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.)
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.
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.
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.
ALLETE, Inc. 2020 Form 10-K
22
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
23
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
24
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
25
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
26
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
27
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
28
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
29
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.
Recent U.S. tax legislation could adversely impact our financial position, results of operations and cash flows.
On December 22, 2017, the TCJA was enacted into law. The TCJA has significantly changed the U.S. Internal Revenue Code and the taxation of corporations. The TCJA is unclear in certain respects and will require interpretations and the promulgation of regulations by the Internal Revenue Service, as well as state tax authorities and it could be subject to potential amendments and technical corrections. The regulatory treatment of the impacts of the TCJA will be subject to the discretion of the FERC and state regulatory authorities.
On February 6, 2018, Standard & Poor’s downgraded its ratings outlook for ALLETE to negative from stable as a result, among other reasons, of the potential negative impact of the TCJA on certain financial metrics used by credit rating agencies to rate us. It is unclear when or how the capital markets and the credit rating agencies will ultimately respond. Further, there may be other adverse effects resulting from the TCJA or regulatory agency responses to the TCJA that we have not yet identified. We are still quantifying the impacts of the TCJA on our businesses, and have reflected estimates for the impacts in our Consolidated Financial Statements as of December 31, 2017, which may be adjusted in future periods as more information becomes available. The reduction in the federal corporate income tax rate required us to remeasure our existing deferred income tax balances as of the date of enactment, resulting in a non‑cash benefit to earnings in our ALLETE Clean Energy and U.S. Water Services segments as well as a non-cash expense at our Corporate and Other businesses. The remeasurement of the existing deferred income tax assets and liabilities for our Regulated Operations segment was recorded as regulatory assets, regulatory liabilities, and a change to our investment in ATC resulting in no material impact on the 2017 results of operations for this segment. The benefits of the TCJA for customers of Minnesota Power and SWL&P are expected to be passed back to those customers over time primarily based upon the normalization provisions of the U.S. Internal Revenue Code over the life of the related property, plant and equipment with the remainder passed back based upon the determinations of regulatory authorities. The decrease in our investment in ATC is expected to be amortized into earnings over time. The final amount and timing over which the benefits of the TCJA will be passed back to customers has not been determined, and therefore, the full cash flow impacts are still uncertain.
Item 1A. Risk Factors (Continued)
Entity-wide Risks (Continued)
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.
ALLETE, Inc. 2020 Form 10-K
30
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.
Item 1A. Risk Factors (Continued)
Entity-wide Risks (Continued)
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.
Regulated Operations Risks
Our results of operations could be negatively impacted if our Large Power Customers experience an economic downturn,incurwork stoppages, fail to compete effectively, experience decreased demand or experience a decline in prices for their product.
Minnesota Power’s nine Large Power Customers accounted for 25 percent of our 2017 consolidated operating revenue (22 percent in 2016 and in 2015), of which one of these customers accounted for approximately 10 percent of consolidated revenue in 2017 (8 percent in 2016 and in 2015). 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.
Accordingly, if our customers experience an economic downturn, incur a work stoppage (including strikes, lock-outs or other events), fail to compete effectively, experience decreased demand 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 Large Power Customers.
Item 1A. Risk Factors (Continued)
Regulated Operations Risks (Continued)
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, among other things. Energy policy initiatives at the state or federal level could increase 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. 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.
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 or the adoption of new regulations could have an adverse impact on our 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 or costs are otherwise unable to be recovered through rates, or if cost recovery is not granted at the requested level, 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 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 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 can result in increased capital expenditures, environmental emission allowance trading, operating and other costs, as a result of compliance, remediation, containment and monitoring obligations, particularly with regard to laws relating to power plant emissions, coal ash, water discharge and wind energy 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.
Item 1A. Risk Factors (Continued)
Regulated Operations Risks (Continued)
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.
