ALLETE(ALE) - 2023 Q3 - Quarterly Report

Forward-Looking Statements This section outlines statements regarding future expectations and events, which are subject to risks and uncertainties Part I. Financial Information This part presents the company's unaudited consolidated financial statements and related disclosures for the reporting period ITEM 1. Consolidated Financial Statements - Unaudited This section presents ALLETE, Inc.'s unaudited consolidated financial statements for the quarter and nine months ended September 30, 2023, including the balance sheet, income statement, comprehensive income statement, cash flow statement, and statement of equity, along with detailed notes on operations, regulatory matters, equity investments, fair value, debt, commitments, earnings per share, income taxes, pension plans, and business segments Consolidated Balance Sheet This statement provides a snapshot of the company's assets, liabilities, and equity for the reporting periods Consolidated Balance Sheet (September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 ($ Millions) | Dec 31, 2022 ($ Millions) | | :--------------------------- | :------------------------ | :------------------------ | | Total Current Assets | $503.2 | $718.0 | | Total Assets | $6,644.8 | $6,845.6 | | Total Current Liabilities | $413.5 | $716.2 | | Total Liabilities | $3,248.1 | $3,497.3 | | Total Equity | $3,396.7 | $3,348.3 | Consolidated Statement of Income This statement details the company's revenues, expenses, and net income for the reporting periods Consolidated Statement of Income (Quarter and Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Q3 2023 ($ Millions) | Q3 2022 ($ Millions) | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :-------------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Total Operating Revenue | $378.8 | $388.3 | $1,477.1 | $1,144.9 | | Operating Income | $36.0 | $33.4 | $137.8 | $100.5 | | Net Income Attributable to ALLETE | $85.9 | $33.7 | $195.6 | $137.6 | | Basic Earnings Per Share of Common Stock| $1.50 | $0.59 | $3.41 | $2.48 | | Diluted Earnings Per Share of Common Stock| $1.49 | $0.59 | $3.41 | $2.48 | Consolidated Statement of Comprehensive Income This statement presents net income and other comprehensive income components for the reporting periods Consolidated Statement of Comprehensive Income (Quarter and Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Q3 2023 ($ Millions) | Q3 2022 ($ Millions) | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :-------------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Net Income | $69.6 | $26.8 | $147.9 | $94.1 | | Total Other Comprehensive Income (Loss) | $(0.1) | $0.1 | $(0.1) | $— | | Total Comprehensive Income Attributable to ALLETE | $85.8 | $33.8 | $195.5 | $137.6 | Consolidated Statement of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities for the reporting periods Consolidated Statement of Cash Flows (Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :-------------------------------------- | :------------------- | :------------------- | | Cash provided by Operating Activities | $520.0 | $81.2 | | Cash used in Investing Activities | $(200.6) | $(311.1) | | Cash provided by (used in) Financing Activities | $(228.4) | $230.8 | | Change in Cash, Cash Equivalents and Restricted Cash | $91.0 | $0.9 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $131.2 | $48.6 | Consolidated Statement of Equity This statement details changes in the company's equity components, including common stock and retained earnings, for the reporting periods Consolidated Statement of Equity (Quarter and Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Q3 2023 ($ Millions) | Q3 2022 ($ Millions) | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :-------------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Common Stock, End of Period | $1,797.2 | $1,777.2 | $1,797.2 | $1,777.2 | | Retained Earnings, End of Period | $1,013.9 | $929.2 | $1,013.9 | $929.2 | | Total Equity, End of Period | $3,396.7 | $3,353.9 | $3,396.7 | $3,353.9 | | Dividends Per Share of Common Stock | $0.6775 | $0.65 | $2.0325 | $1.95 | Notes to Consolidated Financial Statements These notes provide detailed disclosures and explanations for the unaudited consolidated financial statements, covering significant accounting policies, regulatory matters, equity investments, fair value measurements, debt, commitments, earnings per share, income taxes, pension plans, and segment reporting Note 1. Operations and Significant Accounting Policies This note details the company's business operations and significant accounting policies applied in preparing the financial statements - Total cash, cash equivalents, and restricted cash increased to $131.2 million as of September 30, 2023, from $40.2 million as of December 31, 2022[19] - Total inventories decreased to $180.3 million as of September 30, 2023, from $455.9 million as of December 31, 2022, primarily due to a significant reduction in Renewable Energy Facilities Under Development[20] - Total Other Income for the nine months ended September 30, 2023, was $75.3 