Part I
Item 1. Business
Overview.
ALLETE is a clean-energy leader committed to answering the call to transform the nation’s energy landscape through innovative and sustainable solutions. Our businesses deliver critical, quality-of-life services in ways that respect the environment, support communities and the people who live there, and provide value to customers and investors. Minnesota Power has a vision to deliver 100 percent carbon-free energy to customers by 2050, continuing its commitment to climate, customers and communities through its EnergyForward strategy. This vision builds on Minnesota Power’s recent achievement of now providing 50 percent renewable energy to its customers. ALLETE Clean Energy also operates more than 1,000 MW of renewable wind energy generation in addition to approximately 300 MW currently under construction and 155 MW previously constructed and sold to others. Delivery of these sustainable energy solutions helps the customers and communities we serve achieve their sustainability goals.
On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply to 70 percent by 2030, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. Minnesota Power has also set a target to achieve an 80 percent reduction in carbon emissions by 2035 compared to 2005 levels. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in late 2021.
In recent years, Minnesota Power has transformed its energy supply from more than a 95 percent reliance on coal to become a leader in the nation’s clean-energy transformation. Since 2013, the company has closed or converted seven of its nine coal-fired units and added nearly 900 megawatts of renewable energy sources. Additionally, Minnesota Power has been a leader in energy conservation, surpassing the state’s conservation goals each year for the past decade.
ALLETE is also committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses, and sustains growth. ALLETE is predominately a regulated utility through Minnesota Power, SWL&P, and an investment in ATC. ALLETE’s strategy is to remain predominately a regulated utility while also investing in ALLETE Clean Energy and our Corporate and Other businesses to complement its regulated businesses, balance exposure to the utility’s industrial customers, and provide potential long-term earnings growth.
The ongoing COVID-19 pandemic has resulted in widespread impacts on the global economy and on our employees, customers, contractors, and suppliers. There is considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders (including those in effect in areas our businesses operate), and business and government shutdowns. Additional disclosures in this Form 10-K regarding the impacts of the ongoing COVID-19 pandemic are located in Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 1615 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service in northwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities. (See Note 4. Regulatory Matters.)
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in fourseven states, approximately 535more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300 MW of wind energy facilities under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.
ALLETE, Inc. 2020 Form 10-K
7
Overview (Continued)
U.S. Water Services providesprovided integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage, and improve efficiency. In March 2019, the Company sold U.S. Water Services to a subsidiary of Kurita Water Industries Ltd.
Corporate and Otheris comprised of BNI Energy, our coal mining operations in North Dakota,Dakota; our investment in Nobles 2, an entity that owns and operates a 250 MW wind energy facility in southwestern Minnesota; ALLETE Properties, our legacy Florida real estate investment,investment; other business development and corporate expenditures,expenditures; unallocated interest expense,expense; a small amount of non-rate base generation,generation; approximately 5,0004,000 acres of land in Minnesota,Minnesota; and earnings on cash and investments.
ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of December 31, 2017,2020, unless otherwise indicated. All subsidiaries are wholly-owned unless otherwise specifically indicated. References in this report to “we,” “us” and “our” are to ALLETE and its subsidiaries, collectively.
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
Consolidated Operating Revenue – Millions (a)(b) | $1,169.1 | $1,240.5 | $1,498.6 | ||||||||
| Percentage of Consolidated Operating Revenue | |||||||||||
| Regulated Operations | 84 | % | 84 | % | 71 | % | |||||
ALLETE Clean Energy (a) | 7 | % | 5 | % | 11 | % | |||||
U.S. Water Services (b) | — | 3 | % | 11 | % | ||||||
| Corporate and Other | 9 | % | 8 | % | 7 | % | |||||
| 100 | % | 100 | % | 100 | % | ||||||
| Year Ended December 31 | 2017 | 2016 | 2015 (a) | ||||||
| Consolidated Operating Revenue – Millions | $1,419.3 | $1,339.7 | $1,486.4 | ||||||
| Percentage of Consolidated Operating Revenue | |||||||||
| Regulated Operations | 75 | % | 75 | % | 67 | % | |||
| ALLETE Clean Energy | 6 | % | 6 | % | 18 | % | |||
| U.S. Water Services | 11 | % | 10 | % | 8 | % | |||
| Corporate and Other | 8 | % | 9 | % | 7 | % | |||
| 100 | % | 100 | % | 100 | % | ||||
(b) ALLETE sold U.S. Water Services in the first quarter of 2019.
For a detailed discussion of results of operations and trends, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. For business segment information, see Note 1. Operations and Significant Accounting Policies and Note 17.13. Business Segments.
ALLETE, Inc. 2020 Form 10-K
8
REGULATED OPERATIONS
Electric Sales / Customers
| Regulated Utility Kilowatt-hours Sold | ||||||||||||||||||||
| Year Ended December 31 | 2020 | % | 2019 | % | 2018 | % | ||||||||||||||
| Millions | ||||||||||||||||||||
| Retail and Municipal | ||||||||||||||||||||
| Residential | 1,134 | 9 | 1,130 | 8 | 1,140 | 8 | ||||||||||||||
| Commercial | 1,306 | 10 | 1,390 | 10 | 1,426 | 10 | ||||||||||||||
| Industrial | 6,192 | 47 | 7,277 | 54 | 7,261 | 50 | ||||||||||||||
| Municipal | 584 | 4 | 672 | 5 | 798 | 5 | ||||||||||||||
| Total Retail and Municipal | 9,216 | 70 | 10,469 | 77 | 10,625 | 73 | ||||||||||||||
| Other Power Suppliers | 4,039 | 30 | 3,185 | 23 | 3,953 | 27 | ||||||||||||||
| Total Regulated Utility Kilowatt-hours Sold | 13,255 | 100 | 13,654 | 100 | 14,578 | 100 | ||||||||||||||
| Regulated Utility Kilowatt-hours Sold | |||||||||
| Year Ended December 31 | 2017 | % | 2016 | % | 2015 | % | |||
| Millions | |||||||||
| Retail and Municipal | |||||||||
| Residential | 1,096 | 7 | 1,102 | 8 | 1,113 | 8 | |||
| Commercial | 1,420 | 10 | 1,442 | 10 | 1,462 | 10 | |||
| Industrial | 7,327 | 50 | 6,456 | 45 | 6,635 | 46 | |||
| Municipal | 799 | 5 | 816 | 6 | 833 | 6 | |||
| Total Retail and Municipal | 10,642 | 72 | 9,816 | 69 | 10,043 | 70 | |||
| Other Power Suppliers | 4,039 | 28 | 4,316 | 31 | 4,310 | 30 | |||
| Total Regulated Utility Kilowatt-hours Sold | 14,681 | 100 | 14,132 | 100 | 14,353 | 100 | |||
Industrial Customers. In 2017,2020, industrial customers represented 5047 percent of total regulated utility kWh sales. Our industrial customers are primarily in the taconite mining, iron concentrate, paper, pulp and secondary wood products, and pipeline industries.
| Industrial Customer Kilowatt-hours Sold | |||||||||
| Year Ended December 31 | 2017 | % | 2016 | % | 2015 | % | |||
| Millions | |||||||||
| Taconite/Iron Concentrate | 4,930 | 67 | 3,906 | 61 | 4,000 | 60 | |||
| Paper, Pulp and Secondary Wood Products | 1,104 | 15 | 1,303 | 20 | 1,456 | 22 | |||
| Pipelines and Other Industrial | 1,293 | 18 | 1,247 | 19 | 1,179 | 18 | |||
| Total Industrial Customer Kilowatt-hours Sold | 7,327 | 100 | 6,456 | 100 | 6,635 | 100 | |||
| Industrial Customer Kilowatt-hours Sold | ||||||||||||||||||||
| Year Ended December 31 | 2020 | % | 2019 | % | 2018 | % | ||||||||||||||
| Millions | ||||||||||||||||||||
| Taconite | 4,296 | 69 | 5,039 | 69 | 5,039 | 69 | ||||||||||||||
| Paper, Pulp and Secondary Wood Products | 752 | 12 | 1,014 | 14 | 987 | 14 | ||||||||||||||
| Pipelines and Other Industrial | 1,144 | 19 | 1,224 | 17 | 1,235 | 17 | ||||||||||||||
| Total Industrial Customer Kilowatt-hours Sold | 6,192 | 100 | 7,277 | 100 | 7,261 | 100 | ||||||||||||||
Six taconite facilities served by Minnesota Power made up approximately 7080 percent of 20162019 iron ore pellet production in the U.S. according to data from the Minnesota Department of Revenue 20172020 Mining Tax Guide. These taconite facilities were all owned by Cliffs and USS Corporation at the end of the 2020. (See Large Power Customer Contracts.) Sales to taconite customers and iron concentrate customers represented 4,9304,296 million kWh, or 6769 percent of total industrial customer kWh sales in 2017.2020. Taconite, an iron-bearingiron‑bearing rock of relatively low iron content, is abundantly available in northern Minnesota and an important domestic source of raw material for the steel industry. Taconite processing plants use large quantities of electric power to grind the iron-bearing rock, and agglomerate and pelletize the iron particles into taconite pellets. Iron concentrate reclamation facilities also use large quantities of electricity to extract and process iron-bearing tailings left from previous mining operations to produce iron ore concentrate.
Minnesota Power’s taconite customers are capable of producing up to approximately 41 million tons of taconite pellets annually. Taconite pellets produced in Minnesota are primarily shipped to North American steel making facilities that are part of the integrated steel industry.industry, which continues to lead the world in environmental performance among steelmaking countries. According to the U.S. Department of Energy, steel produced in the U.S. is the most energy efficient of any major steel producing country. Steel produced from these North American facilities is used primarily in the manufacture of automobiles, appliances, pipe and tube productstubular applications for the gas and oil industry,all industries, and in the construction industry. Steel is also a critical component of the clean energy transformation underway today. The demand for more renewable energy and the need for additional infrastructure to transport green energy from the point of generation to the end user all requires steel. Historically, less than five10 percent of Minnesota taconite production has been exported outside of North America. Minnesota Power also provides electric service to three iron concentrate facilities capable of producing up to approximately 4 million tons of iron concentrate per year. Iron concentrate is used in the production of taconite pellets. These iron concentrate facilities are owned in whole, or in part, by ERP Iron Ore and are currently idled. (See Item 7. Management’s Discussion and Analysis – Outlook –
ALLETE, Inc. 2020 Form 10-K
9
REGULATED OPERATIONS (Continued)
Industrial Customers and Prospective Additional Load.)(Continued)
There has been a general historical correlation between U.S. steel production and Minnesota taconite production. The American Iron and Steel Institute, an association of North American steel producers, reported that U.S. raw steel production operated at approximately 7468 percent of capacity in 2017 (712020 (80 percent in 20162019 and 78 percent in 2015)2018). The World Steel Association, an association of over 160 steel producers, national and regional steel industry associations, and steel research institutes representing approximately 85 percent of world steel production, projected U.S. steel consumption in 20182021 will increase by approximately 17 percent compared to 2017.2020.
The following table reflects Minnesota Power’s taconite customers’ production levels for the past ten years:
| Minnesota Power Taconite Customer Production | ||||||||
| Year | Tons (Millions) | |||||||
| 2020* | 30 | |||||||
| 2019 | 37 | |||||||
| 2018 | 39 | |||||||
| 2017 | 38 | |||||||
| 2016 | 28 | |||||||
| 2015 | 31 | |||||||
| 2014 | 39 | |||||||
| 2013 | 37 | |||||||
| 2012 | 39 | |||||||
| 2011 | 39 | |||||||
| Source: Minnesota Department of Revenue 2020 Mining Tax Guide for years 2011 - 2019. | ||||||||
| * Preliminary data from the Minnesota Department of Revenue. | ||||||||
| Minnesota Power Taconite Customer Production | ||
| Year | Tons (Millions) | |
2017* | 37 | |
| 2016 | 28 | |
| 2015 | 31 | |
| 2014 | 39 | |
| 2013 | 37 | |
| 2012 | 39 | |
| 2011 | 39 | |
| 2010 | 35 | |
| 2009 | 17 | |
| 2008 | 39 | |
| Source: Minnesota Department of Revenue 2017 Mining Tax Guide for years 2008 - 2016. | ||
| * Preliminary data from the Minnesota Department of Revenue. | ||
Minnesota Power’s taconite customers may experience annual variations in production levels due to such factors as economic conditions, short-term demand changes or maintenance outages. We estimate that a one million ton change in Minnesota Power’s taconite customers’ production would impact our annual earnings per share by approximately $0.04, net of expected power marketing sales at current prices. Changes in wholesale electric prices or customer contractual demand nominations could impact this estimate. Minnesota Power proactively sells power in the wholesale power markets that is temporarily not required by industrial customers to optimize the value of its generating facilities. Long-term reductions in taconite production or a permanent shut down of a taconite customer may lead Minnesota Power to file a general rate case to recover lost revenue.
In addition to serving the taconite industry, Minnesota Power serves a number of customers in the paper, pulp and secondary wood products industry, which represented 1,104752 million kWh, or 1512 percent of total industrial customer kWh sales in 2017.2020. Minnesota Power also has agreements to provide steam for two of its paper and pulp customers for use in the customers’ operations. The four major paper and pulp mills we serve reported operating at or near, full capacitylower levels in 2017; however,2020 compared to 2019 resulting from the smaller of UPM Blandin’s twoongoing COVID-19 pandemic. In addition, Verso Corporation indefinitely idled its paper machines was closedmill in the fourth quarter of 2017.Duluth, Minnesota. (See Item 7. Management’s Discussion and AnalysisOutlook – OutlookRegulated Operations – Industrial Customers and Prospective Additional Load.Load – Paper, Pulp and Secondary Wood Products – Verso Corporation.)
Large Power Customer Contracts. Minnesota Power has nineeight Large Power Customer contracts, each serving requirements of 10 MW or more of customer load. The customers consist of six taconite facilities two iron concentrate reclamation facilitiesowned by Cliffs and USS Corporation at the end of the 2020 as well as four paper and pulp mills. Certain facilities havewith common ownership and are served under combined contracts.
ALLETE, Inc. 2020 Form 10-K
10
REGULATED OPERATIONS (Continued)
Large Power Customer Contracts (Continued)
Large Power Customer contracts require Minnesota Power to have a certain amount of generating capacity available. In turn, each Large Power Customer is required to pay a minimum monthly demand charge that covers the fixed costs associated with having this capacity available to serve the customer, including a return on common equity. Most contracts allow customers to establish the level of megawatts subject to a demand charge on a three to four-month basis and require that a portion of their megawatt needs be committed on a take-or-pay basis for at least a portion of the term of the agreement. In addition to the demand charge, each Large Power Customer is billed an energy charge for each kWh used that recovers the variable costs incurred in generating electricity. Five of the Large Power Customer contracts have interruptible service which provides a discounted demand rate in exchange for the ability to interrupt the customers during system emergencies. Minnesota Power also provides incremental production service for customer demand levels above the contractual take-or-pay levels. There is no demand charge for this service and energy is priced at an increment above Minnesota Power’s cost. Incremental production service is interruptible.
All contracts with Large Power Customers continue past the contract termination date unless the required advance notice of cancellation has been given. The required advance notice of cancellation varies from two to four years. Such contracts minimizereduce the impact on earnings that otherwise would result from significant reductions in kWh sales to such customers. Large Power Customers are required to take all of their purchased electric service requirements from Minnesota Power for the duration of their contracts. The rates and corresponding revenue associated with capacity and energy provided under these contracts are subject to change through the same regulatory process governing all retail electric rates. (See Item 1. Business – Regulated Operations – Regulatory Matters – Electric Rates.Rates.)
Minnesota Power, as permitted by the MPUC, requires most of its taconite-producing Large Power Customers to pay weekly for electric usage based on monthly energy usage estimates. These customers receive estimated bills or make weekly prepayments based on Minnesota Power’s estimate of the customer’s energy usage, forecasted energy prices and fuel adjustment clause estimates. Minnesota Power’s taconite‑producing Large Power Customers have generally predictable energy usage on a week-to-week basis and any differences that occur are trued-up the following month.
Contract Status for Minnesota Power Large Power Customers
As of February 1, 2018
December 31, 2020
| Customer | Industry | Location | Ownership | Earliest Termination Date | ||||||||||
Cliffs – Minorca Mine(a) | Taconite | Virginia, MN | December 31, 2025 | |||||||||||
Hibbing Taconite | Taconite | Hibbing, MN | 14.7% USS Corporation | |||||||||||
| United Taconite and Northshore Mining | Taconite | Eveleth, MN and Babbitt, MN | Cliffs | December 31, 2026 | ||||||||||
USS Corporation (USS – Minnesota Ore) | Taconite | USS Corporation | ||||||||||||
| International Falls, MN | Packaging Corporation of America | December 31, | ||||||||||||
| UPM Blandin | Paper | Grand Rapids, MN | UPM-Kymmene Corporation | December 31, 2029 | ||||||||||
| Paper and Pulp | Duluth, MN | Verso Corporation | ||||||||||||
Sappi Cloquet LLC | Paper and Pulp | Cloquet, MN | Sappi Limited | |||||||||||
(a)In December 2020, Cliffs acquired substantially all of the operations of ArcelorMittal and its subsidiaries. The transaction included ArcelorMittal’s Minorca mine in Virginia, Minnesota, and its ownership share of Hibbing Taconite in Hibbing, Minnesota.(See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Cliffs Acquisition.)
(b)The contract will terminate four years from the date of written notice from either Minnesota Power or the customer. No notice of contract cancellation has been given by either party. Thus, the earliest date of cancellation is December 31, 2024.
(c)USS Corporation owns both the Minntac Plant in Mountain Iron, MN, and the Keewatin Taconite Plant in Keewatin, MN.
(d)In June 2020, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. On January 29, 2021, Verso Corporation provided notice of termination for its contract effective in January 2025. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Paper, Pulp and Secondary Wood Products – Verso Corporation.)
ALLETE, Inc. 2020 Form 10-K
11
REGULATED OPERATIONS (Continued)
Residential and Commercial Customers. In 2017,2020, residential and commercial customers represented 1719 percent of total regulated utility kWh sales.
Municipal Customers. In 2017,2020, municipal customers represented 54 percent of total regulated utility kWh sales. All of the municipal customer contracts include a termination clause requiring a three-year notice to terminate.
Minnesota Power’s wholesale electric contracts with 15 non-affiliated municipal customers in Minnesota have termination dates ranging from 2024 through 2037, with a majority of contracts effective through 2024. All wholesale contracts include a termination clause requiring a three-year notice to terminate. (See Note 4. Regulatory Matters.)
The contract with the Nashwauk Public Utilities Commission is effective through at least December 31, 2032. No termination notice may be given for this contract prior to July 1, 2029. The wholesale electric service contracts with SWL&P and anothera former municipal customer are effective through at least February 28, 2021, and through June 30, 2019, respectively. Under the agreement with SWL&P, no termination notice has been given. The other municipal customer provided a contract termination noticeexpired in June 2016.2019. Minnesota Power currently provideshistorically provided approximately 29 MW of average monthly demand to this customer. The rates included in these three contracts are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate of return that is equal to Minnesota Power’s authorized rate of return for Minnesota retail customers. The formula-based rate methodology also provides for a yearly true-up calculation for actual costs incurred.
Other Power Suppliers. The Company also enters into off-system sales with Other Power Suppliers. These sales are at market‑based prices into the MISO market on a daily basis or through bilateral agreements of various durations.
Our PSAs are detailed in Note 8. Commitments, Guarantees and Contingencies, with additional disclosure provided in the following paragraphs.
Basin PSA.PSAs. Minnesota Power hashad an agreement to sell 100 MW of capacity and energy to Basin for a ten-year period which expiresexpired in April 2020. The capacity charge is based on a fixed monthly schedule with a minimum annual escalation provision. The energy charge is based on a fixed monthly schedule and provides for annual escalation based on the cost of fuel. The agreement also allows Minnesota Power to recover a pro rata share of increased costs related to emissions that occur during the last five years of the contract. Minnesota Power has antwo additional agreementagreements to sell 100 MW of capacity to Basin at fixed rates for a two-year period that began in June 2016.prices. (See Note 8. Commitments, Guarantees and Contingencies.)
Minnkota Power PSA. Minnesota Power has a PSA with Minnkota Power where Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power, resulting in Minnkota Power’s net entitlement increasing and Minnesota Power’s net entitlement decreasing until Minnesota Power’s share is eliminated at the end of 2025. Of Minnesota Power’s 50 percent output entitlement, it sold approximately 28 percent to Minnkota Power in 20172020 (28 percent in 20162019 and in 2015)2018). Minnkota Power’s net entitlement increases to approximately 32 percent in 2022, 37 percent in 2023, 41 percent in 2024, 46 percent in 2025 and 50 percent in 2026. (See Note 11. Commitments, Guarantees and Contingencies.Power Supply – Long-Term Purchased Power.)
Silver Bay Power PSA. In 2016, Minnesota Power and Silver Bay Power entered into a long-term PSA through 2031. Silver Bay Power supplies approximately 90 MW of load to Northshore Mining, an affiliate of Silver Bay Power, which hashad previously been served predominately through self-generation by Silver Bay Power. In the yearsStarting in 2016, through 2019, Minnesota Power is supplyingsupplied Silver Bay Power with at least 50 MW of energy and Silver Bay Power hashad the option to purchase additional energy from Minnesota Power as it transitionstransitioned away from self-generation. On December 31,In the third quarter of 2019, Silver Bay Power will ceaseceased self-generation and Minnesota Power will supplybegan supplying the full energy requirements for Silver Bay Power.
Seasonality
The operations of our industrial customers, which make up a large portion of our electric sales, are not typically subject to significant seasonal variations. (See Electric Sales / Customers.) As a result, Minnesota Power is generally not subject to significant seasonal fluctuations in electric sales; however, Minnesota Power and SWL&P electric and natural gas sales to other customers may be affected by seasonal differences in weather. In general, peak electric sales occur in the winter and summer months with fewer electric sales in the spring and fall months. Peak sales of natural gas generally occur in the winter months. Additionally, our regulated utilities have historically generated fewer sales and less revenue when weather conditions are milder in the winter and summer.
Power Supply
In order to meet its customers’ electric requirements, Minnesota Power utilizes a mix of its own generation and purchased power. As of December 31, 2017,2020, approximately 50 percent of Minnesota Power’s generating capabilitypower supply is primarily coal-fired, but also includes natural gas-fired and biomass co-fired generation, hydroelectric generation,expected to be provided by renewable energy sources with the completion of the 250 MW Nobles 2 wind energy generationfacility in December 2020 and solar generation. In 2017,the GNTL in June 2020, which will be used to deliver 250 MW of hydroelectric energy from Manitoba Hydro. Minnesota Power’s remaining operating coal-fired facilities are Boswell Units 3 and 4, which Minnesota Power had record hydroelectricproposed in its latest IRP to retire by 2030 and wind energy generation. Purchased power primarily consists of long-term coal, wind and hydro PPAs as well as market purchases.coal-free by 2035, respectively. (See Regulatory Matters.) The following table reflects Minnesota Power’s generating capabilities as of December 31, 2017,2020, and total electrical supply for 2017.2020. Minnesota Power had an annual net peak load of 1,5991,588 MW on December 27, 2017.February 14, 2020.
ALLETE, Inc. 2020 Form 10-K
12
REGULATED OPERATIONS (Continued)
Power Supply (Continued)
| Year Ended | ||||||||||||||||||||
| Unit | Year | Net | December 31, 2020 | |||||||||||||||||
| Regulated Utility Power Supply | No. | Installed | Capability | Generation and Purchases | ||||||||||||||||
| MW | MWh | % | ||||||||||||||||||
| Coal-Fired | ||||||||||||||||||||
Boswell Energy Center (a) | 3 | 1973 | 355 | |||||||||||||||||
| in Cohasset, MN | 4 | 1980 | 468 | (b) | ||||||||||||||||
| 823 | 3,673,480 | 26.9 | ||||||||||||||||||
| Taconite Harbor Energy Center | 1 | 1957 | 75 | |||||||||||||||||
| in Schroeder, MN | 2 | 1957 | 75 | |||||||||||||||||
| 150 | (c) | — | — | |||||||||||||||||
| Total Coal-Fired | 973 | 3,673,480 | 26.9 | |||||||||||||||||
| Biomass Co-Fired / Natural Gas | ||||||||||||||||||||
| Hibbard Renewable Energy Center in Duluth, MN | 3 & 4 | 1949, 1951 | 62 | 30,858 | 0.2 | |||||||||||||||
| Laskin Energy Center in Hoyt Lakes, MN | 1 & 2 | 1953 | 110 | 16,473 | 0.1 | |||||||||||||||
| Total Biomass Co-Fired / Natural Gas | 172 | 47,331 | 0.3 | |||||||||||||||||
Hydro (d) | ||||||||||||||||||||
| Group consisting of ten stations in MN | Multiple | Multiple | 120 | 546,847 | 4.0 | |||||||||||||||
Wind (e) | ||||||||||||||||||||
| Taconite Ridge Energy Center in Mt. Iron, MN | Multiple | 2008 | 25 | 59,419 | 0.5 | |||||||||||||||
| Bison Wind Energy Center in Oliver and Morton Counties, ND | Multiple | 2010-2014 | 497 | 1,700,098 | 12.4 | |||||||||||||||
| Total Wind | 522 | 1,759,517 | 12.9 | |||||||||||||||||
Solar (f) | ||||||||||||||||||||
| Group consisting of two solar arrays in MN | Multiple | Multiple | 10 | 16,230 | 0.1 | |||||||||||||||
| Total Generation | 1,797 | 6,043,405 | 44.2 | |||||||||||||||||
| Long-Term Purchased Power | ||||||||||||||||||||
Lignite Coal - Square Butte near Center, ND (g) | 1,466,584 | 10.7 | ||||||||||||||||||
| Wind - Oliver Wind I and II in Oliver County, ND | 309,324 | 2.3 | ||||||||||||||||||
Wind - Nobles 2 in Nobles County, MN (h) | 52,477 | 0.4 | ||||||||||||||||||
| Hydro - Manitoba Hydro in Manitoba, Canada | 1,052,539 | 7.7 | ||||||||||||||||||
| Total Long-Term Purchased Power | 2,880,924 | 21.1 | ||||||||||||||||||
Other Purchased Power (i) | 4,749,729 | 34.7 | ||||||||||||||||||
| Total Purchased Power | 7,630,653 | 55.8 | ||||||||||||||||||
| Total Regulated Utility Power Supply | 13,674,058 | 100.0 | ||||||||||||||||||
(a) Minnesota Power retired Boswell Units 1 and 2 in the fourth quarter of 2018. Minnesota Power proposed in its latest IRP to retire Boswell Unit 3 by 2030 and for Boswell Unit 4 to be coal-free by 2035. (See Regulatory Matters.)
(b)Boswell Unit 4 net capability shown above reflects Minnesota Power’s ownership percentage of 80 percent. WPPI Energy owns 20 percent of Boswell Unit 4. (See Note 3. Jointly-Owned Facilities and Assets.)
(c)Taconite Harbor Units 1 and 2 were idled in 2016. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook – EnergyForward.)
(d)Hydro consists of 10 stations with 34 generating units.
(e)Taconite Ridge consists of 10 WTGs and Bison consists of 165 WTGs.
(f)Solar includes the 10 MW Camp Ripley Solar Array near Little Falls, MN, and a 40 kW community solar garden in Duluth, MN.
(g)Minnesota Power has a PSA with Minnkota Power whereby Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power. (See Electric Sales / Customers – Minnkota Power PSA.)
(h)See Item 1. Business – Corporate and Other – Investment in Nobles 2.
(i)Includes short-term market purchases in the MISO market and from Other Power Suppliers.
ALLETE, Inc. 2020 Form 10-K
13
| Year Ended | ||||||||
| Unit | Year | Net | December 31, 2017 | |||||
| Regulated Utility Power Supply | No. | Installed | Capability | Generation and Purchases | ||||
| MW | MWh | % | ||||||
| Coal-Fired | ||||||||
| Boswell Energy Center | 1 | 1958 | 67 | (a) | ||||
| in Cohasset, MN | 2 | 1960 | 68 | (a) | ||||
| 3 | 1973 | 355 | ||||||
| 4 | 1980 | 468 | (b) | |||||
| 958 | 6,286,858 | 41.4 | ||||||
| Taconite Harbor Energy Center | 1 | 1957 | 75 | |||||
| in Schroeder, MN | 2 | 1957 | 75 | |||||
| 150 | (c) | — | — | |||||
| Total Coal-Fired | 1,108 | 6,286,858 | 41.4 | |||||
| Biomass Co-Fired / Natural Gas | ||||||||
| Hibbard Renewable Energy Center in Duluth, MN | 3 & 4 | 1949, 1951 | 62 | 4,502 | — | |||
| Laskin Energy Center in Hoyt Lakes, MN | 1 & 2 | 1953 | 110 | 5,615 | 0.1 | |||
| Total Biomass Co-Fired / Natural Gas | 172 | 10,117 | 0.1 | |||||
Hydro (d) | ||||||||
| Group consisting of ten stations in MN | Multiple | Multiple | 120 | 773,707 | 5.1 | |||
Wind (e) | ||||||||
| Taconite Ridge Energy Center in Mt. Iron, MN | Multiple | 2008 | 25 | 56,594 | 0.4 | |||
| Bison Wind Energy Center in Oliver and Morton Counties, ND | Multiple | 2010-2014 | 497 | 1,775,474 | 11.7 | |||
| Total Wind | 522 | 1,832,068 | 12.1 | |||||
| Solar | ||||||||
| Camp Ripley Solar Array near Little Falls, MN | Multiple | 2016 | 10 | 17,129 | 0.1 | |||
| Total Generation | 1,932 | 8,919,879 | 58.8 | |||||
| Long-Term Purchased Power | ||||||||
Lignite Coal - Square Butte near Center, ND (f) | 1,739,781 | 11.5 | ||||||
| Wind - Oliver County, ND | 341,785 | 2.2 | ||||||
| Hydro - Manitoba Hydro in Manitoba, Canada | 305,532 | 2.0 | ||||||
| Total Long-Term Purchased Power | 2,387,098 | 15.7 | ||||||
Other Purchased Power (g) | 3,867,865 | 25.5 | ||||||
| Total Purchased Power | 6,254,963 | 41.2 | ||||||
| Total Regulated Utility Power Supply | 1,932 | 15,174,842 | 100.0 | |||||
REGULATED OPERATIONS (Continued)
Power Supply (Continued)
Fuel. Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder River Basin region located in Montana and Wyoming. Coal consumption in 20172020 for electric generation at Minnesota Power’s coal-fired generating stations was 2.2 million tons (2.5 million tons in 2019; 3.8 million tons (4.2 million tons in 2016; 4.4 million tons in 2015)2018). As of December 31, 2017,2020, Minnesota Power had coal inventories of 1.20.8 million tons (1.4(0.9 million tons as of December 31, 2016)2019). Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirements through December 2018 and a portion of its coal requirements through December 2021. In 2018,2021, Minnesota Power expects to obtain coal under these coal supply agreements and in the spot market. Minnesota Power continues to explore other future coal supply options and believes that adequate supplies of low-sulfur, sub‑bituminoussub-bituminous coal will continue to be available.
Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2018.2021. The costs of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s utility customers through the fuel adjustment clause.
| Coal Delivered to Minnesota Power | |||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Average Price per Ton | $34.94 | $35.31 | $38.89 | ||||||||
| Average Price per MBtu | $1.93 | $1.94 | $2.10 | ||||||||
| Coal Delivered to Minnesota Power | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Average Price per Ton | $36.50 | $35.87 | $27.00 | ||||||
| Average Price per MBtu | $2.01 | $1.98 | $1.49 | ||||||
Long-Term Purchased Power. Minnesota Power has contracts to purchase capacity and energy from various entities, including output from certain coal, wind, hydro and solar generating facilities.
Our PPAs are detailed in Note 11.8. Commitments, Guarantees and Contingencies, with additional disclosure provided in the following paragraph.
Square Butte PPA. Under the PPA with Square Butte that extends through 2026, Minnesota Power is entitled to 50 percent of the output of Square Butte’s 455 MW coal-fired generating unit. (See Note 11.8. Commitments, Guarantees and Contingencies.) BNI Energy mines and sells lignite coal to Square Butte. This lignite supply is sufficient to provide fuel for the anticipated useful life of the generating unit. Square Butte’s cost of lignite consumed in 20172020 was approximately $1.71$1.75 per MBtu ($1.571.88 per MBtu in 2016; $1.552019; $1.60 per MBtu in 2015)2018). (See Electric Sales / Customers – Minnkota Power PSA.)
Manitoba Hydro. Minnesota Power has three long-term PPAs with Manitoba Hydro. Under the first PPA, Minnesota Power is purchasing surplus energy through April 2022. This energy-only agreement primarily consists of surplus hydro energy on Manitoba Hydro’s system that is delivered to Minnesota Power on a non-firm basis. Under this agreement, Minnesota Power will purchase at least one million MWh of energy over the contract term. The second PPA provides for Minnesota Power to purchase 250 MW of capacity and energy from Manitoba Hydro through May 2035. The third PPA provides for Minnesota Power to purchase up to 133 MW of energy from Manitoba Hydro through June 2040.
Transmission and Distribution
We have electric transmission and distribution lines of 500 kV (8(232 miles), 345 kV (242 miles), 250 kV (466(465 miles), 230 kV (717(714 miles), 161 kV (43 miles), 138 kV (190(130 miles), 115 kV (1,280(1,252 miles) and less than 115 kV (6,334(6,369 miles). We own and operate 167158 substations with a total capacity of 8,54010,066 megavoltamperes. Some of our transmission and distribution lines interconnect with other utilities.
Great Northern Transmission Line. As a condition of the 250 MW long-term PPA entered into with Manitoba Hydro, construction of additional transmission capacity iswas required. As a result, Minnesota Power and Manitoba Hydro proposed construction ofconstructed the GNTL, an approximately 220-mile220‑mile 500-kV transmission line between Manitoba and Minnesota’s Iron Range that was proposed by Minnesota Power and Manitoba Hydro in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainable energy.
totaled approximately $660 million. Also on June 1, 2020, Manitoba Hydro must obtain regulatory and governmental approvals related to a new transmission line in Canada. In 2015,placed the MMTP into service. The 250 MW PPA with Manitoba Hydro submittedcommenced when the final preferred route and EIS for the transmission line in Canada to the Manitoba Conservation and Water Stewardship for regulatory approval. In December 2016, Manitoba Hydro filed an application with the National Energy Board in Canada requesting authorization to construct and operate an international transmission line. Both provincial and federal approvals are pending. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in 2014 and is anticipated to be in service by early 2021.GNTL was placed into service.
REGULATED OPERATIONS (Continued)
Investment in ATC
Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. As of December 31 2017,2020, our equity investment in ATC was $118.7$149.0 million ($135.6($141.6 million as of December 31, 2016)2019). The decrease in our equity investment in ATC in 2017 is due to the impact of the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies, and Note 5. Investment in ATC.Equity Investments.)
ATC’s 10-year transmission assessment, which covers the years 20172020 through 2026,2029, identifies a need for between $2.8$2.9 billion and $3.6$3.5 billion in transmission system investments. These investments by ATC, if undertaken, are expected to be funded through a combination of internally generated cash, debt and investor contributions. As opportunities arise, we plan to make additional investments in ATC through general capital calls based upon our pro rata ownership interest in ATC.
Properties
Our Regulated Operations businesses own office and service buildings, an energy control center, repair shops, electric plants, transmission facilities and storerooms in various localities in Minnesota, Wisconsin and North Dakota. All of the electric plants are subject to mortgages, which collateralize the outstanding first mortgage bonds of Minnesota Power and SWL&P. Most of the generating plants and substations are located on real property owned by Minnesota Power or SWL&P, subject to the lien of a mortgage, whereas most of the electrictransmission and distribution lines are located on real property owned by others with appropriate easement rights or necessary permits from governmental authorities. WPPI Energy owns 20 percent of Boswell Unit 4. WPPI Energy has the right to use our transmission line facilities to transport its share of Boswell generation. (See Note 3. Jointly-Owned Facilities and Projects.Assets.)
Regulatory Matters
We are subject to the jurisdiction of various regulatory authorities and other organizations. Regulatory matters and proceedings are detailed in Note 4. Regulatory Matters, with a summary included in the following paragraphs.
Electric Rates. All rates and contract terms in our Regulated Operations are subject to approval by applicable regulatory authorities. Minnesota Power and SWL&P design their retail electric service rates based on cost of service studies under which allocations are made to the various classes of customers as approved by the MPUC or the PSCW. Nearly all retail sales include billing adjustment clauses, which may adjust electric service rates for changes in the cost of fuel and purchased energy, recovery of current and deferred conservation improvement programexpenditures and recovery of certain transmission, renewable and environmental investments.
Minnesota Public Utilities Commission. The MPUC has regulatory authority over Minnesota Power’s retail service area in Minnesota, retail rates, retail services, capital structure, issuance of securities and other matters. Minnesota Power’s current retail rates are based on a March 2018 MPUC retail rate order that allows for a 9.25 percent return on common equity and a 53.81 percent equity ratio. The resolution of Minnesota Power’s 2020 general rate case did not change its allowed return on equity or equity ratio. (See 2020 Minnesota General Rate Case.) As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable and environmental investments.
ALLETE, Inc. 2020 Form 10-K
REGULATED OPERATIONS (Continued)
Regulatory Matters (Continued)
2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed a revised EITE petitionits latest IRP with the MPUC, which included additional informationoutlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply to 70 percent by 2030, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. Minnesota Power has also set a target to achieve an 80 percent reduction in carbon emissions by 2035 compared to 2005 levels. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the net benefits analysis, limits on eligibleIRP is expected in late 2021.
Minnesota Power has a vision to deliver 100 percent carbon-free energy to customers by 2050, continuing its commitment to climate, customers and term lengths for the EITE discount. The rate adjustments were intended to be revenue and cash flow neutral to Minnesota Power. The MPUC approved a reduction in rates for EITE customers in a December 2016 order and subsequently approved cost recovery in an order dated April 20, 2017; collection of the discount was subject to the MPUC’s review ofcommunities through its EnergyForward strategy. This vision builds on Minnesota Power’s compliance filing implementing approvalrecent achievement of a recovery mechanism, with the subsequent order issued on October 13, 2017, that modified the order dated April 20, 2017. During 2017, Minnesota Power provided discounts of $8.6 million which were recorded as a receivable. On September 29, 2017, Minnesota Power informednow providing 50 percent renewable energy to its EITE customers that it had suspended the EITE discount due to a concern that it was not revenue and cash flow neutral to Minnesota Power based on an MPUC decision at a hearing on September 7, 2017, as well as the interim rate reduction and decisions in its 2016 general rate case. Based on the MPUC’s decisions at a hearing on January 18, 2018, as part of Minnesota Power’s 2016 general rate case, Minnesota Power reinstated the EITE discount effective January 1, 2018. Minnesota Power expects the discount to EITE customers to be approximately $15 million annually based on EITE customer current operating levels. While interim rates are in effect for Minnesota Power’s 2016 general rate case, EITE discounts will offset interim rate refund reserves for non-EITE customers.
Public Service Commission of Wisconsin. The PSCW has regulatory authority over SWL&P’s retail sales of electricity, natural gas and water, issuances of securities and other matters.
North Dakota Public Service Commission. The NDPSC has jurisdiction over site and route permitting of generation and transmission facilities in rates for retail customers (3.8 percent increase in electric rates; 4.8 percent decrease in natural gas rates; and 9.8 percent increase in water rates). On an annualized basis, SWL&P expects to collect additional revenue of $2.5 million.North Dakota.
Federal Energy Regulatory Commission. The FERC has jurisdiction over the licensing of hydroelectric projects, the establishment of rates and charges for transmission of electricity in interstate commerce, electricity sold at wholesale (including the rates for Minnesota Power’s municipal and wholesale customers), natural gas transportation, certain accounting and record‑keeping practices, certain activities of our regulated utilities and the operations of ATC. FERC jurisdiction also includes enforcement of NERC mandatory electric reliability standards. Violations of FERC rules are subject to enforcement action by the FERC including financial penalties up to $1 million per day per violation. Regulatory proceedings pending with the FERC are detailed in Note 4. Regulatory Matters.
Regional Organizations
Midcontinent Independent System Operator, Inc. Minnesota Power, SWL&P and ATC are members of MISO, a regional transmission organization. While Minnesota Power and SWL&P retain ownership of their respective transmission assets, their transmission networks are under the regional operational control of MISO. Minnesota Power and SWL&P take and provide transmission service under the MISO open access transmission tariff. In cooperation with stakeholders, MISO continues its efforts to overseemanages the safe, cost-effective delivery of electric power across all or parts of 15 states and the Canadian province of Manitoba which includes nearly 176,000 MW of generating capacity.Manitoba.
North American Electric Reliability Corporation. The NERC has been certified by the FERC as the national electric reliability organization. The NERC ensures the reliability of the North American bulk power system. The NERC oversees eightsix regional entities that establish requirements, approved by the FERC, for reliable operation and maintenance of power generation facilities and transmission systems. Minnesota Power is subject to these reliability requirements and can incur significant penalties for non‑compliance.
ALLETE, Inc. 2020 Form 10-K
16
REGULATED OPERATIONS (Continued)
Regional Organizations (Continued)
Midwest Reliability Organization (MRO).Minnesota Power and ATC are members of the MRO, one of the eightsix regional entities overseen by the NERC. The MRO's primary responsibilities are to: ensure compliance with mandatory reliability standards by entities who own, operate or use the interconnected, international bulk power system; conduct assessments of the grid's ability to meet electricity demand in the region; and analyze regional system events.
The MRO region spans the Canadian provinces of Saskatchewan and Manitoba, and all or parts of the states of Illinois, Iowa, Minnesota, Michigan, Montana, Nebraska, North Dakota, South Dakota and Wisconsin. The region includes more than 130 organizations that are involved in the production and delivery of electricity to more than 20 million people. These organizations include municipal utilities, cooperatives, investor-owned utilities, transmission system operators, a federal power marketing agency, Canadian Crown corporations and independent power producers.16 states.
Minnesota Legislation
Renewable Energy. Minnesota law requires 25 percent of electric utilities’ applicable retail and municipal energy sales in Minnesota to be from renewable energy sources by 2025. Minnesota law also requires Minnesota Power to meet interim milestones of 12 percent by 2012, 17 percent by 2016 andincluding 20 percent by 2020. The law allows the MPUC to modify or delay meeting a milestone if implementation will cause significant ratepayer cost or technical reliability issues. If a utility is not in compliance with a milestone, the MPUC may order the utility to construct facilities, purchase renewable energy or purchase renewable energy credits. Minnesota Power has exceeded the interim milestone requirements to date.
As of December 31, 2020, approximately 50 percent of Minnesota Power’s 2015 IRP, which was filed with the MPUC in 2015 and approved with modificationspower supply is expected to be provided by the MPUC in a July 2016 order, includes an update on its plans and progress in meeting the Minnesota renewable energy milestones through 2025.sources. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook – EnergyForward.)
Minnesota Solar Energy Standard. Minnesota law requiresrequired at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generated by solar energy by the end of 2020. At least 10 percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 40 kW or less and community solar garden subscriptions. In a 2016 order, the MPUC approved Camp Ripley, a 10 MW utility scale solar project at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, as eligible to meetPower has met both parts of the solar energy standard and for current cost recovery. Camp Ripley was completed in the fourth quarter of 2016. In a July 2016 order, the MPUC approved a community solar garden project in northeastern Minnesota, which is comprised of a 1 MW solar array owned and operated by a third party with the output purchased by Minnesota Power and a 40 kW solar array that is owned and operated by Minnesota Power. Minnesota Power believes Camp Ripley and the community solar garden arrays will meet approximately one-third of the overall mandate. Additionally, in an order dated February 10, 2017, the MPUC approved Minnesota Power’s proposal to increase the amount of solar rebates available for customer-sited solar installations and recover costs of the program through Minnesota Power’s renewable cost recovery rider. The proposal to incentivize customer-sited solar installations and the community solar garden subscriptions is expected to meet a portion of the required small scale solar mandate.
Competition
Retail electric energy sales in Minnesota and Wisconsin are made to customers in assigned service territories. As a result, most retail electric customers in Minnesota do not have the ability to choose their electric supplier. Large energy users of 2 MW and above that are located outside of a municipality are allowed to choose a supplier upon MPUC approval. Minnesota Power serves 128 Large Power facilities overCustomers under contracts of at least 10 MW, none of which have engaged in a competitive rate process. No other large commercial or small industrial customers in Minnesota Power’s service territory have sought a provider outside Minnesota Power’s service territory since 1994.territory. Retail electric and natural gas customers in Wisconsin do not have the ability to choose their energy supplier. In both states, however, electricity may compete with other forms of energy. Customers may also choose to generate their own electricity, or substitute other forms of energy for their manufacturing processes.
In 2017, 52020, 4 percent of total regulated utility kWh sales were to municipal customers in Minnesota by contract.Minnesota. These customers have the right to seek an energy supply from any wholesale electric service provider upon contract expiration. Minnesota Power’s wholesale electric contract with the Nashwauk Public Utilities Commission was extended in October 2020 and is effective through at least December 31, 2032.2037. Minnesota Power wholesale electric contracts with 14 municipal customers are effective through at least December 31, 2024. In June 2016, one of Minnesota Power’svarying dates ranging from 2024 through 2029. The contract with a former municipal customers provided a contract termination notice effectivecustomer expired on June 30, 2019. (See Electric Sales / Customers.)
The FERC has continued with its efforts to promote a more competitive wholesale market through open-access electric transmission and other means. As a result, our electric sales to Other Power Suppliers and our purchases to supply our retail and wholesale load are made in thea competitive market.
Franchises
Minnesota Power holds franchises to construct and maintain an electric distribution and transmission system in 9195 cities. The remaining cities, villages and towns served by Minnesota Power do not require a franchise to operate. SWL&P serves customers under electric, natural gas or water franchises in 1 city and 14 villages orand towns.
ALLETE Clean EnergyCLEAN ENERGY
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in fourseven states, approximately 535more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300 MW of wind energy facilities under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook – ALLETE Clean Energy.)
ALLETE Clean Energy believes the market for renewable energy in North America is robust, driven by several factors including environmental regulation, tax incentives such as the extension of production tax credit and investment tax credits, societal expectations and continual technology advances. State renewable portfolio standards, and state or federal regulations to limit GHG emissions and the extension of production tax credit and investment tax credits are examples of environmental regulation or public policy that we believe will drive renewable energy development.
ALLETE Clean Energy’s strategy includes the safe, reliable, optimal and profitable operation of its existing facilities. This includes a strong safety culture, the continuous pursuit of operational efficiencies at existing facilities and cost controls. ALLETE Clean Energy generally acquires facilities in liquid power markets and its strategy includes the exploration of PSA extensions upon expiration of existing contracts.
ALLETE Clean Energy manages risk by having a diverse portfolio of assets, which includes PSA expiration, technology and geographic diversity. The current operating portfolio of approximately 535 MW is subject to typical variations in seasonal wind with higher wind resources typically available in the winter months. The majority of its planned maintenance leverages this seasonality and is performed during lower wind periods. TheALLETE Clean Energy’s current mix of PSA expiration and geographic location for existing facilitiesoperating portfolio is as follows:
| Region | Wind Energy Facility | Capacity MW | PSA MW | PSA Expiration | ||||||||||
| East | Armenia Mountain | 101 | 100% | 2024 | ||||||||||
| Midwest | Chanarambie/Viking | 98 | ||||||||||||
PSA 1 (a) | 12% | 2023 | ||||||||||||
| PSA 2 | 88% | 2023 | ||||||||||||
| Lake Benton | 104 | 100% | 2028 | |||||||||||
| Storm Lake I | 108 | 100% | 2027 | |||||||||||
| Storm Lake II | 77 | |||||||||||||
| PSA 1 | 90% | 2022 | ||||||||||||
| PSA 2 | 10% | 2032 | ||||||||||||
| Other | 17 | 100% | 2028 | |||||||||||
| South | Diamond Spring | 303 | ||||||||||||
| PSA 1 | 58% | 2035 | ||||||||||||
| PSA 2 | 25% | 2032 | ||||||||||||
| PSA 3 | 16% | 2035 | ||||||||||||
| West | Condon | 50 | 100% | 2022 | ||||||||||
| Glen Ullin | 106 | 100% | 2039 | |||||||||||
| South Peak | 80 | 100% | 2035 | |||||||||||
| Wind Energy Facility | Location | Capacity MW | PSA MW | PSA Expiration |
| Armenia Mountain | Pennsylvania | 100.5 | 100% | 2024 |
| Chanarambie/Viking | Minnesota | 97.5 | ||
| PSA 1 | 12% | 2018 | ||
| PSA 2 | 88% | 2023 | ||
| Condon | Oregon | 50 | 100% | 2022 |
| Lake Benton | Minnesota | 104 | 100% | 2028 |
| Storm Lake I | Iowa | 108 | 100% | 2019 |
| Storm Lake II | Iowa | 77 | ||
| PSA 1 | 90% | 2019 | ||
| PSA 2 | 10% | 2032 | ||
The majority of ALLETE Clean Energy’s wind operations are located on real property owned by others with appropriate easementseasement rights or necessary consents of governmental authorities. TwoOne of ALLETE Clean Energy’s wind energy facilities areis encumbered by liens against theirits assets securing financing. ALLETE Clean Energy’s Glen Ullin, South Peak, and Diamond Spring wind energy facilities are subject to tax equity financing structures. (See Note 1. Operations and Significant Accounting Policies.)
U.S. Water ServicesWATER SERVICES
U.S. Water Services providesprovided integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage, and improve efficiency. In March 2019, the Company sold U.S. Water Services is locatedto a subsidiary of Kurita Water Industries Ltd. pursuant to a stock purchase agreement for approximately $270 million in 49 statescash, net of transaction costs and Canada and has an established basecash retained. The Company recognized a gain on the sale of approximately 4,900 customers. U.S. Water Services differentiates itselfof $13.2 million after-tax in 2019. ALLETE used the proceeds from the competition by developing synergies between established solutions in engineering, equipment and chemical water treatment, and helping customers achieve efficient and sustainable usesale of their water and energy systems. U.S. Water Services is a leading provider to the biofuels industry,reinvest in growth initiatives at our Regulated Operations and also serves the commercial and institutional markets, food and beverage, light manufacturing, power generation, and midstream oil and gas industries, among others. U.S. Water Services principally relies upon recurring revenues from a diverse mix of industrial customers. U.S. Water Services sells certain products which are seasonal in nature, with higher demand typically realized in warmer months; generally, lower sales occur in the first quarter of each year.ALLETE Clean Energy.
ALLETE, Inc. 2020 Form 10-K
CORPORATE AND OTHER
BNI Energy
BNI Energy is a supplier of lignite coal in North Dakota, producing approximately 4 million tons annually and has an estimated 650 million tons of lignite coal reserves. Two electric generating cooperatives, Minnkota Power and Square Butte, consume virtually all of BNI Energy’s production of lignite under cost-plus fixed fee coal supply agreements extending through December 31, 2037. (See Item 1. Business – Regulated Operations – Power Supply – Long-Term Purchased Power and Note 11.8. Commitments, Guarantees and Contingencies.) The mining process disturbs and reclaims between 200 and 250 acres per year. Laws require that the reclaimed land be at least as productive as it was prior to mining. As of December 31, 2017,2020, BNI Energy had a $25.0Energy’s total reclamation liability is estimated at $67.3 million asset reclamation obligation ($23.5 million as of December 31, 2016)and is included in Other Non-Current Liabilities on the Consolidated Balance Sheet. These costs are included in the cost-plus fixed fee contract, for which an asset reclamation cost receivable was included in Other Non-Current Assets on the Consolidated Balance Sheet. The asset reclamation obligation is guaranteed by surety bonds and a letter of credit. (See Note 11.8. Commitments, Guarantees and Contingencies.)
Our subsidiary, ALLETE South Wind, owns a 49 percent equity interest in Nobles 2, the entity that owns and operates the 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. Construction of the wind energy facility was completed and tax equity funding of $116.3 million, net of issuance costs, was received in the fourth quarter of 2020. We account for our investment in Nobles 2 under the equity method of accounting. As of December 31, 2020, our equity investment in Nobles 2 was $152.2 million ($56.0 million at December 31, 2019). (See Note 5. Equity Investments.)
ALLETE Properties
ALLETE Properties represents our legacy Florida real estate investment. Market conditions can impact land sales and could result in our inability to cover our cost basis, operating expenses or fixed carrying costs such as community development district assessments and property taxes.
ALLETE Properties’ major projectsproject in Florida areis Town Center at Palm Coast, which consists of 639 acres of land as well as various residential units and Palm Coast Park.
| Summary of Projects | Residential | Non-residential | |||||||
| As of December 31, 2017 | Acres (a) | Units (b) | Sq. Ft. (b)(c) | ||||||
| Projects | |||||||||
| Town Center at Palm Coast | 971 | 2,419 | 2,178,700 | ||||||
| Palm Coast Park | 1,025 | 830 | 2,143,000 | ||||||
| Total Projects | 1,996 | 3,249 | 4,321,700 | ||||||
non-residential square footage. In addition to the two projects,Town Center at Palm Coast project, ALLETE Properties has approximately 800600 acres of other land available for sale. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook – Corporate and Other – ALLETE Properties.)