There is significant uncertainty regarding if and when new laws or regulations will be adopted to reduce GHGs and the impact any such laws or regulations would have on us. In 2017, coal was the primary fuel source for 70 percent of the energy produced by our generating facilities. Any future limits on GHG emissions would likely require us to incur significant capital expenditures and increases in operating costs, which if significant, could result in the closure of certain coal-fired energy centers, an impairment of assets, or otherwise adversely affect our results of operations, particularly if such 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 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 operations risks, breakdown or failure of facilities, the dependence on a specific fuel source, inadequatefuel supply, availability of fuel transportation, or 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, 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 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 and results of operation.
Our 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.
Item 1A. Risk Factors (Continued)
Regulated Operations Risks (Continued)
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. If there are reductions in demand from customers or if we lose customers, 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 can make no assurances that our power marketing efforts would fully offset any reduction in earnings resulting from the lower demand from existing customers or the loss of customers.
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. There could be lower demand for energy due to a loss of customers as a result of economic conditions, customers constructing their own generation facilities, higher costs and rates charged to customers, 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 would 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 more of our customers. If more 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.
Item 1A. Risk Factors (Continued)
Energy Infrastructure and Related Services Risks
The inability to successfully manage and grow our Energy Infrastructure and Related Services businesses could adversely affect our results of operations.
Our Energy Infrastructure and Related Services businesses consist of ALLETE Clean Energy and U.S. Water Services. The Company's strategy for these businesses includes adding customers, products, and new geographies, project development for others and growth through acquisitions. This strategy depends, in part, on the Company’s ability to successfully identify and evaluate acquisition opportunities and consummate acquisitions on acceptable terms. The Company may compete with other companies for these acquisition opportunities, which may increase the Company’s cost of making acquisitions and the Company may be unsuccessful in pursuing these acquisition opportunities. These 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. 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, products 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.
U.S. Water Services principally relies upon recurring revenues from a diverse mix of industrial customers. Some of these customers can be adversely affected by low commodity prices such as those for ethanol and oil which may cause these customers to purchase less of U.S. Water Services’ products and services. If U.S. Water Services is unable to retain its existing customers, add new customers, or if it experiences reduced demand for its products and services, adverse impacts on our results of operations could occur that would prevent us from achieving our future growth expectations.
The generation of electricity from ALLETE Clean Energy’s wind energy facilities depends heavily on suitable meteorological conditions.
ALLETE Clean Energy’s facilities are geographically diverse; however, if wind conditions are unfavorable, ALLETE Clean Energy’s electricity generation and revenue from its wind energy facilities may be substantially below its 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 beyond ALLETE Clean Energy’s control. Furthermore, components of its systems could be damaged by severe weather, such as hailstorms, lightning or tornadoes. In addition, replacement and spare parts for key components of ALLETE Clean Energy’s diverse turbine portfolio may be difficult or costly to acquire or may be unavailable. Unfavorable weather and atmospheric conditions could impair the effectiveness of ALLETE Clean Energy’s assets or reduce their output beneath their rated capacity or require shutdown of key equipment, impeding operation of its wind energy facilities.
The operation and maintenance of ALLETE Clean Energy’s electric generation 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 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. A portion of our facilities contain older generating equipment, 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.
Item 1A. Risk Factors (Continued)
Energy Infrastructure and Related Services Risks (Continued)
As contracts with its counterparties expire, ALLETE Clean Energy 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 2018 and 2032. 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.
Counterparties to ALLETE Clean Energy’s offtake agreements may not fulfill their obligations.
ALLETE Clean Energy is party to 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 remarket the energy resulting in similar revenue, our financial position, results of operations and cash flows could be adversely affected.
ALLETE has a significant amount of goodwill and intangible assets. A determination that goodwill or intangible assets have been impaired could result in a significant non-cash charge to earnings.
We had approximately $226 million of goodwill and intangible assets recorded on our Consolidated Balance Sheet as of December 31, 2017, relating to our initial acquisition of U.S. Water Services in 2015 as well as U.S. Water Services’ subsequent acquisitions. If we change our business strategy, fail to deliver on our projected results or if market or other conditions adversely affect the operations of U.S. Water Services, we may be required to record an impairment charge. Declines in projected operating cash flows at U.S. Water Services could also result in 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.