million, significantly up from $16.4 million in the same period of 2022, largely driven by a $58.4 million gain on an arbitration award[24] - A $5.7 million increase in Net Loss Attributable to Non-Controlling Interest was recognized in Q3 2023 for a prior period error correction, deemed immaterial to affected periods[26] Note 2. Regulatory Matters This note discusses regulatory filings, rate cases, and their financial implications for the company's regulated operations - Minnesota Power filed for an average retail rate increase of approximately 12.00% (net of rider revenue) on November 1, 2023, seeking $89 million in additional annual revenue and expecting an interim rate increase of $64 million within 60 days[28] - The MPUC approved a 9.65% return on common equity and 52.50% equity ratio for the 2022 Minnesota General Rate Case, expecting $60 million in additional base rate revenue and $10 million from cost recovery riders annually. Minnesota Power is appealing specific aspects of the MPUC's orders[30][31] - Minnesota Power recorded a pre-tax reserve of $39.4 million as of September 30, 2023, for an interim rate refund to customers, which will begin in Q4 2023[31] - A $28.3 million regulatory liability was recognized as of September 30, 2023, due to lower fuel and purchased power costs in 2023, leading to lower rates implemented in October 2023 to refund over-collected amounts[35] Regulatory Assets and Liabilities (September 30, 2023 vs. December 31, 2022) | Metric | Sep 30, 2023 ($ Millions) | Dec 31, 2022 ($ Millions) | | :-------------------------------------- | :------------------------ | :------------------------ | | Total Current Regulatory Assets | $13.9 | $25.6 | | Total Non-Current Regulatory Assets | $443.3 | $441.0 | | Total Current Regulatory Liabilities | $41.9 | $23.4 | | Total Non-Current Regulatory Liabilities| $549.3 | $526.1 | Note 3. Equity Investments This note provides details on the company's equity method investments, including ownership stakes and related financial impacts - ALLETE Transmission Holdings owns approximately 8% of ATC, with an equity investment balance of $176.5 million as of September 30, 2023. ATC's authorized return on equity is 10.02% (10.52% with incentive adder), but this is subject to legal challenges and potential FERC rule changes[43][44] - ALLETE South Wind owns 49% of Nobles 2, a 250 MW wind energy facility, with an equity investment balance of $153.2 million as of September 30, 2023[45][46] Note 4. Fair Value This note describes the fair value measurements of financial instruments and other assets and liabilities - As of September 30, 2023, total fair value of assets measured on a recurring basis was $19.7 million, primarily consisting of available-for-sale equity securities ($8.1 million) and corporate/governmental debt securities ($5.8 million)[49] - Deferred compensation liabilities measured at fair value on a recurring basis totaled $15.9 million as of September 30, 2023[49] - The fair value of Short-Term and Long-Term Debt was $1,582.5 million as of September 30, 2023, compared to a carrying amount of $1,805.5 million[51] Note 5. Short-Term and Long-Term Debt This note details the company's short-term and long-term debt obligations, including changes and covenant compliance - Total debt (principal) decreased to $1,805.5 million as of September 30, 2023, from $1,929.1 million as of December 31, 2022[54] - ALLETE amended its $400 million credit facility to $355 million and extended its expiration to January 10, 2027, on October 17, 2023[54] - ALLETE issued $125 million of First Mortgage Bonds at 4.98% interest, maturing in April 2033, to refinance existing debt and for general corporate purposes[55] - ALLETE was in compliance with its most restrictive financial covenant, maintaining an indebtedness to total capitalization ratio of approximately 0.36 to 1.00 as of September 30, 2023 (covenant limit: <= 0.65 to 1.00)[56] Note 6. Commitments, Guarantees and Contingencies This note outlines the company's contractual commitments, guarantees, and potential contingent liabilities, including environmental matters - The company is subject to extensive environmental regulations (Clean Air Act, Clean Water Act, waste management) and anticipates potential material expenditures for future environmental matters, which it would seek to recover through rate proceedings[61][62] - The EPA's Good Neighbor Plan for 2015 Ozone NAAQS, aiming to reduce NOx emissions, was stayed for Minnesota on July 5, 2023, preventing compliance obligations for the 2023 ozone season. Future compliance costs could be material[66][67] - ALLETE is addressing climate change by expanding renewable power, implementing energy conservation, improving generation efficiency, supporting carbon reduction research, and developing less carbon-intensive assets[70] - An ALLETE Clean Energy subsidiary won a favorable arbitration ruling in September 2023, awarding $68.3 million, including $5.1 million in prejudgment interest and $3.6 million in arbitration costs, resulting in a $58.4 million pre-tax gain[90] - As of September 30, 2023, ALLETE had $163.6 million