Seller Financing. ALLETE Properties occasionally provides seller financing to certain qualified buyers. As of December 31, 2017,2020, outstanding finance receivables were $15.5$4.3 million, net of reserves, with maturities through 2022.2025. These finance receivables accrue interest at market-based rates and are collateralized by the financed properties.
Regulation. A substantial portion of our development properties in Florida are subject to federal, state and local regulations, and restrictions that may impose significant costs or limitations on our ability to develop the properties. Much of our property is vacant land and some is located in areas where development may affect the natural habitats of various protected wildlife species or in sensitive environmental areas such as wetlands.
Non-Rate Base Generation and Miscellaneous
Corporate and Other also includes other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 5,0004,000 acres of land in Minnesota, and earnings on cash and investments.
As of December 31, 2017,2020, non-rate base generationconsists of 29 MW of natural gas and hydro generation at Rapids Energy Center. In 2017, we sold 0.1 million MWhCenter in Grand Rapids, Minnesota, which is primarily dedicated to the needs of non-rate base generation (0.1 million MWh in 2016 and in 2015).one customer, UPM Blandin.
ALLETE, Inc. 2020 Form 10-K
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| Non-Rate Base Power Supply | Unit No. | Year Installed | Year Acquired | Net Capability (MW) |
Rapids Energy Center (a) | ||||
| in Grand Rapids, MN | ||||
Steam – Biomass (b) | 6 & 7 | 1969, 1980 | 2000 | 27 |
| Hydro | 4 & 5 | 1917, 1948 | 2000 | 2 |
ENVIRONMENTAL MATTERS
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have recently been promulgated by both the EPA and state authorities.authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation.
We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have been obtained. We anticipate that with many state and federal environmental regulations and requirements finalized, or to be finalized in the near future, potential expenditures for future environmental matters may be material and may require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.
We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers. (See Note 11.8. Commitments, Guarantees and Contingencies.)
The Company’s key human capital management objectives are to attract, recognize and retain high quality talent, align with strategic business objectives and support the Company’s values. To support these objectives, the Company’s programs are designed to develop talent; reward and support employees through competitive compensation programs and benefit plans; enhance the Company’s culture through efforts aimed at making the workplace more engaging, safe and inclusive; and acquire talent and leverage internal opportunities to create a high-performing, diverse workforce. Our management and Board of Directors play key roles in reviewing and overseeing our human capital practices.
As of December 31, 2017,2020, ALLETE had 2,0171,342 employees, of which 1,9721,322 were full-time.
Minnesota Power and SWL&P have an aggregate of 517460 employees whocovered under collective bargaining agreements, of which most are members of the International Brotherhood of Electrical Workers (IBEW) Local 31. The current labor agreements with IBEW Local 31 expire on April 30, 2023 for Minnesota Power and expired on January 31, 2018.February 1, 2021 for SWL&P. Negotiations are proceeding between SWL&P and we believe ratified agreements will be agreed upon in the first quarter of 2018. Minnesota Power,IBEW Local 31. SWL&P and IBEW Local 31 are operating under the expired labor agreements until new contracts are agreed upon.
BNI Energy has 179137 employees of which 136that are members of IBEW Local 1593. The current labor agreement with IBEW Local 1593 expires on March 31, 2019.2023.
Integrity. Integrity is a foundational, shared value at ALLETE, is important to ALLETE’s business and operations, and enables our success. The Company has a written Code of Ethics that applies to all of our employees.
Health and Safety. The success of our business is fundamentally connected to the well-being of our people. We are responding to the COVID-19 pandemic by taking steps to mitigate the potential risks to us posed by its transmission and have implemented company-wide business continuity plans in response to the pandemic. These plans guide our emergency response, business continuity, and the precautionary measures we are taking on behalf of employees and the public.
Zero Injury Culture.Our journey to Zero Injury starts with a culture that is open and transparent. We encourage all employees to report injuries, near misses, and good catches, so that we can learn and share with others throughout the Company in an effort to improve safety performance. Leaders have regular safety conversations with employees, where the data learned from the conversations is examined, shared with the ALLETE safety strategy team and used to improve the Company’s safety programs.
Talent Development. We recognize and support the growth and development of our employees and offer opportunities to participate in internal and external learning programs. Our internal talent development programs provide employees with the resources they need to develop proficiency in their role, help achieve their career goals and build leadership skills. In addition to role specific training, targeted training also includes respect in the workplace, cyber awareness, safety, integrity and leadership development.
ALLETE, Inc. 2020 Form 10-K
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HUMAN CAPITAL MANAGEMENT (Continued)
Compensation and Benefits. Our competitive compensation package gives employees flexibility, choices and opportunities. Competitive compensation is important for the Company to attract and retain a qualified workforce to successfully manage our business and achieve our business objectives. We also strive to ensure pay equity amongst diverse employees performing equal or substantially similar work. Periodically, we review the median pay of our male and female employees as well as employees from diverse backgrounds.
Diversity, Equity and Inclusion. Increasing staff diversity enriches our workforce culture at ALLETE. Our employees are operating in an increasingly diverse society. In order to be accountable to our employees and stakeholders, we strive to have a workforce that reflects the diversity of the communities we serve, promotes inclusivity and is equitable.
At ALLETE, we want to ensure that we have a workplace culture where we treat each other with fairness, dignity and respect. The Company has a Respect in the Workplace initiative, which includes education as well as ongoing discussions focused on building respectful relationships and managing bias. In 2020, further efforts began in crafting a framework to strengthen ALLETE’s diversity, equity and inclusion efforts in the areas of: workforce, supply chain and ALLETE as a community citizen.
Yellow Ribbon Program. ALLETE and its subsidiaries are dedicated to supporting veterans, military members and their families. An employee effort grew out of that spirit of commitment to veterans and led the state of Minnesota to designate ALLETE/Minnesota Power and ALLETE Clean Energy as Yellow Ribbon Companies. The mission of ALLETE’s Yellow Ribbon Program is to contribute to the Company’s unique culture by proactively recruiting and retaining the best and supporting an environment in which military-connected employees can thrive.
AVAILABILITY OF INFORMATION
ALLETE makes its SEC filings, including its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(e) or 15(d) of the Securities Exchange Act of 1934, available free of charge on ALLETE’s website, www.allete.com, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.
ALLETE, Inc. 2020 Form 10-K
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INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
As of February 15, 2018,17, 2021, these are the executive officers of ALLETE:
| Executive Officers | Initial Effective Date | ||||
| Alan R. Hodnik, Age 61 | |||||
Executive Chairman (a) | February 3, 2020 | ||||
| Chairman and Chief Executive Officer | January 31, 2019 | ||||
| Chairman, President and Chief Executive Officer | May 10, 2011 | ||||
| President | January 31, 2019 | ||||
| Senior Vice President and Chief | |||||
| Robert J. Adams, Age | |||||
| Senior Vice President and Chief Financial Officer | March 4, 2017 | ||||
| Senior Vice President – Energy-Centric Businesses and Chief Risk Officer | November 14, 2015 | ||||
| Patrick L. Cutshall, Age | |||||
| Vice President and Corporate Treasurer | December 18, 2017 | ||||
| Treasurer | January 1, 2016 | ||||
| Nicole R. Johnson, Age 46 | |||||
| Vice President and Chief Administrative Officer | June 28, 2019 | ||||
| Steven W. Morris, Age | |||||
| Vice President, Controller and Chief Accounting Officer | December 24, 2016 | ||||
| Controller | March 3, 2014 | ||||
(a) Alan R. Hodnik will retire in May 2021.
All of the executive officers have been employed by us for more than five years in executive or management positions. Prior to election to the position listed above, the following executives held other positions with the Company during the past five years.
Ms. Owen was Vice President – Information Technology Solutions and President – SWL&P.
There are no family relationships between any of the executive officers. All officers and directors are elected or appointed annually.
The present term of office of the executive officers listed in the preceding table extends to the first meeting of our Board of Directors after the next annual meeting of shareholders. Both meetings are scheduled for May 8, 2018.11, 2021.
Item 1A. Risk Factors
The risks and uncertainties discussed below could materially affect our business operations, financial position, results of operations and cash flows, and should be carefully considered by stakeholders. The risks and uncertainties in this section are not the only ones we face; additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations, financial position, results of operations and cash flows. Accordingly, the risks described below should be carefully considered together with other information set forth in this report and in future reports that we file with the SEC.
Regulated Operations Risks
Our results of operations could be negatively impacted if our taconite, paper and pipeline customers experience an economic downturn,incurwork stoppages, fail to compete effectively, experience decreased demand, fail to economically obtain raw materials, fail to renew or obtain necessary permits, or experience a decline in prices for their product.
Minnesota Power’s eight Large Power Customers, which consist of six taconite facilities and four paper and pulp mills, and Silver Bay Power accounted for 29 percent of our 2020 consolidated operating revenue (30 percent in 2019 and 24 percent in 2018) and 34 percent of Regulated Operations operating revenue (36 percent in 2019 and 34 percent in 2018). Minnesota Power’s taconite customers, which are currently owned by only two entities at the end of 2020, accounted for approximately 25 percent of consolidated operating revenue and 29 percent of Regulated Operations operating revenue in 2020. These customers are involved in cyclical industries that by their nature are adversely impacted by economic downturns and are subject to strong competition in the marketplace. Additionally, the North American paper and pulp industry also faces declining demand due to the impact of electronic substitution for print and changing customer needs. As a result, certain paper and pulp customers have reduced their existing operations in recent years and have pursued or are pursuing product changes in response to declining demand.
Minnesota Power also serves two pipeline customers that accounted for 2 percent of our 2020 consolidated operating revenue (2 percent in 2019 and in 2018) and 3 percent of Regulated Operations revenue in 2020 (3 percent in 2019 and 2 percent in 2018). These customers are involved in an industry that is seeing increased environmental pressure for construction of new or expanded pipeline infrastructure for the transportation of fossil fuels. Changes in regulatory rulings or permit proceedings could result in changes to operations of the pipeline network in our service territory.
Accordingly, if our industrial customers experience an economic downturn, incur a work stoppage (including strikes, lock-outs or other events), fail to compete effectively, experience decreased demand, fail to economically obtain raw materials, fail to renew or obtain necessary permits, or experience a decline in prices for their product, there could be adverse effects on their operations and, consequently, this could have a negative impact on our results of operations if we are unable to remarket at similar prices the energy that would otherwise have been sold to such customers. In addition, these customers have been impacted by the ongoing COVID-19 pandemic. (See Entity-wide Risks.)
Our utility operations are subject to an extensive legal and regulatory framework under federal and state laws as well as regulations imposed by other organizations that may have a negative impact on our business and results of operations.
We are subject to an extensive legal and regulatory framework imposed under federal and state law including regulations administered by the FERC, MPUC, MPCA, PSCW, NDPSC and EPA as well as regulations administered by other organizations including the NERC. These laws and regulations relate to allowed rates of return, capital structure, financings, rate and cost structure, acquisition and disposal of assets and facilities, construction and operation of generation, transmission and distribution facilities (including the ongoing maintenance and reliable operation of such facilities), recovery of purchased power costs and capital investments, approval of integrated resource plans and present or prospective wholesale and retail competition, renewable portfolio standards that require utilities to obtain specified percentages of electric supply from eligible renewable generation sources, among other things. Energy policy initiatives at the state or federal level could increase renewable portfolio standards or incentives for distributed generation, municipal utility ownership, or local initiatives could introduce generation or distribution requirements that could change the current integrated utility model. Our transmission systems and electric generation facilities are subject to the NERC mandatory reliability standards, including cybersecurity standards. Compliance with these standards may lead to increased operating costs and capital expenditures which are subject to regulatory approval for recovery. If it was determined that we were not in compliance with these mandatory reliability standards or other statutes, rules and orders, we could incur substantial monetary penalties and other sanctions, which could adversely affect our results of operations.
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
Regulated Operations Risks (Continued)
These laws and regulations significantly influence our operations and may affect our ability to recover costs from our customers. We are required to have numerous permits, licenses, approvals and certificates from the agencies and other organizations that regulate our business. We believe we have obtained the necessary permits, licenses, approvals and certificates for our existing operations and that our business is conducted in accordance with applicable laws; however, we are unable to predict the impact on our operating results from the future regulatory activities of any of these agencies and other organizations. Changes in regulations, the adoption of new regulations or the expansion of jurisdiction by these agencies and other organizations could have an adverse impact on our business and results of operations.
Our ability to obtain rate adjustments to maintain reasonable rates of return depends upon regulatory action under applicable statutes and regulations, and we cannot provide assurance that rate adjustments will be obtained or reasonable authorized rates of return on capital will be earned. Minnesota Power and SWL&P, from time to time, file general rate cases with, or otherwise seek cost recovery authorization from, federal and state regulatory authorities. If Minnesota Power and SWL&P do not receive an adequate amount of rate relief in general rate cases, including if rates are reduced, if increased rates are not approved on a timely basis, if cost recovery is not granted at the requested level, or costs are otherwise unable to be recovered through rates, we may experience an adverse impact on our financial position, results of operations and cash flows. We are unable to predict the impact on our business and results of operations from future legislation or regulatory activities of any of these agencies or organizations.
Our regulated operations present certain environmental risks that could adversely affect our financial position and results of operations, including effects of environmental laws and regulations, physical risks associated with climate change and initiatives designed to reduce the impact of GHG emissions.
We are subject to extensive environmental laws and regulations affecting many aspects of our past, present and future operations, including air quality, water quality and usage, waste management, reclamation, hazardous wastes, avian mortality and natural resources. These laws and regulations, or new laws and regulations that may be passed, can result in increased capital expenditures and increased operating and other costs as a result of compliance, remediation, containment and monitoring obligations, particularly with regard to laws relating to emissions, coal ash and water discharge at generating facilities.
These laws and regulations could restrict the output of some existing facilities, limit the use of some fuels in the production of electricity, require the installation of additional pollution control equipment, require participation in environmental emission allowance trading, and lead to other environmental considerations and costs, which could have an adverse impact on our business, operations and results of operations.
These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Violations of these laws and regulations could expose us to regulatory and legal proceedings, disputes with, and legal challenges by, governmental authorities and private parties, as well as potential significant civil fines criminal penalties and other sanctions.
Existing environmental regulations may be revised and new environmental regulations may be adopted or become applicable to us. Revised or additional regulations which result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from customers, could have an adverse effect on our results of operations.
The scientific community generally accepts that emissions of GHG are linked to global climate change. Physical risks of climate change, such as more frequent or more extreme weather events, changes in temperature and precipitation patterns, changes to ground and surface water availability, and other related phenomena, could affect some, or all, of our operations. Severe weather or other natural disasters could be destructive, which could result in increased costs. An extreme weather event within our utility service areas can also directly affect our capital assets, causing disruption in service to customers due to downed wires and poles or damage to other operating equipment. These all have the potential to adversely affect our business and operations.
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
Regulated Operations Risks (Continued)
There is significant uncertainty regarding if and when new laws, regulations or administrative policies will be adopted to reduce or limit GHG and the impact any such laws or regulations would have on us. In 2020, our operating coal-fired generating facilities consisted of the 355 MW Boswell Unit 3 and the 468 MW Boswell Unit 4. (See Outlook – EnergyForward.) Any future limits on GHG emissions at the federal or state level, or action taken by regulators, before these facilities are retired or become coal-free may require us to incur significant capital expenditures and increases in operating costs, or could result in early closure of coal-fired generating facilities, an impairment of assets, or otherwise adversely affect our results of operations, particularly if resulting expenditures and costs are not fully recoverable from customers.
We cannot predict the amount or timing of all future expenditures related to environmental matters because of uncertainty as to applicable regulations or requirements. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties. Violations of certain environmental statutes, rules and regulations could expose ALLETE to third party disputes and potentially significant monetary penalties, as well as other sanctions for non‑compliance.
The operation and maintenance of our regulated electric generation and transmission facilities are subject to operational risks that could adversely affect our financial position, results of operations and cash flows.
The operation of generating facilities involves many risks, including start-up operational risks, breakdown or failure of facilities, the dependence on a specific fuel source, inadequatefuel supply, availability of fuel transportation, and the impact of unusual or adverse weather conditions or other natural events, as well as the risk of performance below expected levels of output or efficiency. A significant portion of our facilities contain older generating equipment, which, even if maintained in accordance with good engineering practices, may require significant capital expenditures to continue operating at peak efficiency. Generation and transmission facilities and equipment are also likely to require periodic upgrades and improvements due to changing environmental standards and technological advances. We could be subject to costs associated with any unexpected failure to produce or deliver power, including failure caused by breakdown or forced outage, as well as repairing damage to facilities due to storms, natural disasters, wars, sabotage, terrorist acts and other catastrophic events.
Our ability to successfully and timely complete capital improvements to existing regulated facilities or other capital projects is contingent upon many variables.
We expect to incur significant capital expenditures in making capital improvements to our existing electric generation and transmission facilities and in the development and construction of new electric generation and transmission facilities. Should any such efforts be unsuccessful or not completed in a timely manner, we could be subject to additional costs or impairments which could have an adverse impact on our financial position, results of operation and cash flows.
Our regulated electric generating operations may not have access to adequate and reliable transmission and distribution facilities necessary to deliver electricity to our customers.
We depend on our own transmission and distribution facilities, as well as facilities owned by other utilities, to deliver the electricity produced and sold to our customers, and to other energy suppliers. If transmission capacity is inadequate, our ability to sell and deliver electricity may be limited. We may have to forgo sales or may have to buy more expensive wholesale electricity that is available in the capacity-constrained area. In addition, any infrastructure failure that interrupts or impairs delivery of electricity to our customers could negatively impact the satisfaction of our customers, which could have an adverse impact on our business and results of operations.
Our results of operations could be impacted by declining wholesale power prices.
Wholesale prices for electricity have declined in recent years primarily due to low natural gas prices, the extension of renewable tax credits and additional renewable generation commencing operations. If there are reductions in demand from customers, we lose retail customers, or we lose municipal customers that do not renew existing contracts, we will market any available power to Other Power Suppliers in an effort to mitigate any earnings impact. Sales to Other Power Suppliers are sold at market-based prices into the MISO market on a daily basis or through bilateral agreements of various durations. Due to the low wholesale prices for electricity, we do not expect that our power marketing efforts would fully offset the reduction in earnings resulting from the lower demand from existing customers or the loss of customers. (See Item 1. Business – Regulated Operations – Electric Sales / Customers.)
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
Regulated Operations Risks (Continued)
The price of electricity and fuel may be volatile.
Volatility in market prices for electricity and fuel could adversely impact our financial position and results of operations and may result from:
•severe or unexpected weather conditions and natural disasters;
•seasonality;
•changes in electricity usage;
•transmission or transportation constraints, inoperability or inefficiencies;
•availability of competitively priced alternative energy sources;
•changes in supply and demand for energy;
•changes in power production capacity;
•outages at our generating facilities or those of our competitors;
•availability of fuel transportation;
•changes in production and storage levels of natural gas, lignite, coal, crude oil and refined products;
•wars, sabotage, terrorist acts or other catastrophic events; and
•federal, state, local and foreign energy, environmental, or other regulation and legislation.
Fluctuations in our fuel and purchased power costs related to our retail and municipal customers are passed on to customers through the fuel adjustment clause. Volatility in market prices for our fuel and purchase power costs primarily impacts our sales to Other Power Suppliers.
Demand for energy may decrease.
Our results of operations are impacted by the demand for energy in our service territories, our municipal customers and other power suppliers. There could be lower demand for energy due to a loss of customers as a result of economic conditions, customers constructing or installing their own generation facilities, higher costs and rates charged to customers, eligible municipal and other power suppliers choosing an alternative energy provider, or loss of service territory or franchises. Further, energy conservation and technological advances that increased energy efficiency may temporarily or permanently reduce the demand for energy products. In addition, we are impacted by state and federal regulations requiring mandatory conservation measures, which reduce the demand for energy products. Continuing technology improvements and regulatory developments may make customer and third party-owned generation technologies such as rooftop solar systems, WTGs, microturbines and battery storage systems more cost effective and feasible for of our customers. If customers utilize their own generation, demand for energy from us would decline. There may not be future economic growth opportunities that would enable us to replace the lost energy demand from these customers. Therefore, a decrease in demand for energy could adversely impact our financial position, results of operations and cash flows.
We may not be able to successfully implement our strategic objectives of growing load at our utilities if current or potential industrial or municipal customers are unable to successfully implement expansion plans, including the inability to obtain necessary governmental permits.
As part of our long-term strategy, we pursue new wholesale and retail loads in and around our service territories. Currently, there are several companies in northeastern Minnesota that are in the process of developing natural resource-based projects that represent long-term growth potential and load diversity for our Regulated Operations businesses. These projects may include construction of new facilities and restarts of old facilities, both of which require permitting and approvals to be obtained before the projects can be successfully implemented. If a project does not obtain any necessary governmental (including environmental) permits and approvals or if these customers are unable to successfully implement expansion plans, our long-term strategy and thus our results of operations could be adversely impacted.
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
ALLETE Clean Energy / Corporate and Other Risks
The inability to successfully manage and grow ALLETE Clean Energy and our Corporate and Other businesses could adversely affect our results of operations.
The Company's strategy for ALLETE Clean Energy includes adding customers, new geographies, and growth through acquisitions or project development with long-term PSAs in place for the output or to be sold upon completion. This strategy depends, in part, on the Company’s ability to successfully identify and evaluate acquisition or development opportunities and consummate acquisitions on acceptable terms. The Company may compete with other companies for these acquisition and development opportunities, which may increase the Company’s cost of making acquisitions and the Company may be unsuccessful in pursuing these acquisition opportunities. Other companies may be able to pay more for acquisitions and may be able to identify, evaluate, bid for and purchase a greater number of assets than the Company’s financial or human resources permit. New laws and regulations promoting renewable energy generation may result in increased competition. Our ALLETE Clean Energy business is experiencing return pressures from increased competition, and lower forward price curves, as a growing amount of investment capital is being directed into wind generation opportunities. In addition, current and potential new project developments can be negatively affected by a lower ALLETE stock price, which may result in such projects not being accretive, or otherwise unable to satisfy our financial objectives criteria to proceed. Additionally, tax law changes may adversely impact the economic characteristics of potential acquisitions or investments. If the Company is unable to execute its strategy of growth through acquisitions, project development for others, or the addition of new customers and geographies, it may impede our long-term objectives and business strategy.
Acquisitions are subject to uncertainties. If we are unable to successfully integrate and manage future acquisitions or strategic investments, this could have an adverse impact on our results of operations. Our actual results may also differ from our expectations due to factors such as the ability to obtain timely regulatory or governmental approvals, integration and operational issues and the ability to retain management and other key personnel.
The generation of electricity from our wind energy facilities depends heavily on suitable meteorological conditions.
Although our wind energy facilities are located in diverse geographic regions to reduce the potential impact that may be caused by unfavorable weather in a particular region, suitable meteorological conditions are variable and difficult to predict. If wind conditions are unfavorable or meteorological conditions are unsuitable, our electricity generation and revenue from wind energy facilities may be substantially below our expectations. The electricity produced, production tax credits received, and revenues generated by a wind energy facility are highly dependent on suitable wind conditions and associated weather conditions, which are variable and beyond our control. We base our decisions about which wind projects to build or acquire as well as our electricity generation estimates, in part, on the findings of long-term wind and other meteorological studies conducted on the project site and its region; however, the unpredictable nature of wind conditions, weather and meteorological conditions can result in material deviations from these studies and our expectations. Furthermore, components of our systems could be damaged by severe weather, such as hailstorms, lightning or tornadoes. In addition, replacement and spare parts for key components of our diverse turbine portfolio may be difficult or costly to acquire or may be unavailable. Unfavorable wind conditions, weather or changes to meteorological patterns could impair the effectiveness of our wind energy facility assets, reduce their output beneath their rated capacity or require shutdown of key equipment, impeding operation of our wind energy facilities.
The construction, operation and maintenance of our electric generation facilities or investment in facilities are subject to operational risks that could adversely affect our financial position, results of operations and cash flows.
The construction and operation of generating facilities involves many risks, including the performance by key contracted suppliers and maintenance providers, start-up operations risks, breakdown or failure of facilities, the dependence on the availability of wind resources, or the impact of unusual, adverse weather conditions or other natural events, as well as the risk of performance below expected levels of output or efficiency. Some of our facilities contain older generating equipment, which even if maintained in accordance with good engineering practices, may require significant capital expenditures to continue operating at peak efficiency. We could be subject to costs associated with any unexpected failure to produce and deliver power, including failure caused by breakdown or forced outage, as well as repairing damage to facilities due to storms, natural disasters, wars, sabotage, terrorist acts and other catastrophic events.
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
ALLETE Clean Energy / Corporate and Other Risks (Continued)
As contracts with counterparties expire, we may not be able to replace them with agreements on similar terms.
ALLETE Clean Energy is party to PSAs which expire in various years between 2022 and 2039. These PSA expirations are prior to the end of the estimated useful lives of the respective wind energy facilities. If, for any reason, ALLETE Clean Energy is unable to enter into new agreements with existing or new counterparties on similar terms once the current agreements expire, or sell energy in the wholesale market resulting in similar revenue, our financial position, results of operations and cash flows could be adversely affected, which includes potential impairment of property, plant and equipment.
Counterparties to turbine supply, service and maintenance, or power sale agreements may not fulfill their obligations.
ALLETE Clean Energy is party to turbine supply agreements, service and maintenance agreements, and PSAs under various durations with a limited number of creditworthy counterparties. If, for any reason, any of the counterparties under these agreements do not fulfill their related contractual obligations, and ALLETE Clean Energy is unable to mitigate non-performance by a key supplier or maintenance provider or remarket PSA energy resulting in similar revenue, our financial position, results of operations and cash flows could be adversely affected.
BNI Energy may be adversely impacted by its exposure to customer concentration, and environmental laws and regulations.
BNI Energy sells lignite coal to two electric generating cooperatives, Minnkota Power and Square Butte, and could be adversely impacted if these customers were unable or unwilling to fulfill their related contractual obligations, or change the way in which they operate their generating facilities. In addition, BNI Energy and its customers may be adversely impacted by existing or new environmental laws and regulations which could have an adverse effect on our financial position, results of operations and cash flows. In addition, insurance companies have decreased the available coverage for policy holders in the mining industry, impacting the availability of coverage, and leading to higher deductibles and premiums.
Real estate market conditions where our legacy Florida real estate investment is located may not improve.
The Company’s strategy related to the real estate assets of ALLETE Properties incorporates the possibility of a bulk sale of its entire portfolio, in addition to sales over time, however, adverse market conditions could impact the timing of land sales, which could result in little to no sales, while still incurring operating expenses such as community development district assessments and property taxes, resulting in net operating losses at ALLETE Properties. Furthermore, weak market conditions could put the properties at risk for an impairment charge. An impairment charge would result in a non-cash charge to earnings that could have an adverse effect on our results of operations.
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
Entity-wide Risks
We could be materially adversely affected by the ongoing COVID-19 pandemic for which we are unable to predict the ultimate impact as the extent and duration of the COVID-19 pandemic is uncertain.
The ongoing COVID-19 pandemic has resulted in widespread impacts on the global economy and on our employees, customers, contractors, and suppliers. There is considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders (including those in effect in areas our businesses operate), and business and government shutdowns. We are responding to the COVID-19 pandemic by taking steps to mitigate the potential risks to us posed by its transmission and have implemented company-wide business continuity plans in response to the pandemic. These plans guide our emergency response, business continuity, and the precautionary measures we are taking on behalf of employees and the public. We have taken additional precautions for our employees who work in the field and for employees who continue to work in our facilities, and we have implemented work from home policies where appropriate. We continue to implement physical and cyber-security measures to ensure that our systems remain functional in order to both serve our operational needs with a remote workforce and keep them running to ensure uninterrupted service to our customers.
The ongoing COVID-19 pandemic and related federal and state government responses has led to a disruption of economic activity, and could result in an extended disruption of economic activity. This disruption has resulted and is expected to continue to result in reduced sales and revenue from commercial, municipal and industrial customers as well as an increase in uncollectible accounts from residential and commercial customers. Many commercial and industrial customers were operating at reduced levels or were temporarily closed or idled during 2020. In addition, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Paper, Pulp and Secondary Wood Products – Verso Corporation.) The current disruption of economic activity or an extended disruption of economic activity may lead to additional adverse impacts on our taconite, paper, pulp and secondary wood products, and pipeline customers’ operations including further reduced production or the temporary idling or indefinite shutdown of other facilities, which would result in lower sales and revenue from these customers. In Minnesota Power’s service territory, we have also voluntarily and as requested by state regulators extended Minnesota’s cold weather rule as well as temporarily suspended disconnections for non-payment and waived late payment charges for residential and small business customers. In SWL&P’s service territory, we have implemented state regulator requested customer service actions to further limit service disconnections and late payment charges for residential, commercial and industrial customers.
The Company is monitoring the capital markets and has access to liquidity to enable us to operate our businesses and fund capital projects; however, a disruption in capital markets could lead to increased borrowing costs or adversely impact our ability to access capital markets or other financing sources. If we are not able to access capital on acceptable terms in sufficient amounts and when needed, or at all, the ability to maintain our businesses or to implement our business plans would be adversely affected. In addition, the performance of capital markets impacts the values of the assets that are held in trust to satisfy future obligations under our pension and other postretirement benefit plans. A decline in the market value of these assets would increase the funding requirements under our benefit plans and future costs recognized for the benefit plans if the asset market values do not recover. The Company is also monitoring supply chains for key materials, supplies and services for our operations and large capital projects. We have received notices of force majeure from certain suppliers and the pandemic could result in a disruption to our supply chains which could adversely impact our operations and capital projects; however, there has been limited impact on our supply chains as to the availability of materials, supplies and services to date. In addition, disruptions in our supply chains or a lack of available financing could jeopardize our ability to complete certain capital projects in time to qualify them for production tax credits.
We will continue to monitor developments affecting our workforce, operations and customers, and we will take additional precautions that we determine are necessary in order to mitigate the impacts of the COVID-19 pandemic. Despite our efforts to manage these impacts to the Company, their ultimate impact also depends on factors beyond our control, including the duration and severity of this pandemic as well as governmental and third-party actions taken to contain its spread and mitigate its public health effects. As a result, we cannot predict the ultimate impact of the COVID-19 pandemic and whether it will have a material impact on our liquidity, financial position, results of operations and cash flows.
ALLETE, Inc. 2020 Form 10-K
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Item 1A. Risk Factors (Continued)
Entity-wide Risks (Continued)
We rely on access to financing sources and capital markets. If we do not have access to capital on acceptable terms or are unable to obtain capital when needed, our ability to execute our business plans, make capital expenditures or pursue other strategic actions that we may otherwise rely on for future growth would be adversely affected.
We rely on access to financing sources and the capital markets, on acceptable terms and at reasonable costs, as sources of liquidity for capital requirements not satisfied by our cash flows from operations. Market disruptions or a downgrade of our credit ratings may increase the cost of borrowing or adversely affect our ability to access and financing costsfinance in the capital markets.markets or to access other financing sources. Such disruptions or causes of a downgrade could include but are not limited to: the effects of the TCJA on the Company’s cash flow metrics; a loss of, or a reduction in sales to, Large Power Customersour taconite, paper and pipeline customers if we are unable to offset the related lost margins; weaker operating performance; adverse regulatory outcomes; disproportionate increase in the contribution to net income from ALLETE Clean Energy and our Energy InfrastructureCorporate and Related ServicesOther businesses as compared to that from our Regulated Operations; deteriorating economic or capital market conditions; or volatility in commodity prices.
If we are not able to access capital on acceptable terms in sufficient amounts and when needed, or at all, the ability to maintain our businesses or to implement our business plans would be adversely affected.
A deterioration in general economic conditions may have adverse impacts on our financial position, results of operations and cash flows.
If economic conditions deteriorate on a national or regional level, it may have a negative impact on the Company’s financial position, results of operations and cash flows as well as on our customers. This impact may include volatility and unpredictability in the demand for the products and services offered by our businesses, the loss of existing customers, tempered growth strategies, customer production cutbacks or customer bankruptcies. An uncertain economy could also adversely affect expenses including pension costs, interest costs, and uncollectible accounts, or lead to reductions in the value of certain real estate and other investments.
We are subject to extensive state and federal legislation and regulation, compliance with which could have an adverse effect on our businesses.
We are subject to, and affected by, extensive state and federal legislation and regulation. If it was determined that our businesses failed to comply with applicable laws and regulations, we could become subject to fines or penalties or be required to implement additional compliance measures or actions, the cost of which could be material. Adoption of new laws, rules, regulations, principles, or practices by federal and state agencies, or changes to or a failure to comply with current laws, rules, regulations, principles, or practices and their interpretations, could have an adverse effect on our financial position, results of operations and cash flows.
The inability to attract and retain a qualified workforce including, but not limited to, executive officers, key employees and employees with specialized skills, could have an adverse effect on our operations.
The success of our business heavily depends on the leadership of our executive officers and key employees to implement our business strategy. The inability to maintain a qualified workforce including, but not limited to, executive officers, key employees and employees with specialized skills, may negatively affect our ability to service our existing or new customers, or successfully manage our business or achieve our business objectives. Personnel costs may increase due to competitive pressures or terms of collective bargaining agreements with union employees.
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Item 1A. Risk Factors (Continued)
Entity-wide Risks (Continued)
Market performance and other changes could decrease the value of pension and other postretirement benefit plan assets, which may result in significant additional funding requirements and increased annual expenses.
The performance of the capital markets impacts the values of the assets that are held in trust to satisfy future obligations under our pension and other postretirement benefit plans. We have significant obligations to these plans and the trusts hold significant assets. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected rates of return. A decline in the market value of the pension and other postretirement benefit plan assets would increase the funding requirements under our benefit plans if asset returns do not recover. Additionally, our pension and other postretirement benefit plan liabilities are sensitive to changes in interest rates. As interest rates decrease, the liabilities increase, potentially increasing benefit expense and funding requirements. Our pension and other postretirement benefit plan costs are generally recoverable in our electric rates as allowed by our regulators or through our cost-plus fixed fee coal supply agreements at BNI Energy; however, there is no certainty that regulators will continue to allow recovery of these rising costs in the future.
We are exposed to significant reputational risk.
The Company could suffer negative impacts to its reputation as a result of operational incidents, violations of corporate compliance policies, regulatory violations, or other events which may result in negative customer perception and increased regulatory oversight, each of which could have an adverse effect on our financial position, results of operations and cash flows.
Catastrophic events, such as natural disasters and acts of war, may adversely affect our operations.
Catastrophic events such as fires, including wildfires, earthquakes, explosions, and floods, severe weather, such as ice storms, hailstorms, or tornadoes or similar occurrences, as well as acts of war, could adversely affect the Company’s facilities, operations, financial position, results of operations and cash flows. Although the Company has contingency plans and employs crisis management to respond and recover operations in the event of a severe disruption resulting from such events,a catastrophic event, these measures may not be successful. Furthermore, despite these measures, if such an occurrencea catastrophic event were to occur, our financial position, results of operations and cash flows could be adversely affected.
We are vulnerable to acts of terrorism or cybersecurity attacks.
Our operations may be targets of terrorist activities includingor cybersecurity attacks, which could disrupt our ability to produceprovide utility service at our regulated utilities, develop or distribute some portionoperate our renewable energy projects at ALLETE Clean Energy, or operate our other businesses. The impacts may also impair the fulfillment of critical business functions, negatively impact our products. reputation, subject us to litigation or increased regulation, or compromise sensitive, confidential and other data.
There have been cyber securitycybersecurity attacks on U.S. energy infrastructure in the past and there may be such attacks in the future. Our generation, transmission and distribution facilities, information technology systems and other infrastructure facilities and systems could be direct targets of, or otherwise be materially adversely affected by such activities. ComputerHacking, computer viruses, terrorism, theft and sabotage could impact our systems and facilities, or those of third parties on which we rely, which may disrupt our operations and adversely impactour results of operations.
Our businesses require the continued operation of sophisticated custom-developed, purchased, and leased information technology systems and network infrastructure. Ourinfrastructure as well as the collection and retention of personally identifiable information of our customers, shareholders and employees. Although we maintain security measures designed to prevent cybersecurity incidents and protect our information technology and control systems, network infrastructure and other assets, our technology systems, or those of third parties on which we rely, may be vulnerable to disability, failures or unauthorized access due to hacking, viruses, acts of war or terrorism andas well as other causes. If those technology systems fail or are breached and not recovered in a timely manner, we may be unable to perform critical business functions including effectively maintaining certain internal controls over financial reporting, our reputation may be negatively impacted, we may become subject to litigation or increased regulation, and sensitive, confidential and other data could be compromised, whichcompromised. If our business were impacted by terrorist activities or cybersecurity attacks, such impacts could have an adverse effect on our financial position, results of operations and cash flows.
ALLETE, Inc. 2020 Form 10-K
31
Item 1A. Risk Factors (Continued)
Entity-wide Risks (Continued)
We maintain insurance against some, but not all, of the risks and uncertainties we face.
We maintain insurance against some, but not all, of the risks and uncertainties we face. The occurrence of these risks and uncertainties, if not fully covered by insurance, could have a material effect on our financial position, results of operations and cash flows.
Government challenges to our tax positions, as well as tax law changes and the inherent difficulty in quantifying potential tax effects of our operations and business decisions, could adversely affect our results of operations and liquidity.
We are required to make judgments regarding the potential tax effects of various financial transactions and our ongoing operations in order to estimate federal and state tax obligations. These judgments include reserves for potential adverse outcomes for tax positions that may be challenged by taxour obligations to taxing authorities. The obligations, which include income taxes and taxes other than income taxes, involve complex matters that ultimately could be litigated. We also estimate our ability to use tax benefits, including those in the form of carryforwards and tax credits that are recorded as deferred tax assets on our Consolidated Balance Sheet. A disallowance of these tax benefits could have an adverse impact on our financial position, results of operations and cash flows.
We are currently utilizing, and plan to utilize in the future, our carryforwards and tax credits in the future to reduce our income tax obligations. If we cannot generate enough taxable income in the future to utilize all of our carryforwards and tax credits before they expire, we may incur adverse charges to earnings. If federal or state tax authorities disagree with thedeny any deductions resulting from ouror tax planning strategies,credits, our financial position, results of operations and cash flows may be adversely impacted.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
A discussion of our properties is included in Item 1. Business and is incorporated by reference herein.
Item 3. Legal Proceedings
Discussions of material regulatory and environmental proceedings are included in Note 4. Regulatory Matters and Note 11.8. Commitments, Guarantees and Contingencies, and are incorporated by reference herein.
We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base and cost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires issuers to include in periodic reports filed with the SEC certain information relating to citations or orders for violations of standards under the Federal Mine Safety and Health Act of 1977 (Mine Safety Act). Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and this Item are included in Exhibit 95 to this Form 10-K.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NYSE under the symbol ALE. We have paid dividends, without interruption, on our common stock since 1948. A quarterly dividend of $0.56$0.63 per share on our common stock is payable on March 1, 2018,2021, to the shareholders of record on February 15, 2018.16, 2021. The timing and amount of future dividends will depend upon earnings, cash requirements, the financial condition of the Company, applicable government regulations and other factors deemed relevant by the ALLETE Board of Directors.
| 2017 | 2016 | |||||||||
| Price Range | Dividends | Price Range | Dividends | |||||||
| Quarter | High | Low | Declared | High | Low | Declared | ||||
| First | $68.38 | $61.64 | $0.535 | $58.34 | $48.26 | $0.52 | ||||
| Second | $74.59 | $66.81 | 0.535 | $64.69 | $53.47 | 0.52 | ||||
| Third | $79.61 | $69.79 | 0.535 | $65.41 | $52.50 | 0.52 | ||||
| Fourth | $81.24 | $72.96 | 0.535 | $66.92 | $56.48 | 0.52 | ||||
| Annual Total | $2.14 | $2.08 | ||||||||
As of February 1, 2018,2021, there were approximately 23,00020,000 common stock shareholders of record.
Performance Graph.
The following graph compares ALLETE’s cumulative Total Shareholder Return on its common stock with the cumulative return of the S&P 500 Index and the Philadelphia Utility Index. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Because this composite index has a broad industry base, its performance may not closely track that of a composite index comprised solely of electric utilities. The Philadelphia Utility Index is a capitalization-weighted index of 20 utility companies involved in the generation of electricity.
The calculations assume a $100 investment on December 31, 2012,2015, and reinvestment of dividends.
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||
| ALLETE | $100 | $131 | $156 | $165 | $181 | $144 | ||||||||||||||
| S&P 500 Index | $100 | $112 | $136 | $130 | $171 | $203 | ||||||||||||||
| Philadelphia Utility Index | $100 | $117 | $132 | $137 | $174 | $179 | ||||||||||||||
ALLETE, Inc. 2020 Form 10-K
33
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| ALLETE | $100 | $127 | $146 | $140 | $183 | $218 |
| S&P 500 Index | $100 | $132 | $150 | $153 | $171 | $208 |
| Philadelphia Utility Index | $100 | $111 | $143 | $152 | $178 | $201 |
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||
| Millions Except Per Share Amounts | |||||||||||||||
Operating Revenue (a) | $1,419.3 | $1,339.7 | $1,486.4 | $1,136.8 | $1,018.4 | ||||||||||
Operating Expenses (a) | $1,189.5 | $1,116.2 | $1,275.7 | $948.0 | $864.3 | ||||||||||
Net Income (b) | $172.2 | $155.8 | $141.5 | $125.5 | $104.7 | ||||||||||
Less: Non-Controlling Interest in Subsidiaries (c) | — | 0.5 | 0.4 | 0.7 | — | ||||||||||
Net Income Attributable to ALLETE (b) | $172.2 | $155.3 | $141.1 | $124.8 | $104.7 | ||||||||||
| Common Stock Dividends | 108.7 | 102.7 | 97.9 | 83.8 | 75.2 | ||||||||||
Earnings Retained in Business (b) | $63.5 | $52.6 | $43.2 | $41.0 | $29.5 | ||||||||||
| Shares Outstanding | |||||||||||||||
| Year-End | 51.1 | 49.6 | 49.1 | 45.9 | 41.4 | ||||||||||
Average (d) | |||||||||||||||
| Basic | 50.8 | 49.3 | 48.3 | 42.9 | 39.7 | ||||||||||
| Diluted | 51.0 | 49.5 | 48.4 | 43.1 | 39.8 | ||||||||||
Diluted Earnings Per Share (b) | $3.38 | $3.14 | $2.92 | $2.90 | $2.63 | ||||||||||
Total Assets (e) | $5,080.0 | $4,876.9 | $4,864.4 | $4,329.1 | $3,458.6 | ||||||||||
| Long-Term Debt | $1,439.2 | $1,370.4 | $1,556.7 | $1,263.2 | $1,074.9 | ||||||||||
Return on Common Equity (b) | 8.6 | % | 8.4 | % | 8.0 | % | 8.6 | % | 8.3 | % | |||||
| Common Equity Ratio | 58 | % | 55 | % | 53 | % | 54 | % | 55 | % | |||||
| Dividends Declared per Common Share | $2.14 | $2.08 | $2.02 | $1.96 | $1.90 | ||||||||||
Dividend Payout Ratio (b) | 63 | % | 66 | % | 69 | % | 68 | % | 72 | % | |||||
| Book Value Per Share at Year-End | $40.46 | $38.17 | $37.18 | $35.04 | $32.43 | ||||||||||
| Capital Expenditures by Segment | |||||||||||||||
| Regulated Operations | $177.1 | $121.8 | $224.4 | $583.5 | $326.3 | ||||||||||
| ALLETE Clean Energy | 56.1 | 106.9 | 8.6 | 4.2 | — | ||||||||||
| U.S. Water Services | 4.4 | 3.7 | 2.9 | — | — | ||||||||||
| Corporate and Other | 28.9 | 15.4 | 15.9 | 16.6 | 13.2 | ||||||||||
| Total Capital Expenditures | $266.5 | $247.8 | $251.8 | $604.3 | $339.5 | ||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements and notes to those statements and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Form 10-K contain forward-looking information that involves risks and uncertainties. Readers are cautioned that forward-looking statements should be read in conjunction with our disclosures in this Form 10-K under the headings: “Forward‑Looking Statements” located on page 6 and “Risk Factors” located in Item 1A. The risks and uncertainties described in this Form 10-K are not the only risks facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the risks are realized.
The trends and results for the year ended December 31, 2020, may not be indicative of future results that may be expected due to uncertainty regarding the extent and duration of the COVID-19 pandemic. This pandemic has resulted in widespread impacts on the global economy and on our employees, customers, contractors, and suppliers. There is considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders (including those in effect in areas our businesses operate), and business and government shutdowns. Additional disclosures in this Form 10-K regarding the impacts of the ongoing COVID-19 pandemic are located in Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load, Liquidity and Capital Resources – Liquidity Position and Part I, Item 1A. Risk Factors.
Overview
Basis of Presentation. We present three reportable segments: Regulated Operations, ALLETE Clean Energy and U.S. Water Services. Our segments were determined in accordance with the guidance on segment reporting. We measure performance of our operations through budgeting and monitoring of contributions to consolidated net income by each business segment.
Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 1615 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service in northwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities. (See Note 4. Regulatory Matters.)
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in fourseven states, approximately 535more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300 MW of wind energy facilities under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.
U.S. Water Services providesprovided integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage, and improve efficiency. In March 2019, the Company sold U.S. Water Services to a subsidiary of Kurita Water Industries Ltd.
Corporate and Otheris comprised of BNI Energy, our coal mining operations in North Dakota,Dakota; our investment in Nobles 2, an entity that owns and operates a 250 MW wind energy facility in southwestern Minnesota; ALLETE Properties, our legacy Florida real estate investment,investment; other business development and corporate expenditures,expenditures; unallocated interest expense,expense; a small amount of non-rate base generation,generation; approximately 5,0004,000 acres of land in Minnesota,Minnesota; and earnings on cash and investments.
ALLETE, Inc. 2020 Form 10-K
34
Overview (Continued)
ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of December 31, 2017,2020, unless otherwise indicated. All subsidiaries are wholly-owned unless otherwise specifically indicated. References in this report to “we,” “us” and “our” are to ALLETE and its subsidiaries, collectively.
The following net income discussion summarizes a comparison of the year ended December 31, 2017,2020 to the year ended December 31, 2016.2019. The trends and results for the year ended December 31, 2020 may not be indicative of future results due to uncertainty regarding the extent and duration of the COVID-19 pandemic. (See Overview.)
Net income attributable to ALLETE in 20172020 was $172.2$174.2 million, or $3.38$3.35 per diluted share, compared to $155.3$185.6 million, or $3.14$3.59 per diluted share, in 2016.2019. Net income in 20172020 included the favorable impactsreserves for interim rates of $13.0 million after-tax, or $0.25 per share, for the remeasurement of deferred income tax assets and liabilities resulting from the TCJA (see Note 1. Operations and Significant Accounting Policies) and $7.9$8.3 million after-tax, or $0.16 per share, related tofor the regulatory outcomerefund of interim rates collected through April 30, 2020, resulting from the MPUC’s approval of the MPUC’s modification of its November 2016 order on the allocation of North Dakota investment tax credits. Net income in 2017 also included a non‑cash $11.4 million after-tax charge, or $0.22 per share, for the MPUC’s decision in Minnesota Power’s 2016 general rate case at a hearing on January 18, 2018, disallowing recoveryresolution of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodology.2020 general rate case. (See Note 4. Regulatory Matters.) Net income in 20162019 included the favorable impact related to the change in fair valuegain on sale of the contingent consideration liabilityU.S. Water Services of $13.6$13.2 million after-tax, or $0.28 per share. Net income in 2016 also included an adverse impact of $8.8 million after‑tax, or $0.18$0.26 per share, for the regulatory outcomeand U.S. Water Services results of the November 2016 MPUC order on the allocationoperations amounted to a net loss of North Dakota investment tax credits, a $3.3$1.1 million after‑tax, or $0.07 per share, goodwill impairment charge and a $0.9 million after-tax, expense, or $0.02 per share, related to the repayment of long-term debt at ALLETE Clean Energy.share. Earnings per share dilution in 20172020 was $0.11$0.02 due to additional shares of common stock outstanding as of December 31, 2017.2020.
Regulated Operations net income attributable to ALLETE was $128.4$136.3 million in 2017,2020, compared to $135.5$154.4 million in 2016.2019. Net income in 2017 at Minnesota Power decreased $9.8 million after-tax reflecting a non-cash $11.4 million after-tax charge for the MPUC’s decision disallowing the recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costswas lower than 2019 primarily due to the anticipated adoption of a forward-looking fuel adjustment clause methodology. In addition, net income decreased due toto: lower kWh sales to other power suppliers asretail and municipal customers; lower revenue from Other Power Suppliers resulting from the expiration of a result ofPSA; higher industrial sales coupled with lower market prices, higher interest and taxes other than income taxes,depreciation expense; and lower kWh sales to residential, commercial and municipal customers due to milder temperaturesfuel adjustment clause recoveries in 2017.2020 with the adoption of a new fuel adjustment clause methodology for Minnesota utilities this year. These decreases were partially offset by lower depreciation expensehigher rates resulting from Minnesota Power’s rate case and increased earnings related to the GNTL. In addition, results for 2020 included reserves for interim rates of $14.6$8.3 million after-tax resulting fromfor the MPUC’s decisionrefund of interim rates collected through April 30, 2020. Net income at SWL&P was similar to modify the depreciable lives at Boswell, and higher industrial kWh sales. Interim retail rate refund reserves fully offset the interim retail rates recognized during 2017 due to the regulatory outcome of the MPUC’s decisions in Minnesota Power’s 2016 general rate case on January 18, 2018.2019. Our after-tax equity earnings in ATC for 2017 increased $2.6 million after‑taxwere higher compared to 2019 primarily due to additional investments in ATC and period over period changes in ATC’s estimate of a refund liability related to MISO return on equity complaints..
ALLETE Clean Energy net income attributable to ALLETE was $41.5$29.9 million in 20172020 compared to $13.4$12.4 million in 2016.2019. Net income in 2017 reflected a $23.62020 included $9.1 million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, increasedadditional production tax credits duecompared to 2019 as well as earnings from the requalification of WTGs for production tax credits at its Storm Lake I, Storm Lake IIGlen Ullin, South Peak and Lake BentonDiamond Spring wind energy facilities, lower operatingwhich commenced full operations in December 2019, April 2020 and maintenance expenses,December 2020, respectively, and lower interest expense compared to 2016. Net income in 2016 included a $3.3 million after-tax goodwill impairment charge and a $0.9 million after-tax expense related to the repayment of long-term debt. Net income in 2016 also included an allocation of earnings to a non‑controlling interest in the limited liability company that owns the Condonhigher wind resources at other wind energy facility, which was acquired by ALLETE Clean Energy in April 2016. (See Note 6. Acquisitions.)facilities.
U.S. Water Services net loss attributable to ALLETE was $1.1 million in 2019. ALLETE completed the sale of U.S. Water Services in the first quarter of 2019.
Corporate and Othernet income attributable to ALLETE was $10.7$8.0 million in 2017,2020 compared to $1.5$19.9 million in 2016.2019. Net income in 2017 reflected2019 included a $9.2gain on the sale of U.S. Water Services of $13.2 million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, and higher operating revenue, partially offset by increased operating expenses as a result of investments for future growth in waste treatment and water safety applications.after-tax. Net income in 2017 also2020 included a net loss of $0.8 million primarily for transaction fees and amortization expense of the Tonka Water acquisition on September 1, 2017. (See Note 6. Acquisitions.)earnings from our investment in Nobles 2 which commenced operations in December 2020.
ALLETE, was $8.4 million in 2017, compared to net income of $4.9 million in 2016. The net loss in 2017 included additional income tax expense of $19.8 million after-tax for the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. The net loss in 2017 also included a $7.9 million after‑tax favorable impact for the regulatory outcome of the MPUC’s modification of its November 2016 order on the allocation of North Dakota investment tax credits, lower accretion expense relating to the contingent consideration liability, and lower interest expense. Net income in 2016 included an after-tax gain of $13.6 million related to the change in fair value of the contingent consideration liability, partially offset by an $8.8 million after-tax adverse impact for the regulatory outcome of the November 2016 MPUC order.Inc. 2020 Form 10-K
35
(See Note 17.13. Business Segments for financial results by segment.)