Corporate and Other Risks
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. In addition, BNI Energy and its customers may be adversely impacted by environmental laws and regulations which could have an adverse effect on our financial position, results of operations and cash flows.
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, continued 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.
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.
ALLETE, Inc. 2020 Form 10-K
32
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.
The following table shows dividends declared per share, and the high and low prices of our common stock for the periods indicated as reported by the NYSE:
|
| | | | | | | | | | |
| | 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.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (Continued)
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 |
Item 6. Selected Financial Data
Not Required.
|
| | | | | | | | | | | | | | | |
| 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 |
|
| |
(a) | In 2015, operating revenue and operating expenses included the construction and sale of a wind energy facility from ALLETE Clean Energy to Montana-Dakota Utilities for $197.7 million and $162.9 million, respectively. |
| |
(b) | The year ended December 31, 2017, includes the impact of the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. (See Note 1. Operations and Significant Accounting Policies.) |
| |
(c) | The non-controlling interest related to ALLETE Clean Energy’s Condon wind energy facility was acquired in April 2016. (See Note 6. Acquisitions.) |
| |
(d) | Excludes unallocated ESOP shares in 2013 and 2014. |
| |
(e) | During the first quarter of 2017, the Company identified an error related to the deferred income tax treatment associated with its Wholesale and Retail Contra AFUDC Regulatory Liability resulting in a decrease in Regulatory Assets and Deferred Income Taxes. The periods presented have been revised for the correction of the error. (See Note 1. Operations and Significant Accounting Policies.) |
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.
20172020 Financial Overview
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.
2017 Financial Overview (Continued)
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.
Corporate and Other net loss attributable to
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
20172020 Compared to 20162019
(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.
Revenue increased $29.3 million due to the period over period impact of the regulatory outcomes related to the allocation of North Dakota investment tax credits. As a result of the 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, operating revenue increased approximately $14 million in 2017. In 2016, operating revenue decreased approximately $15 million2020 as a result of the adverse impact for the regulatory outcome of the November 2016 MPUC order.COVID-19 pandemic and related governmental responses. In addition, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Note 4. Regulatory Matters.)
Fuel adjustment clause recoveries increased $24.4 million due to higher fuelOutlook – Regulated Operations – Industrial Customers and purchased power costs attributable to retailProspective Additional Load – Paper, Pulp and municipal customers. (See Operating Expenses - Fuel, Purchased Power and GasSecondary Wood Products – Utility.Verso Corporation.)
Conservation improvement program recoveries increased $7.2 million from 2016 primarily due to an increase in related expenditures. (See Operating Expenses - Operating and Maintenance.)
Revenue from kWh sales increased $3.9 million from 2016 primarily due to higher sales to Industrial customers. Sales to Industrialmunicipal customers increased 13.5 percent primarily due to increased taconite production and the commencement of a long‑term PSA with Silver Bay Power in June 2016. Sales to Other Power Suppliers decreased 6.4 percent from 20162019 as a result of increased sales to Industrial customers.the expiration of a contract with a municipal customer in June 2019. 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; market prices were lower in 2017 compared to 2016. Sales to Residential, Commercial and Municipalresidential customers decreasedincreased from 2019 primarily due to milder temperaturesthe impact of COVID-19, partially offset by warmer weather in 2017.2020.
| | | | | | | | | | | | | | |
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) | |
2017 Compared to 2016 (Continued)
Regulated Operations (Continued)
|
| | | | | | | | |
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).
Interim retail rates for Minnesota Power were approved by the MPUC and became effective January 1, 2017. Interim retail rate refund reserves of $31.6Fuel adjustment clause revenue decreased $14.4 million fully offset the interim retail rates recognized during 2017 due to lower fuel and purchased power costs attributable to retail and municipal customers.
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.)
Revenue from wholesale customers under FERC formula-based rates decreased $4.9 million from 2016 primarily dueCost recovery rider and transmission revenue related to lower rates.
Financial incentives under the conservation improvement program decreased $1.9 million from 2016.