in outstanding letters of credit and BNI Energy had $82.4 million in surety bonds for reclamation liability[85][87] Note 7. Earnings Per Share and Common Stock This note presents the calculation of basic and diluted earnings per share and information on common stock Earnings Per Share (Quarter and Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 | | :-------------------------------------- | :------ | :------ | :------ | :------ | | Basic Earnings Per Share of Common Stock| $1.50 | $0.59 | $3.41 | $2.48 | | Diluted Earnings Per Share of Common Stock| $1.49 | $0.59 | $3.41 | $2.48 | Note 8. Income Tax Expense This note provides details on the company's income tax expense, effective tax rates, and unrecognized tax benefits Total Income Tax Expense (Benefit) (Quarter and Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | Q3 2023 ($ Millions) | Q3 2022 ($ Millions) | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :-------------------------------------- | :------------------- | :------------------- | :------------------- | :------------------- | | Total Current Income Tax Expense | $5.1 | $0.2 | $19.1 | $0.3 | | Total Deferred Income Tax Expense (Benefit)| $14.2 | $(7.4) | $1.3 | $(19.7) | | Total Income Tax Expense (Benefit) | $19.3 | $(7.2) | $20.4 | $(19.4) | - For the nine months ended September 30, 2023, the effective tax rate was an expense of 12.1%, compared to a benefit of 26.0% for the same period in 2022, primarily due to lower production tax credits[96] - Gross unrecognized tax benefits were $1.1 million as of September 30, 2023[97] Note 9. Pension and Other Postretirement Benefit Plans This note outlines the net periodic benefit costs and funding for the company's pension and other postretirement plans Net Periodic Benefit Cost (Credit) (Nine Months Ended Sep 30, 2023 vs. 2022) | Metric | 9M 2023 Pension ($ Millions) | 9M 2022 Pension ($ Millions) | 9M 2023 Other Postretirement ($ Millions) | 9M 2022 Other Postretirement ($ Millions) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :---------------------------------------- | :---------------------------------------- | | Service Cost | $4.9 | $6.9 | $1.7 | $2.3 | | Net Periodic Benefit Cost (Credit) | $6.7 | $4.7 | $(9.2) | $(6.9) | - Contributed $17.3 million in cash to defined benefit pension plans for the nine months ended September 30, 2023, with no further contributions expected in 2023. No contributions were made to other postretirement benefit plans in 2023[100] Note 10. Business Segments This note provides financial information disaggregated by the company's operating segments, including revenue and net income Operating Revenue by Segment (9M 2023 vs. 9M 2022) | Segment | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :---------------------- | :------------------- | :------------------- | | Regulated Operations | $919.1 | $960.3 | | ALLETE Clean Energy | $396.8 | $65.0 | | Corporate and Other | $161.2 | $119.6 | | Total Operating Revenue | $1,477.1 | $1,144.9 | Net Income (Loss) Attributable to ALLETE by Segment (9M 2023 vs. 9M 2022) | Segment | 9M 2023 ($ Millions) | 9M 2022 ($ Millions) | | :------------------------------------ | :------------------- | :------------------- | | Regulated Operations | $112.4 | $119.4 | | ALLETE Clean Energy | $66.4 | $15.0 | | Corporate and Other | $16.8 | $3.2 | | Total Net Income Attributable to ALLETE | $195.6 | $137.6 | - ALLETE Clean Energy net income in 2023 includes a $44.3 million after-tax gain recognized for a favorable arbitration ruling[104] - Corporate and Other net income in 2023 includes $12.0 million from New Energy, compared to $0.2 million in 2022 (which included a $5.7 million after-tax expense from purchase price accounting)[104] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on ALLETE, Inc.'s financial condition and results of operations, offering a detailed comparison of performance for the quarter and nine months ended September 30, 2023, against the prior year, alongside discussions on critical accounting policies, future outlook, liquidity, and capital resources Overview This overview summarizes the company's financial performance and key drivers for the reporting period - Net income attributable to ALLETE for the nine months ended September 30, 2023, increased to $195.6 million ($3.41 diluted EPS) from $137.6 million ($2.48 diluted EPS) in 2022, driven by a $40.5 million after-tax arbitration gain, partially offset by low wind resources and interim rate reserves[111] - Regulated Operations net income decreased to $112.4 million in 9M 2023 from $119.4 million in 9M 2022, primarily due to interim rate refund reserves and higher expenses, partially offset by higher industrial sales and lower property tax[113] - ALLETE Clean Energy net income significantly increased to $66.4 million in 9M 2023 from $15.0 million in 9M 2022, largely due to a $44.3 million after-tax arbitration gain and Red Barn project sale gain, despite lower wind resources[113] - Corporate and Other net income increased to $16.8 million in 9M 2023 from $3.2 million in 9M 2022, reflecting higher earnings from New Energy due to more project