Regulated Operations
| Year Ended December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Operating Revenue – Utility | $987.3 | $1,042.4 | ||||||
| Fuel, Purchased Power and Gas – Utility | 358.6 | 390.7 | ||||||
| Transmission Services – Utility | 67.0 | 69.8 | ||||||
| Operating and Maintenance | 200.9 | 201.9 | ||||||
| Depreciation and Amortization | 166.9 | 159.4 | ||||||
| Taxes Other than Income Taxes | 50.7 | 48.4 | ||||||
| Operating Income | 143.2 | 172.2 | ||||||
| Interest Expense | (58.5) | (58.9) | ||||||
| Equity Earnings | 22.3 | 21.7 | ||||||
| Other Income | 9.9 | 12.3 | ||||||
| Income Before Income Taxes | 116.9 | 147.3 | ||||||
| Income Tax Benefit | (19.4) | (7.1) | ||||||
| Net Income Attributable to ALLETE | $136.3 | $154.4 | ||||||
| Year Ended December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Operating Revenue – Utility | $1,063.8 | $1,000.7 | ||||
| Fuel, Purchased Power and Gas – Utility | 396.9 | 339.9 | ||||
| Transmission Services – Utility | 71.2 | 65.2 | ||||
| Operating and Maintenance | 223.1 | 220.7 | ||||
| Depreciation and Amortization | 132.6 | 154.3 | ||||
| Taxes Other than Income Taxes | 51.1 | 47.7 | ||||
| Operating Income | 188.9 | 172.9 | ||||
| Interest Expense | (57.0 | ) | (52.1 | ) | ||
| Equity Earnings in ATC | 22.5 | 18.5 | ||||
| Other Income | 1.2 | 2.1 | ||||
| Income Before Income Taxes | 155.6 | 141.4 | ||||
| Income Tax Expense | 27.2 | 5.9 | ||||
| Net Income Attributable to ALLETE | $128.4 | $135.5 | ||||
Operating Revenue – Utility decreased $55.1 million from 2019 primarily due to lower revenue from kWh sales, fuel adjustment clause recoveries and conservation improvement program recoveries, partially offset by higher rates resulting from Minnesota Power’s rate case and increased $63.1revenue related to the GNTL.
Revenue from kWh sales decreased $68.5 million or 6 percent, from 20162019 reflecting lower sales to commercial, industrial and municipal customers as well as the expiration of a 100 MW PSA in April 2020. Sales to commercial and industrial customers decreased primarily due to the period over periodadverse impact of the regulatory outcomes related to the allocation of North Dakota investment tax credits, as well as higher fuel adjustment clause recoveries, conservation improvement program recoveriesCOVID-19 pandemic on customer operations. Many commercial and revenue from kWh sales, partially offset by lower FERC formula-based rates, financial incentives under the conservation improvement program and transmission revenue. Interim retail rate refund reserves fully offset the interim retail rates recognizedindustrial customers were operating at reduced levels or were temporarily closed or idled during 2017.
Kilowatt-hours Sold | 2020 | 2019 | Quantity Variance | % Variance | ||||||||||
| Millions | ||||||||||||||
| Regulated Utility | ||||||||||||||
| Retail and Municipal | ||||||||||||||
| Residential | 1,134 | 1,130 | 4 | 0.4 | ||||||||||
| Commercial | 1,306 | 1,390 | (84) | (6.0) | ||||||||||
| Industrial | 6,192 | 7,277 | (1,085) | (14.9) | ||||||||||
| Municipal | 584 | 672 | (88) | (13.1) | ||||||||||
| Total Retail and Municipal | 9,216 | 10,469 | (1,253) | (12.0) | ||||||||||
| Other Power Suppliers | 4,039 | 3,185 | 854 | 26.8 | ||||||||||
| Total Regulated Utility Kilowatt-hours Sold | 13,255 | 13,654 | (399) | (2.9) | ||||||||||
Kilowatt-hours Sold | 2017 | 2016 | Quantity Variance | % Variance | ||||
| Millions | ||||||||
| Regulated Utility | ||||||||
| Retail and Municipal | ||||||||
| Residential | 1,096 | 1,102 | (6 | ) | (0.5 | ) | ||
| Commercial | 1,420 | 1,442 | (22 | ) | (1.5 | ) | ||
| Industrial | 7,327 | 6,456 | 871 | 13.5 | ||||
| Municipal | 799 | 816 | (17 | ) | (2.1 | ) | ||
| Total Retail and Municipal | 10,642 | 9,816 | 826 | 8.4 | ||||
| Other Power Suppliers | 4,039 | 4,316 | (277 | ) | (6.4 | ) | ||
| Total Regulated Utility Kilowatt-hours Sold | 14,681 | 14,132 | 549 | 3.9 | ||||
Revenue from electric sales to taconite and iron concentrate customers accounted for 2230 percent of consolidatedregulated operating revenue in 2017 (182020 (30 percent in 2016)2019). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of consolidatedregulated operating revenue in 2017 (62020 (7 percent in 2016)2019). Revenue from electric sales to pipelines and other industrial customers accounted for 79 percent of consolidatedregulated operating revenue in 2017 (72020 (9 percent in 2016)2019).
ALLETE, Inc. 2020 Form 10-K
36
2020 Compared to 2019 (Continued)
Regulated Operations (Continued)
Conservation improvement program recoveries decreased $4.9 million from 2019 primarily due to a decrease in related expenditures. (See Operating Expenses - Operating and Maintenance.)
Revenue increased $19.4 million due to higher rates beginning in May 2020 resulting from the regulatory outcomeresolution of Minnesota Power’s 2020 general rate case. As part of the MPUC’s decisionresolution, interim rates collected from January 2020 through April 2020 were offset with reserves for interim rates which were refunded in Minnesota Power’s 2016 general rate case on January 18, 2018.the third and fourth quarters of 2020. (See Note 4. Regulatory Matters.)
Operating Expenses - Transmission Services – Utility.)
Fuel, Purchased Power and Gas – Utility expense increased $57.0decreased $32.1 million, or 178 percent, from 20162019 primarily due to increasedlower kWh sales, higher fuel costs and a $19.5 million expense for the MPUC’s decision disallowing recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs at a hearing on January 18, 2018, due to the anticipated adoption of a forward-looking fuel adjustment clause methodology. These increases were partially offset by lower purchased power prices.prices and fuel costs. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause. (See Operating Revenue – Utility.)
Transmission Services – Utility expense increased $6.0decreased $2.8 million, or 94 percent, from 20162019 primarily due to higherlower MISO-related expense. (See Operating Revenue – Utility.)
Taxes Other than Income Taxes increased $3.4$2.3 million, or 75 percent, from 20162019 primarily due to higher property tax expensesexpense resulting from higher taxable plant.the GNTL being placed into service in June 2020.
Income Tax Benefit increased $4.9$12.3 million or 9 percent, from 20162019 primarily due to lower pre-tax income and additional production tax credits in 2020 compared to 2019.
ALLETE Clean Energy
| Year Ended December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Operating Revenue | ||||||||
| Contracts with Customers – Non-utility | $68.3 | $48.0 | ||||||
Other – Non-utility (a) | 11.3 | 11.6 | ||||||
| Operating and Maintenance | 37.4 | 29.5 | ||||||
| Depreciation and Amortization | 37.9 | 26.8 | ||||||
| Taxes Other than Income Taxes | 3.3 | 2.1 | ||||||
| Operating Income | 1.0 | 1.2 | ||||||
| Interest Expense | (2.2) | (2.8) | ||||||
| Other Income | 0.2 | 2.0 | ||||||
| Income (Loss) Before Income Taxes | (1.0) | 0.4 | ||||||
| Income Tax Benefit | (19.1) | (11.9) | ||||||
| Net Income | 18.1 | 12.3 | ||||||
Net Loss Attributable to Non-Controlling Interest (b) | (11.8) | (0.1) | ||||||
| Net Income Attributable to ALLETE | $29.9 | $12.4 | ||||||
(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs.
(b)See Note 1. Operations and Significant Accounting Policies.
Operating Revenue increased $20.0 million from 2019 primarily due to revenue from the Glen Ullin, South Peak and Diamond Spring wind energy facilities which commenced full operations in December 2019, April 2020 and December 2020, respectively, as well as higher average interest rates. We record interestwind resources at other wind energy facilities.
ALLETE, Inc. 2020 Form 10-K
37
2020 Compared to 2019 (Continued)
ALLETE Clean Energy (Continued)
| Year Ended December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Production and Operating Revenue | kWh | Revenue | kWh | Revenue | ||||||||||
| Millions | ||||||||||||||
| Wind Energy Regions | ||||||||||||||
| East | 262.2 | $23.5 | 232.9 | $21.0 | ||||||||||
| Midwest | 902.0 | 32.2 | 805.8 | 32.4 | ||||||||||
| South | 169.1 | 3.9 | — | — | ||||||||||
| West | 777.5 | 20.0 | 87.8 | 6.2 | ||||||||||
| Total Production and Operating Revenue | 2,110.8 | $79.6 | 1,126.5 | $59.6 | ||||||||||
Operating and Maintenance expense for Regulated Operations primarily based on rate base and authorized capital structure, and allocate the balance to Corporate and Other.
Depreciation and Amortizationexpense increased $11.1 million, or 41 percent, from 2019 primarily due to additional investmentsproperty, plant and equipment in ATC and period over period changes in ATC’s estimate of a refund liabilityservice related to MISO return on equity complaints. (See Note 5. Investment in ATC.)the Glen Ullin, South Peak and Diamond Spring wind energy facilities.
Taxes Other Than Income Tax ExpenseTaxes increased $21.3$1.2 million, or 57 percent, from 20162019 primarily due to the period over period impact of the regulatory outcomesadditional property, plant and equipment in service related to the allocation of North Dakota investmentGlen Ullin, South Peak and Diamond Spring wind energy facilities.
Other Incomedecreased $1.8 million from 2019 reflecting various individually immaterial items.
Income Tax Benefit increased $7.2 million from 2019 primarily due to additional production tax credits and higher pre-tax income.generated in 2020. The TCJA did not have an impact on income tax expense for our Regulated Operations as the remeasurement of deferred income tax assets and liabilities primarily resulted in the recording of regulatory assets and liabilities.
Net Loss Attributable to Non-Controlling Interest increased $11.7 million reflecting net losses attributable to non-controlling interests for the North Dakota investment tax credits transferred from Regulated Operations.Glen Ullin, South Peak and Diamond Spring wind energy facilities.
| Year Ended December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Operating Revenue | — | $33.4 | ||||||
| Net Loss Attributable to ALLETE | — | $(1.1) | ||||||
| Year Ended December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Operating Revenue | $80.5 | $80.5 | ||||
Net Income Attributable to ALLETE (a) | $41.5 | $13.4 | ||||
Operating Revenue is consistent with 2016 as lower kWh sales atdecreased $33.4 million from 2019. ALLETE sold U.S. Water Services in the wind energy facilities resulting from lower wind resources were offset by higher amortizationfirst quarter of PSAs.2019. (See Note 1. Operations and Significant Accounting Policies.)
| Year Ended December 31, | ||||||||||
| 2017 | 2016 | |||||||||
| Production and Operating Revenue | kWh | Revenue | kWh | Revenue | ||||||
| Millions | ||||||||||
| Wind Energy Facility | ||||||||||
| Lake Benton | 241.8 | $12.3 | 254.7 | $12.8 | ||||||
| Storm Lake II | 152.6 | 10.0 | 154.8 | 10.1 | ||||||
| Condon | 90.7 | 7.5 | 96.9 | 8.2 | ||||||
| Storm Lake I | 215.6 | 12.4 | 222.3 | 11.6 | ||||||
| Chanarambie/Viking | 263.5 | 13.9 | 278.8 | 13.4 | ||||||
| Armenia Mountain | 267.4 | 24.4 | 268.2 | 24.4 | ||||||
| Total Production and Operating Revenue | 1,231.6 | $80.5 | 1,275.7 | $80.5 | ||||||
| Year Ended December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Operating Revenue | $151.8 | $137.5 | ||||
Net Income Attributable to ALLETE (a) | $10.7 | $1.5 | ||||
Corporate and Other
Operating Revenue increased $2.2 decreased $2.9 million, or 23 percent, from 20162019 primarily due to an increase inlower land sales at ALLETE Properties, partially offset by higher revenue at BNI Energy, which operates under cost-plus fixed fee contracts, as a result of higher expenses and record coal sales in 2017, partially offset by2020 compared to 2019.
Net Income Attributable to ALLETE was $8.0 million in 2020 compared to $19.9 million in 2019. Net income in 2019 included a decrease in land sales at ALLETE Properties. Operating revenue in 2016 includedgain on the sale of ALLETE Properties’ Ormond Crossings project and Lake Swamp wetland mitigation bank for approximately $21 million.
Nobles 2 which commenced operations in December 2020. Net income at BNI Energy was $4.5$7.3 million in 2017 which included a $3.12020 compared to $7.4 million after-tax expense due to the remeasurement of deferredin 2019. Net income tax assets and liabilities resulting from the TCJA, partially offset by more tons sold; net income in 2016 was $6.8 million. The net loss at ALLETE Properties was $8.8$0.4 million in 2017 which included a $7.82020 compared to $0.3 million after-tax expense for the remeasurement of deferred income tax assets and liabilities resulting from the TCJA; net income in 2016 was $0.7 million.2019.
Income Taxes – Consolidated
For the year ended December 31, 2017,2020, the effective tax rate was 7.9a benefit of 32.4 percent (11.3(benefit of 3.7 percent for the year ended December 31, 2016)2019). The decrease from 2016effective tax rate for 2020 was primarily due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA and increased production tax credits, partially offset bya higher pre-tax income. (See Regulated Operations - Income Tax Expense.) The effective rate deviated from the combined statutory rate of approximately 41 percent primarily due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, and production tax credits. (See Note 13. Income Tax Expense.)
| Year Ended December 31 | 2016 | 2015 | ||||
| Millions | ||||||
| Operating Revenue – Utility | $1,000.7 | $991.2 | ||||
| Fuel, Purchased Power and Gas – Utility | 339.9 | 336.0 | ||||
| Transmission Services – Utility | 65.2 | 54.1 | ||||
| Operating and Maintenance | 220.7 | 229.6 | ||||
| Depreciation and Amortization | 154.3 | 135.1 | ||||
| Taxes Other than Income Taxes | 47.7 | 46.2 | ||||
| Operating Income | 172.9 | 190.2 | ||||
| Interest Expense | (52.1 | ) | (53.9 | ) | ||
| Equity Earnings in ATC | 18.5 | 16.3 | ||||
| Other Income | 2.1 | 3.4 | ||||
| Income Before Income Taxes | 141.4 | 156.0 | ||||
| Income Tax Expense | 5.9 | 24.4 | ||||
| Net Income Attributable to ALLETE | $135.5 | $131.6 | ||||
Kilowatt-hours Sold | 2016 | 2015 | Quantity Variance | % Variance | ||||
| Millions | ||||||||
| Regulated Utility | ||||||||
| Retail and Municipal | ||||||||
| Residential | 1,102 | 1,113 | (11 | ) | (1.0 | ) | ||
| Commercial | 1,442 | 1,462 | (20 | ) | (1.4 | ) | ||
| Industrial | 6,456 | 6,635 | (179 | ) | (2.7 | ) | ||
| Municipal | 816 | 833 | (17 | ) | (2.0 | ) | ||
| Total Retail and Municipal | 9,816 | 10,043 | (227 | ) | (2.3 | ) | ||
| Other Power Suppliers | 4,316 | 4,310 | 6 | 0.1 | ||||
| Total Regulated Utility Kilowatt-hours Sold | 14,132 | 14,353 | (221 | ) | (1.5 | ) | ||
ALLETE, Inc. 2020 Form 10-K
38
2019 Compared to 2018
The comparison of the adverse impactresults of operations for the regulatory outcome of the November 2016 MPUC order related to the allocation of North Dakota investment tax credits. (See Note 4. Regulatory Matters.)
| Year Ended December 31, | 2016 | 2015 | ||||
| Millions | ||||||
| Operating Revenue | $80.5 | $262.1 | ||||
| Net Income Attributable to ALLETE | $13.4 | $29.9 | ||||
| Year Ended December 31, | ||||||||||
| 2016 | 2015 | |||||||||
| Production and Operating Revenue | kWh | Revenue | kWh | Revenue | ||||||
| Millions | ||||||||||
| Wind Energy Facility | ||||||||||
| Lake Benton | 254.7 | $12.8 | 265.1 | $13.5 | ||||||
| Storm Lake II | 154.8 | 10.1 | 186.4 | 11.7 | ||||||
| Condon | 96.9 | 8.2 | 84.1 | 7.8 | ||||||
| Storm Lake I | 222.3 | 11.6 | 230.7 | 12.1 | ||||||
| Chanarambie/Viking | 278.8 | 13.4 | 199.1 | 9.8 | ||||||
| Armenia Mountain | 268.2 | 24.4 | 111.6 | 9.5 | ||||||
| Total Wind Energy Facilities | 1,275.7 | 80.5 | 1,077.0 | 64.4 | ||||||
Development Fee (a) | — | — | — | 197.7 | ||||||
| Total Production and Operating Revenue | 1,275.7 | $80.5 | 1,077.0 | $262.1 | ||||||
| Year Ended | Period February 10, 2015 | |||||
| December 31, 2016 | Through December 31, 2015 | |||||
| Millions | ||||||
| Operating Revenue | $137.5 | $119.8 | ||||
| Net Income Attributable to ALLETE | $1.5 | $0.9 | ||||
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make various estimates and assumptions that affect amounts reported in the Consolidated Financial Statements. These estimates and assumptions may be revised, which may have a material effect on the Consolidated Financial Statements. Actual results may differ from these estimates and assumptions. These policies are discussed with the Audit Committee of our Board of Directors on a regular basis. We believe the following policies are most critical to our business and the understanding of our results of operations.
Regulatory Accounting. Our regulated utility operations are accounted for in accordance with thesubject to accounting standards for the effects of certain types of regulation. These standards require us to reflect the effect of regulatory decisions in our financial statements. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. This assessment considers factors such as, but not limited to, changes in the regulatory environment and recent rate orders to other regulated entities under the same jurisdiction. If future recovery or refund of costs becomes no longer probable, the assets and liabilities would be recognized in current period net income or other comprehensive income. (See Note 4. Regulatory Matters.)
Pension and Postretirement Health and Life Actuarial Assumptions. We account for our pension and other postretirement benefit obligations in accordance with the accounting standards for defined benefit pension and other postretirement plans. These standards require the use of several important assumptions, including the expected long-term rate of return on plan assets, the discount rate and mortality assumptions, among others, in determining our obligations and the annual cost of our pension and other postretirement benefits. In establishing the expected long-term rate of return on plan assets, we determine the long-term historical performance of each asset class and adjust these for current economic conditions while utilizing the target allocation of our plan assets to forecast the expected long-term rate of return. Our pension asset allocation as of December 31, 2017,2020, was approximately 5336 percent equity securities, 3861 percent debt, 5fixed income, 1 percent private equity and 42 percent real estate. Our postretirement health and life asset allocation as of December 31, 2017,2020, was approximately 6467 percent equity securities, 3132 percent debtfixed income and 51 percent private equity. Equity securities consist of a mix of market capitalization sizes with domestic and international securities. In 2017,2020, we used weighted average expected long-term rates of return of 7.506.75 percent in our actuarial determination of our pension expense and 6.00 percent to 7.506.08 percent in our actuarial determination of our other postretirement expense. The actuarial determination uses an asset smoothing methodology for actual returns to reduce the volatility of varying investment performance over time. We review our expected long-term rate of return assumption annually and will adjust it to respond to changing market conditions. A one‑quarter percent decrease in the expected long-term rate of return would increase the annual expense for pension and other postretirement benefits by approximately $1.8$1.9 million, pre-tax.
The discount rate is computed using a bond matching study which utilizes a portfolio of high quality bonds that produce cash flows similar to the projected costs of our pension and other postretirement plans. In 2017,2020, we used weighted average discount rates of 4.533.52 percent and 4.573.45 percent in our actuarial determination of our pension and other postretirement expense, respectively. We review our discount rates annually and will adjust them to respond to changing market conditions. A one-quarter percent decrease in the discount rate would increase the annual expense for pension and other postretirement benefits by approximately $1.1$1.3 million, pre‑tax.
The mortality assumptions used to calculate our pension and other postretirement benefit obligations as of December 31, 2017,2020, considered a modified RP-2014PRI-2012 mortality table and mortality projection scale. (See Note 15.11. Pension and Other Postretirement Benefit Plans.)
Impairment of Long-Lived Assets. We review our long-lived assets, which include the legacy real estate assets of ALLETE Properties, for indicators of impairment in accordance with the accounting standards for property, plant and equipment on a quarterly basis.
ALLETE, Inc. 2020 Form 10-K
39
Critical Accounting Policies (Continued)
In accordance with the accounting standards for property, plant and equipment, if indicators of impairment exist, we test our long‑lived assets for recoverability by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. Cash flows are assessed at the lowest level of identifiable cash flows. The undiscounted future net cash flows are impacted by trends and factors known to us at the time they are calculated and our expectations related to: management’s best estimate of future sales prices; holding period and timing of sales; method of disposition; and future expenditures necessary to maintain the operations.
Taxation. We are required to make judgments regarding the potential tax effects of various financial transactions and our ongoing operations to estimate our obligations to taxing authorities. These tax obligations include income taxes and taxes other than income taxes. Judgments related to income taxes require the recognition in our financial statements of the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit. Tax positions that do not meet the “more-likely-than-not” criteria are reflected as a tax liability in accordance with the accounting standards for uncertainty in income taxes. We record a valuation allowance against our deferred tax assets to the extent it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
We are subject to income taxes in various jurisdictions. We make assumptions and judgments each reporting period to estimate our income tax assets, liabilities, benefits and expenses. Judgments and assumptions are supported by historical data and reasonable projections. Our assumptions and judgments include the application of tax statutes and regulations, and projections of future federal taxable income, state taxable income, and state apportionment to determine our ability to utilize NOL and credit carryforwards prior to their expiration. Significant changes in assumptions regarding future federal and state taxable income or a change in tax rates could require new or increased valuation allowances which could result in a material impact on our results of operations.
Outlook
ALLETE is an energy company committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses, and sustains growth. The Company has a long-term objectivesobjective of achieving consolidated average annual earnings per share growth of 5 percent to 7 percent; with a Regulated Operations growth objective of 4 percent to 5 percent, and providingan ALLETE Clean Energy and Corporate and Other businesses growth objective of at least 15 percent over the long-term. We have made steady progress over the past several quarters in the evolution of our ALLETE Clean Energy strategy as we position the business to provide more comprehensive clean energy solutions. We believe that the renewable energy industry continues to have tremendous potential driven by societal demands for climate action and fulfilling ESG commitments. ALLETE Clean Energy’s existing platform provides a dividend payout competitivestrong foundation for growth as we seek to expand our product offerings, further diversify our portfolio and deliver financial returns within our expected criteria over the long-term. Our efforts have resulted in an improvement in our long-term growth outlook above the 4 percent most recently reported. Our current projection of ALLETE’s consolidated average annual earnings per share growth rate, using 2019 as a base year, is in line with our industry.stated long-term (5-year) growth objective of 5 percent to 7 percent; with a Regulated Operations growth projection of approximately 3 percent, and an ALLETE Clean Energy and Corporate and Other businesses growth projection of approximately 30 percent to 40 percent.
Our earnings during the year ended December 31, 2020 were negatively impacted by the ongoing COVID-19 pandemic and related disruptions. COVID-19 has had a material impact on Minnesota Power’s industrial customers and, as a result, our sales to these customers. Multiple taconite facilities were idled for portions of the year in 2020 and Verso Corporation idled its paper mill in Duluth, Minnesota. The Verso Corporation paper mill remains indefinitely idled; however, Verso Corporation has disclosed it is considering options for the paper mill, including marketing for a sale. In addition, many of our commercial, municipal, and small industrial customers are operating at reduced levels, or are temporarily closed. We expect our earnings to continue to be impacted in 2021 due to the ongoing COVID-19 pandemic, with lower sales to our industrial customers than historical levels, Verso Corporation remaining indefinitely idled, and some of our commercial, municipal, and small industrial customers operating at reduced levels throughout the year. Our 2021 consolidated ALLETE earnings are expected to be lower than 2020, primarily due to lower earnings at our Regulated Operations.
ALLETE, Inc. 2020 Form 10-K
40
Outlook (Continued)
In response to these lower sales in 2020, and in anticipation of potentially lower sales in 2021, Minnesota Power submitted a petition in November 2020 to the MPUC requesting authority to track and record as a regulatory asset lost large industrial customer revenue resulting from the idling of USS Corporation’s Keetac facility and Verso Corporation’s paper mill in Duluth, Minnesota. Keetac and Verso represent revenue of approximately $30 million annually, net of associated expense savings such as fuel costs. Minnesota Power proposed in this petition to defer any lost revenue related to the idling of the Keetac facility and the Verso paper mill to its next general rate case or other proceeding for review for recovery by the MPUC. (See Note 4. Regulatory Matters – COVID-19 Related Deferred Accounting.) Minnesota Power anticipates filing a general rate case in November 2021 with a 2022 test year.
Minnesota Power also submitted its IRP with the MPUC on February 1, 2021. The outcome of this IRP is likely to be instrumental in the evolution of our EnergyForward strategic plan that provides for significant emission reductions and diversifying our electricity generation mix to include more renewables, and is expected to provide potential earnings growth over the long-term. (See EnergyForward.)
Portions of our ALLETE Clean Energy business is experiencing return pressures on our earnings per share growth from increased competition, and lower forward price curves, as a growing amount of investment capital is being directed into wind generation opportunities. In addition, current and potential new project developments can be negatively affected by a lower ALLETE stock price, which may result in such projects not being accretive, or otherwise unable to satisfy our financial objectives criteria to proceed. In response to these market pressures, we are actively evaluating additional growth opportunities to deliver more comprehensive clean energy solutions for customers at ALLETE Clean Energy, which may include solar, storage solutions, and related energy infrastructure investments and services. We believe that the renewable energy industry is entering a new phase of growth and that we are well-positioned to serve customers and drive future growth at ALLETE. ALLETE Clean Energy will continue to optimize its existing wind energy facility portfolio, seek development of its remaining safe harbor inventory of tax credit qualified turbines, and explore other renewable energy opportunities to expand its service offerings to further enhance its growth and profitability.
ALLETE is predominately a regulated utility through Minnesota Power, SWL&P, and an investment in ATC. ALLETE’s strategy is to remain predominately a regulated utility while investing in itsALLETE Clean Energy Infrastructure and Related Servicesour Corporate and Other businesses to complement its regulated businesses, balance exposure to the utility’s industrial customers, and provide potential long-term earnings growth. ALLETE expects net income from Regulated Operations to be approximately 80 percent of total consolidated net income in 2018.2021. Over the next several years, the contribution of theALLETE Clean Energy Infrastructure and Related Servicesour Corporate and Other businesses to net income is expected to increase as ALLETE grows these operations. ALLETE expects its businesses to provide regulated, contracted or recurring revenues, and to support sustained growth in net income and cash flow.
Regulated Operations. Minnesota Power’s long-term strategy is to be the leading electric energy provider in northeastern Minnesota by providing safe, reliable and cost-competitive electric energy, while complying with environmental permit conditions and renewable energy requirements. Keeping the cost of energy production competitive enables Minnesota Power to effectively compete in the wholesale power markets and minimizes retail rate increases to help maintain customer viability. As part of maintaining cost competitiveness, Minnesota Power intends to reduce its exposure to possible future carbon and GHG legislation by reshaping its generation portfolio, over time, to reduce its reliance on coal. Minnesota Power has a goal of delivering 100 percent carbon-free energy by 2050. (See EnergyForward.EnergyForward.) We will monitor and review proposed environmental regulations and may challenge those that add considerable cost with limited environmental benefit. Minnesota Power will continue to pursue customer growth opportunities and cost recovery rider approvals for transmission, renewable and environmental investments, as well as work with regulators to earn a fair rate of return.
Regulatory Matters. Entities within our Regulated Operations segment are under the jurisdiction of the MPUC, FERC, PSCW and NDPSC. See Note 4. Regulatory Matters for discussion of regulatory matters within these jurisdictions.
ALLETE, Inc. 2020 Form 10-K
Outlook (Continued)
Regulatory Matters (Continued)
Industrial Customers and Prospective Additional Load
Industrial Customers. Electric power is one of several key inputs in the taconite mining, iron concentrate, paper, pulp and secondary wood products, pipeline and other industries. Approximately 5047 percent of our regulated utility kWh sales in 2017 (452020 (54 percent in 20162019 and 4650 percent in 2015)2018) were made to our industrial customers. We expect industrial sales of approximately 7.06.0 million to 7.5 million MWh in 2018 (7.3 million MWh in 2017; 6.5 million MWh in 2016)2021 (6.2 million MWh in 2020 and 7.3 million in 2019). (See Item 1. Business – Regulated Operations – Electric Sales / Customers.)
Taconite. Minnesota Power’s taconite customers are capable of producing up to approximately 41 million tons of taconite pellets annually. Taconite pellets produced in Minnesota are primarily shipped to North American steel making facilities that are part of the integrated steel industry.industry, which continues to lead the world in environmental performance among steelmaking countries. According to the U.S. Department of Energy, steel produced in the U.S. is the most energy efficient of any major steel producing country. Steel produced from these North American facilities is used primarily in the manufacture of automobiles, appliances, pipe and tube productstubular applications for the gas and oil industry,all industries, and in the construction industry. Steel is also a critical component of the clean energy transformation underway today. The demand for more renewable energy and the need for additional infrastructure to transport green energy from the point of generation to the end user all requires steel. Historically, less than five10 percent of Minnesota taconite production has been exported outside of North America. Minnesota Power also provides electric service to three iron concentrate facilities capable of producing up to approximately 4 million tons of iron concentrate per year. Iron concentrate is used in the production of taconite pellets. These iron concentrate facilities are owned in whole, or in part, by ERP Iron Ore and are currently idled. (See ERP Iron Ore /Magnetation.)
There has been a general historical correlation between U.S. steel production and Minnesota taconite production. The American Iron and Steel Institute, an association of North American steel producers, reported that U.S. raw steel production operated at approximately 7468 percent of capacity in 2017 (712020 (80 percent in 20162019 and 78 percent in 2015).2018); however, the American Iron and Steel Institute also reported that U.S. raw steel production in January 2021 was approximately 76 percent of capacity. The World Steel Association, an association of over 160 steel producers, national and regional steel industry associations, and steel research institutes representing approximately 85 percent of world steel production, projected U.S. steel consumption in 20182021 will increase by approximately 17 percent compared to 2017.2020.
ALLETE, Inc. 2020 Form 10-K
42
Outlook (Continued)
Industrial Customers and Prospective Additional Load (Continued)
Minnesota Power’s taconite customers may experience annual variations in production levels due to such factors as economic conditions, short-term demand changes or maintenance outages. We estimate that a one million ton change in Minnesota Power’s taconite customers’ production would impact our annual earnings per share by approximately $0.04, net of expected power marketing sales at current prices. Changes in wholesale electric prices or customer contractual demand nominations could impact this estimate. Minnesota Power proactively sells power in the wholesale power markets that is temporarily not required by industrial customers to optimize the value of its generating facilities. Long-term reductions in taconite production or a permanent shut down of a taconite customer may lead Minnesota Power to file a general rate case to recover lost revenue.
Silver Bay Power. In 2016, Minnesota Power and Silver Bay Power entered into a long-term PSA through 2031. Silver Bay Power supplies approximately 90 MW of load to Northshore Mining, an affiliate of Silver Bay Power, which hashad previously been served predominately through self-generation by Silver Bay Power. In the yearsStarting in 2016, through 2019, Minnesota Power is supplyingsupplied Silver Bay Power with at least 50 MW of energy and Silver Bay Power hashad the option to purchase additional energy from Minnesota Power as it transitionstransitioned away from self-generation. On December 31,In the third quarter of 2019, Silver Bay Power will ceaseceased self-generation and Minnesota Power will supplybegan supplying the full energy requirements for Silver Bay Power.
Hibbing Taconite. In 2015, MagnetationApril 2020, ArcelorMittal announced that Hibbing Taconite in Hibbing, Minnesota, would idle production due to the COVID-19 pandemic. Hibbing Taconite resumed normal production in August 2020. Hibbing Taconite’s current mineable ore reserves are expected to be exhausted in 2025. Cliffs, who in December 2020 became majority owner and resumed management of Hibbing Taconite, has stated that it has a plan to extend the mine life of Hibbing Taconite with ore reserves already under control of Cliffs. There are ample ore reserves in northeastern Minnesota that could supply operations for decades to come, and Minnesota Power’s taconite customers routinely develop and extend their mine plans to optimize assets. Hibbing Taconite has the capability to produce approximately 8 million tons annually.
Cliffs Acquisition. On December 9, 2020, Cliffs announced that it had filed voluntary petitions for reorganization under Chapter 11completed the previously announced acquisition of substantially all of the Bankruptcy Code inoperations of ArcelorMittal USA LLC and its subsidiaries. Cliffs had stated that upon closure Cliffs would be the U.S. Bankruptcy Court forlargest flat-rolled steel producer and the District of Minnesota, citing the significant decrease in globallargest iron ore prices and its existing capital structure. In January 2016, Magnetation idled its Plant 2 facilitypellet producer in Bovey, Minnesota. In October 2016, the bankruptcy court approved plans to idle Magnetation’s Plant 4 facility near Grand Rapids,North America. The transaction included ArcelorMittal’s Minorca mine in Virginia, Minnesota, and its pellet plantownership share of Hibbing Taconite in Reynolds, Indiana, as well as terminate Magnetation’s pellet purchase agreement with AK Steel Corporation.Hibbing, Minnesota, which are both large industrial customers of Minnesota Power. Cliffs is now Minnesota Power’s largest customer. The company subsequently idledacquisition has increased customer concentration risk for the facilitiesCompany and stated it was preservingcould lead to further capacity consolidation for both steel blast furnaces and the plants and their value for a potential buyer. On January 30, 2017, ERP Iron Ore purchased substantially all of Magnetation’s assets pursuant to an asset purchase agreement approved by the bankruptcy court. Although we cannot predict whether the facilities will be restarted,related Minnesota Power would serve the Plant 2 and Plant 4 facilities through ERP Iron Ore’s assumption of the existing electric service agreement.iron ore production.
Paper, Pulp and Secondary Wood Products. Minnesota Power servesThe North American paper and pulp industry faces declining demand due to the impact of electronic substitution for print and changing customer needs. As a number ofresult, certain paper and pulp customers have reduced their existing operations in recent years and have pursued or are pursuing product changes in response to the paper, pulp and secondary wood products industry. Thedeclining demand. We expect operating levels in 2021 at the four major paper and pulp mills we serve reportedto be lower than 2020 primarily due to the indefinite idling of Verso Corporation’s paper mill in Duluth, Minnesota. (See Verso Corporation.)
Verso Corporation. In June 2020, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota (Duluth Mill). Verso Corporation stated the decision was due to the accelerated decline in graphic paper demand resulting from the COVID-19 pandemic and has disclosed it is considering options for the Duluth Mill, including marketing for a sale. On January 29, 2021, Verso Corporation provided notice of termination for its contract effective in January 2025, with no demand charge expected after February 2023 (minimal demand charge through January 2023).
ALLETE, Inc. 2020 Form 10-K
43
Outlook (Continued)
Industrial Customers and Prospective Additional Load (Continued)
Pipeline and Other Industries.
Husky Energy. In April 2018, a fire at Husky Energy’s refinery in Superior, Wisconsin, disrupted operations at the facility. Under normal operating conditions, SWL&P provides approximately 14 MW of average monthly demand to Husky Energy in addition to water service. In September 2019, Husky Energy announced that it had received the required permit approvals to begin reconstruction. In June 2020, Husky Energy announced that rebuild construction at or near, full capacitythe refinery had resumed following a suspension in 2017. Lower levels of production areMarch 2020 due to the COVID-19 pandemic. The facility remains at minimal operations, and the refinery is not expected in 2018 asto resume normal operations until 2022. On October 25, 2020, Husky Energy announced a result of the closure of the smaller of the two paper machines located at UPM Blandintransaction to combine with Cenovus Energy Inc., which closed in the fourthfirst quarter of 2017. (See UPM Blandin.)2021.
Prospective Additional Load.Minnesota Power is pursuing new wholesale and retail loads in and around its service territory. Currently, several companies in northeastern Minnesota continue to progress in the development of natural resource-based projects that represent long-term growth potential and load diversity for Minnesota Power. We cannot predict the outcome of these projects.
PolyMet. PolyMet is planning to start a new copper-nickel and precious metal (non-ferrous) mining operation in northeastern Minnesota. In 2015, PolyMet announced the completion of the final EIS by state and federal agencies, which was subsequently published in the Federal Register and Minnesota Environmental Quality Board Monitor. The Minnesota Department of Natural Resources (DNR) and the U.S. Army Corps of Engineers have both issued its Recordfinal Records of Decision, in March 2016, finding the final EIS adequate.
In July 2016, PolyMet submitted applications for water-related permits with the State of Minnesota,DNR and in August 2016, an application forMPCA, an air quality permit was submitted towith the MPCA. In November 2016, PolyMet submittedMPCA, and a state permit to mine application towith the DNR detailing its operational plans for the mine. On January 5,In June 2018, the DNR released PolyMet’s draft permit to mine and opened a public comment period through March 6, 2018. Public hearings were held in February 2018 to review the draft permit to mine, as well as the MPCA’s recently released draft water quality permit, draft air quality permit and draft water quality certification. The final EIS also requires Records of Decision by the federal agencies, which are expected in 2018, before final action can be taken on the required federal permits to construct and operate the mining operation. On January 9, 2017, the U.S. Forest Service signed the Final Record of Decision authorizingand PolyMet closed on a land exchange, with PolyMet, which upon completion of title transfer will resultresulted in PolyMet obtaining surface rights to land needed to develop its mining operation. In November 2018, the DNR issued PolyMet’s permit to mine and certain water-related permits. In December 2018, the MPCA issued PolyMet’s final state water and air quality permits. On March 21, 2019, the U.S. Army Corps of Engineers issued PolyMet’s final federal permit. PolyMet was issued all necessary permits to construct and operate its new mining operation; however, on January 13, 2020, the Minnesota Court of Appeals reversed the DNR’s decisions granting PolyMet’s permit to mine and dam-safety permits, and remanded them back to the DNR to hold a contested-case hearing. Further, in March 2020, the Minnesota Court of Appeals remanded PolyMet’s air permit. PolyMet filed petitions for further review with the Minnesota Supreme Court seeking to overturn the Minnesota Court of Appeals decisions, which were accepted for review by the Minnesota Supreme Court with oral arguments held in October and November 2020. Minnesota Power could supply between 45 MW and 50 MW of load under a ten-year10-year power supply contract with PolyMet that would begin upon start-up of operations.
EnergyForward. Minnesota Power is executing EnergyForward, a strategic plan forits strategy assuring reliability, protecting affordability and further improving environmental performance. The plan includes completed and planned investments in wind, solar, natural gas and hydroelectric power, construction of additional transmission capacity, the installation of emissions control technology and the idling and retirement of certain coal-fired generating facilities. Minnesota Power has a vision to deliver 100 percent carbon-free energy to customers by 2050, continuing its commitment to climate, customers and communities through its EnergyForward strategy. This vision builds on Minnesota Power’s recent achievement of now providing 50 percent renewable energy to its customers.
2021 Integrated Resource Plan. On July 28,February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply to 70 percent by 2030, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. Minnesota Power has also set a target to achieve an 80 percent reduction in carbon emissions by 2035 compared to 2005 levels. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in late 2021.
In recent years, Minnesota Power has transformed its energy supply from more than a 95 percent reliance on coal to become a leader in the nation’s clean-energy transformation. Since 2013, the company has closed or converted seven of its nine coal-fired units and added nearly 900 megawatts of renewable energy sources. Additionally, Minnesota Power has been a leader in energy conservation, surpassing the state’s conservation goals each year for the past decade.
ALLETE, Inc. 2020 Form 10-K
44
Outlook (Continued)
EnergyForward (Continued)
Nemadji Trail Energy Center.In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of PPAs for the output of a 250 MW wind energy facility and a 10 MW solar energy facility as well as approval of a 250 MW natural gas energy PPA. Thesecapacity dedication and other affiliated-interest agreements will be subject to MPUC approval of the construction offor NTEC, a proposed 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. In ana January 2019 order, dated September 19, 2017, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication and other affiliated-interest agreements. In December 2019, the Minnesota Court of Appeals reversed and remanded the MPUC’s decision to approve certain affiliated-interest agreements. The MPUC was ordered to determine whether NTEC may have the potential for significant environmental effects and, if so, to prepare an environmental assessment before reassessing the agreements. On January 22, 2020, Minnesota Power filed a petition for further review with the Minnesota Supreme Court requesting that approvalit review and overturn the Minnesota Court of Appeals decision, which petition was accepted for review by the Minnesota Supreme Court with oral arguments held on October 6, 2020. There is no deadline for the natural gas energy PPAMinnesota Supreme Court to issue a ruling. In January 2019, an application for a certificate of public convenience and necessity for NTEC was submitted to the PSCW, which was approved by the PSCW at a hearing on January 16, 2020. Construction of NTEC is subject to obtaining additional permits from local, state and federal authorities. The total project cost is estimated to be decided through an administrative law judge process. The administrative law judgeapproximately $700 million, of which ALLETE’s portion is expected to provide a recommendation by July 2018, and the Company anticipates a MPUC decision in the second halfbe approximately $350 million. ALLETE’s portion of 2018. The MPUC did not take any action regarding the wind and solar energy PPAs which will be refiled separately from the natural gas energy PPA.NTEC project costs incurred through December 31, 2020, is approximately $15 million.
Renewable Energy. Minnesota Power’s 2015 IRP includes an update on its plans and progress in meeting the Minnesota renewable energy milestones through 2025. Minnesota Power continues to execute its renewable energy strategy through renewable projects that will ensure it meets the identified state mandate at the lowest cost for customers. Minnesota Power has exceeded the interim milestone requirements to date and expects 28approximately 50 percent of its applicable retail and municipal energy sales will be supplied by renewable energy sources in 2018. (See Item 1. Business – Regulated Operations –2021. Minnesota Legislation and EnergyForward.)
Wind Energy. Minnesota Power’s wind energy facilities consist of Bison (497 MW) located in North Dakota, and Taconite Ridge (25 MW) located in northeastern Minnesota. Minnesota Power also has two long-term wind energy PPAs with an affiliate of NextEra Energy, Inc. to purchase the output from Oliver Wind I (50 MW) and Oliver Wind II (48 MW) located in North Dakota.
Minnesota Power uses the 465-mile, 250-kV DC transmission line that runs from Center, North Dakota, to Duluth, Minnesota, to transport increasing amounts of wind energy from North Dakota while gradually phasing out coal-based electricity delivered to its system over this transmission line from Square Butte’s lignite coal-fired generating unit. TheMinnesota Power is currently pursuing a modernization and capacity upgrade of its DC transmission line capacity can be increased if renewable energy or transmission needs justify investmentssystem to upgrade the line.continue providing reliable operations and additional system capabilities.
Manitoba Hydro. Minnesota Power has fivethree long-term PPAs with Manitoba Hydro. The first PPA expires in May 2020. Under this agreement, Minnesota Power is purchasing 50 MW of capacity and the energy associated with that capacity. Both the capacity price and the energy price are adjusted annually by the change in a governmental inflationary index. Under the secondfirst PPA, Minnesota Power is purchasing surplus energy through April 2022. This energy-only agreement primarily consists of surplus hydro energy on Manitoba Hydro’s system that is delivered to Minnesota Power on a non-firm basis. The pricing is based on forward market prices. Under this agreement, Minnesota Power will purchase at least one million MWh of energy over the contract term.
The thirdsecond PPA provides for Minnesota Power to purchase 250 MW of capacity and energy from Manitoba Hydro for 15 years beginning in 2020.through May 2035. The agreement is subject to construction of additional transmission capacity between Manitoba and the U.S., along with construction of new hydroelectric generating capacity in Manitoba. (See Item 1. Business – Regulated Operations – Transmission and Distribution – Great Northern Transmission Line.) The capacity price is adjusted annually until 2020 by the change in a governmental inflationary index. The energy price is based on a formula that includes an annual fixed price component adjusted for the change in a governmental inflationary index and a natural gas index, as well as market prices.
Solar Energy. Minnesota Power’s solar energy supply consists of Camp Ripley, a 10 MW solar energy facility at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, and a community solar garden in 2020. The pricing under this PPAnortheastern Minnesota, which is based on forward market prices. The PPA is subject tocomprised of a 1 MW solar array owned and operated by a third party with the construction of the GNTL. (See Item 1. Business – Regulated Operations – Transmission and Distribution – Great Northern Transmission Line.)
ALLETE, Inc. 2020 Form 10-K
45
Outlook (Continued)
EnergyForward (Continued)
On June 17, 2020, Minnesota Power filed a proposal with the MPUC to accelerate its plans for solar energy with an estimated $40 million investment in approximately 20 MW of capacity from Manitoba Hydro at fixed prices. The PPA begansolar energy projects in Minnesota. (See Note 4. Regulatory Matters.)
Minnesota Power has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard. On June 201730, 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs related to investments and expires in May 2020.expenditures for meeting the state of Minnesota’s solar energy standard.
Transmission. We continue to make investments in transmission opportunities that strengthen or enhance the transmission grid or take advantage of our geographical location between sources of renewable energy and end users. These include the GNTL, investments to enhance our own transmission facilities, investments in other transmission assets (individually or in combination with others), and our investment in ATC. See also Item 1. Business – Regulated Operations.Operations and Note 8. Commitments, Guarantees and Contingencies.
ALLETE Clean Energy.
ALLETE Clean Energy will pursue growth through acquisitions or project development for others.development. ALLETE Clean Energy is targeting acquisitions of existing facilities up to 200 MW each,operating portfolios which have a mix of long-term PSAs in place and/or available for repowering and recontracting. Further, ALLETE Clean Energy will evaluate actions that will lead to the facilities’ output.addition of complimentary clean energy products and services. At this time, ALLETE Clean Energy expects acquisitions or development of new facilities will be primarily wind, solar, energy storage or solarstorage ready facilities inacross North America. ALLETE Clean Energy is also targeting the development of new facilities up to 200300 MW each, which will have long-term PSAs in place for the output or may be sold upon completion.
Federal production tax credit qualification is important to developmentthe economics of project economics,development, and ALLETE Clean Energy has invested in equipment in late 2016 and late 2017 to meet production tax credit safe harbor provisions which provides an opportunity to seek development of up to approximately 1,500 MW ofits remaining safe harbor production tax credit qualified wind projectsequipment through 2021.2024. ALLETE Clean Energy will also investhas invested approximately $80 million through 2020 to requalify up to 385for production tax credit requalification of approximately 470 WTGs at its Storm Lake I, Storm Lake II, and Lake Benton and Condon wind energy facilities for production tax credits.facilities. We anticipate annual production tax credits relating to these projects of approximately $5 million in 2018, $10 million in 2019, $15$17 million to $20$22 million annually in 2020 through 2027 and decreasing thereafter through 2030. Disruptions in our supply chains or a lack of available financing resulting from the ongoing COVID-19 pandemic, if they occur, could jeopardize our ability to complete certain capital projects in time to qualify them for production tax credits. To date we have not experienced disruptions in our supply chains related to the COVID-19 pandemic. (See Item 1A. Risk Factors.)
In May 2019, ALLETE Clean Energy acquired the Diamond Spring wind project in Oklahoma from Apex Clean Energy. ALLETE Clean Energy owns and operates the approximately 300 MW wind energy facility. The Diamond Spring wind energy facility is fully contracted to sell wind power under long-term power sales agreements; construction was completed and saletax equity funding of $230.7 million in cash, net of issuance costs, was received in the fourth quarter of 2020.
On March 10, 2020, ALLETE Clean Energy acquired the rights to the approximately 300 MW Caddo wind development project in Oklahoma from Apex Clean Energy. The Caddo wind project is fully contracted to sell wind power under long-term power sales agreements. Construction is expected to be completed in December 2018. Revenue is expected to be recognized upon completion; if the wind energy facility is not completed and sold in 2018, revenue and related margins would be recognized in 2019.late 2021.
On February 4, 2021, ALLETE Clean Energy constructedentered into a purchase and soldsale agreement with a 107subsidiary of Xcel Energy Inc. to sell a 120 MW wind energy facility to Montana-Dakota Utilities in 2015. On March 16, 2017,for approximately $210 million. ALLETE Clean Energy announced it will build, ownrepower and operate a separateexpand its Northern Wind project, consisting of its 100 MW Chanarambie and Viking wind energy facility pursuant to a 20-year PSA with Northern States Power; constructionfacilities located in southwest Minnesota, as part of the transaction. Construction is expected to begin in late 2018.2021, and the Northern Wind project is expected to continue operating until early 2022. The sale is expected to close in late 2022, subject to regulatory approval by the MPUC and receipt of permits.
ALLETE, Inc. 2020 Form 10-K
46
Outlook (Continued)
ALLETE Clean Energy (Continued)
ALLETE Clean Energy manages risk by having a diverse portfolio of assets, which includes PSA expiration, technology and geographic diversity. The current operating portfolio of approximately 535 MW is subject to typical variations in seasonal wind with higher wind resources typically available in the winter months. The majority of its planned maintenance leverages this seasonality and is performed during lower wind periods. TheALLETE Clean Energy’s current mix of PSA expiration and geographic location for existing facilitiesoperating portfolio is as follows:
| Region | Wind Energy Facility | Capacity MW | PSA MW | PSA Expiration | ||||||||||
| East | Armenia Mountain | 101 | 100% | 2024 | ||||||||||
| Midwest | Chanarambie/Viking | 98 | ||||||||||||
PSA 1 (a) | 12% | 2023 | ||||||||||||
| PSA 2 | 88% | 2023 | ||||||||||||
| Lake Benton | 104 | 100% | 2028 | |||||||||||
| Storm Lake I | 108 | 100% | 2027 | |||||||||||
| Storm Lake II | 77 | |||||||||||||
| PSA 1 | 90% | 2022 | ||||||||||||
| PSA 2 | 10% | 2032 | ||||||||||||
| Other | 17 | 100% | 2028 | |||||||||||
| South | Diamond Spring | 303 | ||||||||||||
| PSA 1 | 58% | 2035 | ||||||||||||
| PSA 2 | 25% | 2032 | ||||||||||||
| PSA 3 | 16% | 2035 | ||||||||||||
| West | Condon | 50 | 100% | 2022 | ||||||||||
| Glen Ullin | 106 | 100% | 2039 | |||||||||||
| South Peak | 80 | 100% | 2035 | |||||||||||
| Wind Energy Facility | Location | Capacity MW | PSA MW | PSA Expiration |
| Armenia Mountain | Pennsylvania | 100.5 | 100% | 2024 |
| Chanarambie/Viking | Minnesota | 97.5 | ||
| PSA 1 | 12% | 2018 | ||
| PSA 2 | 88% | 2023 | ||
| Condon | Oregon | 50 | 100% | 2022 |
| Lake Benton | Minnesota | 104 | 100% | 2028 |
| Storm Lake I | Iowa | 108 | 100% | 2019 |
| Storm Lake II | Iowa | 77 | ||
| PSA 1 | 90% | 2019 | ||
| PSA 2 | 10% | 2032 | ||
Corporate and Other.
BNI Energy.In 2017,2020, BNI Energy sold a record 4.74.2 million tons of coal (3.8(4.1 million tons in 2016)2019) and anticipates 20182021 sales will be lower than 2017 primarily duesimilar to an expected outage for one of its customers.2020. BNI Energy operates under cost-plus fixed fee agreements extending through December 31, 2037.
Investment in Nobles 2.Our subsidiary, ALLETE South Wind, owns a 49 percent equity interest in Nobles 2, the entity that owns and operates the 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. Construction of the wind energy facility was completed and tax equity funding of $116.3 million, net of issuance costs, was received in the fourth quarter of 2020. We account for our investment in Nobles 2 under the equity method of accounting. (See Note 5. Equity Investments.)
ALLETE Properties.Our strategy incorporates the possibility of a bulk sale of the entire ALLETE Properties representsportfolio. Proceeds from a bulk sale would be strategically deployed to support growth initiatives at our legacy Florida real estate investment.Regulated Operations and ALLETE Clean Energy. ALLETE Properties also continues to pursue sales of individual parcels over time and will continue to maintain key entitlements and infrastructure. Market conditions can impact land sales and could result in our inability to cover our cost basis and operating expenses orincluding fixed carrying costs such as community development district assessments and property taxes.
ALLETE, Properties’ major projects in Florida are Town Center at Palm Coast and Palm Coast Park, with approximately 2,000 acres combined of land available for sale. (See Item 1. Business – Corporate and Other – ALLETE Properties.) In addition to these two projects, ALLETE Properties has approximately 800 acres of other land available for sale.Inc. 2020 Form 10-K
47
Outlook (Continued)
Income Taxes
ALLETE’s aggregate federal and multi-state statutory tax rate is approximately 4128 percent for 2017. On an ongoing basis, ALLETE’s statutory tax rate will be reduced to approximately 28 percent as a result of the federal income tax rate change of the TCJA.2020. ALLETE also has tax credits and other tax adjustments that reduce the combined statutory rate to the effective tax rate. These tax credits and adjustments historically have included items such as investment tax credits, production tax credits, AFUDC‑Equity, depletion, as well as other items. The annual effective rate can also be impacted by such items as changes in income before income taxes, state and federal tax law changes that become effective during the year, business combinations, tax planning initiatives and resolution of prior years’ tax matters. We expect our effective tax rate to be a benefit of approximately negative 1035 percent to 40 percent for 20182021 primarily due to a lower statutory tax rate resulting from the TCJA, and federal production tax credits as a result of wind energy generation. We also expect that our effective tax rate will be lower than the combined statutory rate over the next 1210 years due to production tax credits attributable to our wind energy generation.
Liquidity and Capital Resources
Liquidity Position. ALLETE is well-positioned to meet its liquidity needs. needs; however, the Company is monitoring capital markets and other financing sources in light of the ongoing COVID-19 pandemic. (See Item 1A. Risk Factors.) A disruption in capital markets could lead to increased borrowing costs or adversely impact our ability to access capital markets or other financing sources. If we are not able to access capital on acceptable terms in sufficient amounts and when needed, or at all, the ability to maintain our businesses or to implement our business plans would be adversely affected.