Transmission revenue decreased $1.7GNTL increased $18.7 million primarily due to lower MISO-related revenue, partially offset by period over period changesrecovery of related expenses resulting from the GNTL being placed into service in the estimate of a refund liability related to MISO return on equity complaints. (See June 2020 and additional expenditures for property, plant and equipment.
Operating Expenses - Transmission Services – Utility.)
Operating Expenses increased $47.1 decreased $26.1 million, or 63 percent, from 2016.2019.
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.)
OperatingDepreciation and Maintenance Amortizationexpense increased $2.4$7.5 million, or 15 percent, from 20162019 primarily due to a $7.2 million increase in conservation improvement program expenses in 2017. Conservation improvement program expenses are recovered from certain retail customers. (See Operating Revenue – Utility.) This increase was partially offset by lower materials purchased for generation facilities. Operating and Maintenance expense in 2016 included a $3.6 million sales tax refund, partially offset by higher storm restoration costs of $2.9 million related to severe wind storms across Minnesota Power’s service territory in July 2016.
2017 Compared to 2016 (Continued)
Regulated Operations (Continued)
Depreciation and Amortization expense decreased $21.7 million, or 14 percent, from 2016 primarily due to modifications of the depreciable lives for Boswell, partially offset by additional property, plant and equipment in service. At a hearing on January 18, 2018,service resulting from the MPUC decided to extend the depreciable lives of Boswell Unit 3, Unit 4 and common facilities to 2050, and shorten the depreciable lives of Boswell Unit 1 and Unit 2 to 2022, resultingGNTL being placed into service in a net decrease to depreciation expense of approximately $25 million in 2017.June 2020.
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.
Interest ExpenseOther Income decreased $2.4 million from2019 reflecting various individually immaterial items.
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.
Equity Earnings in ATC increased $4.0$7.9 million, or 2227 percent, from2016 2019 primarily due to operating and maintenance expenses related to the Glen Ullin, South Peak and Diamond Spring wind energy facilities.
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.
In 2017, as a result of the 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, Regulated Operations increased operating revenue and reduced the corresponding regulatory liability by approximately $14 million resulting in an income tax expense of $6.1 million. In addition, Regulated Operations recorded an income tax expense of $7.9 million for North Dakota investment tax credits transferred to Corporate and Other, resulting in no impact to net income for Regulated Operations. Corporate and Other recorded an offsetting income tax benefit reflected production tax credits of $7.9$20.6 million in 2020 and $11.5 million in 2019.
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.
In 2016, as a result of the adverse impact for the regulatory outcome of the November 2016 MPUC order, Regulated Operations reduced operating revenue and recorded a corresponding regulatory liability for approximately $15 million resulting in an income tax benefit of $6.2 million. In addition, Regulated Operations recorded an income tax benefit of $8.8 million for North Dakota investment tax credits transferred from Corporate and Other, resulting in no impact to net income for Regulated Operations. Corporate and Other recorded an offsetting income tax expense of $8.8 million for the North Dakota investment tax credits transferred to Regulated Operations.U.S. Water Services
| | | | | | | | |
Year Ended December 31 | 2020 | 2019 |
Millions | | |
Operating Revenue | — | | $33.4 |
Net Loss Attributable to ALLETE | — | | $(1.1) |
ALLETE Clean Energy
|
| | | | | | |
Year Ended December 31 | 2017 |
| 2016 |
|
Millions | | |
Operating Revenue |
| $80.5 |
|
| $80.5 |
|
Net Income Attributable to ALLETE (a) | $41.5 |
| $13.4 |
|
| |
(a) | Results in 2017 include a $23.6 million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. |
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.)
2017 Compared to 2016 (Continued)
ALLETE Clean Energy (Continued)
|
| | | | | | | | | | |
| 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 |
|
Net Income Attributable to ALLETE increased $28.1 million from 2016. Net income in 2017 included a $23.6 million after‑tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA, increased production tax credits due to the requalification of WTGs at ALLETE Clean Energy’s Storm Lake I, Storm Lake II and Lake Benton wind energy facilities, lower operating and maintenance expense, 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 Condon wind energy facility, which was acquired by ALLETE Clean Energy in April 2016. (See Note 6. Acquisitions.)
