- | | Equity Investment Balance as of Dec 31, 2022 | $165.4 | | Cash Investments | $4.3 | | Equity in ATC Earnings | $11.6 | | Distributed ATC Earnings | $(9.3) | | Amortization of the Remeasurement of Deferred Income Taxes | $0.7 | | Equity Investment Balance as of June 30, 2023 | $172.7 | - ATC's authorized return on equity (ROE) of 10.02% (10.52% with incentive adder) is subject to legal challenges and FERC reconsideration, with a potential reduction of $1 million pre-tax annually if the incentive adder is limited[40][41] ALLETE's Investment in Nobles 2 (Millions USD) | Item | Amount | | :----------------------------------------- | :----------- | | Equity Investment Balance as of Dec 31, 2022 | $157.3 | | Equity in Nobles 2 Earnings | $(0.2) | | Distributed Nobles 2 Earnings | $(2.3) | | Equity Investment Balance as of June 30, 2023 | $154.8 | Note 4. Fair Value Recurring Fair Value Measures – Assets (Millions USD) | Item | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------------------------- | :------ | :------ | :------ | :---- | | June 30, 2023 | | | | | | Available-for-sale – Equity Securities | $8.4 | — | — | $8.4 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $5.7 | — | $5.7 | | Cash Equivalents | $5.8 | — | — | $5.8 | | Total Fair Value of Assets | $14.2 | $5.7 | — | $19.9 | | December 31, 2022 | | | | | | Available-for-sale – Equity Securities | $7.7 | — | — | $7.7 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $5.7 | — | $5.7 | | Cash Equivalents | $4.2 | — | — | $4.2 | | Total Fair Value of Assets | $11.9 | $5.7 | — | $17.6 | Recurring Fair Value Measures – Liabilities (Millions USD) | Item | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------------------------- | :------ | :------ | :------ | :---- | | June 30, 2023 | | | | | | Deferred Compensation | — | $16.2 | — | $16.2 | | Total Fair Value of Liabilities | — | $16.2 | — | $16.2 | | December 31, 2022 | | | | | | Deferred Compensation | — | $15.0 | — | $15.0 | | Total Fair Value of Liabilities | — | $15.0 | — | $15.0 | Fair Value of Financial Instruments (Millions USD) | Item | Carrying Amount | Fair Value | | :---------------------------------- | :-------------- | :--------- | | June 30, 2023 | | | | Short-Term and Long-Term Debt | $1,801.3 | $1,647.9 | | December 31, 2022 | | | | Short-Term and Long-Term Debt | $1,929.1 | $1,782.7 | Note 5. Short-Term and Long-Term Debt Short-Term and Long-Term Debt (Millions USD) | Item | June 30, 2023 (Principal) | June 30, 2023 (Total) | Dec 31, 2022 (Principal) | Dec 31, 2022 (Total) | | :---------------- | :------------------------ | :-------------------- | :----------------------- | :------------------- | | Short-Term Debt | $106.8 | $106.7 | $272.7 | $272.6 | | Long-Term Debt | $1,694.5 | $1,685.9 | $1,656.4 | $1,648.2 | | Total Debt | $1,801.3 | $1,792.6 | $1,929.1 | $1,920.8 | - ALLETE issued $125 million of First Mortgage Bonds in April 2023, bearing 4.98% interest and maturing in April 2033, to refinance existing debt and for general corporate purposes[52] - As of June 30, 2023, ALLETE's ratio of indebtedness to total capitalization was approximately 0.37 to 1.00, well within the covenant limit of 0.65 to 1.00[53] Note 6. Commitments, Guarantees and Contingencies - Minnesota Power's cost of power purchased from Square Butte was $44.0 million for the six months ended June 30, 2023, up from $41.0 million in 2022[55] - Minnesota Power sold approximately 37% of its 50% output entitlement from Square Butte to Minnkota Power in 2023, with its share to be eliminated by the end of 2025[56] - The EPA's new Good Neighbor Plan, published June 5, 2023, aims to reduce NOX emissions for regional ozone transport, potentially imposing compliance obligations on Minnesota Power, though a stay was granted on July 5, 