As of December 31, 2017,2020, we had cash and cash equivalents of $98.9$44.3 million, $395.1$384.7 million in available consolidated lines of credit, 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets and a debt-to-capital ratio of 4239 percent.
In 2020, ALLETE received $414.5 million in cash, net of issuance costs, from third-party investors as part of tax equity financing for ALLETE Clean Energy’s South Peak and Diamond Spring wind energy facilities as well as for our investment in Nobles 2. In addition, ALLETE issued $140 million of the Company's first mortgage bonds in August 2020, sold $150 million of senior unsecured notes in September 2020 and ALLETE Clean Energy borrowed $65 million under a term loan agreement.
Capital Structure. ALLETE’s capital structure for each of the last three years is as follows:
| As of December 31 | 2020 | % | 2019 | % | 2018 | % | ||||||||||||||
| Millions | ||||||||||||||||||||
| ALLETE Equity | $2,294.6 | 50 | $2,231.9 | 56 | $2,155.8 | 59 | ||||||||||||||
| Non-Controlling Interest in Subsidiaries | 505.6 | 11 | 103.7 | 3 | — | — | ||||||||||||||
Short-Term and Long-Term Debt (a) | 1,806.4 | 39 | 1,622.6 | 41 | 1,495.2 | 41 | ||||||||||||||
| $4,606.6 | 100 | $3,958.2 | 100 | $3,651.0 | 100 | |||||||||||||||
(a) Excludes unamortized debt issuance costs.
| As of December 31 | 2017 | % | 2016 | % | 2015 | % | ||||||
| Millions | ||||||||||||
| ALLETE Equity | $2,068.2 | 58 | $1,893.0 | 55 | $1,820.2 | 53 | ||||||
| Non-Controlling Interest | — | — | — | — | 2.2 | — | ||||||
| Long-Term Debt (Including Current Maturities) | 1,513.3 | 42 | 1,569.1 | 45 | 1,605.0 | 47 | ||||||
| Notes Payable | — | — | — | — | 1.6 | — | ||||||
| $3,581.5 | 100 | $3,462.1 | 100 | $3,429.0 | 100 | |||||||
Cash Flows. Selected information from ALLETE’s Consolidated Statement of Cash Flows is as follows:
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period | $92.5 | $79.0 | $110.1 | ||||||||
| Cash Flows from (used for) | |||||||||||
| Operating Activities | 299.8 | 246.9 | 431.3 | ||||||||
| Investing Activities | (812.8) | (342.7) | (347.2) | ||||||||
| Financing Activities | 485.7 | 109.3 | (115.2) | ||||||||
| Change in Cash, Cash Equivalents and Restricted Cash | (27.3) | 13.5 | (31.1) | ||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Period | $65.2 | $92.5 | $79.0 | ||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Cash and Cash Equivalents at Beginning of Period | $27.5 | $97.0 | $145.8 | ||||||
| Cash Flows from (used for) | |||||||||
| Operating Activities | 402.9 | 332.0 | 340.1 | ||||||
| Investing Activities | (229.0 | ) | (276.2 | ) | (618.8 | ) | |||
| Financing Activities | (102.5 | ) | (125.3 | ) | 229.9 | ||||
| Change in Cash and Cash Equivalents | 71.4 | (69.5 | ) | (48.8 | ) | ||||
| Cash and Cash Equivalents at End of Period | $98.9 | $27.5 | $97.0 | ||||||
Operating Activities. Cash from operating activities was higher in 20172020 compared to 2016 primarily2019. Cash from operating activities in 2019 included the refund of Minnesota Power’s provisions for interim rates and tax reform, and the impact of U.S. Water Services prior to its sale. Cash from operating activities in 2020 included lower collections of accounts receivable due to a payment of $31.0 million made in 2016 as part of a long-term PSA between Minnesota Powertiming.
ALLETE, Inc. 2020 Form 10-K
48
Liquidity and Silver Bay Power, as well as higher recoveries of our cost recovery riders, net income and non-cash items in 2017, partially offset by an increase in customer receivables and higher payments on accounts payable in 2017.Capital Resources (Continued)
Cash Flows (Continued)
Cash from operating activities was lower in 20162019 compared to 20152018 primarily due to a paymentthe refund of $31.0 million made as part of a long-term PSA between Minnesota PowerPower’s provisions for tax reform and Silver Bay Power, cash contributionsinterim rates to our defined benefit pension plancustomers, fewer customer deposits received and non-cash items,lower recoveries from customers under cost recovery riders in 2019. These decreases were partially offset by higher net income, lower fuel inventory and increased recoveries through our cost recovery riders.the timing of collections of accounts receivable.
Investing Activities. Cash used for investing activities was lowerhigher in 20172020 compared to 2016 primarily due2019. Cash used for investing activities in 2020 included higher additions to lowerproperty, plant and equipment and additional payments for capital expendituresequity method investments compared to 2019. Cash used for investing activities in 2017, partially offset by2019 included proceeds received from the acquisitionsale of TonkaU.S. Water and additional investments in ATC in 2017.Services.
Cash used for investing activities in 2019 was lower in 2016 comparedsimilar to 2015 primarily due to a decrease in cash used for2018 reflecting proceeds received from the acquisitionssale of subsidiaries, as well as fewer capital expenditures in 2016. In 2015, we acquired U.S. Water Services, mostly offset by higher additions to property, plant and ALLETE Clean Energy acquired the Chanarambie/Viking and Armenia Mountain wind energy facilities. (See Note 6. Acquisitions.)equipment.
Financing Activities. Cash used forfrom financing activities was lowerhigher in 20172020 compared to 2019 primarily due to higher proceeds received from the issuance of common stock of $86.0 million compared to $30.9 millionlong-term debt and proceeds from a tax equity financing (non-controlling interest in 2016,subsidiaries) in 2020. These increases were partially offset by higher contingent consideration payments in 2017 and repayments of long-term debt of $189.6 million in 2017, net of long-term debt issuances of $131.5 million in 2017. Additionally, in 2016 the Company paid $8.0 million to acquire the non-controlling interest of the limited liability company that owns the Condon wind energy facility. (See Securities and Note 6. Acquisitions.)2020.
Cash used forfrom financing activities decreasedwas higher in 20162019 compared to 2015 primarily2018primarily due to lowerhigher proceeds from the issuance of long‑termlong-term debt and proceeds from a tax equity financing (non-controlling interest in subsidiaries), partially offset by higher dividends on common stock.
Working Capital. Additional working capital, if and when needed, generally is provided by consolidated bank lines of credit and the issuance of securities, including long-term debt, common stock and commercial paper. As of December 31, 2017,2020, we had consolidated bank lines of credit aggregating $407.0 million ($409.0407.0 million as of December 31, 2016)2019), the majoritymost of which expire in October 2020.January 2024. We had $11.9$22.3 million outstanding in standby letters of credit and no outstanding draws under our lines of credit as of December 31, 20172020 ($11.162.0 million in standby letters of credit and no outstanding draws as of December 31, 2016)2019). We also have other credit facility agreements in place that provide the ability to issue up to $100.0 million in standby letters of credit. As of December 31, 2020, we had $82.9 million outstanding in standby letters of credit under these agreements.
In addition, as of December 31, 2017,2020, we had 3.23.4 million original issue shares of our common stock available for issuance through Invest Direct and 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets, Inc.Markets. (See Securities.) The amount and timing of future sales of our securities will depend upon market conditions and our specific needs.
Securities. We entered into a distribution agreement with Lampert Capital Markets, Inc., in 2008, as amended most recently in August 2016,2020, with respect to the issuance and sale of up to an aggregate of 13.6 million shares of our common stock, without par value, of which 2.9 million shares remain available for issuance as of December 31, 2017.2020. For the year ended December 31, 2017, 1.0 million2020, no shares of common stock were issued under this agreement resulting(none in net proceeds of $65.7 million (0.1 million shares for net proceeds of $8.0 million in 2016; 1.3 million shares for net proceeds of $69.9 million in 2015)2019 and 2018). The shares issued in 2017 and 2016 were offered and sold pursuant toIn July 2019, we filed Registration Statement No. 333-212794,333-232905, pursuant to which the remaining shares will continue to be offered for sale, from time to time. The shares issued in 2015 were offered and sold pursuant to Registration Statement No. 333-190335.
During the year ended December 31, 2017,2020, we issued 0.30.4 million shares of common stock through Invest Direct, the Employee Stock Purchase Plan and the Retirement Savings and Stock Ownership Plan, resulting in net proceeds of $20.3$18.1 million (0.4(0.2 million shares for net proceeds of $22.9$1.9 million in 2016;2019; 0.4 million shares for net proceeds of $25.9$20.3 million in 2015)2018). These shares of common stock were registered under Registration Statement Nos. 333-211075, 333-188315,333-231030, 333-183051 and 333-162890. See Note 9. Common Stock and Earnings Per Share for additional detail regarding ALLETE’s equity securities.
Financial Covenants. See Note 10.7. Short-Term and Long-Term Debt for information regarding our financial covenants.
Pension and Other Postretirement Benefit Plans. Management considers various factors when making funding decisions, such as regulatory requirements, actuarially determined minimum contribution requirements and contributions required to avoid benefit restrictions for the defined benefit pension plans. For the year ended December 31, 2017,2020, we contributed $1.7$10.7 million in cash and 0.2 million shares of ALLETE common stock, which had an aggregate value of $13.5 million when contributed, to the defined benefit pension plans. These shares of ALLETE common stock were contributed in reliance upon an exemption available pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. On January 8, 2018,15, 2021, we contributed $15.0$10.3 million in cash to the defined benefit pension plans. We do not expect to make any additional contributions to our defined benefit pension plans in 2018,2021, and we do not expect to make any contributions to our other postretirement benefit plans in 2018.2021. (See Note 12.9. Common Stock and Earnings Per Share and Note 15.11. Pension and Other Postretirement Benefit Plans.)
ALLETE, Inc. 2020 Form 10-K
49
Liquidity and Capital Resources (Continued)
Off-Balance Sheet Arrangements. Off-balance sheet arrangements are discussed in Note 11.8. Commitments, Guarantees and Contingencies.
Contractual Obligations and Commercial Commitments. ALLETE has contractual obligations and other commitments that will need to be funded in the future, in addition to its capital expenditure programs. The following table summarizesMaterial contractual obligations and other commercial commitments are as of December 31, 2017:follows:
| Payments Due by Period | |||||||||||||||
| Less than | 1 to 3 | 4 to 5 | After | ||||||||||||
Contractual Obligations (a) | Total | 1 Year | Years | Years | 5 Years | ||||||||||
| Millions | |||||||||||||||
| Long-Term Debt | $2,255.4 | $126.1 | $313.6 | $284.8 | $1,530.9 | ||||||||||
Pension (b) | 458.0 | 46.3 | 92.1 | 91.6 | 228.0 | ||||||||||
Other Postretirement Benefit Plans (b) | 97.2 | 9.2 | 19.1 | 19.2 | 49.7 | ||||||||||
| Operating Lease Obligations | 79.9 | 14.2 | 22.3 | 13.4 | 30.0 | ||||||||||
PPA Obligations (c) | 2,283.1 | 104.5 | 222.1 | 289.5 | 1,667.0 | ||||||||||
| Other Purchase Obligations | 56.5 | 40.5 | 3.5 | 1.4 | 11.1 | ||||||||||
| Total Contractual Obligations | $5,230.1 | $340.8 | $672.7 | $699.9 | $3,516.7 | ||||||||||
Long-Term Debt. Our ALLETE has material long-term debt obligations, including long-term debt due within one year, representyear. These obligations include the principal amount of bonds, notes and loans which are recorded on the Consolidated Balance Sheet, plus interest. The table above assumes that the interest rates in effect at December 31, 2017, remain constant through the remaining term. (See Note 10.7. Short-Term and Long‑Term Debt.)
Pension and Other Postretirement Benefit Plans. Our pension Pension and other postretirement benefit plan obligations represent ourinclude the current estimate of future benefit payments through 2027.payments. Pension contributions will beare dependent on several factors including realized asset performance, future discount rate and other actuarial assumptions, Internal Revenue Service and other regulatory requirements, and contributions required to avoid benefit restrictions for the pension plans. Funding for the other postretirement benefit plans is impacted by realized asset performance, future discount rate and other actuarial assumptions, and utility regulatory requirements. These amountsOur obligations are estimates and will change based on actual market performance, changes in interest rates and any changes in governmental regulations. (See Note 15.11. Pension and Other Postretirement Benefit Plans.)
Operating Lease Obligations. ALLETE has certain operating lease obligations for the minimum payments required under various lease agreements which are recorded on the Consolidated Balance Sheet. (See Note 1. Operations and Significant Accounting Policies.)
Easement Obligations. ALLETE has easement obligations for the minimum payments required under our land easement agreements at our wind energy facilities. (See Note 8. Commitments, Guarantees and Contingencies.)
PPA Obligations. PPA obligations represent our Square Butte, Manitoba Hydro Minnkota Power and other PPA’s.PPAs. (See Note 11.8. Commitments, Guarantees and Contingencies.)
Other Purchase Obligations. Other ALLETE has other purchase obligations representscovering our minimum purchase commitments under coal supply and rail contracts, purchase obligations for certain capital expenditure projects, and long-term service agreements for wind energy facilities. (See Note 11.8. Commitments, Guarantees and Contingencies.)
Credit Ratings. Access to reasonably priced capital markets is dependent in part on credit and ratings. Our securities have been rated by Standard & Poor’sS&P and by Moody’s. Rating agencies use both quantitative and qualitative measures in determining a company’s credit rating. These measures include business risk, liquidity risk, competitive position, capital mix, financial condition, predictability of cash flows, management strength and future direction. Some of the quantitative measures can be analyzed through a few key financial ratios, while the qualitative ones are more subjective. Our current credit ratings are listed in the following table:
| Credit Ratings | Moody’s | |||||||
| Issuer Credit Rating | ||||||||
| Commercial Paper | A-2 | P-2 | ||||||
| First Mortgage Bonds | (a) | |||||||
(a) Not rated by S&P.
On April 22, 2020, S&P Global Ratings downgraded ALLETE’s long-term issuer credit rating to BBB stable from BBB+ outlook negative and affirmed its short-term rating at A-2. S&P Global Ratings noted the impacts of debt coverage ratios going forward along with the lack of a revenue decoupling mechanism at Minnesota Power combined with the large commercial and industrial presence in its service territory as its rationale for the downgrade.
The disclosure of these credit ratings is not a recommendation to buy, sell or hold our securities. Ratings are subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
ALLETE, to negative from stable, while affirming its issuerInc. 2020 Form 10-K
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Liquidity and commercial paper ratings on ALLETE. Standard & Poor’s cited the potential effect of the TCJA on the Company’s cash flows and Standard & Poor’s assessment of the Company’s regulatory risk following Minnesota Power’s recent general rate case as its rationale for issuing the negative outlook.Capital Resources (Continued)
Credit Ratings (Continued)
The Company believes it is well-positioned to meet its liquidity needs. As of December 31, 2017,2020, we had cash and cash equivalents of $98.9$44.3 million, $395.1$384.7 million in available consolidated lines of credit and a debt-to-equitydebt-to-capital ratio of 4239 percent. Our cash from operating activities for the year ended December 31, 20172020 was $402.9$299.8 million. In addition, as of December 31, 2017,2020, we had 3.23.4 million original issue shares of our common stock available for issuance through Invest Direct and 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets, Inc.Markets.
Common Stock Dividends. ALLETE is committed to providing a competitive dividend to its shareholders while at the same time funding its growth. The Company’sALLETE’s long-term objective is to maintain a dividend payout ratio similar to our peers and provide for future dividend increases. Our targeted payout range is between 60 percent and 6570 percent. In 2017,2020, we paid out 6374 percent (66(65 percent in 2016; 692019; 66 percent in 2015)2018) of our per share earnings in dividends. On January 23, 2018,February 4, 2021, our Board of Directors declared a dividend of $0.56$0.63 per share, which is payable on March 1, 2018,2021, to shareholders of record at the close of business on February 15, 2018.16, 2021.
Capital Requirements
ALLETE’s projected capital expenditures for the years 20182021 through 20222025 are presented in the following table. Actual capital expenditures may vary from the estimatesprojections due to changes in forecasted plant maintenance, regulatory decisions or approvals, future environmental requirements, base load growth, capital market conditions or executions of new business strategies.
| Capital Expenditures | 2021 | 2022 | 2023 | 2024 | 2025 | Total | |||||||||||||||||
| Millions | |||||||||||||||||||||||
| Regulated Operations | |||||||||||||||||||||||
| Base and Other | $160 | $120 | $160 | $220 | $205 | $865 | |||||||||||||||||
Nemadji Trail Energy Center (a) | 15 | 50 | 150 | 115 | 15 | 345 | |||||||||||||||||
| Regulated Operations Capital Expenditures | 175 | 170 | 310 | 335 | 220 | 1,210 | |||||||||||||||||
ALLETE Clean Energy (b) | 255 | 5 | 10 | 10 | 10 | 290 | |||||||||||||||||
| Corporate and Other | 60 | 20 | 15 | 15 | 10 | 120 | |||||||||||||||||
| Total Capital Expenditures | $490 | $195 | $335 | $360 | $240 | $1,620 | |||||||||||||||||
(a)Our portion of estimated capital expenditures for construction of NTEC, a proposed 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE.
(b)Capital Requirements (Continued)expenditures in 2021 include construction of a 300 MW wind energy facility by ALLETE Clean Energy. These capital expenditures do not include the cost of safe harbor equipment purchased previously. (See Outlook – ALLETE Clean Energy.)
| Capital Expenditures | 2018 | 2019 | 2020 | 2021 | 2022 | Total | |||||||||||||
| Millions | |||||||||||||||||||
| Regulated Operations | |||||||||||||||||||
| Base and Other | $130 | $190 | $130 | $170 | $170 | $790 | |||||||||||||
Transmission Cost Recovery (a) | 110 | 85 | 50 | — | — | 245 | |||||||||||||
| Regulated Operations Capital Expenditures | 240 | 275 | 180 | 170 | 170 | 1,035 | |||||||||||||
| ALLETE Clean Energy | 65 | 65 | 25 | 5 | 5 | 165 | |||||||||||||
| U.S. Water Services | 5 | 5 | 5 | 10 | 10 | 35 | |||||||||||||
Corporate and Other (b) | 15 | 15 | 35 | 60 | 170 | 295 | |||||||||||||
| Total Capital Expenditures | $325 | $360 | $245 | $245 | $355 | $1,530 | |||||||||||||
We are well positioned to meet our financing needs due to adequate operating cash flows, available additional working capital and access to capital markets. We will finance capital expenditures from a combination of internally generated funds, debt and equity issuance proceeds. We intend to maintain a capital structure with capital ratios near current levels. (See Capital Structure.)
Environmental and Other Matters
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have recently been promulgated by both the EPA and state authorities.authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation. (See Note 11.8. Commitments, Guarantees and Contingencies.)
Market Risk
Securities Investments.
Available-for-Sale Securities. As of December 31, 2017,2020, our available-for-sale securities portfolio consisted primarily of securities held in other postretirement plans to fund employee benefits. (See Note 8. Investments.)
INTEREST RATE RISK
We are exposed to risks resulting from changes in interest rates as a result of our issuance of variable rate debt. We manage our interest rate risk by varying the issuance and maturity dates of our fixed rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. We may also enter into derivative financial instruments, such as interest rate swaps, to mitigate interest rate exposure. The following table presents the long-term debt obligations and the corresponding weighted average interest rate as of December 31, 2017:2020:
| Expected Maturity Date | ||||||||||||||||||||||||||
| Interest Rate Sensitive Financial Instruments | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | ||||||||||||||||||
| Long-Term Debt | ||||||||||||||||||||||||||
| Fixed Rate – Millions | $99.0 | $89.2 | $89.1 | $73.9 | $213.3 | $1,109.1 | $1,673.6 | $1,989.2 | ||||||||||||||||||
| Average Interest Rate – % | 3.9 | 3.7 | 5.9 | 3.9 | 3.4 | 4.2 | 4.1 | |||||||||||||||||||
| Variable Rate – Millions | $105.0 | — | — | — | $27.8 | — | $132.8 | $132.8 | ||||||||||||||||||
| Average Interest Rate – % | 1.5 | — | — | — | 0.1 | — | 1.2 | |||||||||||||||||||
| Expected Maturity Date | ||||||||||||||||||||||||
Interest Rate Sensitive Financial Instruments | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | Fair Value | ||||||||||||||||
| Long-Term Debt | ||||||||||||||||||||||||
| Fixed Rate – Millions | $63.4 | $56.2 | $89.0 | $97.8 | $88.0 | $1,034.5 | $1,428.9 | $1,543.2 | ||||||||||||||||
| Average Interest Rate – % | 2.8 | 7.6 | 4.2 | 3.8 | 3.7 | 4.4 | 4.4 | |||||||||||||||||
| Variable Rate – Millions | $1.2 | $1.4 | $54.0 | — | — | $27.8 | $84.4 | $84.4 | ||||||||||||||||
| Average Interest Rate – % | 5.4 | 5.4 | 2.1 | — | — | 0.7 | 1.8 | |||||||||||||||||
Interest rates on variable rate long-term debt are reset on a periodic basis reflecting prevailing market conditions. Based on the variable rate debt outstanding as of December 31, 2017,2020, an increase of 100 basis points in interest rates would impact the amount of pre-tax interest expense by $0.8$1.3 million. This amount was determined by considering the impact of a hypothetical 100 basis point increase to the average variable interest rate on the variable rate debt outstanding as of December 31, 2017.2020.
COMMODITY PRICE RISK
Our regulated utility operations incur costs for power and fuel (primarily coal and related transportation) in Minnesota, and power and natural gas purchased for resale in our regulated service territory in Wisconsin. Minnesota Power’s exposure to price risk for these commodities is significantly mitigated by the current ratemaking process and regulatory framework, which allows recovery of fuel costs in excess of those included in base rates or distribution of savings in fuel costs to ratepayers. SWL&P’s exposure to price risk for natural gas is significantly mitigated by the current ratemaking process and regulatory framework, which allows the commodity cost to be passed through to customers. We seek to prudently manage our customers’ exposure to price risk by entering into contracts of various durations and terms for the purchase of power and coal and related transportation costs (Minnesota Power) and natural gas (SWL&P).
POWER MARKETING
Minnesota Power’s power marketing activities consist of: (1) purchasing energy in the wholesale market to serve its regulated service territory when energy requirements exceed generation output; and (2) selling excess available energy and purchased power. From time to time, Minnesota Power may have excess energy that is temporarily not required by retail and municipal customers in our regulated service territory. Minnesota Power actively sells any excess energy to the wholesale market to optimize the value of its generating facilities.
We are exposed to credit risk primarily through our power marketing activities. We use credit policies to manage credit risk, which includes utilizing an established credit approval process and monitoring counterparty limits.
Recently Adopted Accounting Standards.Pronouncements.
New accounting standardspronouncements are discussed in Note 1. Operations and Significant Accounting Policies of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Market Risk for information related to quantitative and qualitative disclosure about market risk.
Item 8. Financial Statements and Supplementary Data
See our Consolidated Financial Statements as of December 31, 20172020 and 2016,2019, and for the years ended December 31, 2017, 20162020, 2019 and 2015,2018, and supplementary data, which are indexed in Item 15(a).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2017,2020, evaluations were performed, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, on the effectiveness of the design and operation of ALLETE’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act). Based upon those evaluations, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are effective to provide assurance that information required to be disclosed in ALLETE’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control – Integrated Framework (framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2017.2020.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2020, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Controls
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Not applicable.
ALLETE, Inc. 2020 Form 10-K
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Part III
Item 10. Directors, Executive Officers and Corporate Governance
Unless otherwise stated, the information required by this Item is incorporated by reference herein from our Proxy Statement for the 20182021 Annual Meeting of Shareholders (2018(2021 Proxy Statement) under the following headings:
•Directors. The information regarding directors will be included in the “Election of Directors” section;
•Audit Committee Financial Expert. The information regarding the Audit Committee financial expert will be included in the “Corporate Governance” section and the “Audit Committee Report” section;
•Audit Committee Members. The identity of the Audit Committee members will be included in the “Corporate Governance” section and the “Audit Committee Report” section;
•Executive Officers. The information regarding executive officers is included in Part I of this Form 10-K; and
•Section 16(a) Compliance. TheDelinquency. If applicable, information regarding Section 16(a) compliancedelinquencies will be included in the “Ownership of ALLETE Common Stock –a “Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” section.
Our 20182021 Proxy Statement will be filed with the SEC within 120 days after the end of our 20172020 fiscal year.
Code of Ethics. We have adopted a written Code of Ethics that applies to all of our employees, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer. A copy of our Code of Ethics is available on our website at www.allete.com and print copies are available without charge upon request to ALLETE, Inc., Attention: Secretary, 30 West Superior St., Duluth, Minnesota 55802. Any amendment to the Code of Ethics or any waiver of the Code of Ethics will be disclosed on our website at www.allete.com promptly following the date of such amendment or waiver.
Corporate Governance. The following documents are available on our website at www.allete.com and print copies are available upon request:
•Corporate Governance Guidelines;
•Audit Committee Charter;
•Executive Compensation Committee Charter; and
•Corporate Governance and Nominating Committee Charter.
Any amendment to these documents will be disclosed on our website at www.allete.com promptly following the date of such amendment.
Item 11. Executive Compensation
The information required forby this Item is incorporated by reference herein from the “Compensation Discussion and Analysis,” the “Compensation of Executive Officers,” the “Compensation Committee Report” and the “Director Compensation” sections in our 20182021 Proxy Statement.
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required forby this Item is incorporated by reference herein from the “Ownership of ALLETE Common Stock – Securities Owned by Certain Beneficial Owners” and the “Ownership of ALLETE Common Stock – Securities Owned by Directors and Management” sections in our 20182021 Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth the shares of ALLETE common stock available for issuance under the Company's equity compensation plans as of December 31, 2017:2020:
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants, and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants, and Rights (b) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (c) | ||||||||
| Equity Compensation Plans Approved by Security Holders | 122,431 | — | 820,161 | ||||||||
| Equity Compensation Plans Not Approved by Security Holders | — | — | — | ||||||||
| Total | 122,431 | — | 820,161 | ||||||||
(a) Includes the following as of December 31, 2020: (i) 51,909 securities representing the target number of performance share awards (including accrued dividends) granted under the executive long-term incentive compensation plan that were unvested; and (ii) 70,522 director deferred stock units (including accrued dividends) under the non-employee director compensation deferral plan. With respect to unvested performance share awards, the actual number of shares to be issued will vary from 0 percent to 200 percent of the target level depending upon the achievement of total shareholder return objectives established for such awards. For additional information about the performance shares, including payout calculations, see our 2021 Proxy Statement.
(b) Earned performance share awards are paid in shares of ALLETE common stock on a one-for-one basis. Accordingly, these awards do not have a weighted-average exercise price.
(c) Excludes the number of securities shown in the first column as to be issued upon exercise of outstanding options, warrants, and rights. The amount shown is comprised of: (i) 700,864 shares available for issuance under the executive long-term incentive compensation plan in the form of options, rights, restricted stock units, performance share awards, and other grants as approved by the Executive Compensation Committee of the Company’s Board of Directors; (ii) 27,186 shares available for issuance under the Non-Employee Director Stock Plan as payment for a portion of the annual retainer payable to non-employee Directors; and (iii) 92,111 shares available for issuance under the ALLETE and Affiliated Companies Employee Stock Purchase Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required forby this Item is incorporated by reference herein from the “Corporate Governance” section in our 20182021 Proxy Statement.
We have adopted a Related Person Transaction Policy which is available on our website at www.allete.com. Print copies are available without charge, upon request. Any amendment to this policy will be disclosed on our website at www.allete.com promptly following the date of such amendment.
Item 14. Principal Accounting Fees and Services
The information required forby this Item is incorporated by reference herein from the “Audit Committee Report” section in our 20182021 Proxy Statement.
Part IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | Certain Documents Filed as Part of this Form 10-K. | |||||||||||||
| (1) | Financial Statements | Page | ||||||||||||
| ALLETE | ||||||||||||||
| For the Years Ended December 31, | ||||||||||||||
| (2) | Financial Statement Schedules | |||||||||||||
| All other schedules have been omitted either because the information is not required to be reported by ALLETE or because the information is included in the Consolidated Financial Statements or the notes. | ||||||||||||||
| (3) | Exhibits including those incorporated by reference. | |||||||||||||
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| Exhibit Number | |||||||||||||||||
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| *4(a)1 | — | Mortgage and Deed of Trust, dated as of September 1, 1945, between Minnesota Power & Light Company (now ALLETE) and The Bank of New York Mellon (formerly Irving Trust Company) and Andres Serrano (successor to Richard H. West), Trustees (filed as Exhibit 7(c), File No. 2-5865). | |||||||||||||||
| *4(a)2 | — | Supplemental Indentures to ALLETE’s Mortgage and Deed of Trust: | |||||||||||||||
| Number | Dated as of | Reference File | Exhibit | ||||||||||||||
| First | March 1, 1949 | 2-7826 | 7(b) | ||||||||||||||
| Second | July 1, 1951 | 2-9036 | 7(c) | ||||||||||||||
| Third | March 1, 1957 | 2-13075 | 2(c) | ||||||||||||||
| Fourth | January 1, 1968 | 2-27794 | 2(c) | ||||||||||||||
| Fifth | April 1, 1971 | 2-39537 | 2(c) | ||||||||||||||
| Sixth | August 1, 1975 | 2-54116 | 2(c) | ||||||||||||||
| Seventh | September 1, 1976 | 2-57014 | 2(c) | ||||||||||||||
| Eighth | September 1, 1977 | 2-59690 | 2(c) | ||||||||||||||
| Ninth | April 1, 1978 | 2-60866 | 2(c) | ||||||||||||||
| Tenth | August 1, 1978 | 2-62852 | 2(d)2 | ||||||||||||||
| Eleventh | December 1, 1982 | 2-56649 | 4(a)3 | ||||||||||||||
| Twelfth | April 1, 1987 | 33-30224 | 4(a)3 | ||||||||||||||
| Thirteenth | March 1, 1992 | 33-47438 | 4(b) | ||||||||||||||
| Fourteenth | June 1, 1992 | 33-55240 | 4(b) | ||||||||||||||
| Fifteenth | July 1, 1992 | 33-55240 | 4(c) | ||||||||||||||
| Sixteenth | July 1, 1992 | 33-55240 | 4(d) | ||||||||||||||
| Seventeenth | February 1, 1993 | 33-50143 | 4(b) | ||||||||||||||
| Eighteenth | July 1, 1993 | 33-50143 | 4(c) | ||||||||||||||
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| Exhibit Number | |||||||||||||||||
| *4(b)1 | — | Mortgage and Deed of Trust, dated as of March 1, 1943, between Superior Water, Light and Power Company and Chemical Bank & Trust Company and Howard B. Smith, as Trustees, both succeeded by U.S. Bank National Association, as Trustee (filed as Exhibit 7(c), File No. 2-8668). | |||||||||||||||
| *4(b)2 | — | Supplemental Indentures to Superior Water, Light and Power Company’s Mortgage and Deed of Trust: | |||||||||||||||
| Number | Dated as of | Reference File | Exhibit | ||||||||||||||
| First | March 1, 1951 | 2-59690 | 2(d)(1) | ||||||||||||||
| Second | March 1, 1962 | 2-27794 | 2(d)1 | ||||||||||||||
| Third | July 1, 1976 | 2-57478 | 2(e)1 | ||||||||||||||
| Fourth | March 1, 1985 | 2-78641 | 4(b) | ||||||||||||||
| Fifth | December 1, 1992 | 1-3548 (1992 Form 10-K) | 4(b)1 | ||||||||||||||
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| — | ALLETE News Release dated February | ||||||||||||||||
| 101.INS | — | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||
| 101.SCH | — | XBRL Schema | |||||||||||||||
| 101.CAL | — | XBRL Calculation | |||||||||||||||
| 101.DEF | — | XBRL Definition | |||||||||||||||
| 101.LAB | — | XBRL Label | |||||||||||||||
| 101.PRE | — | XBRL Presentation | |||||||||||||||
| 104 | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||||||
ALLETE or its subsidiaries are obligors under various long-term debt instruments including, but not limited to, the following:
•$6,370,000 of City of Superior, Wisconsin, Collateralized Utility Revenue Refunding Bonds Series 2007A; and
•$6,130,000 of City of Superior, Wisconsin, Collateralized Utility Revenue Bonds Series 2007B.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, these and other long-term debt instruments are not filed as exhibits because the total amount of debt authorized under each of these omitted instrumentsinstrument does not exceed 10 percent of our total consolidated assets. We will furnish copies of these instruments to the SEC upon its request.
| * | Incorporated herein by reference as indicated. | ||||
| + | Management contract or compensatory plan or arrangement pursuant to Item 15(b). | ||||
Item 16. Form 10-K Summary
None.
ALLETE, Inc. 2020 Form 10-K
61
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ALLETE, Inc. | |||||||||||
| Dated: | February | By | |||||||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||||||||||
| /s/ Bethany M. Owen | President, Chief Executive Officer and Director | February 17, 2021 | ||||||||||||
| Bethany M. Owen | (Principal Executive Officer) | |||||||||||||
| /s/ Robert J. Adams | Senior Vice President and Chief Financial Officer | February 17, 2021 | ||||||||||||
| Robert J. Adams | (Principal Financial Officer) | |||||||||||||
| /s/ Steven W. Morris | Vice President, Controller and Chief Accounting Officer | February 17, 2021 | ||||||||||||
| Steven W. Morris | (Principal Accounting Officer) | |||||||||||||
ALLETE, Inc. 2020 Form 10-K
62
Signatures (Continued)
| Signature | Title | Date | ||||||||||||
| /s/ Kathryn W. Dindo | Director | February 17, 2021 | ||||||||||||
| Kathryn W. Dindo | ||||||||||||||
| /s/ George G. Goldfarb | Director | February 17, 2021 | ||||||||||||
| George G. Goldfarb | ||||||||||||||
| /s/ Alan R. Hodnik | Executive Chairman and Director | February 17, 2021 | ||||||||||||
| Alan R. Hodnik | ||||||||||||||
| James J. Hoolihan | ||||||||||||||
| February 17, 2021 | ||||||||||||||
| Heidi E. Jimmerson | ||||||||||||||
| /s/ Madeleine W. Ludlow | Director | February | ||||||||||||
| Madeleine W. Ludlow | ||||||||||||||
| /s/ Susan K. Nestegard | Director | February | ||||||||||||
| Susan K. Nestegard | ||||||||||||||
| /s/ Douglas C. Neve | Director | February | ||||||||||||
| Douglas C. Neve | ||||||||||||||
| /s/ Barbara A. Nick | Director | February 17, 2021 | ||||||||||||
| Barbara A. Nick | ||||||||||||||
| /s/ Robert P. Powers | Director | February | ||||||||||||
| Robert P. Powers | ||||||||||||||
ALLETE, Inc. 2020 Form 10-K
63
Report of Independent Registered Public Accounting Firm
To theBoard of Directors and Shareholders of ALLETE, Inc.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheetssheet of ALLETE, Inc. and its subsidiaries (the “Company”) as of December 31, 20172020 and 2016,2019, and the related consolidated statements of income, of comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31, 2017,2020, including the related notes and financial statement schedule of valuation and qualifying accounts and reserves for each of the three yearslisted in the period ended December 31, 2017index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20172020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in Internal Control - Integrated Framework(2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control overOver Financial Reporting.Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ALLETE, Inc. 2020 Form 10-K
64
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for the Effects of Regulatory Matters
As described in Note 4 to the consolidated financial statements, the Company’s regulated utility operations are subject to accounting standards for the effects of certain types of regulation. As of December 31, 2020, there was $481 million of regulatory assets and $532 million of regulatory liabilities recorded. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. Management assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. As disclosed by management, these standards require the Company to reflect the effect of regulatory decisions in its financial statements. This assessment considers factors such as, but not limited to, changes in the regulatory environment and recent rate orders to other regulated entities under the same jurisdiction. If future recovery or refund of costs becomes no longer probable, the assets and liabilities would be recognized in current period net income or other comprehensive income.
The principal consideration for our determination that performing procedures relating to the Company’s accounting for the effects of regulatory matters is a critical audit matter is the significant judgment by management in determining the recoverability of costs; this in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence obtained related to the recoverability of costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s implementation of new regulatory orders, changes to existing regulatory orders, and assessing the recoverability of costs. These procedures also included, among others, evaluating (i) the reasonableness of management’s assessment of impacts arising from correspondence with regulators and changes in laws and regulations, (ii) management’s judgments related to the recoverability of regulatory assets and the establishment of regulatory liabilities, and (iii) the sufficiency of the disclosures in the consolidated financial statements. Testing the regulatory assets and liabilities involved considering the provisions and formulas outlined in rate orders, other regulatory correspondence, and application of relevant regulatory precedents.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 15, 201817, 2021
We have served as the Company’s auditor since 1963.
ALLETE, Inc. 2020 Form 10-K
65
CONSOLIDATED FINANCIAL STATEMENTS
ALLETE Consolidated Balance Sheet
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and Cash Equivalents | $44.3 | $69.3 | ||||||
| Accounts Receivable (Less Allowance of $2.5 and $0.9) | 111.9 | 96.4 | ||||||
| Inventories – Net | 74.2 | 72.8 | ||||||
| Prepayments and Other | 24.5 | 31.0 | ||||||
| Total Current Assets | 254.9 | 269.5 | ||||||
| Property, Plant and Equipment – Net | 4,840.8 | 4,377.0 | ||||||
| Regulatory Assets | 480.9 | 420.5 | ||||||
| Equity Investments | 301.2 | 197.6 | ||||||
| Other Non-Current Assets | 206.8 | 218.2 | ||||||
| Total Assets | $6,084.6 | $5,482.8 | ||||||
| Liabilities and Equity | ||||||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $110.0 | $165.2 | ||||||
| Accrued Taxes | 59.4 | 50.8 | ||||||
| Accrued Interest | 19.8 | 18.1 | ||||||
| Long-Term Debt Due Within One Year | 203.7 | 212.9 | ||||||
| Other | 66.7 | 60.4 | ||||||
| Total Current Liabilities | 459.6 | 507.4 | ||||||
| Long-Term Debt | 1,593.2 | 1,400.9 | ||||||
| Deferred Income Taxes | 195.7 | 212.8 | ||||||
| Regulatory Liabilities | 524.8 | 560.3 | ||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | 225.8 | 172.8 | ||||||
| Other Non-Current Liabilities | 285.3 | 293.0 | ||||||
| Total Liabilities | 3,284.4 | 3,147.2 | ||||||
| Commitments, Guarantees and Contingencies (Note 8) | 0 | 0 | ||||||
| Equity | ||||||||
| ALLETE Equity | ||||||||
| Common Stock Without Par Value, 80.0 Shares Authorized, 52.1 and 51.7 Shares Issued and Outstanding | 1,460.9 | 1,436.7 | ||||||
| Accumulated Other Comprehensive Loss | (31.1) | (23.6) | ||||||
| Retained Earnings | 864.8 | 818.8 | ||||||
| Total ALLETE Equity | 2,294.6 | 2,231.9 | ||||||
| Non-Controlling Interest in Subsidiaries | 505.6 | 103.7 | ||||||
| Total Equity | 2,800.2 | 2,335.6 | ||||||
| Total Liabilities and Equity | $6,084.6 | $5,482.8 | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Assets | ||||||
| Current Assets | ||||||
| Cash and Cash Equivalents | $98.9 | $27.5 | ||||
| Accounts Receivable (Less Allowance of $2.1 and $3.1) | 135.1 | 122.5 | ||||
| Inventories – Net | 95.9 | 104.2 | ||||
| Prepayments and Other | 37.6 | 40.3 | ||||
| Total Current Assets | 367.5 | 294.5 | ||||
| Property, Plant and Equipment – Net | 3,822.4 | 3,741.2 | ||||
| Regulatory Assets | 384.7 | 330.1 | ||||
| Investment in ATC | 118.7 | 135.6 | ||||
| Other Investments | 53.1 | 55.6 | ||||
| Goodwill and Intangible Assets – Net | 225.9 | 213.4 | ||||
| Other Non-Current Assets | 107.7 | 106.5 | ||||
| Total Assets | $5,080.0 | $4,876.9 | ||||
| Liabilities and Shareholders’ Equity | ||||||
| Liabilities | ||||||
| Current Liabilities | ||||||
| Accounts Payable | $136.3 | $74.0 | ||||
| Accrued Taxes | 50.0 | 46.5 | ||||
| Accrued Interest | 17.6 | 17.6 | ||||
| Long-Term Debt Due Within One Year | 64.1 | 187.7 | ||||
| Other | 83.2 | 73.7 | ||||
| Total Current Liabilities | 351.2 | 399.5 | ||||
| Long-Term Debt | 1,439.2 | 1,370.4 | ||||
| Deferred Income Taxes | 230.5 | 554.6 | ||||
| Regulatory Liabilities | 532.0 | 125.8 | ||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | 191.8 | 210.9 | ||||
| Other Non-Current Liabilities | 267.1 | 322.7 | ||||
| Total Liabilities | 3,011.8 | 2,983.9 | ||||
| Commitments, Guarantees and Contingencies (Note 11) | ||||||
| Shareholders’ Equity | ||||||
| Common Stock Without Par Value, 80.0 Shares Authorized, 51.1 and 49.6 Shares Issued and Outstanding | 1,401.4 | 1,295.3 | ||||
| Accumulated Other Comprehensive Loss | (22.6 | ) | (28.2 | ) | ||
| Retained Earnings | 689.4 | 625.9 | ||||
| Total Shareholders’ Equity | 2,068.2 | 1,893.0 | ||||
| Total Liabilities and Shareholders’ Equity | $5,080.0 | $4,876.9 | ||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions Except Per Share Amounts | |||||||||
| Operating Revenue | |||||||||
| Utility | $1,063.8 | $1,000.7 | $991.2 | ||||||
| Non-utility | 355.5 | 339.0 | 495.2 | ||||||
| Total Operating Revenue | 1,419.3 | 1,339.7 | 1,486.4 | ||||||
| Operating Expenses | |||||||||
| Fuel, Purchased Power and Gas – Utility | 396.9 | 339.9 | 336.0 | ||||||
| Transmission Services – Utility | 71.2 | 65.2 | 54.1 | ||||||
| Cost of Sales – Non-utility | 147.8 | 137.7 | 294.4 | ||||||
| Operating and Maintenance | 339.9 | 334.1 | 333.5 | ||||||
| Depreciation and Amortization | 177.5 | 195.8 | 170.0 | ||||||
| Taxes Other than Income Taxes | 56.9 | 53.8 | 51.4 | ||||||
| Other | (0.7 | ) | (10.3 | ) | 36.3 | ||||
| Total Operating Expenses | 1,189.5 | 1,116.2 | 1,275.7 | ||||||
| Operating Income | 229.8 | 223.5 | 210.7 | ||||||
| Other Income (Expense) | |||||||||
| Interest Expense | (67.8 | ) | (70.3 | ) | (64.9 | ) | |||
| Equity Earnings in ATC | 22.5 | 18.5 | 16.3 | ||||||
| Other | 2.4 | 3.9 | 4.7 | ||||||
| Total Other Expense | (42.9 | ) | (47.9 | ) | (43.9 | ) | |||
| Income Before Non-Controlling Interest and Income Taxes | 186.9 | 175.6 | 166.8 | ||||||
| Income Tax Expense | 14.7 | 19.8 | 25.3 | ||||||
| Net Income | 172.2 | 155.8 | 141.5 | ||||||
| Less: Non-Controlling Interest in Subsidiaries | — | 0.5 | 0.4 | ||||||
| Net Income Attributable to ALLETE | $172.2 | $155.3 | $141.1 | ||||||
| Average Shares of Common Stock | |||||||||
| Basic | 50.8 | 49.3 | 48.3 | ||||||
| Diluted | 51.0 | 49.5 | 48.4 | ||||||
| Basic Earnings Per Share of Common Stock | $3.39 | $3.15 | $2.92 | ||||||
| Diluted Earnings Per Share of Common Stock | $3.38 | $3.14 | $2.92 | ||||||
| Dividends Per Share of Common Stock | $2.14 | $2.08 | $2.02 | ||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. 2020 Form 10-K
66
ALLETE Consolidated Statement of Comprehensive Income
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions Except Per Share Amounts | |||||||||||
| Operating Revenue | |||||||||||
| Contracts with Customers – Utility | $987.3 | $1,042.4 | $1,059.5 | ||||||||
| Contracts with Customers – Non-utility | 170.5 | 186.5 | 415.5 | ||||||||
| Other – Non-utility | 11.3 | 11.6 | 23.6 | ||||||||
| Total Operating Revenue | 1,169.1 | 1,240.5 | 1,498.6 | ||||||||
| Operating Expenses | |||||||||||
| Fuel, Purchased Power and Gas – Utility | 358.6 | 390.7 | 407.5 | ||||||||
| Transmission Services – Utility | 67.0 | 69.8 | 69.9 | ||||||||
| Cost of Sales – Non-utility | 66.7 | 80.6 | 218.0 | ||||||||
| Operating and Maintenance | 252.0 | 264.3 | 340.5 | ||||||||
| Depreciation and Amortization | 217.8 | 202.0 | 205.6 | ||||||||
| Taxes Other than Income Taxes | 56.1 | 53.3 | 57.9 | ||||||||
| Other | 0 | 0 | (2.0) | ||||||||
| Total Operating Expenses | 1,018.2 | 1,060.7 | 1,297.4 | ||||||||
| Operating Income | 150.9 | 179.8 | 201.2 | ||||||||
| Other Income (Expense) | |||||||||||
| Interest Expense | (65.6) | (64.9) | (67.9) | ||||||||
| Equity Earnings | 22.1 | 21.7 | 17.5 | ||||||||
| Gain on Sale of U.S. Water Services | 0 | 23.6 | 0 | ||||||||
| Other | 14.7 | 18.7 | 7.8 | ||||||||
| Total Other Expense | (28.8) | (0.9) | (42.6) | ||||||||
| Income Before Non-Controlling Interest and Income Taxes | 122.1 | 178.9 | 158.6 | ||||||||
| Income Tax Benefit | (39.5) | (6.6) | (15.5) | ||||||||
| Net Income | 161.6 | 185.5 | 174.1 | ||||||||
| Net Loss Attributable to Non-Controlling Interest | (12.6) | (0.1) | 0 | ||||||||
| Net Income Attributable to ALLETE | $174.2 | $185.6 | $174.1 | ||||||||
| Average Shares of Common Stock | |||||||||||
| Basic | 51.9 | 51.6 | 51.3 | ||||||||
| Diluted | 51.9 | 51.7 | 51.5 | ||||||||
| Basic Earnings Per Share of Common Stock | $3.36 | $3.59 | $3.39 | ||||||||
| Diluted Earnings Per Share of Common Stock | $3.35 | $3.59 | $3.38 | ||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Net Income | $172.2 | $155.8 | $141.5 | ||||||
| Other Comprehensive Income (Loss) | |||||||||
| Unrealized Gain (Loss) on Securities | |||||||||
| Net of Income Tax Expense (Benefit) of $0.7, $(0.2) and $(0.3) | 0.9 | (0.2 | ) | (0.5 | ) | ||||
| Unrealized Gain on Derivatives | |||||||||
| Net of Income Tax Expense of $–, $– and $0.1 | — | — | 0.1 | ||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | |||||||||
| Net of Income Tax Expense (Benefit) of $2.2, $(2.4) and $(2.2) | 4.7 | (3.5 | ) | (3.0 | ) | ||||
| Total Other Comprehensive Income (Loss) | 5.6 | (3.7 | ) | (3.4 | ) | ||||
| Total Comprehensive Income | 177.8 | 152.1 | 138.1 | ||||||
| Less: Non-Controlling Interest in Subsidiaries | — | 0.5 | 0.4 | ||||||
| Total Comprehensive Income Attributable to ALLETE | $177.8 | $151.6 | $137.7 | ||||||
The accompanying notes are an integral part of these statements.