U.S. Water Services
|
| | | | | | |
Year Ended December 31 | 2017 |
| 2016 |
|
Millions | | |
Operating Revenue |
| $151.8 |
|
| $137.5 |
|
Net Income Attributable to ALLETE (a) | $10.7 |
| $1.5 |
|
| |
(a) | Results in 2017 include a $9.2 million after-tax benefit due to the remeasurement of deferred income tax assets and liabilities resulting from the TCJA. |
Operating Revenue increased $14.3 million from 2016 primarily due to the acquisitions of WEST in October 2016 and Tonka Water in September 2017. (See Note 6. Acquisitions.) Revenue from chemical sales and related services was $116.0 million in 2017 compared to $110.5 million in 2016. Revenue from equipment sales was $35.8 million for 2017 compared to $27.0 million in 2016; equipment sales can significantly fluctuate from period to period.
Net Income Attributable to ALLETE increased$9.2 million from 2016. Net income in 2017 included a $9.2 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. Net income in 2017 also 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.)
Cash flow from operations for U.S. Water Services was approximately $12 million in 2017 compared to approximately $11 million in 2016.
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.
2017 Compared to 2016 (Continued)
Corporate and Other (Continued)
Net Loss Attributable to ALLETE was $8.4U.S. Water Services of $13.2 million in 2017 compared to net income of $4.9 million in 2016. The net loss in 2017 included a $19.8 million after-tax expense due to 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. after-tax. Net income in 20162020 included an after‑tax gain of $13.6 million related to the changeearnings from our investment 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.
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.)
2016 Compared to 2015
(See Note 17. Business Segments for financial results by segment.)
Regulated Operations
|
| | | | | | |
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 |
Operating Revenue – Utility increased $9.5 million, or 1 percent, from 2015 primarily due to higher transmission revenue, cost recovery rider revenue, pricing on PSAs with Other Power Suppliers and FERC formula-based rates, partially offset by the adverse impact for the regulatory outcome of the November 2016 MPUC order related to the allocation of North Dakota investment tax credits as well as lower conservation improvement program recoveries.
Transmission revenue increased $9.7 million primarily due to period over period changes in our estimate of a refund liability related to MISO return on equity complaints and higher MISO-related revenue. (See Operating Expenses - Transmission Services – Utility.)
2016 Compared to 2015 (Continued)
Regulated Operations (Continued)
Cost recovery rider revenue increased $7.5 million primarily due to the completion of the Boswell Unit 4 environmental upgrade in the fourth quarter of 2015.
Despite lower kWh sales, revenue increased $4.9 million from 2015 primarily due to higher pricing on PSAs with Other Power Suppliers in 2016. 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. Sales to industrial customers decreased 2.7 percent primarily due to reduced taconite production. In addition, demand revenue from industrial customers was down in 2016 as a result of lower demand nominations.
|
| | | | | | | | |
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 | ) |
Revenue from electric sales to taconite and iron concentrate customers accounted for 18 percent of consolidated operating revenue in 2016(17 percent in 2015). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 6 percent of consolidated operating revenue in 2016 (6 percent in 2015). Revenue from electric sales to pipelines and other industrial customers accounted for 7 percent of consolidated operating revenue in 2016 (6 percent in 2015).
Revenue from wholesale customers under FERC formula-based rates increased $3.8 millionbenefit primarily due to additional environmental and other investments.
Revenue decreased $15.0 million due to the adverse impact 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.)
Conservation improvement program recoveries decreased $4.1 million from 2015 primarily due to a reduction in related expenditures. (See Operating Expenses - Operating and Maintenance Expense.)
Operating Expenses increased $26.8 million, or 3 percent, from 2015.
Fuel, Purchased Power and Gas – Utility expense increased $3.9 million, or 1 percent, from 2015 primarily due to higher fuel and purchased power prices in 2016 compared to 2015, partially offset by lower kWh sales in 2016. Fuel and purchased power expense related to retail and municipal customers is recovered through the fuel adjustment clause.