2023, preventing immediate effect in Minnesota[63] - The EPA's proposed GHG emissions regulations under Section 111 of the Clean Air Act could apply to several Company assets, including existing EGUs and proposed natural gas-fired facilities, with potential material compliance costs[67] - Minnesota Power estimates compliance costs for Coal Combustion Residuals (CCR) at Boswell and Laskin to be between $65 million and $120 million over the next 12 years[76] - As of June 30, 2023, ALLETE had $161.9 million in outstanding letters of credit and BNI Energy had $82.4 million in surety bonds related to reclamation liability[81][82][83] Note 7. Earnings Per Share and Common Stock Reconciliation of Basic and Diluted Earnings Per Share (Millions Except Per Share Amounts) | Item | Q2 2023 (Basic) | Q2 2023 (Diluted) | Q2 2022 (Basic) | Q2 2022 (Diluted) | 6M 2023 (Basic) | 6M 2023 (Diluted) | 6M 2022 (Basic) | 6M 2022 (Diluted) | | :---------------------------------- | :-------------- | :---------------- | :-------------- | :---------------- | :-------------- | :---------------- | :-------------- | :---------------- | | Net Income Attributable to ALLETE | $51.5 | $51.5 | $37.6 | $37.6 | $109.7 | $109.7 | $103.9 | $103.9 | | Average Common Shares | 57.3 | 57.4 | 56.1 | 56.1 | 57.3 | 57.4 | 54.9 | 54.9 | | Earnings Per Share | $0.90 | $0.90 | $0.67 | $0.67 | $1.91 | $1.91 | $1.89 | $1.89 | Note 8. Income Tax Expense Income Tax Expense (Benefit) (Millions USD) | Item | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :---------------------------------- | :------ | :------ | :------ | :------ | | Current Income Tax Expense – Federal | $3.0 | $— | $8.6 | $— | | Current Income Tax Expense – State | $3.2 | $— | $5.4 | $0.1 | | Total Current Income Tax Expense | $6.2 | $— | $14.0 | $0.1 | | Deferred Income Tax Benefit – Federal | $(7.8) | $(3.7) | $(16.1) | $(12.3) | | Deferred Income Tax Benefit – State | $1.3 | $(4.5) | $3.4 | $0.3 | | Investment Tax Credit Amortization | $(0.1) | $(0.1) | $(0.2) | $(0.3) | | Total Deferred Income Tax Benefit | $(6.6) | $(8.3) | $(12.9) | $(12.3) | | Total Income Tax Expense (Benefit) | $(0.4) | $(8.3) | $1.1 | $(12.2) | Reconciliation of Taxes from Federal Statutory Rate to Total Income Tax Expense (Millions USD) | Item | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :----------------------------------------- | :------ | :------ | :------ | :------ | | Income Before Income Taxes | $40.3 | $12.5 | $79.4 | $55.1 | | Statutory Federal Income Tax Rate | 21% | 21% | 21% | 21% | | Income Taxes Computed at Statutory Federal Rate | $8.5 | $2.6 | $16.7 | $11.6 | | State Income Taxes – Net of Federal Income Tax Benefit | $3.6 | $1.6 | $7.0 | $5.5 | | Production Tax Credits | $(10.2) | $(7.1) | $(20.6) | $(24.7) | | Investment Tax Credits | $(1.4) | $— | $(3.6) | $— | | Non-Controlling Interest in Subsidiaries | $2.1 | $3.2 | $5.9 | $7.0 | | Total Income Tax Expense (Benefit) | $(0.4) | $(8.3) | $1.1 | $(12.2) | - The effective tax rate for the six months ended June 30, 2023, was an expense of 1.4%, compared to a benefit of 22.1% in 2022, primarily due to lower production tax credits[92] Note 9. Pension and Other Postretirement Benefit Plans Components of Net Periodic Benefit Cost (Credit) (Millions USD) | Item | Q2 2023 (Pension) | Q2 2022 (Pension) | Q2 2023 (Other Postretirement) | Q2 2022 (Other Postretirement) | | :---------------------------------- | :---------------- | :---------------- | :----------------------------- | :----------------------------- | | Service Cost | $1.6 | $2.4 | $0.5 | $0.7 | | Non-Service Cost Components | | | | | | Interest Cost | $10.1 | $6.8 | $1.5 | $1.1 | | Expected Return on Plan Assets | $(11.0) | $(10.3) | $(2.8) | $(2.4) | | Amortization of Prior Service Credits | $— | $(0.1) | $(1.7) | $(1.9) | | Amortization