ALLETE Consolidated Statement of Cash FlowsComprehensive Income
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Net Income | $161.6 | $185.5 | $174.1 | ||||||||
| Other Comprehensive Income (Loss) | |||||||||||
| Unrealized Gain (Loss) on Securities | |||||||||||
| Net of Income Tax Expense of $0.1, $0.1 and $– | 0.1 | 0.2 | (0.1) | ||||||||
| Defined Benefit Pension and Other Postretirement Benefit Plans | |||||||||||
| Net of Income Tax (Benefit) Expense of $(3.1), $1.4 and $0.3 | (7.6) | 3.5 | 1.0 | ||||||||
| Total Other Comprehensive Income (Loss) | (7.5) | 3.7 | 0.9 | ||||||||
| Total Comprehensive Income | 154.1 | 189.2 | 175.0 | ||||||||
| Net Loss Attributable to Non-Controlling Interest | (12.6) | (0.1) | 0 | ||||||||
| Total Comprehensive Income Attributable to ALLETE | $166.7 | $189.3 | $175.0 | ||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Operating Activities | |||||||||
| Net Income | $172.2 | $155.8 | $141.5 | ||||||
| AFUDC – Equity | (1.2 | ) | (2.1 | ) | (3.3 | ) | |||
| Income from Equity Investments – Net of Dividends | (3.2 | ) | (5.7 | ) | (1.8 | ) | |||
| Impairment of Real Estate | — | — | 36.3 | ||||||
| Impairment of Goodwill | — | 3.3 | — | ||||||
| Change in Fair Value of Contingent Consideration | (0.7 | ) | (13.6 | ) | — | ||||
| Deferred Fuel Adjustment Clause Charge | 19.5 | — | — | ||||||
| Loss (Gain) on Sales of Investments and Property, Plant and Equipment | 0.4 | (6.0 | ) | (0.2 | ) | ||||
| Depreciation Expense | 171.9 | 190.6 | 165.9 | ||||||
| Amortization of PSAs | (23.6 | ) | (22.3 | ) | (23.2 | ) | |||
| Amortization of Other Intangible Assets and Other Assets | 10.2 | 10.3 | 5.6 | ||||||
| Deferred Income Tax Expense | 14.4 | 19.4 | 25.1 | ||||||
| Share-Based and ESOP Compensation Expense | 6.6 | 5.1 | 11.6 | ||||||
| Defined Benefit Pension and Other Postretirement Benefit Expense | 10.1 | 4.6 | 15.4 | ||||||
| Bad Debt Expense | 0.8 | 4.1 | 1.6 | ||||||
| Provision for Interim Rate Refund | 32.3 | — | — | ||||||
| Changes in Operating Assets and Liabilities | |||||||||
| Accounts Receivable | (8.0 | ) | (4.7 | ) | 1.1 | ||||
| Inventories | 11.9 | 13.3 | (22.1 | ) | |||||
| Prepayments and Other | (5.3 | ) | (6.9 | ) | 3.7 | ||||
| Accounts Payable | (7.5 | ) | 6.5 | (19.3 | ) | ||||
| Other Current Liabilities | 1.8 | (13.8 | ) | 5.1 | |||||
| Cash Contributions to Defined Benefit Pension Plans | (1.7 | ) | (6.3 | ) | — | ||||
| Changes in Regulatory and Other Non-Current Assets | 33.7 | (10.7 | ) | 0.6 | |||||
| Changes in Regulatory and Other Non-Current Liabilities | (31.7 | ) | 11.1 | (3.5 | ) | ||||
| Cash from Operating Activities | 402.9 | 332.0 | 340.1 | ||||||
| Investing Activities | |||||||||
| Proceeds from Sale of Available-for-sale Securities | 10.1 | 9.0 | 1.7 | ||||||
| Payments for Purchase of Available-for-sale Securities | (8.6 | ) | (9.4 | ) | (2.3 | ) | |||
| Acquisitions of Subsidiaries – Net of Cash Acquired | (18.5 | ) | (5.9 | ) | (333.3 | ) | |||
| Investment in ATC | (7.8 | ) | (5.4 | ) | (1.6 | ) | |||
| Changes to Other Investments | 3.0 | 4.4 | 3.1 | ||||||
| Additions to Property, Plant and Equipment | (208.5 | ) | (265.6 | ) | (286.8 | ) | |||
| Proceeds from Sale of Property, Plant and Equipment | 1.3 | 0.7 | 0.4 | ||||||
| Changes in Restricted Cash | — | (4.0 | ) | — | |||||
| Cash for Investing Activities | (229.0 | ) | (276.2 | ) | (618.8 | ) | |||
| Financing Activities | |||||||||
| Proceeds from Issuance of Common Stock | 86.0 | 30.9 | 161.2 | ||||||
| Proceeds from Issuance of Long-Term Debt | 131.5 | 4.8 | 324.5 | ||||||
| Changes in Restricted Cash | (0.4 | ) | 7.0 | 8.5 | |||||
| Changes in Notes Payable | — | (1.6 | ) | (2.1 | ) | ||||
| Repayments of Long-Term Debt | (189.6 | ) | (54.8 | ) | (160.2 | ) | |||
| Acquisition of Non-Controlling Interest | — | (8.0 | ) | — | |||||
| Acquisition-Related Contingent Consideration Payments | (19.7 | ) | (0.9 | ) | — | ||||
| Dividends on Common Stock | (108.7 | ) | (102.7 | ) | (97.9 | ) | |||
| Other Financing Activities | (1.6 | ) | — | (4.1 | ) | ||||
| Cash from (for) Financing Activities | (102.5 | ) | (125.3 | ) | 229.9 | ||||
| Change in Cash and Cash Equivalents | 71.4 | (69.5 | ) | (48.8 | ) | ||||
| Cash and Cash Equivalents at Beginning of Period | 27.5 | 97.0 | 145.8 | ||||||
| Cash and Cash Equivalents at End of Period | $98.9 | $27.5 | $97.0 | ||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. 2020 Form 10-K
68
ALLETE Consolidated Statement of EquityCash Flows
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Operating Activities | |||||||||||
| Net Income | $161.6 | $185.5 | $174.1 | ||||||||
| AFUDC – Equity | (1.9) | (2.3) | (1.2) | ||||||||
| Income from Equity Investments – Net of Dividends | (3.2) | (5.6) | (2.3) | ||||||||
| Change in Fair Value of Contingent Consideration | 0 | 0 | (2.0) | ||||||||
| Realized and Unrealized (Gain) / Loss on Investments and Property, Plant and Equipment | (1.3) | (1.6) | 2.7 | ||||||||
| Depreciation Expense | 217.7 | 200.6 | 200.1 | ||||||||
| Amortization of PSAs | (11.3) | (11.6) | (23.6) | ||||||||
| Amortization of Other Intangible Assets and Other Assets | 10.4 | 11.7 | 9.6 | ||||||||
| Deferred Income Tax Benefit | (39.5) | (6.7) | (15.8) | ||||||||
| Share-Based and ESOP Compensation Expense | 6.1 | 6.3 | 6.8 | ||||||||
| Defined Benefit Pension and Other Postretirement Benefit Expense | 0.1 | 1.2 | 8.6 | ||||||||
| Bad Debt Expense | 2.7 | (0.1) | 1.1 | ||||||||
| Provision (Payments) for Interim Rate Refund | 0 | (40.0) | 16.3 | ||||||||
| Provision (Payments) for Tax Reform Refund | (0.2) | (10.4) | 10.7 | ||||||||
| Gain on Sale of U.S. Water Services | 0 | (23.6) | 0 | ||||||||
| Changes in Operating Assets and Liabilities | |||||||||||
| Accounts Receivable | (18.2) | 22.6 | (10.7) | ||||||||
| Inventories | (1.4) | (4.1) | 55.5 | ||||||||
| Prepayments and Other | 0.9 | 0.3 | (4.0) | ||||||||
| Accounts Payable | 11.8 | (8.8) | 13.6 | ||||||||
| Other Current Liabilities | 16.7 | (13.7) | 6.7 | ||||||||
| Cash Contributions to Defined Benefit Pension Plans | (10.7) | (10.4) | (15.0) | ||||||||
| Changes in Regulatory and Other Non-Current Assets | (31.0) | (25.2) | 5.0 | ||||||||
| Changes in Regulatory and Other Non-Current Liabilities | (9.5) | (17.2) | (4.9) | ||||||||
| Cash from Operating Activities | 299.8 | 246.9 | 431.3 | ||||||||
| Investing Activities | |||||||||||
| Proceeds from Sale of Available-for-sale Securities | 12.8 | 12.1 | 10.2 | ||||||||
| Payments for Purchase of Available-for-sale Securities | (8.7) | (12.2) | (13.3) | ||||||||
| Payments for Equity Investments | (99.1) | (37.9) | (39.2) | ||||||||
| Return of Capital from Equity Investments | 0 | 8.3 | 0 | ||||||||
| Additions to Property, Plant and Equipment | (717.8) | (597.1) | (312.4) | ||||||||
| Proceeds from Sale of U.S. Water Services – Net of Transaction Costs and Cash Retained | 0 | 268.6 | 0 | ||||||||
| Other Investing Activities | 0 | 15.5 | 7.5 | ||||||||
| Cash for Investing Activities | (812.8) | (342.7) | (347.2) | ||||||||
| Financing Activities | |||||||||||
| Proceeds from Issuance of Common Stock | 18.1 | 1.9 | 20.3 | ||||||||
| Proceeds from Issuance of Long-Term Debt | 672.4 | 201.9 | 75.6 | ||||||||
| Repayments of Long-Term Debt | (488.6) | (72.2) | (95.5) | ||||||||
| Proceeds from Non-Controlling Interest in Subsidiaries – Net of Issuance Costs | 414.5 | 103.8 | 0 | ||||||||
| Acquisition-Related Contingent Consideration Payments | 0 | (3.8) | 0 | ||||||||
| Dividends on Common Stock | (128.2) | (121.4) | (115.0) | ||||||||
| Other Financing Activities | (2.5) | (0.9) | (0.6) | ||||||||
| Cash (for) from Financing Activities | 485.7 | 109.3 | (115.2) | ||||||||
| Change in Cash, Cash Equivalents and Restricted Cash | (27.3) | 13.5 | (31.1) | ||||||||
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 92.5 | 79.0 | 110.1 | ||||||||
| Cash, Cash Equivalents and Restricted Cash at End of Period | $65.2 | $92.5 | $79.0 | ||||||||
Total Equity | Retained Earnings | Accumulated Other Comprehensive Loss | Unearned ESOP Shares | Common Stock | Non-Controlling Interest in Subsidiaries | |||||||||||
| Millions | ||||||||||||||||
| Balance as of December 31, 2014 | $1,611.2 | $530.1 | $(21.1) | $(7.2) | $1,107.6 | $1.8 | ||||||||||
| Comprehensive Income | ||||||||||||||||
| Net Income | 141.5 | 141.1 | — | — | — | 0.4 | ||||||||||
| Other Comprehensive Income – Net of Tax | ||||||||||||||||
| Unrealized Loss on Securities | (0.5 | ) | — | (0.5 | ) | — | — | — | ||||||||
| Unrealized Gain on Derivatives | 0.1 | — | 0.1 | — | — | — | ||||||||||
| Defined Benefit Pension and Other Postretirement Plans | (3.0 | ) | — | (3.0 | ) | — | — | — | ||||||||
| Total Comprehensive Income | 138.1 | |||||||||||||||
| Common Stock Issued | 163.8 | — | — | — | 163.8 | — | ||||||||||
| Dividends Declared | (97.9 | ) | (97.9 | ) | — | — | — | — | ||||||||
| ESOP Shares Earned | 7.2 | — | — | 7.2 | — | — | ||||||||||
| Balance as of December 31, 2015 | 1,822.4 | 573.3 | (24.5 | ) | — | 1,271.4 | 2.2 | |||||||||
| Comprehensive Income | ||||||||||||||||
| Net Income | 155.8 | 155.3 | — | — | — | 0.5 | ||||||||||
| Other Comprehensive Income – Net of Tax | ||||||||||||||||
| Unrealized Loss on Securities | (0.2 | ) | — | (0.2 | ) | — | — | — | ||||||||
| Defined Benefit Pension and Other Postretirement Plans | (3.5 | ) | — | (3.5 | ) | — | — | — | ||||||||
| Total Comprehensive Income | 152.1 | |||||||||||||||
| Common Stock Issued | 35.9 | — | — | — | 35.9 | — | ||||||||||
| Common Stock Retired | (8.0 | ) | — | — | — | (8.0 | ) | — | ||||||||
| Dividends Declared | (102.7 | ) | (102.7 | ) | — | — | — | — | ||||||||
| Acquisition of Non-Controlling Interest | (6.7 | ) | — | — | — | (4.0 | ) | (2.7 | ) | |||||||
| Balance as of December 31, 2016 | 1,893.0 | 625.9 | (28.2 | ) | — | 1,295.3 | — | |||||||||
| Comprehensive Income | ||||||||||||||||
| Net Income | 172.2 | 172.2 | — | — | — | — | ||||||||||
| Other Comprehensive Income – Net of Tax | ||||||||||||||||
| Unrealized Gain on Securities | 0.9 | — | 0.9 | — | — | — | ||||||||||
| Defined Benefit Pension and Other Postretirement Plans | 4.7 | — | 4.7 | — | — | — | ||||||||||
| Total Comprehensive Income | 177.8 | |||||||||||||||
| Common Stock Issued | 106.1 | — | — | — | 106.1 | — | ||||||||||
| Dividends Declared | (108.7 | ) | (108.7 | ) | — | — | — | — | ||||||||
| Balance as of December 31, 2017 | $2,068.2 | $689.4 | $(22.6) | — | $1,401.4 | — | ||||||||||
The accompanying notes are an integral part of these statements.
ALLETE, Inc. 2020 Form 10-K
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ALLETE Consolidated Statement of Equity
| 2020 | 2019 | 2018 | |||||||||
| Millions Except Per Share Amounts | |||||||||||
| Common Stock | |||||||||||
| Balance, Beginning of Period | $1,436.7 | $1,428.5 | $1,401.4 | ||||||||
| Common Stock Issued | 24.2 | 8.2 | 27.1 | ||||||||
| Balance, End of Period | 1,460.9 | 1,436.7 | 1,428.5 | ||||||||
| Accumulated Other Comprehensive Loss | |||||||||||
| Balance, Beginning of Period | (23.6) | (27.3) | (22.6) | ||||||||
Adjustments to Opening Balance – Net of Income Taxes (a) | 0 | 0 | (5.6) | ||||||||
| Other Comprehensive Income – Net of Income Taxes | |||||||||||
| Unrealized Gain (Loss) on Debt Securities | 0.1 | 0.2 | (0.1) | ||||||||
| Defined Benefit Pension and Other Postretirement Plans | (7.6) | 3.5 | 1.0 | ||||||||
| Balance, End of Period | (31.1) | (23.6) | (27.3) | ||||||||
| Retained Earnings | |||||||||||
| Balance, Beginning of Period | 818.8 | 754.6 | 689.4 | ||||||||
Adjustments to Opening Balance – Net of Income Taxes (a) | 0 | 0 | 6.1 | ||||||||
| Net Income Attributable to ALLETE | 174.2 | 185.6 | 174.1 | ||||||||
| Common Stock Dividends | (128.2) | (121.4) | (115.0) | ||||||||
| Balance, End of Period | 864.8 | 818.8 | 754.6 | ||||||||
| Non-Controlling Interest in Subsidiaries | |||||||||||
| Balance, Beginning of Period | 103.7 | 0 | 0 | ||||||||
| Proceeds from Non-Controlling Interest in Subsidiaries – Net of Issuance Costs | 414.5 | 103.8 | 0 | ||||||||
| Net Loss Attributable to Non-Controlling Interest | (12.6) | (0.1) | 0 | ||||||||
| Balance, End of Period | 505.6 | 103.7 | 0 | ||||||||
| Total Equity | $2,800.2 | $2,335.6 | $2,155.8 | ||||||||
| Dividends Per share of Common Stock | $2.47 | $2.35 | $2.24 | ||||||||
(a) Reflects the impacts associated with the adoption of accounting standards concerning Financial Instruments, Revenue from Contracts with Customers and the Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
The accompanying notes are an integral part of these statements.
ALLETE, Inc. 2020 Form 10-K
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Preparation. References in this report to “we,” “us,” and “our” are to ALLETE and its subsidiaries, collectively. We prepare our financial statements in conformity with GAAP. These principles require management to make informed judgments, best estimates, and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.
Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the time of the financial statements issuance.
On February 4, 2021, ALLETE Clean Energy entered into a purchase and sale agreement with a subsidiary of Xcel Energy Inc. to sell a 120 MW wind energy facility for approximately $210 million. ALLETE Clean Energy will repower and expand its Northern Wind project, consisting of its 100 MW Chanarambie and Viking wind energy facilities located in southwest Minnesota, as part of the transaction. Construction is expected to begin in late 2021, and the Northern Wind project is expected to continue operating until early 2022. The sale is expected to close in late 2022, subject to regulatory approval by the MPUC and receipt of permits.
Principles of Consolidation. Our Consolidated Financial Statements include the accounts of ALLETE, and all of our majority‑owned subsidiary companies.companies and variable interest entities of which ALLETE is the primary beneficiary. All material intercompany balances and transactions have been eliminated in consolidation.
Variable Interest Entities. The accounting guidance for “Variable Interest Entities” (VIE) is a consolidation model that considers if a company has a variable interest in a VIE. A VIE is a legal entity that possesses any of the following conditions: the entity’s equity at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, equity owners are unable to direct the activities that most significantly impact the legal entity’s economic performance (or they possess disproportionate voting rights in relation to the economic interest in the legal entity), or the equity owners lack the obligation to absorb the legal entity’s expected losses or the right to receive the legal entity’s expected residual returns. Entities are required to consolidate a VIE when it is determined that they have a controlling financial interest in a VIE and therefore, are the primary beneficiary of that VIE, as defined by the accounting guidance for “Variable Interest Entities.” In determining whether ALLETE is the primary beneficiary of a VIE, management considers whether ALLETE has the power to direct the most significant activities of the VIE and is obligated to absorb losses or receive the expected residual returns that are significant to the VIE. The accounting guidance for VIEs applies to certain ALLETE Clean Energy wind energy facilities and our investment in Nobles 2. (See Tax Equity Financing.)
Business Segments. We present three3 reportable segments: Regulated Operations, ALLETE Clean Energy and U.S. Water Services. Our segments were determined in accordance with the guidance on segment reporting. We measure performance of our operations through budgeting and monitoring of contributions to consolidated net income by each business segment.
Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 1615 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service in northwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities.
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in fourseven states, approximately 535more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300 MW of wind energy facilities under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.
U.S. Water Services providesprovided integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage, and improve efficiency. In March 2019, the Company sold U.S. Water Services to a subsidiary of Kurita Water Industries Ltd. pursuant to a stock purchase agreement for approximately $270 million in cash, net of transaction costs and cash retained.
ALLETE, Inc. 2020 Form 10-K
71
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Corporate and Otheris comprised of BNI Energy, our investment in Nobles 2, ALLETE Properties, other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 5,0004,000 acres of land in Minnesota, and earnings on cash and investments.
BNI Energy mines and sells lignite coal to two2 North Dakota mine-mouth generating units, one1 of which is Square Butte. In 2017,2020, Square Butte supplied 50 percent (227.5 MW) of its output to Minnesota Power under long-term contracts. (See Note 11.8. Commitments, Guarantees and Contingencies.)
Our investment in Nobles 2 represents a 49 percent equity interest in Nobles 2, the entity that owns and operates the 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power.
ALLETE Properties represents our legacy Florida real estate investment. Our strategy related to the real estate assets of ALLETE Properties is to sell individual parcels over time, but incorporates the possibility of a bulk sale of ourthe entire real estateALLETE Properties portfolio. Proceeds from a bulk sale would be strategically deployed to support growth inat our Regulated Operations and ALLETE Clean Energy and U.S. Water Services, collectively our energy infrastructure and related services businesses.Energy. ALLETE Properties continues to pursue sales of individual parcels over time and will continue to maintain key entitlements and infrastructure without making additional investments or acquisitions. (See Note 8. Investments.)infrastructure.
Cash, Cash Equivalents and Cash Equivalents.Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of December 31, 2020, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement. The December 31, 2019 amount also includes deposits required under tax equity financing agreements. The December 31, 2018 amount includes U.S. Water Services' standby letters of credit. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under an ALLETE Clean Energy loan agreement and PSAs. The December 31, 2020 and 2019 amounts also include deposits required under tax equity financing agreements. The December 31, 2018 amount includes deposits from a SWL&P customer in aid of future capital expenditures. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.
| Cash, Cash Equivalents and Restricted Cash | |||||||||||||||||
| As of December 31 | 2020 | 2019 | 2018 | ||||||||||||||
| Millions | |||||||||||||||||
| Cash and Cash Equivalents | $44.3 | $69.3 | $69.1 | ||||||||||||||
| Restricted Cash included in Prepayments and Other | 0.8 | 2.8 | 1.3 | ||||||||||||||
| Restricted Cash included in Other Non-Current Assets | 20.1 | 20.4 | 8.6 | ||||||||||||||
| Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $65.2 | $92.5 | $79.0 | ||||||||||||||
Supplemental Statement of Cash Flow Information.
| Consolidated Statement of Cash Flows | ||||||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | |||||||||||
| Millions | ||||||||||||||
| Cash Paid During the Period for Interest – Net of Amounts Capitalized | $62.0 | $63.5 | $66.0 | |||||||||||
Recognition of Right-of-use Assets and Lease Liabilities (a) | 0 | $28.7 | 0 | |||||||||||
| Noncash Investing and Financing Activities | ||||||||||||||
| Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment | $(67.0) | $33.9 | $(0.1) | |||||||||||
Reclassification of Property, Plant and Equipment to Inventory (b) | 0 | 0 | $46.3 | |||||||||||
| Capitalized Asset Retirement Costs | $4.1 | $20.7 | $14.2 | |||||||||||
| AFUDC–Equity | $1.9 | $2.3 | $1.2 | |||||||||||
(a)Amount of the right-of-use asset and lease liability recognized with the adoption of an accounting standards update for leases.
(b)In 2018, Montana-Dakota Utilities exercised its option to purchase the Thunder Spirit II wind energy facility upon completion, resulting in a reclassification from Property, Plant and Equipment – Net to Inventories – Net for project costs incurred in the prior year. On the Consolidated Statement of Cash Flows, the sale of the wind energy facility in 2018 resulted in Operating Activities – Inventories increasing by $46.3 million in 2018 due to the project costs incurred in the prior year.
ALLETE, Inc. 2020 Form 10-K
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NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Consolidated Statement of Cash Flows | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Cash Paid During the Period for Interest – Net of Amounts Capitalized | $64.5 | $68.2 | $59.0 | ||||||
| Cash Paid During the Period for Income Taxes | $0.4 | $0.5 | $0.4 | ||||||
| Remeasurement of Deferred Income Taxes Resulting from the TCJA | |||||||||
| Increase in Regulatory Assets | $80.9 | — | — | ||||||
| Decrease in Investment in ATC | $(27.9) | — | — | ||||||
| Decrease in Deferred Income Taxes | $(353.6) | — | — | ||||||
| Increase in Regulatory Liabilities | $393.6 | — | — | ||||||
| Noncash Investing and Financing Activities | |||||||||
| Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment | $67.2 | $(22.0) | $(40.6) | ||||||
| Capitalized Asset Retirement Costs | $(15.6) | $3.7 | $12.4 | ||||||
| Camp Ripley Solar Financing | — | $15.0 | — | ||||||
| AFUDC–Equity | $1.2 | $2.1 | $3.3 | ||||||
| ALLETE Common Stock Contributed to Pension Plans | $13.5 | — | — | ||||||
| Contingent Consideration | — | — | $35.7 | ||||||
| ALLETE Common Stock Received for Land Inventory | — | $8.0 | — | ||||||
| Long-Term Finance Receivable for Land Inventory | — | $12.0 | — | ||||||
Accounts Receivable. Accounts receivable are reported on the Consolidated Balance Sheet net of an allowance for doubtful accounts. The allowance is based on our evaluation of the receivable portfolio under current conditions, overall portfolio quality, review of specific situations and such other factors that, in our judgment, deserve recognition in estimating losses.
| Accounts Receivable | |||||||||||
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
| Trade Accounts Receivable | |||||||||||
| Billed | $93.5 | $77.2 | |||||||||
| Unbilled | 20.9 | 20.1 | |||||||||
| Less: Allowance for Doubtful Accounts | 2.5 | 0.9 | |||||||||
| Total Accounts Receivable | $111.9 | $96.4 | |||||||||
| Accounts Receivable | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
| Trade Accounts Receivable | |||||||
| Billed | $112.6 | $106.5 | |||||
| Unbilled | 24.6 | 19.1 | |||||
| Less: Allowance for Doubtful Accounts | 2.1 | 3.1 | |||||
| Total Accounts Receivable | $135.1 | $122.5 | |||||
Concentration of Credit Risk. We are subject to concentration of credit risk primarily as a result of accounts receivable. Minnesota Power sells electricity to nine8 Large Power Customers. Receivables from these customers totaled $13.8$10.3 million as of December 31, 20172020 ($9.57.8 million as of December 31, 2016)2019). Minnesota Power does not obtain collateral to support utility receivables, but monitors the credit standing of major customers. In addition, Minnesota Power, as permitted by the MPUC, requires its taconite-producing Large Power Customers to pay weekly for electric usage based on monthly energy usage estimates, which allows us to closely manage collection of amounts due. OneMinnesota Power’s taconite customers, which are currently owned by 2 entities at the end of these customers2020, accounted for 10approximately 29 percent of Regulated Operations operating revenue and approximately 25 percent of consolidated operating revenue in 2017 (82020. In 2019 and 2018, a single entity accounted for approximately 12 percent in 2016 and in 2015).10 percent, respectively, of consolidated operating revenue.
Long-Term Finance Receivables. Long-term finance receivables relating to our real estate operations are collateralized by property sold, accrue interest at market-based rates and are net of an allowance for doubtful accounts. We assess delinquent finance receivables by comparing the balance of such receivables to the estimated fair value of the collateralized property. If the fair value of the property is less than the finance receivable, we record a reserve for the difference. We estimate fair value based on recent property tax assessed values or current appraisals.
Available-for-Sale Securities. Available-for-sale debt and equity securities are recorded at fair value with unrealizedvalue. Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income (loss), net of tax. Unrealized gains and losses that are other than temporaryon available-for-sale equity securities are recognized in earnings. We use the specific identification method as the basis for determining the cost of securities sold. Our policy is to review available-for-sale securities for other than temporary impairment on a quarterly basis by assessing such factors as share price trends and the impact of overall market conditions. (See New Accounting Pronouncements and Note 8. Investments.)
Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations and ALLETE Clean Energy segmentssegment are carried at an average cost or first-in, first-out basis. Inventories in our U.S. Water ServicesALLETE Clean Energy segment and Corporate and Other operationsbusinesses are carried at an average cost, first-in, first-out or specific identification basis.
| Inventories – Net | |||||||||||
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
Fuel (a) | $23.1 | $25.9 | |||||||||
| Materials and Supplies | 51.1 | 46.9 | |||||||||
| Total Inventories – Net | $74.2 | $72.8 | |||||||||
(a) Fuel consists primarily of coal inventory at Minnesota Power.
ALLETE, Inc. 2020 Form 10-K
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| Inventories – Net | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
Fuel (a) | $34.8 | $43.9 | |||||
| Materials and Supplies | 46.5 | 48.7 | |||||
| Raw Materials | 2.8 | 2.9 | |||||
| Work in Progress | 4.2 | 1.0 | |||||
| Finished Goods | 8.3 | 8.6 | |||||
| Reserve for Obsolescence | (0.7 | ) | (0.9 | ) | |||
| Total Inventories – Net | $95.9 | $104.2 | |||||
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Prepayments and Other Current Assets | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
Deferred Fuel Adjustment Clause (a) | — | $18.6 | |||||
Restricted Cash (b) | $2.6 | 2.2 | |||||
| Other | 35.0 | 19.5 | |||||
| Total Prepayments and Other Current Assets | $37.6 | $40.3 | |||||
Property, Plant and Equipment. Property, plant and equipment are recorded at original cost and are reported on the Consolidated Balance Sheet net of accumulated depreciation. Expenditures for additions, significant replacements, improvements and major plant overhauls are capitalized; maintenance and repair costs are expensed as incurred. Gains or losses on property, plant and equipment in our U.S. Water Services segment andfor Corporate and Other operations are recognized when they are retired or otherwise disposed. When property, plant and equipment in our Regulated Operations and ALLETE Clean Energy segments are retired or otherwise disposed, no gain or loss is recognized in accordance with the accounting standards for component depreciation except for certain circumstances where the retirement is unforeseen or unexpected. Our Regulated Operations capitalize AFUDC, which includes both an interest and equity component. AFUDC represents the cost of both debt and equity funds used to finance utility plant additions during construction periods. AFUDC amounts capitalized are included in rate base and are recovered from customers as the related property is depreciated. Upon MPUC approval of cost recovery, the recognition of AFUDC ceases. (See Note 2. Property, Plant and Equipment.)
We believe that long-standing ratemaking practices approved by applicable state and federal regulatory commissions allow for the recovery of the remaining book value of retired plant assets. In 2015, Minnesota Power retired Taconite Harbor Unit 3 and converted Laskin to operate on natural gas which were actions included in Minnesota Power’s MPUC-approved 2013 IRP. In a July 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The 2015 IRP containscontained steps in Minnesota Power’s EnergyForward plan including the economic idling of Taconite Harbor Units 1 and 2 in September 2016, and the ceasing of coal-fired operations at Taconite Harbor in 2020. (See Note 4. Regulatory Matters.)As of December 31, 2020, Taconite Harbor had a net book value of approximately $50 million. The MPUC order for the 2015 IRP also directed Minnesota Power to retire Boswell Units 1 and 2, no later than 2022. In Octoberwhich occurred in the fourth quarter of 2018. As part of the 2016 Minnesota Power announced thatgeneral retail rate case, the MPUC allowed recovery of the remaining book value of Boswell Units 1 and 2 will be retired in 2018.through 2022. In its latest IRP filing, Minnesota Power proposed retiring Boswell Unit 3 by 2030, which has a net book value of approximately $255 million as of December 31, 2020. (See Note 4. Regulatory Matters.) We do not expect to record any impairment charge as a result of the retirement of Taconite Harbor Unit 3, the ceasing of coal-fired operationsthese operating changes at Taconite Harbor Units 1 and 2, or the conversion of Laskin to operate on natural gas.Boswell. In addition, we expect to be able to continue depreciating these assets for at least their established remaining useful lives; however, we are unable to predict the impact of regulatory outcomes resulting in changes to their established remaining useful lives.
Impairment of Long-Lived Assets. We review our long-lived assets which include the legacy real estate assets of ALLETE Properties, for indicators of impairment in accordance with the accounting standards for property, plant and equipment on a quarterly basis. This includes our property, plant and equipment (see Property, Plant and Equipment) and land inventory. Land inventory is accounted for as held for use and is recorded at cost, unless the carrying value is determined not to be recoverable in accordance with the accounting standards for property, plant and equipment, in which case the land inventory is written down to estimated fair value.
In accordance with the accounting standards for property, plant and equipment, if indicators of impairment exist, we test our long‑lived assets for recoverability by comparing the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. Cash flows are assessed at the lowest level of identifiable cash flows. The undiscounted future net cash flows are impacted by trends and factors known to us at the time they are calculated and our expectations related to: management’s best estimate of future use; sales prices; holding period and timing of sales; method of disposition; and future expenditures necessary to maintain the operations.
In connection with implementing the revised strategy, management evaluated its2020, 2019, and 2018, there were no indicators of impairment analysis for its real estate assets using updated assumptions to determine estimated future net cash flows on an undiscounted basis. Estimated fair values were based upon current market dataour property, plant, and pricing for individual parcels. Our impairment analysis incorporates a probability-weighted approach considering the alternative courses of sales noted above.
Derivatives. ALLETE is exposed to certain risks relating to its business operations that can be managed through the use of derivative instruments. ALLETE may enter into derivative instruments to manage those risks including interest rate risk related to certain variable-rate borrowings.
Accounting for Stock-Based Compensation. We apply the fair value recognition guidance for share-based payments. Under this guidance, we recognize stock-based compensation expense for all share-based payments granted, net of an estimated forfeiture rate. (See Note 16.12. Employee Stock and Incentive Plans.)
ALLETE, Inc. 2020 Form 10-K
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NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Other Non-Current Assets | |||||||||||
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
Contract Assets (a) | $25.5 | $28.0 | |||||||||
| Operating Lease Right-of-use Assets | 22.4 | 28.6 | |||||||||
| ALLETE Properties | 18.2 | 21.9 | |||||||||
| Restricted Cash | 20.1 | 20.4 | |||||||||
| Other Postretirement Benefit Plans | 34.2 | 37.5 | |||||||||
| Other | 86.4 | 81.8 | |||||||||
| Total Other Non-Current Assets | $206.8 | $218.2 | |||||||||
| Other Current Liabilities | |||||||||||
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
| PSAs | $12.5 | $12.3 | |||||||||
Fuel Adjustment Clause (a) | 3.7 | 0 | |||||||||
| Operating Lease Liabilities | 5.9 | 6.9 | |||||||||
| Other | 44.6 | 41.2 | |||||||||
| Total Other Current Liabilities | $66.7 | $60.4 | |||||||||
(a) See Note 4. Regulatory Matters.
| Other Non-Current Liabilities | |||||||||||
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
| Asset Retirement Obligation | $166.6 | $160.3 | |||||||||
| PSAs | 52.1 | 64.6 | |||||||||
| Operating Lease Liabilities | 16.5 | 21.8 | |||||||||
| Other | 50.1 | 46.3 | |||||||||
| Total Other Non-Current Liabilities | $285.3 | $293.0 | |||||||||
Leases.
We determine if a contract is, or contains, a lease at inception and recognize a right-of-use asset and lease liability for all leases with a term greater than 12 months. Our right-of-use assets and lease liabilities for operating leases are included in Other Non-Current Assets, Other Current Liabilities and Other Non-Current Liabilities, respectively, in our Consolidated Balance Sheet. We currently do not have any finance leases.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the estimated present value of lease payments over the estimated fairlease term. As our leases do not provide an explicit rate, we determine the present value of net assets of acquired businesses. In accordance with GAAP, goodwill is not amortized. Goodwill is assessed annually in the fourth quarter for impairment and whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is donefuture lease payments based on our estimated incremental borrowing rate using information available at the reporting unit level.
ALLETE, Inc. 2020 Form 10-K
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leases (Continued)
Our leases may include options to extend or buy out the lease at certain points throughout the term, and if it is reasonably certain at lease commencement that we will exercise that option, we include those rental payments in our calculation of the right-of-use asset and lease liability. Lease and rent expense is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less are not recognized on the Consolidated Balance Sheet.
The majority of our operating leases are for heavy equipment, vehicles and land with fixed monthly payments which we group into two categories: Vehicles and Equipment; and Land and Other. Our largest operating lease is for the dragline at BNI Energy which includes a termination payment at the end of the lease term if we do not exercise our purchase option. The amount of this payment is $3 million and is included in our calculation of the right-of-use asset and lease liability recorded. None of our other leases contain residual value guarantees.
Additional information on the components of lease cost and presentation of cash flows were as follows:
| As December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Operating Lease Cost | $8.3 | $9.4 | ||||||
| Other Information: | ||||||||
| Operating Cash Flows From Operating Leases | $8.3 | $9.4 | ||||||
Additional information related to leases was as follows:
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Balance Sheet Information Related to Leases: | ||||||||
| Other Non-Current Assets | $22.4 | $28.6 | ||||||
| Total Operating Lease Right-of-use Assets | $22.4 | $28.6 | ||||||
| Other Current Liabilities | $5.9 | $6.9 | ||||||
| Other Non-Current Liabilities | 16.5 | 21.8 | ||||||
| Total Operating Lease Liabilities | $22.4 | $28.7 | ||||||
| Weighted Average Remaining Lease Term (Years): | ||||||||
| Operating Leases - Vehicles and Equipment | 3 | 4 | ||||||
| Operating Leases - Land and Other | 27 | 28 | ||||||
| Weighted Average Discount Rate: | ||||||||
| Operating Leases - Vehicles and Equipment | 3.1 | % | 3.7 | % | ||||
| Operating Leases - Land and Other | 4.1 | % | 4.1 | % | ||||
ALLETE, Inc. 2020 Form 10-K
76
| Other Non-Current Assets | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
Contract Payment (a) | $27.5 | $29.6 | |||||
Finance Receivable (b) | 11.0 | 11.5 | |||||
Restricted Cash (c) | 8.6 | 8.6 | |||||
| Other | 60.6 | 56.8 | |||||
| Total Other Non-Current Assets | $107.7 | $106.5 | |||||
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| Other Current Liabilities | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
| PSAs | $24.5 | $24.6 | |||||
| Other | 58.7 | 49.1 | |||||
| Total Other Current Liabilities | $83.2 | $73.7 | |||||
| Other Non-Current Liabilities | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
| Asset Retirement Obligation | $122.7 | $136.6 | |||||
| PSAs | 89.5 | 113.8 | |||||
Contingent Consideration (a) | 5.4 | 25.0 | |||||
| Other | 49.5 | 47.3 | |||||
| Total Other Non-Current Liabilities | $267.1 | $322.7 | |||||
Maturities of lease liabilities were as follows:
| December 31, 2020 | ||||||||||||||
| Millions | ||||||||||||||
| 2021 | $6.0 | |||||||||||||
| 2022 | 5.0 | |||||||||||||
| 2023 | 3.2 | |||||||||||||
| 2024 | 2.9 | |||||||||||||
| 2025 | 2.9 | |||||||||||||
| Thereafter | 8.6 | |||||||||||||
| Total Lease Payments Due | 28.6 | |||||||||||||
| Less: Imputed Interest | 6.2 | |||||||||||||
| Total Lease Obligations | 22.4 | |||||||||||||
| Less: Current Lease Obligations | 5.9 | |||||||||||||
| Total Long-term Lease Obligations | $16.5 | |||||||||||||
Environmental Liabilities. We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers. (See Note 11.8. Commitments, Guarantees and Contingencies.)
Revenue.
Contracts with Customers – Utility includes sales from our regulated operations for generation, transmission and distribution of electric service, and distribution of water and gas services to our customers. Also included is an immaterial amount of regulated steam generation that is used by customers in the production of paper and pulp.
Contracts with Customers – Non-utility includes sales of goods and services to customers from ALLETE Clean Energy, U.S. Water Services and our Corporate and Other businesses.
Other – Non-utility is the non-cash adjustments to revenue recognized by ALLETE Clean Energy for the amortization of differences between contract prices and estimated market prices for PSAs that were assumed during the acquisition of various wind energy facilities.
Revenue Recognition. Revenue is recognized upon transfer of control of promised goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Revenue is recognized net of allowance for returns and any taxes collected from customers, which are subsequently remitted to the appropriate governmental authorities. We account for shipping and handling activities that occur after the customer obtains control of goods as a cost rather than an additional performance obligation thereby recognizing revenue at time of shipment and accruing shipping and handling costs when control transfers to our customers. We have a right to consideration from our customers in an amount that corresponds directly with the value to the customer for our performance completed to date; therefore, we may recognize revenue in the amount to which we have a right to invoice.
ALLETE, Inc. 2020 Form 10-K
77
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue (Continued)
Nature of Revenue Recognition.Streams
Residential and Commercial includes sales for electric, gas or water service to customers, who have implied contracts with the utility, under rates are undergoverned by the jurisdiction of Minnesota, Wisconsin and federal regulatory authorities.MPUC, PSCW or FERC. Customers are billed on a monthly cycle basis.basis and revenue is recognized for electric, gas or water service delivered during the billing period. Revenue is accrued for servicesservice provided but not yet billed. Regulatedbilled at period end. Performance obligations with these customers are satisfied at time of delivery to customer meters and simultaneously consumed.
Municipal includes sales to 15 non-affiliated municipal customers in Minnesota under long-term wholesale electric contracts. All wholesale electric contracts include a termination clause requiring a three-year notice to terminate. These contracts have termination dates ranging through 2037, with a majority of contracts effective through 2024. Performance obligations with these customers are satisfied at the time energy is delivered to an agreed upon municipal substation or meter.
Industrial includes sales recognized from contracts with customers in the taconite mining, paper, pulp and secondary wood products, pipeline and other industries. Industrial sales accounted for approximately 47 percent of total regulated utility electric rates include adjustment clauses that: (1) bill or credit customers for fuel and purchased energy costs above or below the base levels in rate schedules; (2) bill retail customerskWh sales for the recoveryyear ended December 31, 2020. Within industrial revenue, Minnesota Power has 8 Large Power Customer contracts, each serving requirements of conservation improvement program expenditures10 MW or more of customer load. These contracts automatically renew past the contract term unless a four-year advanced written notice is given. Large Power Customer contracts have earliest termination dates ranging from 2024 through 2029. On January 29, 2021, Verso Corporation provided notice of termination for its contract effective in January 2025. We satisfy our performance obligations for these customers at the time energy is delivered to an agreed upon customer substation. Revenue is accrued for energy provided but not collected in base rates; and (3) billyet billed at period end. Based on current contracts with industrial customers, we expect to recognize minimum revenue for the recoveryfixed contract components of certain transmission, renewable,approximately $55 million per annum in 2021 and environmental improvement expenditures. Previously, fuel2022, $50 million in 2023 and purchased power expense was deferred to match2024, $20 million in 2025, and $50 million in total thereafter, which reflects the termination notice period in whichthese contracts. When determining minimum revenue, we assume that customer contracts will continue under the contract renewal provision; however, if long-term contracts are renegotiated and subsequently approved by the MPUC or there are changes within our industrial customer class, these amounts may be impacted. Contracts with customers that contain variable pricing or quantity components are excluded from the expected minimum revenue amounts.
Other Power Suppliers includes the sale of energy under a long-term PSA with 1 customer as well as MISO market and liquidation sales. The expiration date of this PSA is 2028. Performance obligations with these customers are satisfied at the time energy is delivered to an agreed upon delivery point defined in the contract (generally the MISO pricing node). The current contract with 1 customer contains variable pricing components that prevent us from estimating future minimum revenue.
Other Revenue includes all remaining individually immaterial revenue streams for fuelMinnesota Power and purchased power expense was billedSWL&P, and is comprised of steam sales to paper and pulp mills, wheeling revenue and other sources. Revenue for steam sales to customers withis recognized at the deferred fuel coststime steam is delivered and simultaneously consumed. Revenue is recognized as a regulatory asset. At a hearing on January 18, 2018,at the MPUC disallowed recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodology resulting in a $19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017. Astime each performance obligation is satisfied.
CIP Financial Incentive reflects certain revenue that is a result of the MPUC hearing, fuel and purchased power costs above or below the base levels in rate schedules are no longer deferred.
ALLETE, Inc. 2020 Form 10-K
78
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognized using the alternative revenue program guidance is included in Operating Revenue – Utility on the Consolidated Statement of Income and Regulatory Assets on the Consolidated Balance Sheet until it is subsequently collected from customers.(Continued)
ALLETE Clean Energy recognizes
Long-term PSA revenue includes all sales recognized under long-term contracts for production, curtailment, capacity and associated renewable energy credits from ALLETE Clean Energy wind energy facilities. Expiration dates of these PSAs range from 2022 through 2039. Performance obligations for these contracts are satisfied at the sale oftime energy from PSAs under various durations. Revenue is recognized when delivered to an agreed upon point, or production is curtailed at the request of its customersthe customer, at specified prices. Revenue from the sale of renewable energy credits is recognized at the same time the related energy is delivered to the customer when sold to the same party.
Sale of Wind Energy Facility includes revenue recognized for the design, development, construction, and sale of a wind energy facility to a customer. Performance obligations for these types of agreements are satisfied at the time the completed project is transferred to the customer at the commercial operation date. Revenue from the sale of a wind energy facility is recognized at the time of asset transfer.
Other is the non-cash adjustments to revenue recognized by ALLETE Clean Energy for the amortization of differences between contract prices and estimated market prices on assumed PSAs. As part of its acquisitions of wind energy facilities,facility acquisitions, ALLETE Clean Energy has assumed various PSAs that were above or below estimated market prices at the time of acquisition and amortizesacquisition; the resulting differences between contract prices and estimated market prices are amortized to Operating Revenue – Non-utility onrevenue over the Consolidated Statement of Income. In 2017, we recognized $23.6 million of non-cash revenue amortization relating to the difference between contract prices and estimated market prices as an increase in Operating Revenue – Non-utility ($22.3 million in 2016; $23.2 million in 2015). Revenue from the construction and sale of wind energy facilities to others will be recognized at a point in time, or over time, as performance obligations are satisfied based on the terms of each specific agreement.remaining PSA term.
U.S. Water Services recognizes revenue from
In March 2019, ALLETE completed the sale of products when the earnings process is complete. This generally occurs when products are shippedU.S. Water Services. Prior to the sale, ALLETE recognized revenue under the point-in-time, contract and capital project streams. Point-in-time revenue was recognized for purchases by customers for chemicals, consumable equipment or related maintenance and repair services as the customer’s usage and needs changed over time. Contract revenue included monthly revenue from contracts with customers to provide chemicals, consumable equipment and services to meet customer in accordance withneeds during the contract or purchase order, ownershipperiod at a fixed monthly price. Capital Project revenue was recognized at the time of sale when equipment and risk of loss have passedother components were assembled to the customer, collectibility is reasonably assured, and pricing is fixed and determinable. Revenue from services is recognized as the services are performed.create a water treatment system for a customer.
Corporate and Other
Payment Terms
Payment terms and conditions vary across our businesses. Aside from taconite-producing Large Power Customers, payment terms generally require payment to be made within 15 to 30 days from the end of the contract priceperiod that the service has been rendered. In the case of its taconite-producing Large Power Customers, as permitted by the MPUC, Minnesota Power requires weekly payments for electric usage based on monthly energy usage estimates. These customers receive estimated bills based on Minnesota Power’s estimate of the customers’ energy usage, forecasted energy prices and fuel adjustment clause estimates. Minnesota Power’s taconite-producing Large Power Customers have generally predictable energy usage on a weekly basis and any differences that occur are trued-up the other requirements underfollowing month. Due to the guidancetiming difference of revenue recognition from the timing of invoicing and payment, the taconite-producing Large Power Customers receive credit for salesthe time value of real estate are met. Certainmoney; however, we have determined that our contracts with customers allow usdo not include a significant financing component as the period between when we transfer the service to receive participation revenue from land sales to third parties if various formula-based criteria are achieved.the customer and when they pay for such service is minimal.
ALLETE, Inc. 2020 Form 10-K
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NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue (Continued)
| Operating Expenses – Other | ||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | |||||
| Millions | ||||||||
Impairment of Real Estate (a) | — | — | $36.3 | |||||
Impairment of Goodwill (b) | — | $3.3 | — | |||||
Change in Fair Value of Contingent Consideration (c) | $(0.7) | (13.6 | ) | — | ||||
| Total Operating Expenses – Other | $(0.7) | $(10.3) | $36.3 | |||||
Assets Recognized From the Costs to Obtain a Contract with a Customer
We recognize as an asset the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We expense incremental costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. As of December 31, 2020, we have $25.5 million of assets recognized for costs incurred to obtain contracts with our customers ($28.0 million as of December 31, 2019). Management determined the amount of costs to be recognized as assets based on actual costs incurred and paid to obtain and fulfill these contracts to provide goods and services to our customers. Assets recognized to obtain contracts are amortized on a straight-line basis over the contract term as a non-cash reduction to revenue. We recognized $2.6 million of non-cash amortization for the years ended December 31, 2020 and 2019.
Operating Expenses - Other. In 2018, we recognized a $2.0 million benefit in Operating Expenses - Other for the change in fair value of contingent consideration related to the earnings based payment resulting from the acquisition of U.S. Water Services in 2015.
Unamortized Discount and Premium on Debt. Discount and premium on debt are deferred and amortized over the terms of the related debt instruments using a method which approximates the effective interest method.
Tax Equity Financings. Certain subsidiaries of ALLETE have entered into tax equity financings that include forming limited liability companies (LLC) with third-party investors for certain wind projects. Tax equity financings have specific terms that dictate distributions of cash and the allocation of tax attributes among the LLC members, who are divided into two categories: the sponsor and third-party investors. ALLETE subsidiaries are the sponsors in these tax equity financings. The distributions of cash and allocation of tax attributes in these financings generally differ from the underlying percentage ownership interests in the related LLC, with a disproportionate share of tax attributes (including accelerated depreciation and production tax credits) allocated to third-party investors in order to achieve targeted after-tax rates of return, or target yield, from project operations, and a disproportionate share of cash distributions made to the sponsor.
The target yield and other terms vary by tax equity financing. Once the target yield has been achieved, a “flip point” is recognized. In addition, tax equity financings typically provide that cash distributions can be temporarily increased to the third-party investors in order to meet cumulative distribution thresholds. After the flip point, tax attributes and cash distributions are both typically disproportionately allocated to the sponsor.
Tax equity financings include affirmative and negative covenants that are similar to what a project lender would require in a project financing, such as financial reporting, insurance, maintenance and prudent operator standards. Most covenants are no longer applicable once the flip point occurs and any other obligations of the third-party investor have been eliminated.
The third-party investors’ portions of equity ownership in tax equity LLCs are recorded as non-controlling interest in subsidiaries on the Consolidated Balance Sheet and earnings allocated to third-party investors are recorded as net loss attributable to non-controlling interest on the Consolidated Statement of Income.
Non-Controlling Interest in Subsidiaries. Non-controlling interest in subsidiaries represents the portion of equity ownership, net income (loss), and comprehensive income (loss) in subsidiaries that is not attributable to equity holders of ALLETE. These amounts as of and for the year ended December 31, 2020, related to the tax equity financings for ALLETE Clean Energy’s 106 MW Glen Ullin, 80 MW South Peak and 303 MW Diamond Spring wind energy facilities as well as ALLETE’s equity investment in the 250 MW Nobles 2 wind energy facility.
For those wind projects with tax equity financings where the economic benefits are not allocated based on the underlying ownership percentage interests, we have determined that the appropriate methodology for calculating the non-controlling interest in subsidiaries balance is the hypothetical liquidation at book value (HLBV) method. The HLBV method is a balance sheet approach which reflects the substantive economic arrangements in the tax equity financing structures.
ALLETE, Inc. 2020 Form 10-K
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NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Non-Controlling Interest in Subsidiaries (Continued)
Under the HLBV method, amounts reported as non-controlling interest in subsidiaries on the Consolidated Balance Sheet represent the amounts the third-party investors would hypothetically receive at each balance sheet reporting date under the liquidation provisions of the LLC agreements, assuming the net assets of the wind projects were liquidated at amounts determined in accordance with GAAP and distributed to the third-party investor and sponsor. The resulting non-controlling interest in subsidiaries balance in these projects is reported as a component of equity on the Consolidated Balance Sheet.
The results of operations for these projects attributable to non-controlling interest under the HLBV method is determined as the difference in non-controlling interest in subsidiaries on the Consolidated Balance Sheet at the start and end of each reporting period, after taking into account any capital transactions between the projects and the third-party investors.
Factors used in the HLBV calculation include GAAP income, taxable income (loss), tax attributes such as accelerated depreciation and production tax credits, capital contributions, cash distributions, and the target yield specified in the corresponding LLC agreement. Changes in these factors could have a significant impact on the amounts that third-party investors and sponsors would receive upon a hypothetical liquidation. The use of the HLBV method to allocate income to the non-controlling interest in subsidiaries may create variability in our results of operations as the application of the HLBV method can drive variability in net income or loss attributable to non-controlling interest in subsidiaries from period to period.
| Other Income (Expense) - Other | |||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
Pension and Other Postretirement Benefit Plan Non-Service Credit (a) | $8.6 | $7.7 | $4.6 | ||||||||
| Interest and Investment Earnings | 1.6 | 4.4 | 0.5 | ||||||||
| AFUDC - Equity | 1.9 | 2.3 | 1.2 | ||||||||
| Gain on Land Sales | 0.4 | 2.1 | 0.9 | ||||||||
| Other | 2.2 | 2.2 | 0.6 | ||||||||
| Total Other Income (Expense) - Other | $14.7 | $18.7 | $7.8 | ||||||||
(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 11. Pension and Other Postretirement Benefit Plans.)
Income Taxes. ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns. We account for income taxes using the liability method in accordance with GAAP for income taxes. Under the liability method, deferred income tax assets and liabilities are established for all temporary differences in the book and tax basis of assets and liabilities, based upon enacted tax laws and rates applicable to the periods in which the taxes become payable.
Due to the effects of regulation on Minnesota Power and SWL&P, certain adjustments made to deferred income taxes are, in turn, recorded as regulatory assets or liabilities. Federal investment tax credits have been recorded as deferred credits and are being amortized to income tax expense over the service lives of the related property. In accordance with GAAP for uncertainty in income taxes, we are required to recognize in our financial statements the largest tax benefit of a tax position that is “more‑likely‑than‑not” to be sustained on audit, based solely on the technical merits of the position as of the reporting date. The term “more‑likely‑than‑not” means more than 50 percent likely. (See Note 13.10. Income Tax Expense.)
Excise Taxes. We collect excise taxes from our customers levied by governmentgovernmental entities. These taxes are stated separately on the billing to the customer and recorded as a liability to be remitted to the governmentgovernmental entity. We account for the collection and payment of these taxes on a net basis.
ALLETE, Inc. 2020 Form 10-K
81
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements.
Recently Adopted Pronouncements
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
| Property, Plant and Equipment | |||||||||||
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
| Regulated Operations | |||||||||||
| Property, Plant and Equipment in Service | $4,972.3 | $4,555.8 | |||||||||
| Construction Work in Progress | 79.4 | 383.6 | |||||||||
| Accumulated Depreciation | (1,758.0) | (1,635.3) | |||||||||
| Regulated Operations – Net | 3,293.7 | 3,304.1 | |||||||||
| ALLETE Clean Energy | |||||||||||
| Property, Plant and Equipment in Service | 1,275.4 | 686.0 | |||||||||
| Construction Work in Progress | 261.0 | 351.3 | |||||||||
| Accumulated Depreciation | (112.9) | (86.8) | |||||||||
| ALLETE Clean Energy – Net | 1,423.5 | 950.5 | |||||||||
Corporate and Other (a) | |||||||||||
| Property, Plant and Equipment in Service | 240.5 | 231.9 | |||||||||
| Construction Work in Progress | 9.6 | 3.8 | |||||||||
| Accumulated Depreciation | (126.5) | (113.3) | |||||||||
| Corporate and Other – Net | 123.6 | 122.4 | |||||||||
| Property, Plant and Equipment – Net | $4,840.8 | $4,377.0 | |||||||||
| Property, Plant and Equipment | |||||||
| As of December 31 | 2017 | 2016 | |||||
| Millions | |||||||
| Regulated Operations | |||||||
| Property, Plant and Equipment in Service | $4,523.7 | $4,437.0 | |||||
| Construction Work in Progress | 121.6 | 84.2 | |||||
| Accumulated Depreciation | (1,520.5 | ) | (1,426.1 | ) | |||
| Regulated Operations – Net | 3,124.8 | 3,095.1 | |||||
| ALLETE Clean Energy | |||||||
| Property, Plant and Equipment in Service | 482.5 | 472.3 | |||||
| Construction Work in Progress | 144.9 | 101.0 | |||||
| Accumulated Depreciation | (60.8 | ) | (41.0 | ) | |||
| ALLETE Clean Energy – Net | 566.6 | 532.3 | |||||
| U.S. Water Services | |||||||
| Property, Plant and Equipment in Service | 24.8 | 19.5 | |||||
| Accumulated Depreciation | (10.4 | ) | (6.9 | ) | |||
| U.S. Water Services – Net | 14.4 | 12.6 | |||||
Corporate and Other (a) | |||||||
| Property, Plant and Equipment in Service | 204.7 | 179.8 | |||||
| Construction Work in Progress | 5.0 | 2.8 | |||||
| Accumulated Depreciation | (93.1 | ) | (81.4 | ) | |||
| Corporate and Other – Net | 116.6 | 101.2 | |||||
| Property, Plant and Equipment – Net | $3,822.4 | $3,741.2 | |||||
Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of assets.
| Estimated Useful Lives of Property, Plant and Equipment (Years) | ||||||||||||||
| Regulated Operations | ||||||||||||||
| 3 to 50 | ALLETE Clean | 5 to 35 | ||||||||||||
| Transmission | 52 to 71 | Corporate and | 3 to | |||||||||||
| Distribution | 19 to 68 |
ALLETE, Inc. 2020 Form 10-K
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NOTE 2. PROPERTY, PLANT AND EQUIPMENT (Continued)
Asset Retirement Obligations. We recognize, at fair value, obligations associated with the retirement of certain tangible, long‑lived assets that result from the acquisition, construction, development or normal operation of the asset. Asset retirement obligations (AROs) relate primarily to the decommissioning of our coal-fired and wind energy facilities, and land reclamation at BNI Energy. AROs are included in Other Non-Current Liabilities on the Consolidated Balance Sheet. The associated retirement costs are capitalized as part of the related long-lived asset and depreciated over the useful life of the asset. Removal costs associated with certain distribution and transmission assets have not been recognized, as these facilities have indeterminate useful lives.
Conditional asset retirement obligations have been identified for treated wood poles and remaining polychlorinated biphenyl and asbestos-containing assets; however, the period of remediation is indeterminable and removal liabilities have not been recognized because they are considered immaterial to our Consolidated Financial Statements.recognized.