closures and earnings from new Minnesota solar projects[114] Comparison of the Quarter Ended September 30, 2023 and 2022 This section analyzes the company's financial results for the third quarter of 2023 compared to the same period in 2022 - Regulated Operations' Operating Revenue – Utility decreased by $8.3 million from 2022, mainly due to lower kWh sales and interim rate revenue, partially offset by higher fuel adjustment clause recoveries and cost recovery rider revenue[115] - Total regulated utility kWh sales decreased by 5.8% (183 million kWh) in Q3 2023 compared to Q3 2022, primarily due to lower sales to other power suppliers, while industrial sales increased by 4.6%[118] - ALLETE Clean Energy's Operating Revenue decreased by $1.4 million compared to 2022, primarily due to lower wind resources across most regions[125] - ALLETE Clean Energy's Other Income increased by $65.0 million from 2022, driven by a $58.4 million gain from a favorable arbitration ruling and $5.1 million in related interest income[128] - The consolidated effective tax rate was an expense of 21.7% in Q3 2023, compared to a benefit of 36.7% in Q3 2022, due to higher pre-tax income and lower production tax credits[131] Comparison of the Nine Months Ended September 30, 2023 and 2022 This section analyzes the company's financial results for the nine months ended September 30, 2023, compared to the same period in 2022 - Regulated Operations' Operating Revenue – Utility decreased by $41.2 million from 2022, primarily due to lower kWh sales, fuel adjustment clause recoveries, and interim rate revenue, partially offset by higher cost recovery rider revenue[133] - Total regulated utility kWh sales decreased by 5.2% (518 million kWh) in 9M 2023 compared to 9M 2022, mainly due to lower sales to residential, commercial, municipal, and other power suppliers, despite a 2.6% increase in industrial sales[134][135] - ALLETE Clean Energy's Operating Revenue increased by $331.8 million from 2022, primarily due to the sales of Northern Wind and Red Barn projects in 2023, partially offset by lower wind resources and availability[142] - ALLETE Clean Energy's Cost of Sales – Non-utility increased by $328.1 million from 2022, reflecting the sales of Northern Wind and Red Barn projects[145] - Corporate and Other Operating Revenue increased by $41.6 million (35%) from 2022, driven by higher revenue from New Energy (acquired April 2022) and BNI Energy[147] - The consolidated effective tax rate was an expense of 12.1% in 9M 2023, compared to a benefit of 26.0% in 9M 2022, primarily due to higher pre-tax income and lower production tax credits[149] Critical Accounting Policies This section discusses accounting policies requiring significant management judgment and estimates - Critical accounting policies involve management's judgment on subjective factors and estimates, including regulatory accounting, pension and postretirement actuarial assumptions, goodwill, impairment of long-lived assets, and taxation[150] Outlook This section provides the company's future expectations, strategic objectives, and planned capital investments - ALLETE has a long-term objective of achieving consolidated earnings per share growth within a range of 5% to 7%[151] - ALLETE expects net income from Regulated Operations to be approximately 60% of total consolidated net income in 2023, reflecting the impact of ALLETE Clean Energy's arbitration award[152] - New Minnesota state law requires electric utilities to source retail sales with 100% carbon-free energy by 2040, with interim targets including 80% carbon-free by 2030[153] - Minnesota Power aims to be the leading electric energy provider in northeastern Minnesota, focusing on safe, reliable, and cost-competitive service, reducing reliance on coal, and achieving 100% carbon-free energy by 2050[154] - Significant transmission investments are planned, including the Duluth Loop Reliability Project ($50-70 million, in service by 2025), HVDC Transmission System Project ($800-900 million, in service 2028-2030, with a $50 million DOE grant), Northland Reliability Project ($970-1,350 million, in service 2030), and Big Stone South Transmission Project ($600-700 million, in service 2027)[166][167][168][169] - ALLETE Clean Energy focuses on optimizing its clean energy project portfolio through recontracting, repowering, partnerships, divestitures, and new acquisitions/development of wind, solar, and energy storage projects across North America[170] - A forced outage at a substation near ALLETE Clean Energy's Caddo wind energy facility is expected to negatively impact results by approximately $7.5 million pre-tax through the remainder of 2023[171] Liquidity and Capital Resources This section assesses the company's ability to meet its financial obligations and fund operations and investments - As of September 30, 2023, ALLETE's liquidity position included $125.5 million in cash and cash equivalents, $370.1 million in available consolidated lines of credit, 2.1 million common stock shares available for issuance, and a debt-to-capital ratio of 35%[173] Capital Structure (September 