of Net Loss | $1.5 | $2.6 | $(0.6) | $0.1 | | Net Periodic Benefit Cost (Credit) | $2.2 | $1.4 | $(3.1) | $(2.4) | - ALLETE contributed $6.5 million in cash to defined benefit pension plans for the six months ended June 30, 2023, and expects to contribute an additional $10 million in 2023[97] Note 10. Business Segments Operating Revenue by Segment (Millions USD) | Segment | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :---------------------- | :------ | :------ | :-------- | :-------- | | Regulated Operations | $292.2 | $308.7 | $604.8 | $637.7 | | ALLETE Clean Energy | $181.1 | $21.2 | $382.6 | $49.4 | | Corporate and Other | $60.1 | $43.2 | $110.9 | $69.5 | | Total Operating Revenue | $533.4 | $373.1 | $1,098.3 | $756.6 | Net Income Attributable to ALLETE by Segment (Millions USD) | Segment | Q2 2023 | Q2 2022 | 6M 2023 | 6M 2022 | | :-------------------------------- | :------ | :------ | :------ | :------ | | Regulated Operations | $37.8 | $29.6 | $78.4 | $81.1 | | ALLETE Clean Energy | $3.1 | $5.8 | $11.6 | $22.3 | | Corporate and Other | $10.6 | $2.2 | $19.7 | $0.5 | | Total Net Income Attributable to ALLETE | $51.5 | $37.6 | $109.7 | $103.9 | Assets by Segment (Millions USD) | Segment | June 30, 2023 | Dec 31, 2022 | | :---------------------- | :------------ | :----------- | | Regulated Operations | $4,259.8 | $4,291.4 | | ALLETE Clean Energy | $1,557.9 | $1,873.3 | | Corporate and Other | $750.2 | $680.9 | | Total Assets | $6,567.9 | $6,845.6 | ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses ALLETE's financial condition and results, comparing performance for Q2 and 6M 2023, outlining policies, outlook, and liquidity Overview - Net income attributable to ALLETE for the six months ended June 30, 2023, was $109.7 million ($1.91 per diluted share), up from $103.9 million ($1.89 per diluted share) in 2022[108] - Regulated Operations net income decreased to $78.4 million (6M 2023) from $81.1 million (6M 2022), primarily due to interim rate refund reserves and higher operating expenses, partially offset by higher industrial sales and lower property tax[109] - ALLETE Clean Energy net income decreased to $11.6 million (6M 2023) from $22.3 million (6M 2022), driven by lower wind resources and availability, partially offset by a gain on the Red Barn project sale[111] - Corporate and Other net income significantly increased to $19.7 million (6M 2023) from $0.5 million (6M 2022), mainly due to higher earnings from New Energy's renewable development projects and Minnesota solar projects[112] Comparison of the Quarter Ended June 30, 2023 and 2022 Regulated Operations - Q2 Financial Highlights (Millions USD) | Item | Q2 2023 | Q2 2022 | Change | | :---------------------------------- | :------ | :------ | :----- | | Operating Revenue – Utility | $292.2 | $308.7 | $(16.5) | | Fuel, Purchased Power and Gas – Utility | $107.6 | $143.2 | $(35.6) | | Operating and Maintenance | $61.5 | $57.1 | $4.4 | | Taxes Other than Income Taxes | $5.6 | $11.9 | $(6.3) | | Net Income Attributable to ALLETE | $37.8 | $29.6 | $8.2 | - Regulated Operations utility revenue decreased by $16.5 million, primarily due to lower fuel adjustment clause recoveries ($25.7M decrease) and interim rate revenue ($6.6M decrease), partially offset by higher cost recovery rider revenue ($9.8M increase) and industrial kWh sales ($3.9M increase)[113][115] Regulated Utility Kilowatt-hours Sold (Millions kWh) - Q2 | Customer Type | Q2 2023 | Q2 2022 | Variance Quantity | % Change | | :------------------------ | :------ | :------ | :---------------- | :------- | | Residential | 241 | 245 | (4) | (1.6)% | | Commercial | 320 | 314 | 6 | 1.9% | | Industrial | 1,778 | 1,616 | 162 | 10.0% | | Municipal | 110 | 131 | (21) | (16.0)% | | Total Retail and