Long-standing ratemaking practices approved by applicable state and federal regulatory authorities have allowed provisions for future plant removal costs in depreciation rates. These plant removal cost recoveries are classified either as AROs or as a regulatory liability for non-AROs. To the extent annual accruals for plant removal costs differ from accruals under approved depreciation rates, a regulatory asset has been established in accordance with GAAP for AROs. (See Note 4. Regulatory Matters.)
| Asset Retirement Obligations | |||||||||
| Millions | |||||||||
| Obligation as of December 31, | $138.6 | ||||||||
| Accretion | |||||||||
| Liabilities | |||||||||
| Liabilities Settled | (4.6) | ||||||||
| Revisions in Estimated Cash Flows | |||||||||
| Obligation as of December 31, | |||||||||
| Accretion | |||||||||
| Liabilities | |||||||||
| Liabilities Settled | (3.6) | ||||||||
| Revisions in Estimated Cash Flows | |||||||||
| Obligation as of December 31, | $166.6 | ||||||||
NOTE 3. JOINTLY-OWNED FACILITIES AND PROJECTSASSETS
Boswell Unit 4. Minnesota Power owns 80 percent of the 585 MW Boswell Unit 4. While Minnesota Power operates the plant, certain decisions about the operations of Boswell Unit 4 are subject to the oversight of a committee on which it and WPPI Energy, the owner of the remaining 20 percent,, have equal representation and voting rights. Each owner must provide its own financing and is obligated to its ownership share of operating costs. Minnesota Power’s share of operating expenses for Boswell Unit 4 is included in Operating Expenses on the Consolidated Statement of Income.
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NOTE 3. JOINTLY-OWNED FACILITIES AND ASSETS (Continued)
CapX2020. Minnesota Power was a participant in the The CapX2020 initiative, whichled by electric cooperatives and municipal and investor-owned utilities, represented an effort to ensure electric transmission and distribution reliability in Minnesota and the surrounding region for the future. CapX2020, which consisted of electric cooperatives and municipal and investor-owned utilities, including Minnesota’s largest transmission owners, assessed the transmission system andbased on projected growth in customer demand for electricity through 2020. Minnesota Power participated in threecertain CapX2020 projects which were completed and placed in service in 2011, 2012 andby 2015.
Minnesota Power’s investments in jointly-owned facilities and projectsassets and the related ownership percentages are as follows:
| Regulated Utility Plant | Plant in Service | Accumulated Depreciation | Construction Work in Progress | % Ownership | ||||||||||
| Millions | ||||||||||||||
| As of December 31, 2020 | ||||||||||||||
| Boswell Unit 4 | $663.8 | $288.8 | $15.0 | 80 | ||||||||||
| CapX2020 | 101.0 | 16.0 | 0 | 9.3 - 14.7 | ||||||||||
| Total | $764.8 | $304.8 | $15.0 | |||||||||||
| As of December 31, 2019 | ||||||||||||||
| Boswell Unit 4 | $662.7 | $258.9 | $5.7 | 80 | ||||||||||
| CapX2020 | 101.0 | 13.5 | 0 | 9.3 - 14.7 | ||||||||||
| Total | $763.7 | $272.4 | $5.7 | |||||||||||
| Regulated Utility Plant | Plant in Service | Accumulated Depreciation | Construction Work in Progress | % Ownership | ||||||
| Millions | ||||||||||
| As of December 31, 2017 | ||||||||||
| Boswell Unit 4 | $668.2 | $222.8 | $8.2 | 80 | ||||||
| CapX2020 Projects | 101.0 | 8.4 | — | 9.3 - 14.7 | ||||||
| Total | $769.2 | $231.2 | $8.2 | |||||||
| As of December 31, 2016 | ||||||||||
| Boswell Unit 4 | $668.1 | $211.2 | $8.1 | 80 | ||||||
| CapX2020 Projects | 101.2 | 5.9 | — | 9.3 - 14.7 | ||||||
| Total | $769.3 | $217.1 | $8.1 | |||||||
NOTE 4. REGULATORY MATTERS
Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable and environmental investments and expenditures. (See Transmission Cost Recovery Rider, Renewable Cost Recovery Rider and Environmental Improvement Rider.) Revenue from cost recovery riders was $96.9$29.9 million in 20172020 ($97.131.8 million in 2016; $89.62019; $103.8 million in 2015)2018). With the implementation of final rates in Minnesota Power’s 2016 general rate case in December 2018, certain revenue previously recognized under cost recovery riders was incorporated into base rates.
On FebruaryApril 23, 2017,2020, Minnesota Power filed an additionala request with the MPUC that proposed a resolution of Minnesota Power’s 2020 general rate case. Key components of our proposal included removing the power marketing margin credit in base rates and reflecting actual power marketing margins in the fuel adjustment clause effective May 1, 2020; refunding to further reduce its requestedcustomers interim rates collected through April 2020; increasing customer rates 4.1 percent compared to the 5.8 percent increase reflected in interim rates; and a provision that Minnesota Power would not file another rate increase.case until at least November 1, 2021, unless certain events occur. In an order dated April 13, 2017,June 30, 2020, the MPUC approved Minnesota Power’s updated retailpetition and proposal to resolve and withdraw the general rate request resulting in a reductioncase. Effective May 1, 2020, customer rates were set at an increase of 4.1 percent with the removal of the power marketing margin credit from base rates. Actual power marketing margins will be reflected in the annualfuel adjustment clause. Reserves for interim rate increase to $32.2rates of $11.7 million beginning May 1, 2017. As a result of working with intervenors and further developments as the rate review progressed, Minnesota Power’s final rate request was adjusted to approximately $49 million on an annualized basis. At a hearing on January 18, 2018, the MPUC made determinations regarding Minnesota Power’s general rate case including allowing a return on common equity of 9.25 percent and a 53.81 percent equity ratio. Upon commencement of final rates, we expect additional revenue of approximately $13 million on an annualized basis. Final rates are expected to commencewere recorded in the fourthsecond quarter of 2018; interim rates will be collected through this period which will be fully offset by2020 and refunded in the recognitionthird and fourth quarters of a corresponding reserve. As a result of the MPUC’s decisions on January 18, 2018, 2020.
FERC-Approved Wholesale Rates. Minnesota Power has recorded a reserve for an interim rate refund of approximately $32 million as of December 31, 2017. The MPUC also disallowed recovery of Minnesota Power’s regulatory asset for deferred fuel adjustment clause costs due to the anticipated adoption of a forward-looking fuel adjustment clause methodology resulting in a $19.5 million pre-tax charge to Fuel, Purchased Power and Gas – Utility in 2017. An order from the MPUC setting forth the effective date of final rates is expected by March 12, 2018. Minnesota Power will review this order for potential reconsideration of certain issues at that time.
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NOTE 4. REGULATORY MATTERS (Continued)
Electric Rates (Continued)
Minnesota Power’s wholesale electric contract with the Nashwauk Public Utilities Commission was extended in October 2020 and is effective through at least December 31, 2032. No termination notice may be given for this contract prior to July 1, 2029.2037. The wholesale electric service contractscontract with SWL&P and another municipal customer areis effective through at least February 28, 2021, and through June 30, 2019, respectively.2024. Under the agreement with SWL&P, no termination notice has been given. The other municipal customer provided a contract termination notice in June 2016. Minnesota Power currently provides approximately 29 MW of average monthly demand to this customer. The rates included in these three2 contracts are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate of return that is equal to Minnesota Power’s authorized rate of return for Minnesota retail customers. The formula-based rate methodology also provides for a yearly true-up calculation for actual costs incurred.
Minnesota Power’s wholesale electric contracts with 14 other municipal customers are effective through at least December 31, 2024.varying dates ranging from 2024 through 2029. No termination notices may be given prior to three years before maturity. These contracts includehad fixed capacity charges through 2018; beginning in 2019, the capacity charge will beis determined using a cost-based formula methodology with limits on the annual change from the previous year’s capacity charge. The base energy charge for each year of the contract term will beis set each January 1, subject to monthly adjustment, and will also beis determined using a cost-based formula methodology.
The contract with a former municipal customer expired in June 2019. Minnesota Power historically provided approximately 29 MW of average monthly demand to this customer.
Transmission Cost Recovery Rider.Rider. Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In a February 2016an order dated December 3, 2020, the MPUC approved Minnesota Power’s request filed in July 2019 for updated customer billing rates which allowsallowing Minnesota Power to charge retail customers on a current basis for the costs of constructing certain transmission facilities plus a return on the capital invested. AsOn December 28, 2020, Minnesota Power filed a result of thepetition seeking MPUC approval of the certificate of needto update customer billing rates for additional investments made for the GNTL in 2015, the project is eligible for cost recovery under the existing transmission cost recovery rider. Minnesota Power is funding the construction of the GNTL with a subsidiary of Manitoba Hydro (see Great Northern Transmission Line), and anticipates including its portion of the investments and expenditures for the GNTL in future transmission bill factor filings.GNTL.
Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for certain renewable investments and expenditures related to Bison, and the restoration and repair of Thomson.expenditures. The cost recovery rider allows Minnesota Power to charge retail customers on a current basis for the costs of constructing certain renewable investments plus a return on the capital invested. Updated customer billing rates for the renewable cost recovery rider were approved by the MPUC in an order dated November 8, 2017.a December 10, 2020 order.
Minnesota Power also has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard. (See Minnesota Solar Energy Standard.) Currently, there is no approvedOn June 30, 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs.costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard.
Environmental Improvement Rider. Minnesota Power has an approved environmental improvement rider in place for investments and expenditures related to the implementation of the Boswell Unit 4 mercury emissions reduction plan completed in 2015. Updated customer billing rates for the environmental improvement rider were approved by the MPUC in a December 2016 order; however, in an order dated March 22, 2017, the MPUC approved a request byNovember 2018 order. On January 19, 2021, Minnesota Power filed a petition seeking MPUC approval to delay implementation ofend the updated rates until resolution of its 2016 general rate case. (See 2016 Minnesota General Rate Case.)environmental improvement rider.
Fuel Adjustment Clause Reform Pilot. In ana 2017 order, dated December 19, 2017, the MPUC adopted a three-year pilot program to implement certain procedural reforms to the Minnesota utilities’ automatic fuel adjustment clause (FAC) for fuel and purchased power. TheWith this order, changes the method of accounting for all Minnesota electric utilities changed to a monthly budgeted, forwarded-lookingforward-looking FAC with an annual prudence review and true-up to actual allowed costs. The MPUC is seeking input fromOn May 1, 2019, Minnesota electric utilities and other stakeholders on the implementation and transition accounting needed to adopt the change. The three-year pilot program is expected to begin in 2019. At a hearing on January 18, 2018,Power filed its fuel adjustment forecast for 2020, which was accepted by the MPUC disallowed recoveryin an order dated November 14, 2019, for purposes of setting fuel adjustment clause rates for 2020, subject to a true-up filing in 2021. On May 1, 2020, Minnesota Power filed its fuel adjustment forecast for 2021, which was approved by the MPUC in an order dated December 22, 2020.
On March 2, 2020, Minnesota Power filed its fuel adjustment clause report covering the period July 2018 through December 2019. In an order dated September 16, 2020, the MPUC referred the review of Minnesota Power’s regulatory assetforced outage costs during the period of the report, which totaled approximately $8 million, to an administrative law judge for deferred fuel adjustment clause costs duea contested case hearing to recommend to the anticipated adoptionMPUC if any of those costs should be returned to customers. A recommendation by the forward-looking fuel adjustment clause methodologyadministrative law judge is expected in the third quarter of 2021. We cannot predict the outcome of this proceedingproceeding.
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NOTE 4. REGULATORY MATTERS (Continued)
Electric Rates (Continued)
COVID-19 Related Deferred Accounting. In an order dated March 24, 2020, the PSCW authorized public utilities, including SWL&P, to defer expenditures incurred by the utility resulting in a $19.5 million pre-tax charge to Fuel, Purchasedfrom its compliance with state government or regulator orders during Wisconsin’s declared public health emergency for COVID-19. On April 20, 2020, Minnesota Power and Gas – Utility in 2017.
Minnesota Power submitted a petition in November 2020 to the MPUC requesting authority to track and record as a regulatory asset lost large industrial customer revenue resulting from the idling of USS Corporation’s Keetac plant and Verso Corporation’s paper mill in Duluth, Minnesota. Keetac and Verso represent revenue of approximately $30 million annually, net of associated expense savings such as fuel costs. Minnesota Power proposed in this petition to defer any lost revenue related to the idling of the TCJAKeetac facility and the Verso paper mill to its next general rate case or other proceeding for review for recovery by the MPUC. Minnesota Power and SWL&P as regulatory assets and liabilities asexpects a final decision by the benefits of the TCJA are expected to be passed back to our customers over time. (See Regulatory Assets and Liabilities.) The final amount and timing over which the benefits of the TCJA will be passed back to customers is expected to be determinedMPUC in these dockets; however, we are unable to predict the outcome of these regulatory proceedings.mid-2021.
Integrated Resource Plan.In 2015, Minnesota Power filed its 2015 IRP with the MPUC which included an analysis of a variety of existing and future energy resource alternatives and a projection of customer cost impact by class. The 2015 IRP also contained steps in Minnesota Power’s EnergyForward strategic plan including the economic idling of Taconite Harbor Units 1 and 2 which occurred in September 2016, the ceasing of coal-fired operations at Taconite Harbor in 2020, and the addition of between 200 MW and 300 MW of natural gas-fired generation in the next decade. In a July 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for the economic idling of Taconite Harbor Units 1 and 2 and the ceasing of coal-fired operations at Taconite Harbor in 2020, directed Minnesota Power to retire Boswell Units 1 and 2, no later than 2022, required an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal, and required Minnesota Power to conduct requestrequests for proposalsproposal for additional wind, solar and demand response resource additions subject to further MPUC approvals. In October 2016,additions. Minnesota Power announcedretired Boswell Units 1 and 2 in the fourth quarter of 2018. The MPUC also required a baseload retirement study analyzing its existing fleet potential early retirement scenarios of Boswell Units 3 and 4, as well as a securitization plan.
2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will be retiredplay a significant role in 2018.completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in late 2021.
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NOTE 4. REGULATORY MATTERS (Continued)
Conservation Improvement Program. Minnesota requires electric utilities to spend a minimum of 1.5 percent of gross operating revenues, excluding revenue received from exempt customers, from service provided in the state on energy CIPs each year and establish an annual energy-savings goal of 1.5 percent of annual retail energy sales. These investments are recovered from certain retail customers through a combination of the conservation cost recovery charge included in retail base rates and a conservation program adjustment, which is adjusted annually through the CIP consolidated filing. The MPUC allows utilities to accumulate, in a deferred account for future cost recovery, all CIP expenditures, any financial incentive earned for cost-effective program achievements and a carrying charge on the deferred account balance. Minnesota Power refers to its conservation programs collectively as the “Power of One”. On November 16, 2017, the Minnesota Department of Commerce approved Minnesota Power’s modified CIP triennial filing for 2017 through 2019, which outlines Minnesota Power’s CIP spending and energy-saving goals for 2017 through 2019. Minnesota Power’s CIP investment goal was $10.3 million for 2017 ($7.3 million for 2016; $7.1 million for 2015), with actual spending of $8.1 million in 2017 ($7.4 million in 2016; $6.6 million in 2015). The investment goals for 2018 and 2019 are $10.3 million and $10.5 million, respectively.year.
On April 3, 2017,May 1, 2020, Minnesota Power submitted its 2016 CIP2019 consolidated filing which detaileddetailing Minnesota Power’s CIP program results and requestedrequesting a CIP financial incentive of $5.5$2.4 million based upon MPUC procedures. Inprocedures, which was recognized in the third quarter of 2020 upon approval by the MPUC in an order dated June 22, 2017,August 18, 2020. In 2019, the MPUC approved Minnesota Power’s CIP consolidated filing, including the requested CIP financial incentive whichof $2.8 million was recorded as revenue and as a regulatory assetrecognized in 2017. The approved financial incentive will be recovered through customer billing rates in 2017 and 2018. In 2016 and 2015, the third quarter upon approval by the MPUC of Minnesota Power’s 2018 CIP financial incentives recognized were $7.5 million and $6.2 million, respectively.consolidated filing. CIP financial incentives are recognized in the period in which the MPUC approves the filing.
On July 1, 2020, Minnesota Power submitted its CIP triennial filing for 2021 through 2023 to the MPUC and Minnesota Department of Commerce, which outlines Minnesota Power’s CIP spending and energy-saving goals for those years. Minnesota Power’s CIP investment goals are $10.5 million for 2021, $10.7 million for 2022 and $10.9 million for 2023, subject to MPUC and Minnesota Department of Commerce approval.
MISO Return on Equity Complaints. In 2013, several customer groups located within the MISO service area filed complaints with the FERC requesting, among other things, a reduction in the base return on equity used by Complaint. MISO transmission owners, including ALLETE and ATC, to 9.15 percent. In 2015, a federal administrative law judge ruled on the complaint proposing a reduction in the basehave an authorized return on equity to 10.32of 10.02 percent, or 10.82 percent including an incentive adder for participation in a regional transmission organization. In September 2016, the FERC issued an order affirming the administrative law judge’s recommendation.
Minnesota Solar Energy Standard. Minnesota law requiresrequired at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generated by solar energy by the end of 2020. At least 10 percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 40kW40 kW or less and community solar garden subscriptions. In a 2016 order, the MPUC approved
Minnesota Power’s solar energy supply consists of Camp Ripley, a 10 MW utility scale solar projectenergy facility at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, as eligible to meet the solar energy standard and for current cost recovery. Camp Ripley was completed in the fourth quarter of 2016. In a July 2016 order, the MPUC approved a community solar garden project in northeastern Minnesota, which is comprised of a 1 MW solar array owned and operated by a third party with the output purchased by Minnesota Power and a 40 kW solar array that is owned and operated by Minnesota Power. Minnesota Power believes Camp Ripley and the community solar garden arrays will meet approximately one‑thirdhas met both parts of the overallsolar mandate. Additionally, in an order dated February 10, 2017,
On May 20, 2020, the MPUC approvedissued a notice requesting all regulated gas and electric utilities provide a list of all ongoing, planned, or possible investments that support Minnesota’s energy policy objectives and aid economic recovery in Minnesota, Power’samong other items. On June 17, 2020, Minnesota Power filed a response which included outlining a proposal to increase the amountaccelerate its plans for solar energy with an estimated $40 million investment in approximately 20 MW of solar rebates available for customer-sited solar installations and recover costs of the program through Minnesota Power’s renewable cost recovery rider. The proposal to incentivize customer‑sited solar installations and the community solar garden subscriptions is expected to meet a portion of the required small scale solar mandate.energy projects in Minnesota.
Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidancestandards for the effecteffects of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. NoWith the exception of the regulatory asset for Boswell Units 1 and 2 net plant and equipment, no other regulatory assets or liabilities are currently earning a return. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.
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NOTE 4. REGULATORY MATTERS (Continued)
| Regulatory Assets and Liabilities | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Non-Current Regulatory Assets | ||||||||
Defined Benefit Pension and Other Postretirement Benefit Plans (a) | $259.7 | $212.9 | ||||||
Income Taxes (b) | 113.7 | 123.4 | ||||||
Asset Retirement Obligations (c) | 31.6 | 32.0 | ||||||
Cost Recovery Riders (d) | 54.0 | 24.7 | ||||||
Boswell Units 1 and 2 Net Plant and Equipment (e) | 5.0 | 10.7 | ||||||
Manufactured Gas Plant (f) | 8.8 | 8.2 | ||||||
| PPACA Income Tax Deferral | 4.5 | 4.8 | ||||||
| Other | 3.6 | 3.8 | ||||||
| Total Non-Current Regulatory Assets | $480.9 | $420.5 | ||||||
Current Regulatory Liabilities (g) | ||||||||
Fuel Adjustment Clause (h) | $3.7 | 0 | ||||||
| Transmission Formula Rates | 2.9 | $1.7 | ||||||
| Other | 1.0 | 0.2 | ||||||
| Total Current Regulatory Liabilities | 7.6 | 1.9 | ||||||
| Non-Current Regulatory Liabilities | ||||||||
Income Taxes (b) | 375.3 | 407.2 | ||||||
Wholesale and Retail Contra AFUDC (i) | 86.6 | 79.3 | ||||||
Plant Removal Obligations (j) | 41.2 | 35.5 | ||||||
Defined Benefit Pension and Other Postretirement Benefit Plans (a) | 4.4 | 17.0 | ||||||
North Dakota Investment Tax Credits (k) | 12.0 | 12.3 | ||||||
Conservation Improvement Program (l) | 1.5 | 5.4 | ||||||
| Other | 3.8 | 3.6 | ||||||
| Total Non-Current Regulatory Liabilities | 524.8 | 560.3 | ||||||
| Total Regulatory Liabilities | $532.4 | $562.2 | ||||||
(a)Defined benefit pension and other postretirement items included in our Regulated Operations, which are otherwise required to be recognized in accumulated other comprehensive income as actuarial gains and losses as well as prior service costs and credits, are recognized as regulatory assets or regulatory liabilities on the Consolidated Balance Sheet. The asset or liability will decrease as the deferred items are amortized and recognized as components of net periodic benefit cost. (See Note 11. Pension and Other Postretirement Benefit Plans.)
(b)These costs represent the difference between deferred income taxes recognized for financial reporting purposes and amounts previously billed to our customers. The balances will primarily decrease over the remaining life of the related temporary differences.
(c)Asset retirement obligations will accrete and be amortized over the lives of the related property with asset retirement obligations.
(d)The cost recovery rider regulatory assets and liabilities are revenue not yet collected from our customers and cash collections from our customers in excess of the revenue recognized, respectively, primarily due to capital expenditures related to Bison, investment in CapX2020 projects, the Boswell Unit 4 environmental upgrade and the GNTL. The cost recovery rider regulatory assets as of December 31, 2020, will be recovered within the next two years.
(e)In 2018, Minnesota Power retired Boswell Units 1 and 2 and reclassified the remaining net book value from property, plant and equipment to a regulatory asset on the Consolidated Balance Sheet. The remaining net book value is currently included in Minnesota Power’s rate base and Minnesota Power is earning a return on the outstanding balance.
(f)The manufactured gas plant regulatory asset represents costs of remediation for a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P. We expect recovery of these remediation costs to be allowed by the PSCW in rates over time.
(g)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
(h)Fuel adjustment clause regulatory liability represents the amount expected to be refunded to customers for the over-collection of fuel adjustment clause recoveries. (See Fuel Adjustment Clause Reform.)
(i)Wholesale and retail contra AFUDC represents amortization to offset AFUDC Equity and Debt recorded during the construction period of our cost recovery rider projects prior to placing the projects in service. The regulatory liability will decrease over the remaining depreciable life of the related asset.
(j)Non-legal plant removal obligations included in retail customer rates that have not yet been incurred.
(k)North Dakota investment tax credits expected to be realized from Bison that will be credited to Minnesota Power’s retail customers through future renewable cost recovery rider filings as the tax credits are utilized.
(l)The conservation improvement program regulatory liability represents CIP expenditures, any financial incentive earned for cost-effective program achievements and a carrying charge deferred for future refund over the next year following MPUC approval.
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| Regulatory Assets and Liabilities | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
Current Regulatory Assets (a) | ||||||
| Deferred Fuel Adjustment Clause | — | $18.6 | ||||
| Non-Current Regulatory Assets | ||||||
Defined Benefit Pension and Other Postretirement Benefit Plans (b) | $220.3 | 226.1 | ||||
Income Taxes (c)(d) | 112.8 | 33.8 | ||||
Asset Retirement Obligations (e) | 29.6 | 26.0 | ||||
Manufactured Gas Plant (f) | 8.1 | 1.0 | ||||
| PPACA Income Tax Deferral | 5.0 | 5.0 | ||||
Conservation Improvement Program (g) | 3.3 | 4.0 | ||||
Cost Recovery Riders (h) | — | 30.5 | ||||
| Other | 5.6 | 3.7 | ||||
| Total Non-Current Regulatory Assets | 384.7 | 330.1 | ||||
| Total Regulatory Assets | $384.7 | $348.7 | ||||
| Non-Current Regulatory Liabilities | ||||||
Income Taxes (d) | $411.2 | $19.1 | ||||
Wholesale and Retail Contra AFUDC (i) | 57.9 | 56.8 | ||||
Provision for Interim Rate Refund (j) | 23.7 | — | ||||
| Plant Removal Obligations | 20.3 | 19.1 | ||||
North Dakota Investment Tax Credits (k) | 14.1 | 28.2 | ||||
Cost Recovery Riders (h) | 2.2 | — | ||||
| Other | 2.6 | 2.6 | ||||
| Total Non-Current Regulatory Liabilities | $532.0 | $125.8 | ||||
NOTE 5. INVESTMENT IN ATCEQUITY INVESTMENTS
Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. As ofFor the year ended December 31, 2017, our equity investment in ATC was $118.7 million ($135.6 million as of December 31, 2016). On January 31, 2018,2020 we invested an additional $1.6$2.7 million in ATC. In total, weWe expect to invest approximately $6$2.0 million throughout 2018.in 2021.
| ALLETE’s Investment in ATC | ||||||||
| Year Ended December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Equity Investment Beginning Balance | $141.6 | $128.1 | ||||||
| Cash Investments | 2.7 | 6.6 | ||||||
| Equity in ATC Earnings | 22.3 | 21.7 | ||||||
| Distributed ATC Earnings | (18.9) | (16.1) | ||||||
| Amortization of the Remeasurement of Deferred Income Taxes | 1.3 | 1.3 | ||||||
| Equity Investment Ending Balance | $149.0 | $141.6 | ||||||
| ALLETE’s Investment in ATC | ||||||
| Year Ended December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Equity Investment Beginning Balance | $135.6 | $124.5 | ||||
| Cash Investments | 7.8 | 5.4 | ||||
| Equity in ATC Earnings | 22.5 | 18.5 | ||||
| Distributed ATC Earnings | (19.3 | ) | (12.8 | ) | ||
Remeasurement of Deferred Income Taxes (a) | (27.9 | ) | — | |||
| Equity Investment Ending Balance | $118.7 | $135.6 | ||||
| ATC Summarized Financial Data | ATC Summarized Financial Data | |||||||||||||
| Balance Sheet Data | Balance Sheet Data | |||||||||||||
| As of December 31 | 2017 | 2016 | As of December 31 | 2020 | 2019 | |||||||||
| Millions | Millions | |||||||||||||
| Current Assets | $87.7 | $75.8 | Current Assets | $92.8 | $84.6 | |||||||||
| Non-Current Assets | 4,598.9 | 4,312.9 | Non-Current Assets | 5,400.5 | 5,244.3 | |||||||||
| Total Assets | $4,686.6 | $4,388.7 | Total Assets | $5,493.3 | $5,328.9 | |||||||||
| Current Liabilities | $767.2 | $495.1 | Current Liabilities | $310.8 | $502.6 | |||||||||
| Long-Term Debt | 1,790.6 | 1,865.3 | Long-Term Debt | 2,512.2 | 2,312.8 | |||||||||
| Other Non-Current Liabilities | 240.3 | 271.5 | Other Non-Current Liabilities | 378.2 | 298.9 | |||||||||
| Members’ Equity | 1,888.5 | 1,756.8 | Members’ Equity | 2,292.1 | 2,214.6 | |||||||||
| Total Liabilities and Members’ Equity | $4,686.6 | $4,388.7 | Total Liabilities and Members’ Equity | $5,493.3 | $5,328.9 | |||||||||
| Income Statement Data | Income Statement Data | |||||||||||||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | Year Ended December 31 | 2020 | 2019 | 2018 | |||||||||||||
| Millions | Millions | |||||||||||||||||||
| Revenue | $721.6 | $650.8 | $615.8 | Revenue | $758.1 | $744.4 | $690.5 | |||||||||||||
| Operating Expense | 344.9 | 322.5 | 319.3 | Operating Expense | 372.4 | 373.5 | 358.7 | |||||||||||||
| Other Expense | 104.1 | 95.5 | 96.1 | Other Expense | 110.9 | 110.5 | 108.3 | |||||||||||||
| Net Income | $272.6 | $232.8 | $200.4 | Net Income | $274.8 | $260.4 | $223.5 | |||||||||||||
| ALLETE’s Equity in Net Income | $22.5 | $18.5 | $16.3 | ALLETE’s Equity in Net Income | $22.3 | $21.7 | $17.5 | |||||||||||||
ALLETE, Inc. 2020 Form 10-K
89
NOTE 6. ACQUISITIONS5. EQUITY INVESTMENTS (Continued)
| ALLETE Clean Energy | U.S. Water Services | Total | |||||||||
| Millions | |||||||||||
| Balance as of December 31, 2015 | $3.3 | $127.3 | $130.6 | ||||||||
Acquired Goodwill (a) | — | 3.9 | 3.9 | ||||||||
Impairment Charge (b) | (3.3 | ) | — | (3.3 | ) | ||||||
| Balance as of December 31, 2016 | — | 131.2 | 131.2 | ||||||||
Acquired Goodwill (a) | — | 16.9 | 16.9 | ||||||||
Other Adjustments (c) | — | 0.2 | 0.2 | ||||||||
| Balance as of December 31, 2017 | — | $148.3 | $148.3 | ||||||||
| December 31, 2016 | Additions (a) | Amortization | December 31, 2017 | ||||||||||
| Millions | |||||||||||||
| Intangible Assets | |||||||||||||
| Definite-Lived Intangible Assets | |||||||||||||
| Customer Relationships | $59.3 | — | $(4.6) | $54.7 | |||||||||
Developed Technology and Other (b) | 6.3 | $0.9 | (0.9) | 6.3 | |||||||||
| Total Definite-Lived Intangible Assets | 65.6 | 0.9 | (5.5) | 61.0 | |||||||||
| Indefinite-Lived Intangible Assets | |||||||||||||
| Trademarks and Trade Names | 16.6 | — | n/a | 16.6 | |||||||||
| Total Intangible Assets | $82.2 | $0.9 | $(5.5) | $77.6 | |||||||||
NOTE 8. INVESTMENTS
| Other Investments | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| ALLETE Properties | $26.4 | $31.7 | ||||
Available-for-sale Securities (a) | 19.1 | 18.8 | ||||
| Cash Equivalents | 3.8 | 1.3 | ||||
| Other | 3.8 | 3.8 | ||||
| Total Other Investments | $53.1 | $55.6 | ||||
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. This category includes primarily equity securities.
Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities. This category includes deferred compensation and fixed income securities.
Level 3 — Significant inputs that are generally less observable from objective sources. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value. This category includesincluded the U.S. Water Services contingent consideration liability.
ALLETE, Inc. 2020 Form 10-K
90
NOTE 9.6. FAIR VALUE (Continued)
The following tables set forth by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2017,2020, and December 31, 2016.2019. Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.
| Fair Value as of December 31, 2020 | |||||||||||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Millions | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Investments (a) | |||||||||||||||||||||||
| Available-for-sale – Equity Securities | $7.2 | 0 | 0 | $7.2 | |||||||||||||||||||
Available-for-sale – Corporate and Governmental Debt Securities (b) | 0 | $10.4 | 0 | 10.4 | |||||||||||||||||||
| Cash Equivalents | 5.5 | 0 | 0 | 5.5 | |||||||||||||||||||
| Total Fair Value of Assets | $12.7 | $10.4 | 0 | $23.1 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
Deferred Compensation (c) | 0 | $21.0 | 0 | $21.0 | |||||||||||||||||||
| Total Fair Value of Liabilities | 0 | $21.0 | 0 | $21.0 | |||||||||||||||||||
| Total Net Fair Value of Assets (Liabilities) | $12.7 | $(10.6) | 0 | $2.1 | |||||||||||||||||||
| Fair Value as of December 31, 2017 | |||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Millions | |||||||||||||||
| Assets: | |||||||||||||||
Investments (a) | |||||||||||||||
| Available-for-sale – Equity Securities | $10.2 | — | — | $10.2 | |||||||||||
| Available-for-sale – Corporate and Governmental Debt Securities | — | $8.9 | — | 8.9 | |||||||||||
| Cash Equivalents | 3.8 | — | — | 3.8 | |||||||||||
| Total Fair Value of Assets | $14.0 | $8.9 | — | $22.9 | |||||||||||
Liabilities: (b) | |||||||||||||||
| Deferred Compensation | — | $18.2 | — | $18.2 | |||||||||||
| U.S. Water Services Contingent Consideration | — | — | $5.4 | 5.4 | |||||||||||
| Total Fair Value of Liabilities | — | $18.2 | $5.4 | $23.6 | |||||||||||
| Total Net Fair Value of Assets (Liabilities) | $14.0 | $(9.3) | $(5.4) | $(0.7) | |||||||||||
(a)Included in Other Non-Current Assets on the Consolidated Balance Sheet.
| Fair Value as of December 31, 2016 | |||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |||||||||||
| Millions | |||||||||||||||
| Assets: | |||||||||||||||
Investments (a) | |||||||||||||||
| Available-for-sale – Equity Securities | $7.1 | — | — | $7.1 | |||||||||||
| Available-for-sale – Corporate and Governmental Debt Securities | — | $11.7 | — | 11.7 | |||||||||||
| Cash Equivalents | 1.3 | — | — | 1.3 | |||||||||||
| Total Fair Value of Assets | $8.4 | $11.7 | — | $20.1 | |||||||||||
Liabilities: (b) | |||||||||||||||
| Deferred Compensation | — | $16.0 | — | $16.0 | |||||||||||
| U.S. Water Services Contingent Consideration | — | — | $25.0 | 25.0 | |||||||||||
| Total Fair Value of Liabilities | — | $16.0 | $25.0 | $41.0 | |||||||||||
| Total Net Fair Value of Assets (Liabilities) | $8.4 | $(4.3) | $(25.0) | $(20.9) | |||||||||||
(c)Included in Other Non-Current Liabilities on the consideration expected to be transferred, discounted to present value. The discount rate was determined at the time of measurementConsolidated Balance Sheet.
| Fair Value as of December 31, 2019 | |||||||||||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Millions | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
Investments (a) | |||||||||||||||||||||||
| Available-for-sale – Equity Securities | $11.1 | 0 | 0 | $11.1 | |||||||||||||||||||
| Available-for-sale – Corporate and Governmental Debt Securities | 0 | $9.7 | 0 | 9.7 | |||||||||||||||||||
| Cash Equivalents | 0.9 | 0 | 0 | 0.9 | |||||||||||||||||||
| Total Fair Value of Assets | $12.0 | $9.7 | 0 | $21.7 | |||||||||||||||||||
Liabilities: (b) | |||||||||||||||||||||||
| Deferred Compensation | 0 | $21.2 | 0 | $21.2 | |||||||||||||||||||
| Total Fair Value of Liabilities | 0 | $21.2 | 0 | $21.2 | |||||||||||||||||||
| Total Net Fair Value of Assets (Liabilities) | $12.0 | $(11.5) | 0 | $0.5 | |||||||||||||||||||
(a)Included in accordance with generally accepted valuation methods. The fair value of the acquisition contingent consideration is remeasured to arrive at estimated fair value each reporting period with the change in fair value recognized as income or expense inOther Non-Current Assets on the Consolidated Statement of Income. Changes toBalance Sheet.
(b)Included in Other Non-Current Liabilities on the fair value of the acquisition contingent consideration can result from changes in discount rates, timing of milestones that trigger payments, and the timing and amount of earnings estimates. Using different valuation assumptions, including earnings projections or discount rates, may result in different fair value measurements and expense (or income) in future periods. Management analyzes the fair value of the contingent liability on a quarterly basis and makes adjustments as appropriate. The acquisition contingent consideration was measured at $5.4 million as of December 31, 2017.Consolidated Balance Sheet.
The Company’s policy is to recognize transfers in and transfers out of Levels as of the actual date of the event or change in circumstances that caused the transfer. For the years ended December 31, 20172020 and 2016,2019, there were no0 transfers in or out of Levels 1, 2 or 3.
Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instruments approximates the carrying amount. The fair value for the item listed in the following table was based on quoted market prices for the same or similar instruments (Level 2).
ALLETE, Inc. 2020 Form 10-K
91
| Financial Instruments | Carrying Amount | Fair Value | |
| Millions | |||
| Long-Term Debt, Including Long-Term Debt Due Within One Year | |||
| December 31, 2017 | $1,513.3 | $1,627.6 | |
| December 31, 2016 | $1,569.1 | $1,653.8 | |
| Financial Instruments | Carrying Amount | Fair Value | |||||||||
| Millions | |||||||||||
Short-Term and Long-Term Debt (a) | |||||||||||
| December 31, 2020 | $1,806.4 | $2,122.0 | |||||||||
| December 31, 2019 | $1,622.6 | $1,791.8 | |||||||||
(a) Excludes unamortized debt issuance costs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, goodwill, intangible assets, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.
Equity Method Investment. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC. (See Note 5. Investment in ATC.) Investments. The aggregate carrying amount of the investmentour equity investments was $118.7$301.2 million as of December 31, 20172020 ($135.6197.6 million as of December 31, 2016)2019). The Company assesses our investmentequity investments in ATC and Nobles 2 for impairment whenever events or changes in circumstances indicate that the carrying amount of our investment in ATCinvestments may not be recoverable. For the years ended December 31, 20172020 and 2016,2019, there were no0 indicators of impairment.
Property, Plant and Equipment. The Company assesses the impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. The impairment of ALLETE Clean Energy’s goodwill in 2016, primarily due to lower estimated energy prices in periods not under PSAs, caused management to review ALLETE Clean Energy’s WTGs for impairment. Based on the results of the undiscounted cash flow analysis, the undiscounted future cash flows were adequate to recover the carrying value of the WTGs. In 2015, the Company implemented a revised strategy for its real estate assets and recorded a non-cash impairment charge of $36.3 million for ALLETE Properties, reducing the carrying value of the real estate to its estimated fair value. (See Note 1. Operations and Significant Accounting Policies.) For the yearyears ended December 31, 2017,2020, and 2019, there were no indicatorswas 0 impairment of impairment.property, plant, and equipment.
We believe that long-standing ratemaking practices approved by applicable state and federal regulatory commissions allow for the recovery of the remaining book value of retired plant assets. In 2015, Minnesota Power retired Taconite Harbor Unit 3 and converted Laskin to operate on natural gas which were actions included in Minnesota Power’s MPUC-approved 2013 IRP. In a July 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The 2015 IRP containscontained steps in Minnesota Power’s EnergyForward plan including the economic idling of Taconite Harbor Units 1 and 2 in September 2016, and the ceasing of coal-fired operations at Taconite Harbor in 2020. (See Note 4. Regulatory Matters.)As of December 31, 2020, Taconite Harbor had a net book value of approximately $50 million. The MPUC order for the 2015 IRP also directed Minnesota Power to retire Boswell Units 1 and 2, no later than 2022. In Octoberwhich occurred in the fourth quarter of 2018. As part of the 2016 Minnesota Power announced thatgeneral retail rate case, the MPUC allowed recovery of the remaining book value of Boswell Units 1 and 2 will be retired in 2018.through 2022. In its latest IRP filing, Minnesota Power proposed retiring Boswell Unit 3 by 2030, which has a net book value of approximately $255 million as of December 31, 2020. (See Note 4. Regulatory Matters.) We do not expect to record any impairment charge as a result of the retirement of Taconite Harbor Unit 3, the ceasing of coal-fired operationsthese operating changes at Taconite Harbor Units 1 and 2, or the conversion of Laskin to operate on natural gas.Boswell. In addition, we expect to be able to continue depreciating these assets for at least their established remaining useful lives; however, we are unable to predict the impact of regulatory outcomes resulting in changes to their established remaining useful lives.
We continue to monitor changes in the broader energy markets that could be indicators of impairment at ALLETE Clean Energy wind energy facilities upon contract expirations. A continued decline in energy prices could result in a future impairment.
NOTE 10.7. SHORT-TERM AND LONG-TERM DEBT
Short-Term Debt. As of December 31, 2017,2020, total short-term debt outstanding was $64.1$203.7 million ($187.7212.9 million as of December 31, 2016)2019), and consisted of long-term debt due within one year and included $0.5$0.3 million of unamortized debt issuance costs.
As of December 31, 2017,2020, we had consolidated bank lines of credit aggregating $407.0 million ($409.0407.0 million as of December 31, 2016)2019), the majoritymost of which expire in October 2020.January 2024. We had $11.9$22.3 million outstanding in standby letters of credit and no0 outstanding draws under our lines of credit as of December 31, 20172020 ($11.162.0 million in standby letters of credit and no0 outstanding draws as of December 31, 2016)2019).
ALLETE, Inc. 2020 Form 10-K
92
NOTE 7. SHORT-TERM AND LONG-TERM DEBT (Continued)
Long-Term Debt. As of December 31, 2017,2020, total long-term debt outstanding was $1,439.2$1,593.2 million ($1,370.41,400.9 million as of December 31, 2016)2019) and included $9.5$9.2 million of unamortized debt issuance costs. The aggregate amount of long-term debt maturing in 20182021 is $64.6$204.0 million; $57.6 million in 2019; $143.0 million in 2020; $97.8 million in 2021; $88.0$89.2 million in 2022; $89.1 million in 2023; $73.9 million in 2024; $241.1 million in 2025; and $1,062.3$1,109.1 million thereafter. Substantially all of our regulated electric plant is subject to the lien of the mortgages collateralizing outstanding first mortgage bonds. The mortgages contain non-financial covenants customary in utility mortgages, including restrictions on our ability to incur liens, dispose of assets, and merge with other entities.
Minnesota Power is obligated to make financing payments for the Camp Ripley solar array totaling $1.4 million annually during the financing term, which expires in 2027. Minnesota Power has the option at the end of the financing term to renew for a two‑2‑year term, or to purchase the solar array for approximately $4 million. Minnesota Power anticipates exercising the purchase option when the term expires.
On June 1, 2017,January 10, 2020, ALLETE entered into a $200 million unsecured term loan agreement (January 2020 Term Loan) of which the full amount was repaid in 2020. Interest was payable monthly at a rate per annum equal to LIBOR plus 0.55 percent. Proceeds from the January 2020 Term Loan were used for construction-related expenditures.
On April 8, 2020, ALLETE entered into a $115 million unsecured term loan agreement (April 2020 Term Loan) of which $40 million remains outstanding as of December 31, 2020. The April 2020 Term Loan is due April 7, 2021, and may be repaid at any time. Interest is payable monthly at a rate per annum equal to LIBOR plus 1.7 percent with a LIBOR floor of 0.75 percent. Proceeds from the April 2020 Term Loan were used for general corporate purposes.
On August 3, 2020, ALLETE issued $80.0first mortgage bonds (Bonds) to certain institutional buyers in the private placement market as follows:
| Maturity Date | Principal Amount | Interest Rate | ||||||
| August 1, 2030 | $46 Million | 2.50% | ||||||
| August 1, 2050 | $94 Million | 3.30% | ||||||
ALLETE has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. ALLETE used the proceeds from the sale of the Bonds to fund utility capital investment and for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.
��
On September 10, 2020, ALLETE sold $150 million of itsthe Company’s senior unsecured notes (the Notes)(Notes) to certain institutional buyers in the private placement market. The Notes were issuedsold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors. The Notes bear interest at 3.11a rate of 2.65 percent and mature on June 1, 2027. September 10, 2025.
Interest on the Notes is payable semi-annually in Juneon March 1 and DecemberSeptember 1 of each year, commencing on DecemberMarch 1, 2017. ALLETE2021. The Company has the option to prepay all or a portion of the Notes at its discretion, subject to a make-whole provision. The Notes are subject to additional terms and conditions which are customary for these types of transactions. Proceeds from the sale of the Notes were used to redeem debt, fund corporate growth opportunitiesfor construction-related expenditures and for general corporate purposes.
On August 25, 2017,December 28, 2020, a subsidiary of ALLETE Clean Energy entered into a $40.0$100.0 million unsecured term loan agreement (Term(December 2020 Term Loan)., with ALLETE Clean Energy and ALLETE as guarantors, and borrowed $65 million upon execution. The additional draw of $35 million provided under the December 2020 Term Loan was made in January 2021. The December 2020 Term Loan is an unsecured, single draw loan that is due on August 25, 2020,December 27, 2021, and may be prepaid at any time subject to a make-whole provision.time. Interest on the December 2020 Term Loan is payable quarterlymonthly at a rate per annum equal to LIBOR plus 1.0251.125 percent. Proceeds from the December 2020 Term Loan were used for general corporate purposes.construction-related expenditures at the Caddo wind energy facility.
ALLETE, entered into a bond purchase agreement providing for the issuance and sale of $60.0 million of its First Mortgage Bonds (the Bonds) that bear interest at 4.07 percent. The Bonds will be issued on or about April 1, 2018, and will mature in April 2048. Interest on the Bonds will be payable semi-annually in April and October of each year, commencing on October 16, 2018. ALLETE has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. The company intends to use the proceeds from the sale of the Bonds to fund utility capital expenditures and for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.Inc. 2020 Form 10-K
93
NOTE 10.7. SHORT-TERM AND LONG-TERM DEBT (Continued)
Long-Term Debt (Continued)
| Long-Term Debt | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| First Mortgage Bonds | ||||||||
| 5.28% Series Due 2020 | 0 | $35.0 | ||||||
| 2.80% Series Due 2020 | 0 | 40.0 | ||||||
| 4.85% Series Due 2021 | $15.0 | 15.0 | ||||||
| 3.02% Series Due 2021 | 60.0 | 60.0 | ||||||
| 3.40% Series Due 2022 | 75.0 | 75.0 | ||||||
| 6.02% Series Due 2023 | 75.0 | 75.0 | ||||||
| 3.69% Series Due 2024 | 60.0 | 60.0 | ||||||
| 4.90% Series Due 2025 | 30.0 | 30.0 | ||||||
| 5.10% Series Due 2025 | 30.0 | 30.0 | ||||||
| 3.20% Series Due 2026 | 75.0 | 75.0 | ||||||
| 5.99% Series Due 2027 | 60.0 | 60.0 | ||||||
| 3.30% Series Due 2028 | 40.0 | 40.0 | ||||||
| 4.08% Series Due 2029 | 70.0 | 70.0 | ||||||
| 3.74% Series Due 2029 | 50.0 | 50.0 | ||||||
| 2.50% Series Due 2030 | 46.0 | 0 | ||||||
| 3.86% Series Due 2030 | 60.0 | 60.0 | ||||||
| 5.69% Series Due 2036 | 50.0 | 50.0 | ||||||
| 6.00% Series Due 2040 | 35.0 | 35.0 | ||||||
| 5.82% Series Due 2040 | 45.0 | 45.0 | ||||||
| 4.08% Series Due 2042 | 85.0 | 85.0 | ||||||
| 4.21% Series Due 2043 | 60.0 | 60.0 | ||||||
| 4.95% Series Due 2044 | 40.0 | 40.0 | ||||||
| 5.05% Series Due 2044 | 40.0 | 40.0 | ||||||
| 4.39% Series Due 2044 | 50.0 | 50.0 | ||||||
| 4.07% Series Due 2048 | 60.0 | 60.0 | ||||||
| 4.47% Series Due 2049 | 30.0 | 30.0 | ||||||
| 3.30% Series Due 2050 | 94.0 | 0 | ||||||
| Variable Demand Revenue Refunding Bonds Series 1997 A Due 2020 | 0 | 13.5 | ||||||
| Unsecured Term Loan Variable Rate Due 2020 | 0 | 110.0 | ||||||
| ALLETE Clean Energy Unsecured Term Loan Variable Rate Due 2021 | 65.0 | 0 | ||||||
| Unsecured Term Loan Variable Rate Due 2021 | 40.0 | 0 | ||||||
| Armenia Mountain Senior Secured Notes 3.26% Due 2024 | 38.6 | 47.8 | ||||||
| Unsecured Senior Notes 2.65% Due 2025 | 150.0 | 0 | ||||||
| Industrial Development Variable Rate Demand Refunding Revenue Bonds Series 2006, Due 2025 | 27.8 | 27.8 | ||||||
| Senior Unsecured Notes 3.11% Due 2027 | 80.0 | 80.0 | ||||||
| SWL&P First Mortgage Bonds 4.15% Series Due 2028 | 15.0 | 15.0 | ||||||
| SWL&P First Mortgage Bonds 4.14% Series Due 2048 | 12.0 | 12.0 | ||||||
| Other Long-Term Debt, 2.97% – 5.75% Due 2021 – 2037 | 43.0 | 46.5 | ||||||
| Unamortized Debt Issuance Costs | (9.5) | (8.8) | ||||||
| Total Long-Term Debt | 1,796.9 | 1,613.8 | ||||||
| Less: Due Within One Year | 203.7 | 212.9 | ||||||
| Net Long-Term Debt | $1,593.2 | $1,400.9 | ||||||
ALLETE, Inc. 2020 Form 10-K
94
| Long-Term Debt | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| First Mortgage Bonds | ||||||
| 1.83% Series Due 2018 | $50.0 | $50.0 | ||||
| 8.17% Series Due 2019 | 42.0 | 42.0 | ||||
| 5.28% Series Due 2020 | 35.0 | 35.0 | ||||
| 2.80% Series Due 2020 | 40.0 | 40.0 | ||||
| 4.85% Series Due 2021 | 15.0 | 15.0 | ||||
| 3.02% Series Due 2021 | 60.0 | 60.0 | ||||
| 3.40% Series Due 2022 | 75.0 | 75.0 | ||||
| 6.02% Series Due 2023 | 75.0 | 75.0 | ||||
| 3.69% Series Due 2024 | 60.0 | 60.0 | ||||
| 4.90% Series Due 2025 | 30.0 | 30.0 | ||||
| 5.10% Series Due 2025 | 30.0 | 30.0 | ||||
| 3.20% Series Due 2026 | 75.0 | 75.0 | ||||
| 5.99% Series Due 2027 | 60.0 | 60.0 | ||||
| 3.30% Series Due 2028 | 40.0 | 40.0 | ||||
| 3.74% Series Due 2029 | 50.0 | 50.0 | ||||
| 3.86% Series Due 2030 | 60.0 | 60.0 | ||||
| 5.69% Series Due 2036 | 50.0 | 50.0 | ||||
| 6.00% Series Due 2040 | 35.0 | 35.0 | ||||
| 5.82% Series Due 2040 | 45.0 | 45.0 | ||||
| 4.08% Series Due 2042 | 85.0 | 85.0 | ||||
| 4.21% Series Due 2043 | 60.0 | 60.0 | ||||
| 4.95% Series Due 2044 | 40.0 | 40.0 | ||||
| 5.05% Series Due 2044 | 40.0 | 40.0 | ||||
| 4.39% Series Due 2044 | 50.0 | 50.0 | ||||
| Unsecured Term Loan Variable Rate Due 2017 | — | 125.0 | ||||
| Senior Unsecured Notes 5.99% Due 2017 | — | 50.0 | ||||
| Variable Demand Revenue Refunding Bonds Series 1997 A Due 2020 | 13.5 | 13.5 | ||||
| Unsecured Term Loan Variable Rate Due 2020 | 40.0 | — | ||||
| Armenia Mountain Senior Secured Notes 3.26% Due 2024 | 65.9 | 74.6 | ||||
| Industrial Development Variable Rate Demand Refunding Revenue Bonds Series 2006, Due 2025 | 27.8 | 27.8 | ||||
| Senior Unsecured Notes 3.11% Due 2027 | 80.0 | — | ||||
| SWL&P First Mortgage Bonds 4.15% Series Due 2028 | 15.0 | 15.0 | ||||
| Other Long-Term Debt, 3.11% – 5.37% Due 2018 – 2037 | 69.1 | 61.2 | ||||
| Unamortized Debt Issuance Costs | (10.0 | ) | (11.0 | ) | ||
| Total Long-Term Debt | 1,503.3 | 1,558.1 | ||||
| Less: Due Within One Year | 64.1 | 187.7 | ||||
| Net Long-Term Debt | $1,439.2 | $1,370.4 | ||||
NOTE 10.7. SHORT-TERM AND LONG-TERM DEBT (Continued)
Long-Term Debt (Continued)
Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00, measured quarterly. As of December 31, 2017,2020, our ratio was approximately 0.420.40 to 1.00. Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. ALLETE has no significant restrictions on its ability to pay dividends from retained earnings or net income. As of December 31, 2017,2020, ALLETE was in compliance with its financial covenants.
NOTE 11.8. COMMITMENTS, GUARANTEES AND CONTINGENCIES
The following table details the estimated minimum payments for certain long-term commitments:
| As of December 31, 2020 | ||||||||||||||||||||
| Millions | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | ||||||||||||||
| Capital Purchase Obligations | $235.0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||
Easements (a) | $5.8 | $6.0 | $6.1 | $6.1 | $6.2 | $175.9 | ||||||||||||||
PPAs (b) | $130.8 | $143.7 | $143.8 | $136.7 | $134.6 | $1,215.6 | ||||||||||||||
Other Purchase Obligations (c) | $40.1 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||
| As of December 31, 2017 | ||||||||||||||||||
| Millions | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | ||||||||||||
| Coal, Rail and Shipping Contracts | $29.0 | $1.8 | — | — | — | — | ||||||||||||
| Leasing Agreements | $14.2 | $12.8 | $9.5 | $7.3 | $6.1 | $30.0 | ||||||||||||
Long-term Service Agreements (a) | $11.0 | $0.9 | — | — | $1.0 | $11.0 | ||||||||||||
PPAs (b) | $104.5 | $107.1 | $115.0 | $144.8 | $144.7 | $1,667.0 | ||||||||||||
(a)Easement obligations represent the minimum payments for our land easement agreements at our wind energy facilities.
delivered. (See Power Purchase Agreements.)
(c)Consists of long-term service agreements for wind energy facilities and minimum purchase commitments under coal and rail contracts.
Power Purchase and Sales Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined that either we have no variable interest in the PPAs, or where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required. These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses or receive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.
These agreements have also been evaluated under the accounting guidance for derivatives. We have determined that either these agreements are not derivatives, or, if they are derivatives, the agreements qualify for the normal purchases and normal sales exemption to the accounting guidance; therefore, derivative accounting is not required.