Transmission Services – Utility expense increased $11.1 million, or 21 percent, from 2015 primarily due to higher MISO‑related expense and period over period changes in our estimate of a refund for MISO transmission expense related to MISO return on equity complaints. (See Operating Revenue and Note 4. Regulatory Matters.)
Operating and Maintenance expense decreased $8.9 million, or 4 percent, from 2015, primarily due to lower pension and other postretirement benefit expenses (see Note 15. Pension and Other Postretirement Benefit Plans), a $3.6 million sales tax refund received in 2016 and a $4.1 million decrease in conservation improvement program expenses. Conservation improvement program expenses are recovered from certain retail customers. (See Operating Revenue.) Operating and Maintenance expense included higher storm restoration costs of $2.9 million related to severe wind storms across Minnesota Power’s service territory in July 2016.
2016 Compared to 2015 (Continued)
Regulated Operations (Continued)
Depreciation and Amortization expense increased $19.2 million, or 14 percent, from 2015 primarily due to additional property, plant and equipment in service.
Taxes Other than Income Taxes increased $1.5 million, or 3 percent, from 2015 primarily due to higher property tax expenses resulting from higher taxable plant.
Interest Expense decreased $1.8 million, or 3 percent, from 2015 primarily due to lower average interest rates. We record interest expense for Regulated Operations based on Minnesota Power’s rate base and authorized capital structure, and allocate the balance to Corporate and Other.
Equity Earnings in ATC increased $2.2 million, or 13 percent, from2015 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.
Other Income decreased $1.3 million, or 38 percent, from 2015 primarily due to lower AFUDC–Equity.
Income Tax Expense decreased $18.5 million, or 76 percent, from 2015 due to lower pre-tax income, higher production tax credits generated in 2020 and lower pre-tax income. (See Note 10. Income Tax Expense.)
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.)
As a result of the adverse impact for the regulatory outcome of the November 2016 MPUC order, Regulated Operations reduced operating revenue and recorded a corresponding regulatory liability for approximately $15 million resulting in an income tax benefit of $6.2 million in 2016. In addition, Regulated Operations recorded an income tax benefit of $8.8 million for North Dakota investment tax credits transferred from Corporate and Other, resulting in no impact to net income for Regulated Operations. Corporate and Other recorded an offsetting income tax expense of $8.8 million for the North Dakota investment tax credits transferred to Regulated Operations.
ALLETE Clean Energy
|
| | | | | | |
Year Ended December 31, | 2016 |
| 2015 |
|
Millions | | |
Operating Revenue |
| $80.5 |
|
| $262.1 |
|
Net Income Attributable to ALLETE | $13.4 | $29.9 |
Operating Revenue decreased $181.6 million from 2015. Operating revenue in 2015 included the recognition of $197.7 million in revenue for the construction of a wind energy facility sold to Montana-Dakota Utilities in 2015. Operating revenue in 2016 was positively impacted by additional revenue generated from the operations of wind energy facilities acquired in April and July 2015.
|
| | | | | | | | | | |
| 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 |
|
(a) 2015 included the recognition of $162.9 million of cost of sales.
2016 Compared to 2015 (Continued)
ALLETE Clean Energy (Continued)
Net Income Attributable to ALLETE decreased $16.5 million from 2015. Net income for 2015 included the recognition of profit of $20.4 million after-tax for the construction of a wind energy facility sold to Montana-Dakota Utilities. In 2015, net income also included $1.8 million after-tax expense in acquisition costs related to the Chanarambie/Viking and Armenia Mountain wind energy facilities. Net income in 2016 included a $3.3 million after-tax non-cash goodwill impairment charge (see Note 1. Operations and Significant Accounting Policies) and a $0.9 million after-tax expense related to the repayment of long-term debt. Earnings in 2016 were positively impacted by income generated from the operations of wind energy facilities acquired in April and July 2015.