Municipal | 2,449 | 2,306 | 143 | 6.2% | | Other Power Suppliers | 786 | 794 | (8) | (1.0)% | | Total Regulated Utility | 3,235 | 3,100 | 135 | 4.4% | - ALLETE Clean Energy operating revenue increased by $159.9 million, primarily due to the sale of the Red Barn project in 2023, despite lower wind resources and availability[119] ALLETE Clean Energy - Q2 Production and Operating Revenue (Millions) | Wind Energy Regions | Q2 2023 kWh | Q2 2023 Revenue | Q2 2022 kWh | Q2 2022 Revenue | | :------------------ | :---------- | :-------------- | :---------- | :-------------- | | East | 41.8 | $4.5 | 58.0 | $5.2 | | Midwest | 148.7 | $4.6 | 203.5 | $7.3 | | South | 377.7 | $2.5 | 574.8 | $3.9 | | West | 156.0 | $2.9 | 214.4 | $4.8 | | Sale of Wind Energy Facility | — | $166.6 | — | — | | Total | 724.2 | $181.1 | 1,050.7 | $21.2 | - Corporate and Other net income increased to $10.6 million (Q2 2023) from $2.2 million (Q2 2022), driven by higher earnings from New Energy's renewable development project sales and fewer impacts from purchase price accounting[126] - Consolidated income tax effective rate was a benefit of 1.0% for Q2 2023, compared to a benefit of 66.4% for Q2 2022, primarily due to higher pre-tax income and lower production tax credits[127] Comparison of the Six Months Ended June 30, 2023 and 2022 Regulated Operations - 6M Financial Highlights (Millions USD) | Item | 6M 2023 | 6M 2022 | Change | | :---------------------------------- | :------ | :------ | :----- | | Operating Revenue – Utility | $604.8 | $637.7 | $(32.9) | | Fuel, Purchased Power and Gas – Utility | $226.2 | $280.6 | $(54.4) | | Operating and Maintenance | $123.4 | $115.5 | $7.9 | | Taxes Other than Income Taxes | $21.5 | $27.1 | $(5.6) | | Net Income Attributable to ALLETE | $78.4 | $81.1 | $(2.7) | | Income Tax Expense (Benefit) | $7.6 | $(4.8) | $12.4 | - Regulated Operations utility revenue decreased by $32.9 million, mainly due to lower fuel adjustment clause recoveries ($30.4M decrease), lower kWh sales ($16.0M decrease) from milder weather and municipal contract reclassification, and interim rate revenue ($13.2M decrease), partially offset by higher cost recovery rider revenue ($19.6M increase)[129][131][133] Regulated Utility Kilowatt-hours Sold (Millions kWh) - 6M | Customer Type | 6M 2023 | 6M 2022 | Variance Quantity | % Change | | :------------------------ | :------ | :------ | :---------------- | :------- | | Residential | 562 | 600 | (38) | (6.3)% | | Commercial | 667 | 674 | (7) | (1.0)% | | Industrial | 3,436 | 3,382 | 54 | 1.6% | | Municipal | 238 | 289 | (51) | (17.6)% | | Total Retail and Municipal | 4,903 | 4,945 | (42) | (0.8)% | | Other Power Suppliers | 1,482 | 1,775 | (293) | (16.5)% | | Total Regulated Utility | 6,385 | 6,720 | (335) | (5.0)% | ALLETE Clean Energy - 6M Financial Highlights (Millions USD) | Item | 6M 2023 | 6M 2022 | Change | | :---------------------------------- | :------ | :------ | :----- | | Operating Revenue | $382.6 | $49.4 | $333.2 | | Cost of Sales – Non-utility | $342.3 | $10.2 | $332.1 | | Operating and Maintenance | $28.6 | $23.9 | $4.7 | | Net Income Attributable to ALLETE | $11.6 | $22.3 | $(10.7) | | Net Loss Attributable to Non-Controlling Interest | $(25.5) | $(30.4) | $4.9 | - ALLETE Clean Energy operating revenue increased by $333.2 million, primarily due to the sales of Northern Wind and Red Barn projects in 2023, despite lower wind resources and availability[138] ALLETE Clean Energy - 6M Production and Operating Revenue (Millions) | Wind Energy Regions | 6M 2023 kWh | 6M 2023 Revenue | 6M 2022 kWh | 6M 2022 Revenue | | :------------------ | :---------- | :-------------- | :---------- | :-------------- | | East | 121.2 | $11.9 | 145.3 | $13.2 | | Midwest | 303.9 | $9.5 | 491.1 | $16.9 | | South | 996.6 | $5.9 | 1,177.7 | $8.5 | | West | 353.1 | $6.9 | 472.7 | $10.8 | | Sale of Wind Energy Facility | — | $348.4 | — | — | | Total | 1,774.8 | $382.6 | 2,286.8 | $49.4 | - Corporate and Other operating revenue increased by $41.4 million, reflecting higher revenue from New Energy (acquired April 2022) and BNI Energy due to higher expenses[142] - Corporate and Other net income increased to $19.7 million (6M 2023) from $0.5 million (6M 2022), driven by higher earnings from New Energy's renewable development project sales and Minnesota solar projects, with fewer impacts from purchase price accounting[143] - Consolidated income tax effective rate was an expense of 1.4% for 6M 2023, compared to a benefit of 22.1% for 6M 2022, primarily due to higher pre-tax income and lower production tax credits[144] Critical Accounting Policies - Critical accounting policies include regulatory accounting, pension and postretirement health and life actuarial assumptions, goodwill, impairment of long-lived assets, and taxation[145] Outlook - ALLETE aims for consolidated earnings per share growth of 5% to 7% and expects Regulated Operations to contribute approximately 75% of total consolidated net income in 2023[146][147] - Minnesota legislation requires electric utilities to source 100% carbon-free energy by 2040, with interim targets of 80% by 2030 and 90% by 2035[148] - Minnesota Power plans to file its next rate case in Q4 2023 and continues to reshape its generation portfolio to reduce reliance on coal, aiming for 100% carbon-free energy by 2050[149] - Industrial customers account for approximately 54% of regulated utility kWh sales for the six months ended June 30, 2023[153] - Key industrial customer updates include Northshore Mining resuming partial pellet plant production in April 2023, USS Corporation investing $150 million for DR-grade pellets at Keetac, Hibbing Taconite securing mineral leases for over two decades of reserves, ST Paper becoming a large power customer in early 2023, and Cenovus Energy's refinery expected to resume normal operations in 2023[154][155][156][157][158] - Major transmission projects include the Duluth Loop Reliability Project (expected completion 2025, $50M-$70M), HVDC Transmission System Project (expected in-service 2028-2030, $800M-$900M), and Northland Reliability Project (expected in-service 2030, ~$970M estimated share)[159][160][161] - ALLETE Clean Energy's strategy focuses on optimizing its clean energy portfolio through acquisitions, development, recontracting, repowering, partnerships, and divestitures, including the sale of the Red Barn wind project in Q2 2023 for approximately $160 million cash proceeds and a $4.3 million after-tax gain[162][163] Liquidity and Capital Resources - As of June 30, 2023, ALLETE had $47.9 million in cash and cash equivalents, $421.0 million in available consolidated lines of credit, 2.1 million common stock shares available for issuance, and a debt-to-capital ratio of 35%[165] Capital Structure (Millions USD) | Item | June 30, 2023 | % | Dec 31, 2022 | % | | :--------------------------------- | :------------ | :-- | :----------- | :-- | | ALLETE Equity | $2,734.1 | 53 | $2,691.9 | 51 | | Non-Controlling Interest in Subsidiaries | $634.4 | 12 | $656.4 | 12 | | Short-Term and Long-Term Debt | $1,801.3 | 35 | $1,929.1 | 37 | | Total | $5,169.8 | 100 | $5,277.4 | 100 | Cash Flows (Millions USD) - 6M | Item | 6M 2023 | | :---------------------------------------- | :-------- | | Cash provided by (used in) Operating Activities | $331.6 | | Cash used in Investing Activities | $(131.3) | | Cash provided by (used in) Financing Activities | $(189.4) | | Change in Cash, Cash Equivalents and Restricted Cash | $10.9 | - Cash provided by operating activities was higher in 2023 due to proceeds from sales of ALLETE Clean