Square Butte PPA. Minnesota Power has a PPA with Square Butte that extends through 2026 (Agreement). Minnesota Power is obligated to pay its pro rata share of Square Butte’s costs based on its entitlement to the output of Square Butte’s 455 MW coal‑fired generating unit. Minnesota Power’s output entitlement under the Agreement is 50 percent for the remainder of the Agreement, subject to the provisions of the Minnkota Power PSA described in the following table. Minnesota Power’s payment obligation will be suspended if Square Butte fails to deliver any power, whether produced or purchased, for a period of one year. Square Butte’s costs consist primarily of debt service, operating and maintenance, depreciation and fuel expenses. As of December 31, 2017,2020, Square Butte had total debt outstanding of $330.0$268.6 million. Annual debt service for Square Butte is expected to be approximately $49$45.5 million annually through 2023, $30.5 million in each of the next five years, 2018 through 2022,2024 and $26.6 million in 2025, of which Minnesota Power’s obligation is 50 percent. Fuel expenses are recoverable through Minnesota Power’s fuel adjustment clause and include the cost of coal purchased from BNI Energy under a long-term contract.
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NOTE 8. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Power Purchase and Sales Agreements (Continued)
Minnesota Power’s cost of power purchased from Square Butte during 20172020 was $75.7$79.5 million ($73.382.7 million in 2016; $77.82019; $78.0 million in 2015)2018). This reflects Minnesota Power’s pro rata share of total Square Butte costs based on the 50 percent output entitlement. Included in this amount was Minnesota Power’s pro rata share of interest expense of $9.4$7.1 million in 20172020 ($9.68.3 million in 2016; $10.12019; $9.1 million in 2015)2018). Minnesota Power’s payments to Square Butte are approved as a purchased power expense for ratemaking purposes by both the MPUC and the FERC.
Minnesota Power has also entered into the following agreementslong-term PPAs for the purchase or sale of capacity and energy as of December 31, 2017:
2020:
| Counterparty | Quantity | Product | Commencement | Expiration | Pricing | ||||||||||||
| PPAs | |||||||||||||||||
| Calpine Corporation | 25 MW | Capacity | June 2019 | May 2026 | Fixed | ||||||||||||
| Energy | May 2011 | April 2022 | Forward Market Prices |
| Capacity / Energy | June 2020 | May 2035 | (b) |
| PPA 3 | 133 MW | Energy | June 2020 | June 2040 | Forward Market Prices | ||||||||||||
| Capacity / Energy | December 2020 | December 2040 | Fixed |
| Oliver Wind I | (c) | Energy | December 2006 | December 2040 | Fixed | ||||||||||||
| Oliver Wind II | (c) | Energy | December 2007 | December 2040 | Fixed | ||||||||||||
(a)The energy purchased consists primarily of surplus hydro energy on Manitoba Hydro's system and is delivered on a non-firm basis. Minnesota Power will purchase at least 1000000 MWh of energy over the contract term.
(b)The capacity price was adjusted annually until 2020 by the change in a governmental inflationary index. The energy price is based on a formula that includes an annual fixed component adjusted for the change in a governmental inflationary index and a natural gas index, as well as market prices.
(c)The PPAs provide for the purchase of all output from the 50 MW Oliver Wind I and 48 MW Oliver Wind II wind energy facilities.
Minnesota Power has also entered into the following long-term PSAs for the sale of capacity and energy as of December 31, 2020:
| Product | Commencement | Expiration | Pricing | ||||||||||||||
| PSAs | |||||||||||||||||
| (a) | Capacity | June 2022 | May 2025 | Fixed | |||||||||||||
| PSA 2 | 100 MW | Capacity | June 2025 | May 2028 | Fixed | ||||||||||||
| Great River Energy | 100 MW | Capacity | June 2022 | May 2025 | Fixed | ||||||||||||
| Minnkota Power | (b) | Capacity / Energy | June 2014 | December 2026 | (b) | ||||||||||||
| Oconto Electric Cooperative | 25 MW | Capacity / Energy | January 2019 | May 2026 | Fixed | ||||||||||||
| Silver Bay Power | (c) | Energy | January 2017 | December | (d) |
(a)The agreement provides for 75 MW of capacity from June 1, 2022, through May 31, 2023, and increases to 125 MW of capacity from June 1, 2023, through May 31, 2025.
(b)Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power, resulting in Minnkota Power’s net entitlement increasing and Minnesota Power’s net entitlement decreasing until Minnesota Power’s share is eliminated at the end of 2025. Of Minnesota Power’s 50 percent output entitlement, it sold to Minnkota Power approximately 28 percent in 2020 (28 percent in 2019 and in 2018). (See Square Butte PPA.)
(c)Silver Bay Power supplies approximately 90 MW of load to Northshore Mining, an affiliate of Silver Bay Power, which has been served predominately through self-generation by Silver Bay Power. Minnesota Power supplied Silver Bay Power with at least 50 MW of energy and Silver Bay Power had the option to purchase additional energy from Minnesota Power as it transitioned away from self-generation. In the third quarter of 2019, Silver Bay Power ceased self-generation and Minnesota Power began supplying the full energy requirements for Silver Bay Power.
(d)The energy pricing escalates at a fixed rate annually and is adjusted for changes in a natural gas index.
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NOTE 11.8. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Coal, Rail and Shipping Contracts. Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirements through December 2021. Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2021. The costs of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s utility customers through the fuel adjustment clause.
Transmission. We continue to make investments in transmission opportunities that strengthen or enhance the transmission grid or take advantage of our geographical location between sources of renewable energy and end users. These include the GNTL, investments to enhance our own transmission facilities, investments in other transmission assets (individually or in combination with others) and our investment in ATC.
Great Northern Transmission Line. As a condition of the 250 MW long-term PPA entered into with Manitoba Hydro, construction of additional transmission capacity iswas required. As a result, Minnesota Power and Manitoba Hydro proposed construction ofconstructed the GNTL, an approximately 220-mile220‑mile 500-kV transmission line between Manitoba and Minnesota’s Iron Range that was proposed by Minnesota Power and Manitoba Hydro in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainable energy.
totaled approximately $660 million. Also on June 1, 2020, Manitoba Hydro must obtain regulatory and governmental approvals related to a new transmission line in Canada. In 2015,placed the MMTP into service. The 250 MW PPA with Manitoba Hydro submittedcommenced when the final preferred route and EIS for the transmission line in Canada to the Manitoba Conservation and Water Stewardship for regulatory approval. In December 2016, Manitoba Hydro filed an application with the National Energy Board in Canada requesting authorization to construct and operate an international transmission line. Both provincial and federal approvals are pending. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in 2014 and is anticipated to be in service by early 2021.GNTL was placed into service.
Environmental Matters.
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have recently been promulgated by both the EPA and state authorities.authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation.
We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have been obtained. We anticipate that with many state and federal environmental regulations and requirements finalized, or to be finalized in the near future, potential expenditures for future environmental matters may be material and may require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.
We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers.
Air. The electric utility industry is regulated both at the federal and state level to address air emissions. Minnesota Power’s thermal generating facilities mainly burn low-sulfur western sub-bituminous coal. All of Minnesota Power’s coal-fired generating facilities are equipped with pollution control equipment such as scrubbers, baghouses and low NOX technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with emission requirements.
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NOTE 11.8. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Cross-State Air Pollution Rule (CSAPR). The CSAPR requires certain states in the eastern half of the U.S., including Minnesota, to reduce power plant emissions that contribute to ozone or fine particulate pollution in other states. The CSAPR does not require installation of controls; rather it requirescontrols but does require facilities have sufficient allowances to cover their emissions on an annual basis. These allowances are allocated to facilities from each state’s annual budget, and can be bought and sold. Based on our review of the NOx and SO2 allowances issued and pending issuance, we currently expect generation levels and emission rates will result in continued compliance with the CSAPR.
National Ambient Air Quality Standards (NAAQS). The EPA is required to review the NAAQS every five years. If the EPA determines that a state’s air quality is not in compliance with the NAAQS, the state is required to adopt plans describing how it will reduce emissions to attain the NAAQS. FourMinnesota Power actively monitors NAAQS have either recently been reviseddevelopments and compliance costs for existing standards or proposed NAAQS revisions are currentlynot expected to be material. Minnesota is not among the states expected to be impacted by the EPA’s October 20, 2020 proposed rule to revise the 2016 CSAPR Update for revision, as described below.
Climate Change. The scientific community generally accepts that emissions of GHG are linked to global climate change which creates physical and financial risks. Physical risks could include, but are not limited to: increased or decreased precipitation and water levels in lakes and rivers; increased or other changes in temperatures; and changes in the intensity and frequency of extreme weather events. These all have the potential to affect the Company’s business and operations. We are addressing climate change by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customers’ requirements:
•Expanding our renewable power supply;supply for both our operations and the operations of others;
•Providing energy conservation initiatives for our customers and engaging in other demand side management efforts;
•Improving efficiency of our generating facilities;
•Supporting research of technologies to reduce carbon emissions from generating facilities and carbon sequestration efforts; and
•Evaluating and developing less carbon intensive future generating assets such as efficient and flexible natural gas‑fired generating facilities.facilities;
•Managing vegetation on right-of-way corridors to reduce potential wildfire or storm damage risks; and
•Practicing sound forestry management in our service territories to create landscapes more resilient to disruption from climate-related changes, including planting and managing long-lived conifer species.
EPA Regulation of GHG Emissions. In 2010,June 2019, the EPA issuedfinalized several separate rulemakings regarding regulating carbon emissions from electric utility generating units. These rulemakings included repealing the PreventionClean Power Plan (CPP) and adopting the Affordable Clean Energy Rule under Section 111(d) of Significant Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule (Tailoring Rule). The Tailoring Rule establishes permitting thresholds required to address GHG emissions for new facilities, existing facilities that undergo major modifications and other facilities characterized as major sources under the Clean Air Act’s Title V program. For ourAct (CAA) to regulate CO2 emissions at existing facilities, the rule does not require amending our existing Title V operating permits to include GHG requirements, however, GHG requirements may be added to our existing Title V operating permits by the MPCAcoal-fired power plants. The CPP was first announced as these permits are renewed or amended.
On January 19, 2021, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued an opinion vacating the Affordable Clean Energy Rule and remanded the Affordable Clean Energy Rule back to hold CPP-related litigation in suspension while the EPA is reviewingfor further consideration, consistent with the rule. On October 10, 2017,D.C. Circuit’s finding that the EPA issued a notice of proposed rulemaking, proposing to repealerred in interpreting the CPP. On December 28, 2017, an Advanced Notice of Proposed Rulemaking (ANPRM) for a CPP replacement rule was published in the Federal Register.CAA, pending rehearing or appeal.
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NOTE 8. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Minnesota Power is currently evaluating the CPP rescission and recently proposed ANPRM for a CPP replacement rule as it relates to the State of Minnesota as well as its potential impact on the Company. Minnesota hashad already initiated several measures consistent with those called for under the CPP.now repealed CPP and vacated Affordable Clean Energy Rule. Minnesota Power iscontinues implementing its EnergyForward strategic plan that provides for significant emission reductions and diversifying its electricity generation mix to include more renewable and natural gas energy. (See Note 4. Regulatory Matters.)
We are unable to predict the GHG emission compliance costs we might incur;incur as a result of a replacement for the Affordable Clean Energy Rule or other future laws, regulations or administrative policies; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Additionally on January 13, 2021, the EPA issued a rulemaking to apply CO2 emission New Source Performance Standards (NSPS) to new, modified and reconstructed fossil fuel-fired electric generating units under Section 111(b) of the CAA. Minnesota Power is monitoring the NSPS final rule and any further Section 111(b) developments including their potential impact to the Company. The Company’s proposed combined-cycle natural gas-fired generating facility, NTEC, is expected to meet these NSPS requirements.
Water. The Clean Water Act requires National Pollutant Discharge Elimination System (NPDES)NPDES permits be obtained from the EPA (or, when delegated, from individual state pollution control agencies) for any wastewater discharged into navigable waters. We have obtained all necessary NPDES permits, including NPDES storm water permits for applicable facilities, to conduct our operations.
Steam Electric Power Generating Effluent Limitations Guidelines. In 2015, the EPA issued revised federal effluent limitlimitation guidelines (ELG) for steam electric power generating stations under the Clean Water Act. It set effluent limits and prescribed BACT for several wastewater streams, including flue gas desulphurization (FGD) water, bottom ash transport water and coal combustion landfill leachate. On September 13,In 2017, the EPA announced a two-year postponement of the ELG compliance date of November 1, 2018, to November 1, 2020, while the agency reconsidersreconsidered the bottom ash transport water and FGD wastewater provisions. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded back to the EPA portions of the ELG that allowed for continued discharge of legacy wastewater and leachate. On October 13, 2020, the EPA published a final ELG Rule allowing re-use of bottom ash transport water in FGD scrubber systems with limited discharges related to maintaining system water balance. The rule sets technology standards and numerical pollutant limits for discharges of bottom ash transport water and FGD wastewater. Compliance deadlines depend on subcategory, with compliance generally required as soon as possible, beginning after October 13, 2021, but no later than December 31, 2023, or December 31, 2028 in some specific cases. The rule also establishes new subcategories for retiring high-flow and low-utilization units, and establishes a voluntary incentives program for FGD wastewater.
The final ELG rule’sELG's potential impact on Minnesota Power operations is primarily at Boswell. Boswell currently discharges bottom ash contact water through its NPDES permit, and also has a closed-loop FGD system that does not discharge to surface waters, but may do so in the future. future if additional water treatment measures are implemented. With Boswell’s planned conversion to dry FGD handling and storage, ongoing FGD water generation will be reduced, and the majority of FGD waters will be legacy waters to be dewatered from existing impoundments. Re-use and onsite consumption for the majority of FGD waters is planned at Boswell.
Under the existingnew ELG rule, most bottom ash transport water discharge to surface waters must cease no later than December 31, 2023. Bottom2025, except for small discharges needed to retain water balance. The majority of bottom ash contacttransport water will either need to be re-used in a closed-loop process or routed to a FGD scrubber, orscrubber. At Boswell, the bottom ash handling system will needsystems are planned to be converted to a dry process. If FGDprocess, which will eliminate bottom ash transport water.
The EPA’s additional reconsideration of legacy wastewater is discharged indischarge requirements have the future, it will require additional wastewater treatment. The ELG rule provision regarding these two waste-streams are being reconsidered and may change prior to November 1, 2020. Efforts have been underway at Boswell for several yearspotential to reduce the amounttimelines for dewatering Boswell’s existing bottom ash pond. The timing of water dischargeda draft rule addressing legacy wastewater and evaluate potential re-use options in its plant processes.leachate is currently unknown.
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NOTE 8. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
At this time, we cannot estimate whatthat the planned dry conversion of bottom ash handling and storage at Boswell in response to the CCR revisions requiring closure of clay-lined impoundments, as well as other water re-use practices, will reduce or eliminate the need for additional significant compliance costs for ELG bottom ash water and FGD requirements. Compliance costs we might incur related to theseother ELG waste streams (e.g. legacy leachate) or other potential future water discharge regulations;regulations cannot be estimated; however, the costs could be material, including costs associated with retrofits for bottom ash handling, pond dewatering, pond closure, and wastewater treatment and reuse.re-use. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Solid and Hazardous Waste.The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We are required to notify the EPA of hazardous waste activity and, consequently, routinely submit the necessary reports to the EPA.
Coal Ash Management Facilities. Minnesota Power stores or disposesproduces the majority of its coal ash at fourBoswell, with small amounts of its electric generating facilities by the following methods:ash generated at Hibbard Renewable Energy Center. Ash storage and disposal methods include storing ash in linedclay-lined onsite impoundments (ash ponds), disposing of dry ash in a lined dry ash landfill, which has been idled and has a temporary landfill cover in place, applying ash to land as an approved beneficial use, and trucking ash to state permitted landfills.
Coal Combustion Residuals from Electric Utilities (CCR). In 2015, the EPA published the final rule regulating CCR as nonhazardous waste under Subtitle D of the Resource Conservation and Recovery Act (RCRA) in the Federal Register. The rule includes additional requirements for new landfill and impoundment construction as well as closure activities related to certain existing impoundments. Costs of compliance for Boswell and Laskin are expected to occur primarily over the next 1015 years and be between approximately $65 million and $100$120 million. The EPA has indicatedCompliance costs for CCR at Taconite Harbor are not expected to be material. Minnesota Power that the Taconite Harbor landfill iswould seek recovery of additional costs through a CCR unit, based on the EPA’s interpretation of the CCR rule language. Minnesota Power has agreed to post the required CCR information for the Taconite Harbor landfill on Minnesota Power’s website while the CCR issue is resolved. rate proceeding.
Minnesota Power continues to work on minimizing costs through evaluation of beneficial re-use and recycling of CCR and CCR-related waters. On September 13,In 2017, the EPA announced its intention to formally reconsider the CCR rule under Subtitle D of the RCRA. ComplianceIn March 2018, the EPA published the first phase of the proposed rule revisions in the Federal Register. In July 2018, the EPA finalized revisions to elements of the CCR rule, including extending certain deadlines by two years, the establishment of alternative groundwater protection standards for certain constituents and the potential for risk-based management options at facilities based on site characteristics. In August 2018, a U.S. District Court for the District of Columbia decision vacated specific provisions of the CCR rule. The court decision resulted in a change to the status of three existing clay-lined impoundments at Boswell that must now be considered unlined. The EPA proposed additional rule revisions in August and December 2019 to address outstanding issues from litigation and closure timelines for unlined impoundments, respectively. The first of these rules, CCR Rule Part A, was finalized on September 28, 2020. The Part A Rule revision requires unlined impoundments to cease disposal of waste as soon as technically feasible but no later than April 11, 2021. Minnesota Power intends to seek EPA approval to extend the closure date for the two active Boswell impoundments. Additionally, the EPA released a proposed Part B rulemaking in February 2020 that addressed options for beneficial reuse of CCR materials, alternative liner demonstrations, and other CCR regulatory revisions. Portions of the Part B Rule addressing alternative liner equivalency standards were finalized on November 12, 2020. According to the EPA’s current regulatory agenda, the remainder of the proposed Part B Rule is expected to be finalized in mid-2021. Expected compliance costs if any,at Boswell due to the court decision and subsequent rule revisions are reflected in our estimate of compliance costs for the CCR at Taconite Harbor cannot be estimated at this time.rule noted previously. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Other Environmental Matters
Manufactured Gas Plant Site. We are reviewing and addressing environmental conditions at a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P. SWL&P has been working with the Wisconsin Department of Natural Resources (WDNR) in determining the extent and location of contamination at the site and surrounding properties. In December 2017,January 2021, SWL&P submitted a final remedial actions options report to the WDNR authorized SWL&Pwith remedial site design expected to transition from site investigation into the remedial design process.be completed in 2021. As of December 31, 2017,2020, we have recorded a liability of approximately $8$7 million for remediation costs at this site and a corresponding(approximately $7 million as of December 31, 2019); however, SWL&P continues to work with the WDNR on the extent of contamination which may result in additional remediation costs being identified. SWL&P has also recorded an associated regulatory asset as we expect recovery of these remediation costs to be allowed by the PSCW. We expectRemediation costs are expected to incur these costs over the next four years.be incurred through 2023.
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NOTE 8. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Other Matters
We have multiple credit facility agreements in place that provide the ability to issue standby letters of credit to satisfy our contractual security requirements across our businesses. As of December 31, 2020, we had $117.2 million of outstanding letters of credit issued, including those issued under our revolving credit facility.
Regulated Operations. As of December 31, 2020, we had $28.8 million outstanding in standby letters of credit at our Regulated Operations which are pledged as security for MISO and state agency agreements as well as energy facilities under development.
ALLETE Clean Energy. Energy. ALLETE Clean Energy’s wind energy facilities have PSAs in place for their entire output and expire in various years between 20182022 and 2032.2039. As of December 31, 2017,2020, ALLETE Clean Energy has $15.4$74.4 million outstanding in standby letters of credit.credit, the majority of which are pledged as security under these PSAs and PSAs for wind energy facilities under development.
Investment in Nobles 2. Nobles 2 wind energy facility requires standby letters of credit as security for certain contractual obligations. As of December 31, 2017, U.S. Water Services2020, ALLETE South Wind has $0.8$14.0 million outstanding in standby letters of credit.credit, related to our portion of the security requirements relative to our ownership in Nobles 2.
BNI Energy.Energy. As of December 31, 2017,2020, BNI Energy had surety bonds outstanding of $49.9 million and a letter of credit for an additional $0.6$67.7 million related to the reclamation liability for closing costs associated with its mine and mine facilities. Although its coal supply agreements obligate the customers to provide for the closing costs, additional assurance is required by federal and state regulations. BNI Energy’s total reclamation liability is currently estimated at $47.5$67.3 million. BNI Energy does not believe it is likely that any of these outstanding surety bonds or the letter of credit will be drawn upon.
ALLETE Properties.Properties. As of December 31, 2017,2020, ALLETE Properties had surety bonds outstanding and letters of credit to governmental entities totaling $8.6$2.0 million primarily related to development and maintenance obligations for various projects. The estimated cost of the remaining development work is $6.1$1.0 million. ALLETE Properties does not believe it is likely that any of these outstanding surety bonds or letters of credit will be drawn upon.
Community Development District Obligations. In 2005, the Town Center District issued $26.4 million of tax-exempt, 6.0 percent capital improvement revenue bonds, and in 2006, the Palm Coast Park District issued $31.8 million of tax-exempt, 5.7 percent special assessment bonds. The capital improvement revenue bonds and the special assessment bonds are payable over 31 years (by May 1, 2036 and 2037, respectively)2036) and are secured by special assessments on the benefited land. The bond proceeds were used to pay for the construction of a portion of the major infrastructure improvements in each district and to mitigate traffic and environmental impacts. The assessments were billed to the landowners beginning in 2006 for the Town Center District and 2007 for the Palm Coast Park District. To the extent that ALLETE Properties still owns land at the time of the assessment, it will incur the cost of ourits portion of these assessments, based upon its ownership of benefited property.
As of December 31, 2017,2020, we owned 7048 percent of the assessable land in the Town Center District (72(53 percent as of December 31, 2016) and 33 percent of the assessable land in the Palm Coast Park District (92 percent as of December 31, 2016)2019). As of December 31, 2017,2020, ownership levels, our annual assessments related to capital improvement and special assessment bonds for the ALLETE Properties projectsproject within these districts are $1.4 million for Town Center at Palm Coast and $2.0 million for Palm Coast Park.the district is approximately $1.8 million. As we sell property at these projects,this project, the obligation to pay special assessments will pass to the new landowners. In accordance with accounting guidance, these bonds are not reflected as debt on our Consolidated Balance Sheet.
Legal Proceedings.
We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base and cost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations or cash flows.
NOTE 12.9. COMMON STOCK AND EARNINGS PER SHARE
| Summary of Common Stock | Shares | Equity | ||||||
| Thousands | Millions | |||||||
| Balance as of December 31, 2017 | 51,117 | $1,401.4 | ||||||
| Employee Stock Purchase Plan | 11 | 0.8 | ||||||
| Invest Direct | 277 | 20.7 | ||||||
| Options and Stock Awards | 57 | 2.1 | ||||||
| Contributions to RSOP | 47 | 3.5 | ||||||
| Balance as of December 31, 2018 | 51,509 | 1,428.5 | ||||||
| Employee Stock Purchase Plan | 8 | 0.7 | ||||||
| Invest Direct | 38 | 3.0 | ||||||
| Options and Stock Awards | 85 | 1.3 | ||||||
| Contributions to RSOP | 39 | 3.2 | ||||||
| Balance as of December 31, 2019 | 51,679 | 1,436.7 | ||||||
| Employee Stock Purchase Plan | 13 | 0.7 | ||||||
| Invest Direct | 309 | 18.3 | ||||||
| Options and Stock Awards | 35 | 2.2 | ||||||
| Contributions to RSOP | 49 | 3.0 | ||||||
| Balance as of December 31, 2020 | 52,085 | $1,460.9 | ||||||
| Summary of Common Stock | Shares | Equity | |||
| Thousands | Millions | ||||
| Balance as of December 31, 2014 | 45,929 | $1,107.6 | |||
| Employee Stock Purchase Plan | 18 | 0.9 | |||
| Invest Direct | 383 | 19.0 | |||
| Options and Stock Awards | 43 | 8.6 | |||
| Equity Issuance Program | 1,289 | 69.9 | |||
| Forward Sale Agreement and Issuance | 1,413 | 65.4 | |||
| Balance as of December 31, 2015 | 49,075 | 1,271.4 | |||
| Employee Stock Purchase Plan | 16 | 0.9 | |||
| Invest Direct | 344 | 20.0 | |||
| Options and Stock Awards | 65 | 3.7 | |||
| Contributions to RSOP | 60 | 3.3 | |||
| Equity Issuance Program | 130 | 8.0 | |||
| Received for Sale of Land Inventory | (130 | ) | (8.0 | ) | |
| Acquisition of Non-Controlling Interest | — | (4.0 | ) | ||
| Balance as of December 31, 2016 | 49,560 | 1,295.3 | |||
| Employee Stock Purchase Plan | 12 | 0.8 | |||
| Invest Direct | 257 | 19.0 | |||
| Options and Stock Awards | 22 | 3.6 | |||
| Contributions to RSOP | 50 | 3.5 | |||
| Equity Issuance Program | 1,000 | 65.7 | |||
| Contributions to Pension | 216 | 13.5 | |||
| Balance as of December 31, 2017 | 51,117 | $1,401.4 | |||
Equity Issuance Program. We entered into a distribution agreement with Lampert Capital Markets, Inc., in 2008, as amended most recently in August 2016,2020, with respect to the issuance and sale of up to an aggregate of 13.6 million shares of our common stock, without par value, of which 2.9 million shares remain available for issuance as of December 31, 2017.2020. For the year ended December 31, 2017, 1.0 million2020, 0 shares of common stock were issued under this agreement resulting(NaN in net proceeds of $65.7 million (0.1 million shares for net proceeds of $8.0 million in 2016; 1.3 million shares for net proceeds of $69.9 million in 2015)2019 and 2018). The shares issued in 2017 and 2016 were offered and sold pursuant toIn July 2019, we filed Registration Statement No. 333-212794,333-232905, pursuant to which the remaining shares will continue to be offered for sale, from time to time. The
Contributions to Pension. For the year ended December 31, 2020, we contributed 0 shares issuedof ALLETE common stock to our pension plan (NaN in 2015 were offered2019 and sold pursuant to Registration Statement No. 333-190335.2018).
Earnings Per Share. We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from outstanding stock options, non-vested restricted stock units and performance share awards granted under our Executive Long-Term Incentive Compensation Plan and common shares under the forward sale agreement (described below). No options to purchase shares of common stock were excluded from the computation of diluted earnings per share in 2017, 2016 and 2015.Plan.
| Reconciliation of Basic and Diluted | |||||||||||
| Earnings Per Share | Dilutive | ||||||||||
| Year Ended December 31 | Basic | Securities | Diluted | ||||||||
| Millions Except Per Share Amounts | |||||||||||
| 2020 | |||||||||||
| Net Income Attributable to ALLETE | $174.2 | $174.2 | |||||||||
| Average Common Shares | 51.9 | 0 | 51.9 | ||||||||
| Earnings Per Share | $3.36 | $3.35 | |||||||||
| 2019 | |||||||||||
| Net Income Attributable to ALLETE | $185.6 | $185.6 | |||||||||
| Average Common Shares | 51.6 | 0.1 | 51.7 | ||||||||
| Earnings Per Share | $3.59 | $3.59 | |||||||||
| 2018 | |||||||||||
| Net Income Attributable to ALLETE | $174.1 | $174.1 | |||||||||
| Average Common Shares | 51.3 | 0.2 | 51.5 | ||||||||
| Earnings Per Share | $3.39 | $3.38 | |||||||||
ALLETE, Inc. 2020 Form 10-K
102
| Reconciliation of Basic and Diluted | ||||||||
| Earnings Per Share | Dilutive | |||||||
| Year Ended December 31 | Basic | Securities | Diluted | |||||
| Millions Except Per Share Amounts | ||||||||
| 2017 | ||||||||
| Net Income Attributable to ALLETE | $172.2 | $172.2 | ||||||
| Average Common Shares | 50.8 | 0.2 | 51.0 | |||||
| Earnings Per Share | $3.39 | $3.38 | ||||||
| 2016 | ||||||||
| Net Income Attributable to ALLETE | $155.3 | $155.3 | ||||||
| Average Common Shares | 49.3 | 0.2 | 49.5 | |||||
| Earnings Per Share | $3.15 | $3.14 | ||||||
| 2015 | ||||||||
| Net Income Attributable to ALLETE | $141.1 | $141.1 | ||||||
| Average Common Shares | 48.3 | 0.1 | 48.4 | |||||
| Earnings Per Share | $2.92 | $2.92 | ||||||
NOTE 13.10. INCOME TAX EXPENSE
| Income Tax Expense | |||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
Current Income Tax Expense (a) | |||||||||||
| Federal | 0 | 0 | 0 | ||||||||
| State | 0 | $0.1 | $0.3 | ||||||||
| Total Current Income Tax Expense | 0 | $0.1 | $0.3 | ||||||||
| Deferred Income Tax Expense (Benefit) | |||||||||||
Federal (b) | $(48.8) | $(27.8) | $(26.2) | ||||||||
| State | 9.8 | 21.7 | 11.0 | ||||||||
| Investment Tax Credit Amortization | (0.5) | (0.6) | (0.6) | ||||||||
| Total Deferred Income Tax Expense (Benefit) | $(39.5) | $(6.7) | $(15.8) | ||||||||
| Total Income Tax Expense (Benefit) | $(39.5) | $(6.6) | $(15.5) | ||||||||
| Income Tax Expense | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
Current Income Tax Expense (a) | |||||||||
| Federal | — | — | — | ||||||
| State | $0.3 | $0.4 | $0.2 | ||||||
| Total Current Income Tax Expense | $0.3 | $0.4 | $0.2 | ||||||
| Deferred Income Tax Expense | |||||||||
| Federal | $12.1 | $12.0 | $19.4 | ||||||
Federal – Remeasurement of Deferred Income Taxes (b) | (13.0 | ) | — | — | |||||
| State | 15.8 | 8.1 | 6.5 | ||||||
| Investment Tax Credit Amortization | (0.5 | ) | (0.7 | ) | (0.8 | ) | |||
| Total Deferred Income Tax Expense | $14.4 | $19.4 | $25.1 | ||||||
| Total Income Tax Expense | $14.7 | $19.8 | $25.3 | ||||||
(a)For the years ended December 31, 2020, 2019 and 2018, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of the Protecting Americans from Tax Hikes Act of 2015, the Tax Increase Prevention Act of 2014 and the American Taxpayer Relief Act of 2012. Federal and state NOLs are being carried forward to offset current and future taxable income.
| Reconciliation of Taxes from Federal Statutory | |||||||||
| Rate to Total Income Tax Expense | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Income Before Non-Controlling Interest and Income Taxes | $186.9 | $175.6 | $166.8 | ||||||
| Statutory Federal Income Tax Rate | 35 | % | 35 | % | 35 | % | |||
| Income Taxes Computed at 35 percent Statutory Federal Rate | $65.4 | $61.5 | $58.4 | ||||||
| Increase (Decrease) in Tax Due to: | |||||||||
| State Income Taxes – Net of Federal Income Tax Benefit | 10.5 | 5.6 | 4.4 | ||||||
| Regulatory Differences for Utility Plant | — | (0.1 | ) | (0.6 | ) | ||||
| Production Tax Credits | (45.1 | ) | (41.5 | ) | (37.0 | ) | |||
| Change in Fair Value of Contingent Consideration | — | (3.8 | ) | — | |||||
Remeasurement of Deferred Income Taxes (a) | (13.0 | ) | — | — | |||||
| Other | (3.1 | ) | (1.9 | ) | 0.1 | ||||
| Total Income Tax Expense | $14.7 | $19.8 | $25.3 | ||||||
| Reconciliation of Taxes from Federal Statutory | ||||||||||||||
| Rate to Total Income Tax Expense | ||||||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | |||||||||||
| Millions | ||||||||||||||
| Income Before Non-Controlling Interest and Income Taxes | $122.1 | $178.9 | $158.6 | |||||||||||
| Statutory Federal Income Tax Rate | 21 | % | 21 | % | 21 | % | ||||||||
| Income Taxes Computed at Statutory Federal Rate | $25.6 | $37.6 | $33.3 | |||||||||||
| Increase (Decrease) in Tax Due to: | ||||||||||||||
| State Income Taxes – Net of Federal Income Tax Benefit | 7.7 | 17.2 | 8.9 | |||||||||||
| Production Tax Credits | (62.7) | (50.7) | (45.0) | |||||||||||
Regulatory Differences – Excess Deferred Tax Benefit (a) | (9.9) | (8.8) | (8.2) | |||||||||||
| U.S. Water Services Sale of Stock Basis Difference | 0 | 1.7 | 0 | |||||||||||
| Change in Fair Value of Contingent Consideration | 0 | 0 | (0.4) | |||||||||||
| Non-Controlling Interest | 2.7 | 0 | 0 | |||||||||||
| Other | (2.9) | (3.6) | (4.1) | |||||||||||
| Total Income Tax Expense (Benefit) | $(39.5) | $(6.6) | $(15.5) | |||||||||||
(a)Excess deferred income taxes are being returned to customers under both the Average Rate Assumption Method and amortization periods as approved by regulators. (See Note 4. Regulatory Matters.)
The effective tax rate was 7.9a benefit of 32.4 percent for 2017 (11.32020 (benefit of 3.7 percent for 2016; 15.22019; benefit of 9.8 percent for 2015)2018). The 20172020 effective tax rate was primarily impacted by production tax credits. The 2019 effective tax rate was primarily impacted by production tax credits and the remeasurementgain on sale of deferred incomeU.S. Water Services. The 2018 effective tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies.) The 2016 and 2015 effective rates wererate was primarily impacted by production tax credits.
ALLETE, Inc. 2020 Form 10-K
103
NOTE 13.10. INCOME TAX EXPENSE (Continued)
| Deferred Income Tax Assets and Liabilities | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Deferred Income Tax Assets | ||||||||
| Employee Benefits and Compensation | $67.6 | $49.9 | ||||||
| Property-Related | 61.4 | 76.9 | ||||||
| NOL Carryforwards | 60.7 | 63.2 | ||||||
| Tax Credit Carryforwards | 455.7 | 395.5 | ||||||
| Power Sales Agreements | 20.1 | 23.7 | ||||||
| Regulatory Liabilities | 107.7 | 116.9 | ||||||
| Other | 22.4 | 23.4 | ||||||
| Gross Deferred Income Tax Assets | 795.6 | 749.5 | ||||||
| Deferred Income Tax Asset Valuation Allowance | (69.9) | (70.0) | ||||||
| Total Deferred Income Tax Assets | $725.7 | $679.5 | ||||||
| Deferred Income Tax Liabilities | ||||||||
| Property-Related | $691.5 | $713.4 | ||||||
| Regulatory Asset for Benefit Obligations | 71.5 | 54.5 | ||||||
| Unamortized Investment Tax Credits | 31.1 | 31.6 | ||||||
| Partnership Basis Differences | 86.7 | 49.4 | ||||||
| Regulatory Assets | 32.6 | 35.4 | ||||||
| Other | 8.0 | 8.0 | ||||||
| Total Deferred Income Tax Liabilities | $921.4 | $892.3 | ||||||
Net Deferred Income Taxes (a) | $195.7 | $212.8 | ||||||
| Deferred Income Tax Assets and Liabilities | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Deferred Income Tax Assets | ||||||
| Employee Benefits and Compensation | $65.9 | $104.6 | ||||
| Property Related | 104.3 | 110.5 | ||||
| NOL Carryforwards | 99.1 | 185.6 | ||||
| Tax Credit Carryforwards | 294.3 | 227.4 | ||||
| Power Sales Agreements | 35.0 | 59.3 | ||||
| Regulatory Liabilities | 117.7 | 7.3 | ||||
| Other | 33.3 | 46.9 | ||||
| Gross Deferred Income Tax Assets | 749.6 | 741.6 | ||||
| Deferred Income Tax Asset Valuation Allowance | (60.0 | ) | (43.0 | ) | ||
| Total Deferred Income Tax Assets | $689.6 | $698.6 | ||||
| Deferred Income Tax Liabilities | ||||||
| Property Related | $758.3 | $1,039.6 | ||||
| Regulatory Asset for Benefit Obligations | 61.4 | 91.9 | ||||
| Unamortized Investment Tax Credits | 32.8 | 33.3 | ||||
| Partnership Basis Differences | 34.9 | 50.9 | ||||
| Regulatory Assets | 32.0 | 25.6 | ||||
| Other | 0.7 | 11.9 | ||||
| Total Deferred Income Tax Liabilities | $920.1 | $1,253.2 | ||||
Net Deferred Income Taxes (a) | $230.5 | $554.6 | ||||
(a)Recorded as a net long-term Deferred Income Tax liability on the Consolidated Balance Sheet.
| NOL and Tax Credit Carryforwards | NOL and Tax Credit Carryforwards | |||||||||||
| As of December 31 | 2017 | 2016 | As of December 31 | 2020 | 2019 | |||||||
| Millions | Millions | |||||||||||
Federal NOL Carryforwards (a) | $375.2 | $485.3 | Federal NOL Carryforwards (a) | $197.5 | $211.3 | |||||||
| Federal Tax Credit Carryforwards | $209.2 | $163.7 | Federal Tax Credit Carryforwards | $362.9 | $302.5 | |||||||
State NOL Carryforwards (a) | $289.9 | $294.4 | State NOL Carryforwards (a) | $270.1 | $274.8 | |||||||
State Tax Credit Carryforwards (b) | $25.6 | $21.0 | State Tax Credit Carryforwards (b) | $23.4 | $23.4 | |||||||
(a)Pre-tax amounts.
(b)Net of a $69.4 million valuation allowance as of December 31, 2020 ($69.6 million as of December 31, 2019).
The federal NOL and tax credit carryforward periods expire between 20302029 and 2037.2040. We expect to fully utilize the federal NOL and federal tax credit carryforwards; therefore, no0 federal valuation allowance has been recognized as of December 31, 2017.2020. The state NOL and tax credit carryforward periods expire between 2024 and 2045. We have established a valuation allowance against certain state NOL and tax credits that we do not expect to utilize before their expiration. We do not expect a material impact on the Company’s ability to utilize its federal and state NOL and tax credit carryforwards due to the TCJA.
| Gross Unrecognized Income Tax Benefits | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Balance at January 1 | $1.4 | $1.6 | $1.7 | ||||||||
| Additions for Tax Positions Related to the Current Year | 0.1 | 0.1 | 0.1 | ||||||||
| Additions for Tax Positions Related to Prior Years | 0 | 0.1 | 0.1 | ||||||||
| Reductions for Tax Positions Related to Prior Years | (0.1) | (0.4) | (0.2) | ||||||||
| Lapse of Statute | 0 | 0 | (0.1) | ||||||||
| Balance as of December 31 | $1.4 | $1.4 | $1.6 | ||||||||
ALLETE, Inc. 2020 Form 10-K
104
NOTE 13.10. INCOME TAX EXPENSE (Continued)
| Gross Unrecognized Income Tax Benefits | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Balance at January 1 | $2.0 | $2.4 | $2.0 | ||||||
| Additions for Tax Positions Related to the Current Year | 0.1 | 0.1 | 0.5 | ||||||
| Additions for Tax Positions Related to Prior Years | 0.1 | 0.2 | 0.7 | ||||||
| Reductions for Tax Positions Related to Prior Years | (0.1 | ) | (0.3 | ) | (0.7 | ) | |||
| Lapse of Statute | (0.4 | ) | (0.4 | ) | (0.1 | ) | |||
| Balance as of December 31 | $1.7 | $2.0 | $2.4 | ||||||
Unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the “more-likely-than-not” criteria. The unrecognized tax benefit balance includes permanent tax positions which, if recognized would affect the annual effective income tax rate. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The gross unrecognized tax benefits as of December 31, 2017,2020, included $0.8$0.6 million of net unrecognized tax benefits which, if recognized, would affect the annual effective income tax rate.
As of December 31, 2017,2020, we had no0 accrued interest (none(NaN as of December 31, 2016,2019, and 2015)2018) related to unrecognized tax benefits included on the Consolidated Balance Sheet due to our NOL carryforwards. We classify interest related to unrecognized tax benefits as interest expense and tax-related penalties in operating expenses on the Consolidated Statement of Income. Interest expense related to unrecognized tax benefits on the Consolidated Statement of Income was immaterial in 2017 (immaterial in 2016,2020, 2019 and in 2015).2018. There were no0 penalties recognized in 2017, 20162020, 2019 or 2015.2018. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.
ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 20132017 or state examination for years before 2012.2016.
Unrealized Gain (Loss) on Available-for-sale Securities | Defined Benefit Pension, Other Postretirement Items (a) | Gain (Loss) on Cash Flow Hedge | Total | |||||
| Millions | ||||||||
| Balance as of December 31, 2014 | $(0.3) | $(20.7) | $(0.1) | $(21.1) | ||||
| Other Comprehensive Income (Loss) Before Reclassifications | (0.4 | ) | (4.3 | ) | 0.1 | (4.6 | ) | |
| Amounts Reclassified From Accumulated Other Comprehensive Loss | (0.1 | ) | 1.3 | — | 1.2 | |||
| Net Other Comprehensive Income (Loss) | (0.5 | ) | (3.0 | ) | 0.1 | (3.4 | ) | |
| Balance as of December 31, 2015 | (0.8 | ) | (23.7 | ) | — | (24.5 | ) | |
| Other Comprehensive Income (Loss) Before Reclassifications | — | (4.1 | ) | — | (4.1 | ) | ||
| Amounts Reclassified From Accumulated Other Comprehensive Loss | (0.2 | ) | 0.6 | — | 0.4 | |||
| Net Other Comprehensive Income (Loss) | (0.2 | ) | (3.5 | ) | — | (3.7 | ) | |
| Balance as of December 31, 2016 | (1.0 | ) | (27.2 | ) | — | (28.2 | ) | |
| Other Comprehensive Income (Loss) Before Reclassifications | 1.1 | 3.9 | — | 5.0 | ||||
| Amounts Reclassified From Accumulated Other Comprehensive Loss | (0.2 | ) | 0.8 | — | 0.6 | |||
| Net Other Comprehensive Income (Loss) | 0.9 | 4.7 | — | 5.6 | ||||
| Balance as of December 31, 2017 | $(0.1) | $(22.5) | — | $(22.6) | ||||
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
We have noncontributory union, non-union and combined retiree defined benefit pension plans covering eligible employees. The combined retiree defined benefit pension plan was created in 2016, to include all union and non-union retirees from the existing plans as of January 1, 2016. The plans provide defined benefits based on years of service and final average pay. We contributed $1.7$10.7 million in cash to the plans in 2017 ($6.32020 ($10.4 million in 2016; none2019; $15.0 million in 2015)2018). We also contributed approximately 0.2 million0 shares of ALLETE common stock to the plans in 2017, which had an aggregate value of $13.5 million when contributed (none2020 (NaN in 2016; none2019; NaN in 2015)2018). We also have a defined contribution RSOP covering substantially all employees. The 20172020 plan year employer contributions, which are made through the employee stock ownership plan portion of the RSOP, totaled $11.0$11.2 million ($9.210.8 million for the 20162019 plan year; $9.0$11.4 million for the 20152018 plan year). (See Note 12.9. Common Stock and Earnings Per Share and Note 16.12. Employee Stock and Incentive Plans.)
The non-union defined benefit pension plan was frozen in 2018, and does not allow further crediting of service or earnings to the plan andplan. Further, it is closed to new participants. The Minnesota Power union defined benefit pension plan is also closed to new participants.
We have postretirement health care and life insurance plans covering eligible employees. In 2010, ourthe postretirement health care plan was amended to close the planclosed to employees hired after January 31, 2011. The full2011, and the eligibility requirement was also amended in 2010, to require employees to be at least age 55 with 10 years of participation in the plan.requirements were amended. In 2014, ourthe postretirement life plan was amended to close the plan to non-union employees retiring after December 31, 2015.2015, and in 2018, the postretirement life plan was amended to limit the benefit level for union employees retiring after December 31, 2018. The postretirement health and life plans are contributory with participant contributions adjusted annually. Postretirement health and life benefits are funded through a combination of Voluntary Employee Benefit Association trusts (VEBAs), established under section 501(c)(9) of the Internal Revenue Code, and irrevocable grantor trusts. In 2017, no2020, 0 contributions were made to the VEBAs (none(NaN in 2016; none2019; NaN in 2015)2018) and no0 contributions were made to the grantor trusts (none(NaN in 2016; none2019; NaN in 2015)2018).
Management considers various factors when making funding decisions such as regulatory requirements, actuarially determined minimum contribution requirements and contributions required to avoid benefit restrictions for the pension plans. Contributions are based on estimates and assumptions which are subject to change. On January 8, 2018,15, 2021, we contributed $15.0$10.3 million in cash to the defined benefit pension plans. We do not0t expect to make any additional contributions to the defined benefit pension plans in 2018,2021, and we do not0t expect to make any contributions to the defined benefit postretirement health and life plans in 2018.2021.
ALLETE, Inc. 2020 Form 10-K
105
NOTE 11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
Accounting for defined benefit pension and other postretirement benefit plans requires that employers recognize on a prospective basis the funded status of their defined benefit pension and other postretirement plans on their balance sheet and recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost.
The defined benefit pension and postretirement health and life benefit expense (credit) recognized annually by our regulated utilities are expected to be recovered (refunded) through rates filed with our regulatory jurisdictions. As a result, these amounts that are required to otherwise be recognized in accumulated other comprehensive income have been recognized as a long-term regulatory asset (regulatory liability) on the Consolidated Balance Sheet, in accordance with the accounting standards for the effect of certain types of regulation applicable to our Regulated Operations. The defined benefit pension and postretirement health and life benefit expense (credits) associated with our other operations are recognized in accumulated other comprehensive income.
| Pension Obligation and Funded Status | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Accumulated Benefit Obligation | $931.2 | $812.0 | ||||||
| Change in Benefit Obligation | ||||||||
| Obligation, Beginning of Year | $854.0 | $747.0 | ||||||
| Service Cost | 10.7 | 9.3 | ||||||
| Interest Cost | 27.9 | 31.9 | ||||||
Actuarial Loss (a) | 118.7 | 98.3 | ||||||
| Benefits Paid | (54.4) | (53.4) | ||||||
| Participant Contributions | 8.8 | 20.9 | ||||||
| Obligation, End of Year | $965.7 | $854.0 | ||||||
| Change in Plan Assets | ||||||||
| Fair Value, Beginning of Year | $699.6 | $598.0 | ||||||
| Actual Return on Plan Assets | 93.0 | 122.1 | ||||||
Employer Contribution (b) | 21.2 | 32.9 | ||||||
| Benefits Paid | (54.4) | (53.4) | ||||||
| Fair Value, End of Year | $759.4 | $699.6 | ||||||
| Funded Status, End of Year | $(206.3) | $(154.4) | ||||||
| Net Pension Amounts Recognized in Consolidated Balance Sheet Consist of: | ||||||||
| Current Liabilities | $(2.2) | $(1.6) | ||||||
| Non-Current Liabilities | $(204.1) | $(152.8) | ||||||
| Pension Obligation and Funded Status | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Accumulated Benefit Obligation | $745.4 | $698.8 | ||||
| Change in Benefit Obligation | ||||||
| Obligation, Beginning of Year | $743.3 | $709.8 | ||||
| Service Cost | 10.2 | 8.1 | ||||
| Interest Cost | 32.5 | 33.2 | ||||
| Actuarial Loss | 44.8 | 12.4 | ||||
| Benefits Paid | (51.0 | ) | (44.5 | ) | ||
| Participant Contributions | 13.4 | 24.3 | ||||
| Obligation, End of Year | $793.2 | $743.3 | ||||
| Change in Plan Assets | ||||||
| Fair Value, Beginning of Year | $557.5 | $521.3 | ||||
| Actual Return on Plan Assets | 91.6 | 48.8 | ||||
Employer Contribution (a) | 30.1 | 31.9 | ||||
| Benefits Paid | (51.0 | ) | (44.5 | ) | ||
| Fair Value, End of Year | $628.2 | $557.5 | ||||
| Funded Status, End of Year | $(165.0) | $(185.8) | ||||
| Net Pension Amounts Recognized in Consolidated Balance Sheet Consist of: | ||||||
| Current Liabilities | $(1.4) | $(1.4) | ||||
| Non-Current Liabilities | $(163.6) | $(184.4) | ||||
(a) Actuarial loss was primarily the result of decreases in discount rates in 2020 and 2019.
(b) Includes Participant Contributions noted above.
The pension costs that are reported as a component within the Consolidated Balance Sheet, reflected in long-term regulatory assets or liabilities and accumulated other comprehensive income, consist of a net loss of $236.2$299.0 million and prior service credit of $1.1 million as of December 31, 20172020 (net loss of $250.4$243.4 million and prior service credit of $1.3 million as of December 31, 2016)2019).
| Reconciliation of Net Pension Amounts Recognized in Consolidated Balance Sheet | ||||
| As of December 31 | 2017 | 2016 | ||
| Millions | ||||
| Net Loss | $(236.2) | $(250.4) | ||
| Accumulated Contributions in Excess of Net Periodic Benefit Cost (Prepaid Pension Asset) | 71.2 | 64.6 | ||
| Total Net Pension Amounts Recognized in Consolidated Balance Sheet | $(165.0) | $(185.8) | ||
ALLETE, Inc. 2020 Form 10-K
106
| Components of Net Periodic Pension Cost | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Service Cost | $10.2 | $8.1 | $10.1 | ||||||
| Interest Cost | 32.5 | 33.2 | 29.9 | ||||||
| Expected Return on Plan Assets | (42.4 | ) | (43.6 | ) | (40.7 | ) | |||
| Amortization of Loss | 9.9 | 9.5 | 17.9 | ||||||
| Amortization of Prior Service Cost | — | — | 0.2 | ||||||
| Net Pension Cost | $10.2 | $7.2 | $17.4 | ||||||
Other Changes in Pension Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | |||||
| Year Ended December 31 | 2017 | 2016 | |||
| Millions | |||||
| Net (Gain) Loss | $(4.3) | $7.2 | |||
| Amortization of Loss | (9.9 | ) | (9.5 | ) | |
| Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | $(14.2) | $(2.3) | |||
| Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Projected Benefit Obligation | $793.2 | $743.3 | ||||
| Accumulated Benefit Obligation | $745.4 | $698.8 | ||||
| Fair Value of Plan Assets | $628.2 | $557.5 | ||||
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
| Reconciliation of Net Pension Amounts Recognized in Consolidated Balance Sheet | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Net Loss | $(299.0) | $(243.4) | ||||||
| Prior Service Credit | 1.1 | 1.3 | ||||||
| Accumulated Contributions in Excess of Net Periodic Benefit Cost (Prepaid Pension Asset) | 91.6 | 87.7 | ||||||
| Total Net Pension Amounts Recognized in Consolidated Balance Sheet | $(206.3) | $(154.4) | ||||||
| Components of Net Periodic Pension Cost | |||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Service Cost | $10.7 | $9.3 | $11.0 | ||||||||
Non-Service Cost Components (a) | |||||||||||
| Interest Cost | 27.9 | 31.9 | 29.6 | ||||||||
| Expected Return on Plan Assets | (42.7) | (44.2) | (44.4) | ||||||||
| Amortization of Loss | 12.8 | 7.5 | 11.4 | ||||||||
| Amortization of Prior Service Credit | (0.2) | (0.1) | (0.1) | ||||||||
| Net Pension Cost | $8.5 | $4.4 | $7.5 | ||||||||
(a)These components of net periodic pension cost are included in the line item “Other” under Other Income (Expense) on the Consolidated Statement of Income.
| Other Changes in Pension Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | ||||||||
| Year Ended December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Net Loss | $68.4 | $20.4 | ||||||
| Amortization of Prior Service Credit | 0.2 | 0.1 | ||||||
| Amortization of Loss | (12.8) | (7.5) | ||||||
| Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | $55.8 | $13.0 | ||||||
| Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Projected Benefit Obligation | $965.7 | $854.0 | ||||||
| Accumulated Benefit Obligation | $931.2 | $812.0 | ||||||
| Fair Value of Plan Assets | $759.4 | $699.6 | ||||||
ALLETE, Inc. 2020 Form 10-K
107
| Postretirement Health and Life Obligation and Funded Status | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Change in Benefit Obligation | ||||||
| Obligation, Beginning of Year | $173.4 | $160.2 | ||||
| Service Cost | 4.4 | 3.9 | ||||
| Interest Cost | 7.7 | 7.4 | ||||
| Actuarial Loss | 15.5 | 11.9 | ||||
| Benefits Paid | (12.2 | ) | (13.1 | ) | ||
| Participant Contributions | 3.1 | 3.1 | ||||
| Plan Amendments | (1.8 | ) | — | |||
| Obligation, End of Year | $190.1 | $173.4 | ||||
| Change in Plan Assets | ||||||
| Fair Value, Beginning of Year | $154.3 | $153.4 | ||||
| Actual Return on Plan Assets | 24.5 | 9.6 | ||||
| Employer Contribution | 1.3 | 1.3 | ||||
| Participant Contributions | 3.1 | 3.1 | ||||
| Benefits Paid | (12.2 | ) | (13.1 | ) | ||
| Fair Value, End of Year | $171.0 | $154.3 | ||||
| Funded Status, End of Year | $(19.1) | $(19.1) | ||||
| Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet Consist of: | ||||||
| Non-Current Assets | $3.0 | $1.4 | ||||
| Current Liabilities | $(1.1) | $(1.1) | ||||
| Non-Current Liabilities | $(21.0) | $(19.4) | ||||
| Postretirement Health and Life Obligation and Funded Status | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Change in Benefit Obligation | ||||||||
| Obligation, Beginning of Year | $149.8 | $176.0 | ||||||
| Service Cost | 3.3 | 3.9 | ||||||
| Interest Cost | 5.0 | 7.3 | ||||||
Actuarial Loss (a) | 19.2 | 10.5 | ||||||
| Benefits Paid | (12.6) | (14.7) | ||||||
| Participant Contributions | 3.2 | 3.5 | ||||||
Plan Amendments (b) | 0 | (34.6) | ||||||
| Plan Curtailments | (0.3) | (2.1) | ||||||
| Obligation, End of Year | $167.6 | $149.8 | ||||||
| Change in Plan Assets | ||||||||
| Fair Value, Beginning of Year | $173.7 | $154.3 | ||||||
| Actual Return on Plan Assets | 20.9 | 29.5 | ||||||
| Employer Contribution | 0.8 | 1.1 | ||||||
| Participant Contributions | 3.2 | 3.5 | ||||||
| Benefits Paid | (12.6) | (14.7) | ||||||
| Fair Value, End of Year | $186.0 | $173.7 | ||||||
| Funded Status, End of Year | $18.4 | $23.9 | ||||||
| Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet Consist of: | ||||||||
| Non-Current Assets | $34.2 | $37.5 | ||||||
| Current Liabilities | $(0.6) | $(0.7) | ||||||
| Non-Current Liabilities | $(15.2) | $(12.9) | ||||||
(a)Actuarial loss was primarily the result of decreases in discount rates in 2020 and 2019.