U.S. Water Services
|
| | | | | | |
| 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 |
|
Operating Revenue increased $17.7 million in 2016 compared to the period from February 10, 2015, to December 31, 2015. The results for 2015 reflect operations from the date of acquisition, February 10, 2015, through December 31, 2015, and therefore, do not reflect a full year. Revenue from chemical sales and related services was $110.5 million in 2016 compared to $92.5 million in 2015. Revenue from equipment sales was $27.0 million for 2016 compared to $27.3 million in 2015; equipment sales can significantly fluctuate from period to period.
Net Income Attributable to ALLETE increased $0.6 million in 2016 compared to the period from February 10, 2015, to December 31, 2015. The results for 2015 reflect operations from the date of acquisition, February 10, 2015, through December 31, 2015, and therefore do not reflect a full year. Net income in 2015 included an additional $1.9 million of after‑tax expense recognized as cost of sales related to purchase accounting for inventories and sales backlog which have been fully recognized as of December 31, 2016. Earnings in 2016 reflected increased investments in back office systems and support at U.S. Water Services as we create a platform for future growth.
Corporate and Other
Operating Revenue increased $7.7 million, or 7 percent, from 2015 primarily due to an increase in land sales at ALLETE Properties, which sold its Ormond Crossings project and Lake Swamp wetland mitigation bank in 2016. The increase was partially offset by a decrease in revenue at BNI Energy, which operates under cost-plus fixed fee contracts, as a result of lower expenses and fewer tons sold in 2016 compared to 2015.
Net Income Attributable to ALLETE increased $26.2 million from 2015. Net income in 2016 included an after-tax gain of $13.6 million related to the change in fair value of the U.S. Water Services contingent consideration liability and increased land sales at ALLETE Properties, partially offset by an adverse impact of $8.8 million after-tax for the regulatory outcome of the November 2016 MPUC order. (Regulated Operations - Income Tax Expense.) In 2015, the net loss included a $22.3 million after-tax non-cash impairment charge relating to the real estate assets of ALLETE Properties and $3.0 million after-tax expense in acquisition costs related to U.S. Water Services. Net income at BNI Energy increased to $6.8 million in 2016 compared to $6.7 million in 2015, and net income at ALLETE Properties increased to $0.7 million in 2016 compared to a net loss of $23.3 million in 2015.
Income Taxes – Consolidated
For the yearyears ended December 31, 2016,2019 and 2018 is included in Management's Discussion in the effective tax rate was 15.2 percent (22.6 percentAnnual Report on Form 10-K for the year ended December 31, 2015). The decrease from the year ended December 31, 2015, was primarily due to increased production tax credits in 2016 related to additional wind energy generation. The effective rate deviated from the combined statutory rate of approximately 41 percent primarily due to production tax credits. (See Note 13. Income Tax Expense.)2019.
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.
Critical Accounting Policies (Continued)
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.
Valuation of Goodwill and Intangible Assets. When we acquire a business, the assets acquired and liabilities assumed are recorded at their respective fair values as of the acquisition date. Determining the fair value of intangible assets acquired as part of a business combination requires us to make significant estimates. These estimates include the amount and timing of projected future cash flows, the discount rate used to discount those cash flows to present value, the assessment of the asset’s life cycle, and the consideration of legal, technical, regulatory, economic and competitive risks. The fair value assigned to intangible assets is determined by estimating the future cash flows of each project and discounting the net cash flows back to their present values. The discount rate used is determined at the time of measurement in accordance with accepted valuation standards.
Goodwill. Goodwill is the excess of the purchase price (consideration transferred) over the estimated fair value of net assets of acquired businesses. In accordance with GAAP, goodwill is not amortized. The Company assesses whether there has been an impairment of goodwill annually in the fourth quarter and whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. An impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with the goodwill impairment test are considered critical due to the amount of goodwill recorded on our Consolidated Balance Sheet and the judgment required in determining fair value, including projected future cash flows. The results of our annual impairment test are discussed in Note 1. Operations and Significant Accounting Policies and Note 9. Fair Value in this Form 10-K. Goodwill was $148.3 million and $131.2 million as of December 31, 2017, and December 31, 2016, respectively.