Energy's Northern Wind and Red Barn projects and lower inventory payments[167] Credit Ratings | | S&P Global Ratings | Moody's | | :----------------------- | :----------------- | :------ | | Issuer Credit Rating | BBB | Baa1 | | Commercial Paper | A-2 | P-2 | | First Mortgage Bonds | (a) | A2 | - Capital expenditures totaled $110.6 million for the six months ended June 30, 2023, primarily in Regulated Operations, plus $25 million for ALLETE Clean Energy's wind energy facility development[173] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section details ALLETE's exposure to market risks from securities, commodity prices, and interest rates, outlining risk management strategies - Available-for-sale securities primarily fund employee benefits in other postretirement plans[178] - Commodity price risk for utility operations (power, fuel, natural gas) is significantly mitigated by ratemaking processes that allow recovery of costs or distribution of savings to ratepayers[179] - Credit risk from power marketing activities is managed through established credit approval processes and monitoring counterparty limits[180] - An increase of 100 basis points in interest rates would impact pre-tax interest expense by $0.4 million, based on variable rate debt outstanding as of June 30, 2023[182] ITEM 4. Controls and Procedures This section confirms the effectiveness of ALLETE's disclosure controls and procedures, with no material changes in internal control over financial reporting - ALLETE's disclosure controls and procedures were deemed effective as of June 30, 2023[183] - There have been no material changes in internal control over financial reporting during the most recent fiscal quarter[184] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings This section refers to other notes for detailed information on material legal and regulatory proceedings - Information on material legal and regulatory proceedings is incorporated by reference from Note 2. Regulatory Matters and Note 6. Commitments, Guarantees and Contingencies[185] ITEM 1A. Risk Factors This section states no material changes to risk factors previously disclosed in the company's 2022 Form 10-K - No material changes from the risk factors disclosed in Part I, Item 1A. Risk Factors of the 2022 Form 10-K[186] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities during the period - No unregistered sales of equity securities and use of proceeds[186] ITEM 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities during the period - No defaults upon senior securities[186] ITEM 4. Mine Safety Disclosures This section indicates mine safety violation information is provided in Exhibit 95, as required by the Dodd-Frank Act - Mine safety disclosures are included in Exhibit 95 to this Form 10-Q[187] ITEM 5. Other Information This section updates on Board decisions regarding shareholder advisory votes on executive compensation and confirms no changes in trading plans - The Board of Directors determined to hold future non-binding shareholder advisory votes on executive compensation on an annual basis[188] - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended June 30, 2023[188] ITEM 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including indentures, certifications, and XBRL data - Key exhibits include the Forty-Fourth Supplemental Indenture, Rule 13a-14(a)/15d-14(a) Certifications by CEO and CFO, Section 1350 Certification, Mine Safety disclosures, ALLETE News Release, and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation documents[190] Signatures This section contains the formal signatures of authorized officers, certifying the Form 10-Q report submission - The report was signed by Steven W. Morris, Senior Vice President and Chief Financial Officer, on August 8, 2023[191]