30, 2023) | Component | Amount ($ Millions) | Percentage | | :----------------------------- | :------------------ | :--------- | | ALLETE Equity | $2,786.6 | 53% | | Non-Controlling Interest | $610.1 | 12% | | Short-Term and Long-Term Debt | $1,805.5 | 35% | | Total | $5,202.2 | 100% | - For the nine months ended September 30, 2023, cash provided by operating activities was $520.0 million, cash used in investing activities was $200.6 million, and cash used in financing activities was $228.4 million[176] - ALLETE's credit ratings include Issuer Credit Rating of BBB (S&P Global Ratings) and Baa1 (Moody's), Commercial Paper of A-2 (S&P) and P-2 (Moody's), and First Mortgage Bonds of A2 (Moody's)[182] - Capital expenditures for the nine months ended September 30, 2023, totaled $182.0 million, primarily in Regulated Operations, plus $26 million for ALLETE Clean Energy's wind energy facility development projects[183] Other This section covers additional information pertinent to the company's operations, including environmental regulations and employee matters - The company's businesses are subject to various federal, state, and local environmental regulations, and Minnesota Power is actively reshaping its generation portfolio to reduce reliance on coal and comply with environmental requirements[184] - As of September 30, 2023, ALLETE had 1,556 employees, with significant portions covered by collective bargaining agreements expiring between January 2024 and March 2026[185] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses ALLETE, Inc.'s exposure to market risks, including securities investments, commodity price risk, power marketing credit risk, and interest rate risk, and outlines the strategies employed to manage these exposures - Regulated utility operations' exposure to power and fuel price risk is significantly mitigated by ratemaking processes that allow recovery of fuel costs or distribution of savings to ratepayers[188] - The company is exposed to credit risk through power marketing activities and manages this using established credit approval processes and counterparty limits[189] - Interest rate risk is managed by varying issuance and maturity dates of fixed-rate debt, limiting variable-rate debt, and monitoring market changes; a 100 basis point increase in interest rates would impact pre-tax interest expense by $0.5 million based on Q3 2023 variable rate debt[190] ITEM 4. Controls and Procedures Management, including the principal executive and financial officers, concluded that ALLETE, Inc.'s disclosure controls and procedures were effective as of September 30, 2023, and reported no material changes in internal control over financial reporting during the quarter - As of September 30, 2023, disclosure controls and procedures were deemed effective by management, including the CEO and CFO[192] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[193] Part II. Other Information This part includes other required disclosures not covered in the financial information section, such as legal proceedings and risk factors ITEM 1. Legal Proceedings This section refers to disclosures in the notes to consolidated financial statements regarding material legal and regulatory proceedings, indicating no new material information beyond what is already incorporated by reference - Information on material legal and regulatory proceedings is incorporated by reference from Note 2 (Regulatory Matters) and Note 6 (Commitments, Guarantees and Contingencies) of the current 10-Q and the 2022 Form 10-K[194] ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. Risk Factors of the company's 2022 Form 10-K - No material changes from the risk factors disclosed in the 2022 Form 10-K[195] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This item reports that there were no unregistered sales of equity securities or use of proceeds to disclose for the period - No unregistered sales of equity securities or use of proceeds to report[195] ITEM 3. Defaults Upon Senior Securities This item indicates that there were no defaults upon senior securities to report for the period - No defaults upon senior securities to report[195] ITEM 4. Mine Safety Disclosures Information regarding mine safety violations and other regulatory matters, as required by the Dodd-Frank Act, is included in Exhibit 95 to this Form 10-Q - Information on mine safety violations is provided in Exhibit 95, as required by the Dodd-Frank Act[196] ITEM 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the quarter ended September 30, 2023 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q3 2023[197] ITEM 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including amendments to credit agreements, certifications by executive officers, mine safety disclosures, news releases, and XBRL interactive data files - Key Exhibits include the Third Amendment to Credit Agreement (Exhibit 10), CEO/CFO Certifications (Exhibits 31a, 31b, 32), Mine Safety (Exhibit 95), and ALLETE News Release (Exhibit 99)[198] Signatures This section contains the required certifications and signatures for the official filing of the report