(b)Plan design changes under the other postretirement benefit plans resulted in a decrease to the benefit obligation of $34.6 million in 2019.
According to the accounting standards for retirement benefits, only assets in the VEBAs are treated as plan assets in the preceding table for the purpose of determining funded status. In addition to the postretirement health and life assets reported in the previous table, we had $19.2$20.4 million in irrevocable grantor trusts included in Other Investments on the Consolidated Balance Sheet as of December 31, 2017 ($17.62020 ($19.1 million as of December 31, 2016)2019).
The postretirement health and life costs that are reported as a component within the Consolidated Balance Sheet, reflected in regulatory long-term assets or liabilities and accumulated other comprehensive income, consist of the following:
| Unrecognized Postretirement Health and Life Costs | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Net Loss | $23.0 | $16.0 | ||||||
| Prior Service Credit | (28.3) | (36.3) | ||||||
| Total Unrecognized Postretirement Health and Life Cost | $(5.3) | $(20.3) | ||||||
| Unrecognized Postretirement Health and Life Costs | ||||
| As of December 31 | 2017 | 2016 | ||
| Millions | ||||
| Net Loss | $21.1 | $19.8 | ||
| Prior Service Credit | (4.6 | ) | (4.7 | ) |
| Total Unrecognized Postretirement Health and Life Cost | $16.5 | $15.1 | ||
ALLETE, Inc. 2020 Form 10-K
108
| Reconciliation of Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet | ||||
| As of December 31 | 2017 | 2016 | ||
| Millions | ||||
Net Loss (a) | $(21.1) | $(19.8) | ||
| Prior Service Credit | 4.6 | 4.7 | ||
Accumulated Net Periodic Benefit Cost in Excess of Contributions (a) | (2.6 | ) | (4.0 | ) |
| Total Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet | $(19.1) | $(19.1) | ||
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
| Reconciliation of Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
Net Loss (a) | $(23.0) | $(16.0) | ||||||
| Prior Service Credit | 28.3 | 36.3 | ||||||
Accumulated Net Periodic Benefit Cost in Excess of Contributions (a) | 13.1 | 3.6 | ||||||
| Total Net Postretirement Health and Life Amounts Recognized in Consolidated Balance Sheet | $18.4 | $23.9 | ||||||
| Components of Net Periodic Postretirement Health and Life Cost | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Service Cost | $4.4 | $3.9 | $4.3 | ||||||
| Interest Cost | 7.7 | 7.4 | 7.2 | ||||||
| Expected Return on Plan Assets | (10.5 | ) | (11.2 | ) | (10.9 | ) | |||
| Amortization of Loss | 0.3 | 0.2 | 0.4 | ||||||
| Amortization of Prior Service Credit | (2.0 | ) | (2.9 | ) | (3.0 | ) | |||
| Net Postretirement Health and Life Credit | $(0.1) | $(2.6) | $(2.0) | ||||||
Other Changes in Postretirement Benefit Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | |||||||||||||||||
| Components of Net Periodic Postretirement Health and Life Cost | Components of Net Periodic Postretirement Health and Life Cost | ||||||||||||||||
| Year Ended December 31 | 2017 | 2016 | Year Ended December 31 | 2020 | 2019 | 2018 | |||||||||||
| Millions | Millions | ||||||||||||||||
| Net Loss | $1.6 | $13.5 | |||||||||||||||
| Prior Service Credit Arising During the Period | (1.8 | ) | — | ||||||||||||||
| Service Cost | Service Cost | $3.3 | $3.9 | $4.7 | |||||||||||||
Non-Service Cost Components (a) | Non-Service Cost Components (a) | ||||||||||||||||
| Interest Cost | Interest Cost | 5.0 | 7.3 | 7.1 | |||||||||||||
| Expected Return on Plan Assets | Expected Return on Plan Assets | (9.7) | (10.5) | (10.9) | |||||||||||||
| Amortization of Loss | Amortization of Loss | 1.0 | 0.5 | 0.8 | |||||||||||||
| Amortization of Prior Service Credit | 2.0 | 2.9 | Amortization of Prior Service Credit | (8.0) | (2.8) | (2.1) | |||||||||||
| Amortization of Loss | (0.3 | ) | (0.2 | ) | |||||||||||||
| Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | $1.5 | $16.2 | |||||||||||||||
| Effect of Plan Curtailment | Effect of Plan Curtailment | (0.3) | (2.1) | 0 | |||||||||||||
| Net Postretirement Health and Life Credit | Net Postretirement Health and Life Credit | $(8.7) | $(3.7) | $(0.4) | |||||||||||||
| Estimated Future Benefit Payments | Pension | Postretirement Health and Life | ||||
| Millions | ||||||
| 2018 | $46.3 | $9.2 | ||||
| 2019 | $46.2 | $9.5 | ||||
| 2020 | $45.9 | $9.6 | ||||
| 2021 | $45.8 | $9.6 | ||||
| 2022 | $45.8 | $9.6 | ||||
| Years 2023 – 2027 | $228.0 | $49.7 | ||||
| Other Changes in Postretirement Benefit Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | ||||||||
| Year Ended December 31 | 2020 | 2019 | ||||||
| Millions | ||||||||
| Net (Gain) Loss | $8.1 | $(10.6) | ||||||
| Prior Service Credit Arising During the Period | 0 | (34.6) | ||||||
| Amortization of Prior Service Credit | 8.0 | 2.8 | ||||||
| Amortization of Loss | (1.0) | (0.5) | ||||||
| Total Recognized in Other Comprehensive Income and Regulatory Assets or Liabilities | $15.1 | $(42.9) | ||||||
| Estimated Future Benefit Payments | Pension | Postretirement Health and Life | ||||||
| Millions | ||||||||
| 2021 | $54.9 | $8.7 | ||||||
| 2022 | $54.5 | $8.7 | ||||||
| 2023 | $54.2 | $8.5 | ||||||
| 2024 | $54.0 | $8.5 | ||||||
| 2025 | $53.4 | $8.5 | ||||||
| Years 2026 – 2030 | $258.0 | $43.2 | ||||||
ALLETE, Inc. 2020 Form 10-K
109
| Pension | Postretirement Health and Life | |||
| Millions | ||||
| Net Loss | $12.0 | $0.7 | ||
| Prior Service Credit | — | (1.8 | ) | |
| Total Pension and Postretirement Health and Life Cost (Credit) | $12.0 | $(1.1) | ||
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
| Assumptions Used to Determine Benefit Obligation | ||
| As of December 31 | 2017 | 2016 |
| Discount Rate | ||
| Pension | 3.81 - 3.96% | 4.53% |
| Postretirement Health and Life | 3.86% | 4.57% |
| Rate of Compensation Increase | 3.70 - 4.10% | 3.70 - 4.30% |
| Health Care Trend Rates | ||
| Trend Rate | 5.00 - 6.73% | 5.00 - 7.00% |
| Ultimate Trend Rate | 4.50% | 4.50% |
| Year Ultimate Trend Rate Effective | 2038 | 2038 |
| Weighted Average Assumptions Used to Determine Benefit Obligation | ||||||||
| As of December 31 | 2020 | 2019 | ||||||
| Discount Rate | ||||||||
| Pension | 2.62% | 3.38% | ||||||
| Postretirement Health and Life | 2.70% | 3.45% | ||||||
| Rate of Compensation Increase | 3.61% | 4.07% | ||||||
| Health Care Trend Rates | ||||||||
| Trend Rate | 5.81% | 6.06% | ||||||
| Ultimate Trend Rate | 4.50% | 4.50% | ||||||
| Year Ultimate Trend Rate Effective | 2038 | 2038 | ||||||
| Assumptions Used to Determine Net Periodic Benefit Costs | |||
| Year Ended December 31 | 2017 | 2016 | 2015 |
| Discount Rate | 4.53 - 4.57% | 4.72 - 4.73% | 4.30 - 4.33% |
| Expected Long-Term Return on Plan Assets | |||
| Pension | 7.50% | 8.00% | 8.00% |
| Postretirement Health and Life | 6.00 - 7.50% | 6.40 - 8.00% | 6.40 - 8.00% |
| Rate of Compensation Increase | 3.70 - 4.30% | 3.70 - 4.30% | 3.70 - 4.30% |
| Weighted Average Assumptions Used to Determine Net Periodic Benefit Costs | |||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Discount Rate | |||||||||||
| Pension | 3.52% | 4.67% | 4.05% | ||||||||
| Postretirement Health and Life | 3.45% | 4.47% | 3.86% | ||||||||
Expected Long-Term Return on Plan Assets (a) | |||||||||||
| Pension | 6.75% | 7.25% | 7.50% | ||||||||
| Postretirement Health and Life | 6.08% | 6.51% | 6.72% | ||||||||
| Rate of Compensation Increase | 4.06% | 4.04% | 4.03% | ||||||||
(a)The expected long-term rates of return used to determine net periodic benefit expense for 2021 have been reduced to 6.50 percent for pension expense and 5.20 percent to 6.50 percent for postretirement health and life expense.
In establishing the expected long-term rate of return on plan assets, we determine the long-term historical performance of each asset class, adjust these for current economic conditions, and utilizing the target allocation of our plan assets, forecast the expected long-term rate of return.
The discount rate is computed using a bond matching study which utilizes a portfolio of high quality bonds that produce cash flows similar to the projected costs of our pension and other postretirement plans.
The Company utilizes actuarial assumptions about mortality to calculate the pension and postretirement health and life benefit obligations. The mortality assumptions used to calculate our pension and other postretirement benefit obligations as of December 31, 2017,2020, considered a modified RP-2014PRI-2012 mortality table and mortality projection scale.
ALLETE, Inc. 2020 Form 10-K
110
| Sensitivity of a One Percent Change in Health Care Trend Rates | ||||||
One Percent Increase | One Percent Decrease | |||||
| Millions | ||||||
| Effect on Total of Postretirement Health and Life Service and Interest Cost | $1.9 | ($1.5 | ) | |||
| Effect on Postretirement Health and Life Obligation | $23.4 | ($19.3 | ) | |||
| Actual Plan Asset Allocations | Pension | Postretirement Health and Life (a) | ||||||
| 2017 | 2016 | 2017 | 2016 | |||||
| Equity Securities | 53 | % | 49 | % | 64 | % | 60 | % |
| Debt Securities | 38 | % | 39 | % | 31 | % | 34 | % |
| Private Equity | 5 | % | 7 | % | 5 | % | 6 | % |
| Real Estate | 4 | % | 5 | % | — | — | ||
| 100 | % | 100 | % | 100 | % | 100 | % | |
| Actual Plan Asset Allocations | Pension | Postretirement Health and Life (a) | ||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||
| Equity Securities | 36% | 34% | 67% | 66% | ||||||||||
| Fixed Income Securities | 61% | 62% | 32% | 33% | ||||||||||
| Private Equity | 1% | 1% | 1% | 1% | ||||||||||
| Real Estate | 2% | 3% | 0 | 0 | ||||||||||
| 100% | 100% | 100% | 100% | |||||||||||
(a)Includes VEBAs and irrevocable grantor trusts.
There were no0 shares of ALLETE common stock included in pension plan equity securities as of December 31, 2017 (no2020 (0 shares as of December 31, 2016)2019).
The defined benefit pension plans have adopted a dynamic asset allocation strategy (glide path) that increases the invested allocation to fixed income assets as the funding level of the plan increases to better match the sensitivity of the plan’s assets and liabilities to changes in interest rates. This is expected to reduce the volatility of reported pension plan expenses. The postretirement health and life plans’ assets are diversified to achieve strong returns within managed risk. Equity securities are diversified among domestic companies with large, mid and small market capitalizations, as well as investments in international companies. The majority of debt securities are made up of investment grade bonds.
Following are the current targeted allocations as of December 31, 2017:2020:
| Plan Asset Target Allocations | Pension | Postretirement Health and Life (a) | ||||||
| Equity Securities | 32 | % | 60 | % | ||||
| Fixed Income Securities | 56 | % | 37 | % | ||||
| Private Equity | 6 | % | 0 | |||||
| Real Estate | 6 | % | 3 | % | ||||
| 100 | % | 100 | % | |||||
| Plan Asset Target Allocations | Pension | Postretirement Health and Life (a) | ||
| Equity Securities | 56 | % | 60 | % |
| Debt Securities | 35 | % | 37 | % |
| Real Estate | 9 | % | 3 | % |
| 100 | % | 100 | % | |
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:(See Note 6. Fair Value)
ALLETE, Inc. 2020 Form 10-K
111
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
Fair Value (Continued)
Pension Fair Value
| Fair Value as of December 31, 2020 | ||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Millions | ||||||||||||||
| Assets: | ||||||||||||||
| Equity Securities: | ||||||||||||||
U.S. Large-cap (a) | 0 | $91.7 | 0 | $91.7 | ||||||||||
U.S. Mid-cap Growth (a) | 0 | 40.0 | 0 | 40.0 | ||||||||||
U.S. Small-cap (a) | 0 | 40.7 | 0 | 40.7 | ||||||||||
| International | 0 | 97.1 | 0 | 97.1 | ||||||||||
Fixed Income Securities (a) | 0 | 461.7 | 0 | 461.7 | ||||||||||
| Cash and Cash Equivalents | $3.2 | 0 | 0 | 3.2 | ||||||||||
| Private Equity Funds | 0 | 0 | $7.0 | 7.0 | ||||||||||
| Real Estate | 0 | 0 | 18.0 | 18.0 | ||||||||||
| Total Fair Value of Assets | $3.2 | $731.2 | $25.0 | $759.4 | ||||||||||
(a)The underlying investments consist of actively-managed funds managed to achieve the returns of certain U.S. equity and fixed income securities indexes.
| Recurring Fair Value Measures | ||||||||
| Activity in Level 3 | Private Equity Funds | Real Estate | ||||||
| Millions | ||||||||
| Balance as of December 31, 2019 | $8.0 | $18.0 | ||||||
| Actual Return on Plan Assets | 0.1 | 0 | ||||||
| Purchases, Sales, and Settlements – Net | (1.1) | 0 | ||||||
| Balance as of December 31, 2020 | $7.0 | $18.0 | ||||||
| Fair Value as of December 31, 2019 | ||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Millions | ||||||||||||||
| Assets: | ||||||||||||||
| Equity Securities: | ||||||||||||||
U.S. Large-cap (a) | 0 | $78.5 | 0 | $78.5 | ||||||||||
U.S. Mid-cap Growth (a) | 0 | 35.9 | 0 | 35.9 | ||||||||||
U.S. Small-cap (a) | 0 | 34.6 | 0 | 34.6 | ||||||||||
| International | 0 | 92.1 | 0 | 92.1 | ||||||||||
Fixed Income Securities (a) | 0 | 425.4 | 0 | 425.4 | ||||||||||
| Cash and Cash Equivalents | $7.1 | 0 | 0 | 7.1 | ||||||||||
| Private Equity Funds | 0 | 0 | $8.0 | 8.0 | ||||||||||
| Real Estate | 0 | 0 | 18.0 | 18.0 | ||||||||||
| Total Fair Value of Assets | $7.1 | $666.5 | $26.0 | $699.6 | ||||||||||
(a)The underlying investments consist of actively-managed funds managed to achieve the returns of certain U.S. equity and fixed income securities indexes.
ALLETE, Inc. 2020 Form 10-K
112
| Fair Value as of December 31, 2017 | ||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Millions | ||||||||||||
| Assets: | ||||||||||||
| Equity Securities: | ||||||||||||
U.S. Large-cap (a) | — | $108.6 | — | $108.6 | ||||||||
U.S. Mid-cap Growth (a) | — | 51.9 | — | 51.9 | ||||||||
U.S. Small-cap (a) | — | 51.5 | — | 51.5 | ||||||||
| International | — | 122.3 | — | 122.3 | ||||||||
| Debt Securities: | ||||||||||||
| Fixed Income | — | 222.8 | — | 222.8 | ||||||||
| Cash and Cash Equivalents | $12.4 | — | — | 12.4 | ||||||||
| Private Equity Funds | — | — | $33.2 | 33.2 | ||||||||
| Real Estate | — | — | 25.5 | 25.5 | ||||||||
| Total Fair Value of Assets | $12.4 | $557.1 | $58.7 | $628.2 | ||||||||
| Recurring Fair Value Measures | ||||||
| Activity in Level 3 | Private Equity Funds | Real Estate | ||||
| Millions | ||||||
| Balance as of December 31, 2016 | $40.6 | $25.6 | ||||
| Actual Return on Plan Assets | 7.1 | 1.7 | ||||
| Purchases, Sales, and Settlements – Net | (14.5 | ) | (1.8 | ) | ||
| Balance as of December 31, 2017 | $33.2 | $25.5 | ||||
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
Fair Value (Continued)
| Recurring Fair Value Measures | |||||||||||
| Activity in Level 3 | Private Equity Funds | Real Estate | |||||||||
| Millions | |||||||||||
| Balance as of December 31, 2018 | $27.8 | $20.8 | |||||||||
| Actual Return on Plan Assets | 0.4 | (1.3) | |||||||||
| Purchases, Sales, and Settlements – Net | (20.2) | (1.5) | |||||||||
| Balance as of December 31, 2019 | $8.0 | $18.0 | |||||||||
| Fair Value as of December 31, 2016 | ||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Millions | ||||||||||||
| Assets: | ||||||||||||
| Equity Securities: | ||||||||||||
U.S. Large-cap (a) | $94.6 | — | — | $94.6 | ||||||||
U.S. Mid-cap Growth (a) | — | $44.8 | — | 44.8 | ||||||||
U.S. Small-cap (a) | — | 45.0 | — | 45.0 | ||||||||
| International | 46.7 | 42.3 | — | 89.0 | ||||||||
| Debt Securities: | ||||||||||||
| Fixed Income | — | 200.1 | — | 200.1 | ||||||||
| Cash and Cash Equivalents | 17.8 | — | — | 17.8 | ||||||||
| Private Equity Funds | — | — | $40.6 | 40.6 | ||||||||
| Real Estate | — | — | 25.6 | 25.6 | ||||||||
| Total Fair Value of Assets | $159.1 | $332.2 | $66.2 | $557.5 | ||||||||
| Recurring Fair Value Measures | |||||||
| Activity in Level 3 | Private Equity Funds | Real Estate | |||||
| Millions | |||||||
| Balance as of December 31, 2015 | $43.3 | $28.9 | |||||
| Actual Return on Plan Assets | 5.0 | 2.3 | |||||
| Purchases, Sales, and Settlements – Net | (7.7 | ) | (5.6 | ) | |||
| Balance as of December 31, 2016 | $40.6 | $25.6 | |||||
Postretirement Health and Life Fair Value
| Fair Value as of December 31, 2020 | ||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Millions | ||||||||||||||
| Assets: | ||||||||||||||
Equity Securities: (a) | ||||||||||||||
| U.S. Large-cap | $34.2 | 0 | 0 | $34.2 | ||||||||||
| U.S. Mid-cap Growth | 31.4 | 0 | 0 | 31.4 | ||||||||||
| U.S. Small-cap | 16.6 | 0 | 0 | 16.6 | ||||||||||
| International | 41.5 | 0 | 0 | 41.5 | ||||||||||
| Fixed Income Securities: | ||||||||||||||
| Mutual Funds | 57.3 | 0 | 0 | 57.3 | ||||||||||
| Debt Securities | 0 | $2.2 | 0 | 2.2 | ||||||||||
| Cash and Cash Equivalents | 1.1 | 0 | 0 | 1.1 | ||||||||||
| Private Equity Funds | 0 | 0 | $1.7 | 1.7 | ||||||||||
| Total Fair Value of Assets | $182.1 | $2.2 | $1.7 | $186.0 | ||||||||||
| Fair Value as of December 31, 2017 | ||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Millions | ||||||||||||
| Assets: | ||||||||||||
Equity Securities: (a) | ||||||||||||
| U.S. Large-cap | $32.1 | — | — | $32.1 | ||||||||
| U.S. Mid-cap Growth | 24.3 | — | — | 24.3 | ||||||||
| U.S. Small-cap | 15.5 | — | — | 15.5 | ||||||||
| International | 35.8 | — | — | 35.8 | ||||||||
| Debt Securities: | ||||||||||||
| Mutual Funds | 49.8 | — | — | 49.8 | ||||||||
| Fixed Income | — | $4.5 | — | 4.5 | ||||||||
| Cash and Cash Equivalents | 0.8 | — | — | 0.8 | ||||||||
| Private Equity Funds | — | — | $8.2 | 8.2 | ||||||||
| Total Fair Value of Assets | $158.3 | $4.5 | $8.2 | $171.0 | ||||||||
| Activity in Level 3 | Private Equity Funds | ||||
| Millions | |||||
| Balance as of | $1.7 | ||||
| Actual Return on Plan Assets | 0 | ||||
| Purchases, Sales, and Settlements – Net | 0 | ||||
| Balance as of December 31, 2020 | $1.7 | ||||
ALLETE, Inc. 2020 Form 10-K
113
NOTE 15.11. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (Continued)
Fair Value (Continued)
| Fair Value as of December 31, 2019 | ||||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Millions | ||||||||||||||
| Assets: | ||||||||||||||
Equity Securities: (a) | ||||||||||||||
| U.S. Large-cap | $33.6 | 0 | 0 | $33.6 | ||||||||||
| U.S. Mid-cap Growth | 27.7 | 0 | 0 | 27.7 | ||||||||||
| U.S. Small-cap | 14.3 | 0 | 0 | 14.3 | ||||||||||
| International | 37.8 | 0 | 0 | 37.8 | ||||||||||
| Fixed Income Securities: | ||||||||||||||
| Mutual Funds | 53.4 | 0 | 0 | 53.4 | ||||||||||
| Debt Securities | 0 | $4.1 | 0 | 4.1 | ||||||||||
| Cash and Cash Equivalents | 1.1 | 0 | 0 | 1.1 | ||||||||||
| Private Equity Funds | 0 | 0 | $1.7 | 1.7 | ||||||||||
| Total Fair Value of Assets | $167.9 | $4.1 | $1.7 | $173.7 | ||||||||||
| Recurring Fair Value Measures | ||||||
| Activity in Level 3 | Private Equity Funds | |||||
| Millions | ||||||
| Balance as of December 31, | $6.5 | |||||
| Actual Return on Plan Assets | ||||||
| Purchases, Sales, and Settlements – Net | ||||||
| Balance as of December 31, | $1.7 | |||||
| Fair Value as of December 31, 2016 | ||||||||||||
| Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Millions | ||||||||||||
| Assets: | ||||||||||||
Equity Securities: (a) | ||||||||||||
| U.S. Large-cap | $27.9 | — | — | $27.9 | ||||||||
| U.S. Mid-cap Growth | 20.7 | — | — | 20.7 | ||||||||
| U.S. Small-cap | 14.0 | — | — | 14.0 | ||||||||
| International | 27.9 | — | — | 27.9 | ||||||||
| Debt Securities: | ||||||||||||
| Mutual Funds | 48.6 | — | — | 48.6 | ||||||||
| Fixed Income | — | $4.6 | — | 4.6 | ||||||||
| Cash and Cash Equivalents | 1.1 | — | — | 1.1 | ||||||||
| Private Equity Funds | — | — | $9.5 | 9.5 | ||||||||
| Total Fair Value of Assets | $140.2 | $4.6 | $9.5 | $154.3 | ||||||||
Accounting and disclosure requirements for the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (Act) provide guidance for employers that sponsor postretirement health care plans that provide prescription drug benefits. We provide a fully insured postretirement health benefit, including a prescription drug benefit, which qualifies us for a federal subsidy under the Act. The federal subsidy is reflected in the premiums charged to us by the insurance company.
NOTE 16.12. EMPLOYEE STOCK AND INCENTIVE PLANS
Employee Stock Ownership Plan. We sponsor an ESOP within the RSOP. Eligible employees may contribute to the RSOP plan as of their date of hire.In 1990, the ESOP issued a $75.0 million note to use as consideration for 2.8 million shares (1.9 million shares adjusted for stock splits) of our common stock. The note matured in December 2015. The ESOP shares were initially pledged as collateral for the debt. As the debt was repaid, shares were released from collateral and allocated to participants based on the proportion of debt service paid in the year. As shares were released from collateral, we reported compensation expense equal to the current market price of the shares less dividends on allocated shares. The dividends received by the ESOP are distributed to participants. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. Future ESOP employer allocations will beare funded with contributions paid in either cash or the issuance of ALLETE common stock at the Company’s discretion. We record compensation expense equal to the cash or current market price of stock contributed. ESOP compensation expense was $11.0$11.2 million in 2017 ($9.22020 ($10.8 million in 2016; $9.02019; $11.4 million in 2015)2018).
According to the accounting standards for stock compensation, unallocated shares of ALLETE common stock held and purchased by the ESOP were treated as unearned ESOP shares and not considered outstanding for earnings per share computations. All ESOP shares are included in earnings per share computations after they arehave been allocated to participants.participants as of December 31, 2020, 2019 and 2018.
| As of December 31 | 2017 | 2016 | 2015 | |||
| Millions | ||||||
| ESOP Shares | ||||||
| Allocated | 1.4 | 1.6 | 1.8 | |||
| Unallocated | — | — | — | |||
| Total | 1.4 | 1.6 | 1.8 | |||
| Fair Value of Unallocated Shares | — | — | — | |||
Stock-Based Compensation.
Stock Incentive Plan. Under our Executive Long-Term Incentive Compensation Plan (Executive Plan), share-based awards may be issued to key employees through a broad range of methods, including non-qualified and incentive stock options, performance shares, performance units, restricted stock, restricted stock units, stock appreciation rights and other awards. There are 1.00.8 million shares of ALLETE common stock reserved for issuance under the Executive Plan, of which 0.80.7 million of these shares remain available for issuance as of December 31, 2017.2020.
ALLETE, Inc. 2020 Form 10-K
114
NOTE 12. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)
Stock-Based Compensation (Continued)
The following types of share-based awards were outstanding in 2017, 20162020, 2019 or 2015:2018:
Performance Shares. Under the performance share awards, plan, the number of shares earned is contingent upon attaining specific market and performance goals over a three-year performance period. Market goals are measured by total shareholder return relative to a group of peer companies.companies while performance goals are measured by earnings per share growth. In the case of qualified retirement, death, or disability during a performance period, a pro rata portion of the award will be earned at the conclusion of the performance period based on the market goals achieved. In the case of termination of employment for any reason other than qualified retirement, death, or disability, no award will be earned. If there is a change in control, a pro rata portion of the award will be paid based on the greater of actual performance up to the date of the change in control or target performance. The fair value of these awards is determined byincorporates the probability of meeting the total shareholder return goals. Compensation cost is recognized over the three-yearthree-year performance period based on our estimate of the number of shares which will be earned by the award recipients.
Restricted Stock Units. Under the restricted stock units plan,unit awards, shares for participants eligible for retirement vest monthly over a three-yearthree-year period. For participants not eligible for retirement, shares vest at the end of the three-year period. In the case of qualified retirement, death or disability, a pro rata portion of the award will be earned. In the case of termination of employment for any reason other than qualified retirement, death or disability, no award will be earned. If there is a change in control, a pro rata portion of the award will be earned. The fair value of these awards is equal to the grant date fair value. Compensation cost is recognized over the three-year vesting period based on our estimate of the number of shares which will be earned by the award recipients.
Employee Stock Purchase Plan (ESPP). Under our ESPP, eligible employees may purchase ALLETE common stock at a 5 percent discount from the market price. Because the discount is not greater than 5 percent,price; we are not required to apply fair value accounting to these awards.awards as the discount is not greater than 5 percent.
RSOP. The RSOP is a contributory defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and qualifies as an employee stock ownership plan and profit sharing plan. The RSOP provides eligible employees an opportunity to save for retirement.
The following share-based compensation expense amounts were recognized in our Consolidated Statement of Income for the periods presented.
| Share-Based Compensation Expense | |||||||||||
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Performance Shares | $2.2 | $2.3 | $2.3 | ||||||||
| Restricted Stock Units | 0.9 | 0.8 | 0.9 | ||||||||
| Total Share-Based Compensation Expense | $3.1 | $3.1 | $3.2 | ||||||||
| Income Tax Benefit | $0.9 | $0.9 | $0.9 | ||||||||
| Share-Based Compensation Expense | |||||||||
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Performance Shares | $2.1 | $1.8 | $1.8 | ||||||
| Restricted Stock Units | 1.0 | 0.8 | 0.8 | ||||||
| Total Share-Based Compensation Expense | $3.1 | $2.6 | $2.6 | ||||||
| Income Tax Benefit | $0.9 | $1.1 | $1.1 | ||||||
There were no0 capitalized share-based compensation costs during the years ended December 31, 2017, 20162020, 2019 or 2015.2018.
As of December 31, 2017,2020, the total unrecognized compensation cost for the performance share awards and restricted stock units not yet recognized in our Consolidated Statement of Income was $2.4$1.7 million and $1.0$0.9 million, respectively. These amounts are expected to be recognized over a weighted-average period of 1.6 years and 1.7 years.years, respectively.
ALLETE, Inc. 2020 Form 10-K
115
NOTE 16.12. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)
Stock-Based Compensation (Continued)
| 2017 | 2016 | 2015 | |||||||||||||
Number of Options | Weighted-Average Exercise Price | Number of Options | Weighted-Average Exercise Price | Number of Options | Weighted-Average Exercise Price | ||||||||||
| Outstanding as of January 1 | 4,357 | $40.29 | 39,654 | $44.39 | 66,279 | $44.39 | |||||||||
| Exercised | (4,357 | ) | $40.29 | (35,297 | ) | $44.89 | (24,456 | ) | $44.52 | ||||||
| Forfeited | — | — | — | — | (2,169 | ) | $42.93 | ||||||||
| Outstanding as of December 31 | — | — | 4,357 | $40.29 | 39,654 | $44.39 | |||||||||
| Exercisable as of December 31 | — | — | 4,357 | $40.29 | 39,654 | $44.39 | |||||||||
Performance Shares. The following table presents information regarding our non-vested performance shares.
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | |||||||||||||||
| Non-vested as of January 1 | 99,585 | $72.78 | 129,693 | $66.12 | 127,898 | $58.23 | ||||||||||||||
Granted (a) | 25,763 | $83.17 | 60,747 | $63.89 | 66,557 | $76.42 | ||||||||||||||
| Awarded | (25,304) | $62.03 | (75,943) | $53.44 | (58,293) | $59.82 | ||||||||||||||
| Unearned Grant Award | (13,625) | $62.03 | 0 | 0 | 0 | 0 | ||||||||||||||
| Forfeited | (1,135) | $79.81 | (14,912) | $77.14 | (6,469) | $72.99 | ||||||||||||||
| Non-vested as of December 31 | 85,284 | $80.73 | 99,585 | $72.78 | 129,693 | $66.12 | ||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||
Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||
| Non-vested as of January 1 | 127,580 | $52.56 | 119,540 | $52.72 | 119,635 | $48.26 | |||||||||
Granted (a) | 50,729 | $62.90 | 57,189 | $52.43 | 43,583 | $58.95 | |||||||||
| Unearned Grant Award | (40,801 | ) | $46.27 | (42,126 | ) | $52.70 | (36,670 | ) | $45.41 | ||||||
| Forfeited | (9,610 | ) | $58.29 | (7,023 | ) | $53.45 | (7,008 | ) | $53.49 | ||||||
| Non-vested as of December 31 | 127,898 | $58.23 | 127,580 | $52.56 | 119,540 | $52.72 | |||||||||
(a) Shares granted include accrued dividends.
There were 35,894approximately 30,000 performance shares granted in January 2018February 2021 for the three-year performance period ending in 2020.2023. The ultimate issuance is contingent upon the attainment of certain goals of ALLETE during the performance periods. The grant date fair value of the performance shares granted was $2.9$2.2 million. There were 58,2930 performance shares awarded in February 2018. The grant date fair value of the shares awarded was $3.5 million.2021.
Restricted Stock Units. The following table presents information regarding our available restricted stock units.
| 2017 | 2016 | 2015 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||
Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||||||||||||||||
| Available as of January 1 | 54,728 | $51.79 | 57,694 | $49.86 | 53,888 | $44.47 | Available as of January 1 | 39,943 | $69.30 | 49,771 | $60.74 | 55,248 | $56.18 | ||||||||||||||||||||||
Granted (a) | 21,241 | $62.20 | 20,351 | $50.25 | 26,702 | $54.81 | Granted (a) | 15,169 | $83.48 | 13,927 | $74.93 | 16,573 | $71.11 | ||||||||||||||||||||||
| Awarded | (17,281 | ) | $49.72 | (19,661 | ) | $44.33 | (19,464 | ) | $41.44 | Awarded | (17,193) | $63.41 | (21,110) | $52.44 | (18,881) | $55.78 | |||||||||||||||||||
| Forfeited | (3,440 | ) | $56.00 | (3,656 | ) | $52.87 | (3,432 | ) | $51.52 | Forfeited | (437) | $77.52 | (2,645) | $72.43 | (3,169) | $64.92 | |||||||||||||||||||
| Available as of December 31 | 55,248 | $56.18 | 54,728 | $51.79 | 57,694 | $49.86 | Available as of December 31 | 37,482 | $77.64 | 39,943 | $69.30 | 49,771 | $60.74 | ||||||||||||||||||||||
(a) Shares granted include accrued dividends.
There were 14,569approximately 14,000 restricted stock units granted in January 2018February 2021 for the vesting period ending in 2020.2023. The grant date fair value of the restricted stock units granted was $1.1$0.9 million. There were 12,766approximately 12,000 restricted stock units awarded in February 2018.2021. The grant date fair value of the shares awarded was $0.7$0.9 million.
NOTE 17.13. BUSINESS SEGMENTS
We present three reportable segments: Regulated Operations, ALLETE Clean Energy, and U.S. Water Services. We measure performance of our operations through budgeting and monitoring of contributions to consolidated net income by each business segment.
Regulated Operations includes three3 operating segments which consist of our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC. ALLETE Clean Energy is our business focused on developing, acquiring and operating clean and renewable energy projects. U.S. Water Services iswas our integrated water management company. The ALLETE Clean Energy and U.S. Water Services reportable segments comprise our Energy Infrastructure and Related Services businesses.company, which reflects operating results until the sale in March 2019. We also present Corporate and Other which includes two2 operating segments, BNI Energy, our coal mining operations in North Dakota, and ALLETE Properties, our legacy Florida real estate investment, along with our investment in Nobles 2, other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 5,0004,000 acres of land in Minnesota, and earnings on cash and investments.
ALLETE, Inc. 2020 Form 10-K
116
NOTE 17.13. BUSINESS SEGMENTS (Continued)
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Operating Revenue | |||||||||||
| Residential | $140.7 | $139.6 | $139.7 | ||||||||
| Commercial | 139.5 | 145.7 | 147.9 | ||||||||
| Municipal | 41.2 | 48.6 | 54.9 | ||||||||
| Industrial | 432.8 | 476.4 | 469.5 | ||||||||
| Other Power Suppliers | 138.8 | 153.7 | 170.3 | ||||||||
CIP Financial Incentive (a) | 2.4 | 2.8 | 3.0 | ||||||||
| Other | 91.9 | 75.6 | 74.2 | ||||||||
| Total Regulated Operations | 987.3 | 1,042.4 | 1,059.5 | ||||||||
| ALLETE Clean Energy | |||||||||||
| Long-term PSA | 68.3 | 48.0 | 55.2 | ||||||||
| Sale of Wind Energy Facility | 0 | 0 | 81.1 | ||||||||
| Other | 11.3 | 11.6 | 23.6 | ||||||||
| Total ALLETE Clean Energy | 79.6 | 59.6 | 159.9 | ||||||||
U.S. Water Services (b) | |||||||||||
| Point-in-time | 0 | 19.0 | 100.3 | ||||||||
| Contract | 0 | 9.2 | 38.3 | ||||||||
| Capital Project | 0 | 5.2 | 33.5 | ||||||||
| Total U.S. Water Services | 0 | 33.4 | 172.1 | ||||||||
| Corporate and Other | |||||||||||
| Long-term Contract | 86.0 | 82.8 | 85.5 | ||||||||
| Other | 16.2 | 22.3 | 21.6 | ||||||||
| Total Corporate and Other | 102.2 | 105.1 | 107.1 | ||||||||
| Total Operating Revenue | $1,169.1 | $1,240.5 | $1,498.6 | ||||||||
Net Income (Loss) Attributable to ALLETE (c) | |||||||||||
| Regulated Operations | $136.3 | $154.4 | $131.0 | ||||||||
ALLETE Clean Energy (d) | 29.9 | 12.4 | 33.7 | ||||||||
| U.S. Water Services | 0 | (1.1) | 3.2 | ||||||||
Corporate and Other (b) | 8.0 | 19.9 | 6.2 | ||||||||
| Total Net Income Attributable to ALLETE | $174.2 | $185.6 | $174.1 | ||||||||
(a) See Note 4. Regulatory Matters.
(b) In March 2019, ALLETE sold U.S. Water Services. The Company recognized a gain on the sale of $13.2 million after-tax which is reflected in Corporate and Other. (See Note 1. Operations and Significant Accounting Policies.)
(c) Includes interest expense resulting from intercompany loan agreements and allocated to certain subsidiaries. The amounts are eliminated in consolidation.
(d) Net income in 2018 includes the recognition of profit for the sale of a wind energy facility to Montana-Dakota Utilities.
ALLETE, Inc. 2020 Form 10-K
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
| Operating Revenue | |||||||||
| Regulated Operations | $1,063.8 | $1,000.7 | $991.2 | ||||||
| Energy Infrastructure and Related Services | |||||||||
ALLETE Clean Energy (a) | 80.5 | 80.5 | 262.1 | ||||||
| U.S. Water Services | 151.8 | 137.5 | 119.8 | ||||||
| Corporate and Other | 123.2 | 121.0 | 113.3 | ||||||
| Total Operating Revenue | $1,419.3 | $1,339.7 | $1,486.4 | ||||||
Net Income (Loss) Attributable to ALLETE (b)(c) | |||||||||
| Regulated Operations | $128.4 | $135.5 | $131.6 | ||||||
| Energy Infrastructure and Related Services | |||||||||
| ALLETE Clean Energy | 41.5 | 13.4 | 29.9 | ||||||
| U.S. Water Services | 10.7 | 1.5 | 0.9 | ||||||
| Corporate and Other | (8.4 | ) | 4.9 | (21.3 | ) | ||||
| Total Net Income Attributable to ALLETE | $172.2 | $155.3 | $141.1 | ||||||
| Depreciation and Amortization | |||||||||
| Regulated Operations | $132.6 | $154.3 | $135.1 | ||||||
| Energy Infrastructure and Related Services | |||||||||
| ALLETE Clean Energy | 23.4 | 22.3 | 18.7 | ||||||
| U.S. Water Services | 9.8 | 8.9 | 7.3 | ||||||
| Corporate and Other | 11.7 | 10.3 | 8.9 | ||||||
| Total Depreciation and Amortization | $177.5 | $195.8 | $170.0 | ||||||
Operating Expenses – Other (d) | |||||||||
| ALLETE Clean Energy | — | $3.3 | — | ||||||
| Corporate and Other | $(0.7) | (13.6 | ) | $36.3 | |||||
| Total Operating Expenses – Other | $(0.7) | $(10.3) | $36.3 | ||||||
Interest Expense (c) | |||||||||
| Regulated Operations | $57.0 | $52.1 | $53.9 | ||||||
| Energy Infrastructure and Related Services | |||||||||
| ALLETE Clean Energy | 4.2 | 5.8 | 3.3 | ||||||
| U.S. Water Services | 1.6 | 1.7 | 1.4 | ||||||
| Corporate and Other | 10.3 | 14.5 | 8.6 | ||||||
| Eliminations | (5.3 | ) | (3.8 | ) | (2.3 | ) | |||
| Total Interest Expense | $67.8 | $70.3 | $64.9 | ||||||
| Equity Earnings in ATC | |||||||||
| Regulated Operations | $22.5 | $18.5 | $16.3 | ||||||
NOTE 17.13. BUSINESS SEGMENTS (Continued)
| Year Ended December 31 | 2020 | 2019 | 2018 | ||||||||
| Millions | |||||||||||
| Depreciation and Amortization | |||||||||||
| Regulated Operations | $166.9 | $159.4 | $158.0 | ||||||||
| ALLETE Clean Energy | 37.9 | 26.8 | 24.4 | ||||||||
| U.S. Water Services | 0 | 2.3 | 10.2 | ||||||||
| Corporate and Other | 13.0 | 13.5 | 13.0 | ||||||||
| Total Depreciation and Amortization | $217.8 | $202.0 | $205.6 | ||||||||
Operating Expenses – Other (a) | |||||||||||
| Corporate and Other | 0 | 0 | $(2.0) | ||||||||
Interest Expense (b) | |||||||||||
| Regulated Operations | $58.5 | $58.9 | $60.2 | ||||||||
| ALLETE Clean Energy | 2.2 | 2.8 | 3.6 | ||||||||
| U.S. Water Services | 0 | 0.2 | 1.5 | ||||||||
| Corporate and Other | 13.2 | 8.0 | 7.3 | ||||||||
| Eliminations | (8.3) | (5.0) | (4.7) | ||||||||
| Total Interest Expense | $65.6 | $64.9 | $67.9 | ||||||||
| Equity Earnings | |||||||||||
| Regulated Operations | $22.3 | $21.7 | $17.5 | ||||||||
| Corporate and Other | (0.2) | 0 | 0 | ||||||||
| Total Equity Earnings | $22.1 | $21.7 | $17.5 | ||||||||
| Income Tax Expense (Benefit) | |||||||||||
| Regulated Operations | $(19.4) | $(7.1) | $(15.5) | ||||||||
| ALLETE Clean Energy | (19.1) | (11.9) | (1.0) | ||||||||
| U.S. Water Services | 0 | (0.4) | 1.0 | ||||||||
Corporate and Other (c) | (1.0) | 12.8 | 0 | ||||||||
| Total Income Tax Benefit | $(39.5) | $(6.6) | $(15.5) | ||||||||
(a) See Note 1. Operations and Significant Accounting Policies.
(b) Includes interest expense resulting from intercompany loan agreements and allocated to certain subsidiaries. The amounts are eliminated in consolidation.
(c) In March 2019, ALLETE sold U.S. Water Services. The Company recognized income tax expense of $10.4 million for the gain on sale of U.S. Water Services which is reflected in Corporate and Other. (See Note 1. Operations and Significant Accounting Policies.)
| As of December 31 | 2020 | 2019 | |||||||||
| Millions | |||||||||||
| Assets | |||||||||||
| Regulated Operations | $4,196.8 | $4,130.8 | |||||||||
| ALLETE Clean Energy | 1,483.3 | 1,001.5 | |||||||||
| Corporate and Other | 404.5 | 350.5 | |||||||||
| Total Assets | $6,084.6 | $5,482.8 | |||||||||
| Capital Expenditures | |||||||||||
| Regulated Operations | $133.7 | $230.9 | |||||||||
| ALLETE Clean Energy | 507.8 | 385.6 | |||||||||
| Corporate and Other | 15.7 | 10.1 | |||||||||
| Total Capital Expenditures | $657.2 | $626.6 | |||||||||
ALLETE, Inc. 2020 Form 10-K
118
| Year Ended December 31 | 2017 | 2016 | 2015 | ||||||
| Millions | |||||||||
Income Tax Expense (Benefit) (a) | |||||||||
Regulated Operations (b) | $27.2 | $5.9 | $24.4 | ||||||
| Energy Infrastructure and Related Services | |||||||||
| ALLETE Clean Energy | (14.2 | ) | 8.1 | 21.0 | |||||
| U.S. Water Services | (7.8 | ) | 1.4 | 0.9 | |||||
Corporate and Other (b) | 9.5 | 4.4 | (21.0 | ) | |||||
| Total Income Tax Expense | $14.7 | $19.8 | $25.3 | ||||||
| As of December 31 | 2017 | 2016 | ||||
| Millions | ||||||
| Assets | ||||||
Regulated Operations (a) | $3,886.6 | $3,823.9 | ||||
| Energy Infrastructure and Related Services | ||||||
| ALLETE Clean Energy | 600.5 | 566.0 | ||||
| U.S. Water Services | 292.4 | 264.1 | ||||
| Corporate and Other | 300.5 | 222.9 | ||||
Total Assets (a) | $5,080.0 | $4,876.9 | ||||
| Capital Expenditures | ||||||
| Regulated Operations | $177.1 | $121.8 | ||||
| Energy Infrastructure and Related Services | ||||||
| ALLETE Clean Energy | 56.1 | 106.9 | ||||
| U.S. Water Services | 4.4 | 3.7 | ||||
| Corporate and Other | 28.9 | 15.4 | ||||
| Total Capital Expenditures | $266.5 | $247.8 | ||||
NOTE 18.14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Information for any one quarterly period is not necessarily indicative of the results which may be expected for the year.
| Quarter Ended | Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | ||||||||||
| Millions Except Earnings Per Share | ||||||||||||||
| 2020 | ||||||||||||||
| Operating Revenue | $311.6 | $243.2 | $293.9 | $320.4 | ||||||||||
| Operating Income | $60.2 | $12.7 | $41.6 | $36.4 | ||||||||||
| Net Income Attributable to ALLETE | $66.3 | $20.1 | $40.7 | $47.1 | ||||||||||
| Earnings Per Share of Common Stock | ||||||||||||||
| Basic | $1.28 | $0.39 | $0.78 | $0.91 | ||||||||||
| Diluted | $1.28 | $0.39 | $0.78 | $0.90 | ||||||||||
| 2019 | ||||||||||||||
| Operating Revenue | $357.2 | $290.4 | $288.3 | $304.6 | ||||||||||
| Operating Income | $56.8 | $36.2 | $37.0 | $49.8 | ||||||||||
| Net Income Attributable to ALLETE | $70.5 | $34.2 | $31.2 | $49.7 | ||||||||||
| Earnings Per Share of Common Stock | ||||||||||||||
| Basic | $1.37 | $0.66 | $0.60 | $0.96 | ||||||||||
| Diluted | $1.37 | $0.66 | $0.60 | $0.96 | ||||||||||
| 2018 | ||||||||||||||
| Operating Revenue | $358.2 | $344.1 | $348.0 | $448.3 | ||||||||||
| Operating Income | $57.4 | $36.5 | $43.3 | $64.0 | ||||||||||
| Net Income Attributable to ALLETE | $51.0 | $31.3 | $30.7 | $61.1 | ||||||||||
| Earnings Per Share of Common Stock | ||||||||||||||
| Basic | $1.00 | $0.61 | $0.59 | $1.19 | ||||||||||
| Diluted | $0.99 | $0.61 | $0.59 | $1.18 | ||||||||||
| Quarter Ended | Mar. 31 | Jun. 30 | Sept. 30 | Dec. 31 | ||||||||
| Millions Except Earnings Per Share | ||||||||||||
| 2017 | ||||||||||||
| Operating Revenue | $365.6 | $353.3 | $362.5 | $337.9 | ||||||||
| Operating Income | $72.6 | $55.0 | $69.0 | $33.2 | ||||||||
| Net Income Attributable to ALLETE | $49.0 | $36.9 | $44.9 | $41.4 | ||||||||
| Earnings Per Share of Common Stock | ||||||||||||
| Basic | $0.97 | $0.73 | $0.88 | $0.81 | ||||||||
| Diluted | $0.97 | $0.72 | $0.88 | $0.81 | ||||||||
| 2016 | ||||||||||||
| Operating Revenue | $333.8 | $314.8 | $349.6 | $341.5 | ||||||||
| Operating Income | $66.8 | $42.2 | $53.4 | $61.1 | ||||||||
| Net Income Attributable to ALLETE | $45.9 | $24.8 | $40.3 | $44.3 | ||||||||
| Earnings Per Share of Common Stock | ||||||||||||
| Basic | $0.93 | $0.50 | $0.82 | $0.89 | ||||||||
| Diluted | $0.93 | $0.50 | $0.81 | $0.89 | ||||||||
| 2015 | ||||||||||||
| Operating Revenue | $320.0 | $323.3 | $462.5 | $380.6 | ||||||||
| Operating Income | $56.4 | $39.5 | $85.2 | $29.6 | ||||||||
| Net Income Attributable to ALLETE | $39.9 | $22.5 | $60.4 | $18.3 | ||||||||
| Earnings Per Share of Common Stock | ||||||||||||
| Basic | $0.85 | $0.46 | $1.24 | $0.37 | ||||||||
| Diluted | $0.85 | $0.46 | $1.23 | $0.37 | ||||||||
Schedule II
ALLETE
Valuation and Qualifying Accounts and Reserves
| Balance at Beginning of Period | Additions | Deductions from Reserves (a) | Balance at End of Period | ||||||||||||||
| Charged to Income | Other Charges | ||||||||||||||||
| Millions | |||||||||||||||||
| Reserve Deducted from Related Assets | |||||||||||||||||
| Reserve For Uncollectible Accounts | |||||||||||||||||
| 2018 Trade Accounts Receivable | $2.1 | $0.9 | 0 | $1.3 | $1.7 | ||||||||||||
| Finance Receivables – Long-Term | 0 | 0 | 0 | 0 | 0 | ||||||||||||
| 2019 Trade Accounts Receivable | $1.7 | $(0.1) | 0 | $0.7 | $0.9 | ||||||||||||
| Finance Receivables – Long-Term | 0 | 0 | 0 | 0 | 0 | ||||||||||||
| 2020 Trade Accounts Receivable | $0.9 | $2.7 | 0 | $1.1 | $2.5 | ||||||||||||
| Finance Receivables – Long-Term | 0 | 0 | 0 | 0 | 0 | ||||||||||||
| Deferred Asset Valuation Allowance | |||||||||||||||||
| 2018 Deferred Tax Assets | $60.0 | $6.5 | 0 | 0 | $66.5 | ||||||||||||
| 2019 Deferred Tax Assets | $66.5 | $3.5 | 0 | 0 | $70.0 | ||||||||||||
| 2020 Deferred Tax Assets | $70.0 | $(0.1) | 0 | 0 | $69.9 | ||||||||||||
Balance at Beginning of Period | Additions | Deductions from Reserves (a) | Balance at End of Period | |||||||||||
Charged to Income | Other Charges | |||||||||||||
| Millions | ||||||||||||||
| Reserve Deducted from Related Assets | ||||||||||||||
| Reserve For Uncollectible Accounts | ||||||||||||||
| 2015 Trade Accounts Receivable | $1.1 | $1.6 | — | $1.7 | $1.0 | |||||||||
| Finance Receivables – Long-Term | $0.6 | — | — | — | $0.6 | |||||||||
| 2016 Trade Accounts Receivable | $1.0 | $4.1 | — | $2.0 | $3.1 | |||||||||
| Finance Receivables – Long-Term | $0.6 | — | — | $0.6 | — | |||||||||
| 2017 Trade Accounts Receivable | $3.1 | $0.8 | — | $1.8 | $2.1 | |||||||||
| Finance Receivables – Long-Term | — | — | — | — | — | |||||||||
| Deferred Asset Valuation Allowance | ||||||||||||||
| 2015 Deferred Tax Assets | $22.1 | $9.5 | — | — | $31.6 | |||||||||
| 2016 Deferred Tax Assets | $31.6 | $11.4 | — | — | $43.0 | |||||||||
| 2017 Deferred Tax Assets | $43.0 | $17.0 | — | — | $60.0 | |||||||||
| (a) Includes uncollectible accounts written-off. |
ALLETE, Inc. 20172020 Form 10-K