Intangible Assets.Intangible assets include customer relationships, patents, non-compete agreements, land easements, trademarks and trade names. Intangible assets with definite lives consist of customer relationships, which are amortized using an attrition model, and patents, non-compete agreements, land easements and certain trade names, which are amortized on a straight-line basis with estimated useful lives ranging from approximately 1 year to approximately 20 years. We review definite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets consist of trademarks and certain trade names, which are tested for impairment annually in the fourth quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment is calculated as the excess of the asset’s carrying amount over its fair value. Our impairment reviews are based on an estimated future cash flow approach that requires significant judgment with respect to future revenue and expense growth rates, selection of an appropriate discount rate, and other assumptions and estimates. We use estimates that are consistent with our business plans and a market participant view of the assets being evaluated. The results of our annual impairment test are discussed in Note 9. Fair Value in this Form 10-K. Intangible assets, net of accumulated amortization, were $77.6 million and $82.2 million as of December 31, 2017, and December 31, 2016, respectively.
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.
20162020 Minnesota General Rate Case. In November 2016,2019, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 910.6 percent for retail customers. The rate filing sought a return on equity of 10.2510.05 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would have generated approximately $55$66 million in additional revenue. In orders dated December 2016, Minnesota Power filed a request to modify its original interim rate proposal reducing its requested interim rate increase to $34.7 million from the original request of approximately $49 million due to a change in its electric sales forecast. In December 2016 orders,23, 2019, the MPUC accepted the November 2016 filing as complete and authorized an annual interim rate increase of $34.7$36.1 million beginning January 1, 2017.2020.
On February 23, 2017, Minnesota Power filed an additional request to further reduce its requested interim rate increase. In an order dated April 13, 2017, the MPUC approved Minnesota Power’s updated retail rate request resulting in a reduction in the annual interim rate increase to $32.2 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 commence in the fourth quarter of 2018; interim rates will be collected through this period which will be fully offset by the recognition of a corresponding reserve. As a result of the MPUC’s decisions on January 18, 2018, 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.
ALLETE, Inc. 2020 Form 10-K
As part of its decision in Minnesota Power’s 2016 general rate case, the MPUC extended the depreciable lives of Boswell Unit 3, Unit 4 and common facilities to 2050 primarily to mitigate rate increases for our customers, and shortened the depreciable lives of Boswell Unit 1 and Unit 2 to 2022, resulting in a decrease to depreciation expense of approximately $25 million pre-tax in 2017.41
Outlook (Continued)
Regulatory Matters (Continued)
Energy-Intensive Trade-Exposed Customer Rates. An EITE customer ratemaking law was enacted in 2015 which established that it is the energy policy of Minnesota to have competitive rates for certain industries such as mining and forest products. In 2015,On April 23, 2020, Minnesota Power filed a rate schedule petitionrequest with the MPUC for EITEthat 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 customers 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 corresponding rider for EITE cost recovery. In a March 2016 order, the MPUC dismissed the petition without prejudice. In June 2016,provision that Minnesota Power filed a revised EITE petition with the MPUC which included additional information on the net benefits analysis, limits on eligible customers and term lengths for the EITE discount. Thewould not file another 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 incase until at least November 1, 2021, unless certain events occur. In an order dated April 20, 2017; collection ofJune 30, 2020, the discount was subject to the MPUC’s review ofMPUC approved Minnesota Power’s compliance filing implementing approval of a recovery mechanism, withpetition and proposal to resolve and withdraw 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 informed 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 onEffective May 1, 2020, customer rates were set at an increase of 4.1 percent with the MPUC’s decisions at a hearing on January 18, 2018, as partremoval of Minnesota Power’s 2016 general rate case, Minnesota Power reinstated the EITE discount effective January 1, 2018. Minnesota Power expectspower marketing margin credit from base rates. Actual power marketing margins will be reflected in the discount to EITE customers to be approximately $15 million annually based on EITE customer current operating levels. Whilefuel adjustment clause. Reserves for interim rates areof $11.7 million were recorded in effect for Minnesota Power’s 2016 general rate case, EITE discounts will offset interim rate refund reserves for non-EITE customers.the second quarter of 2020 and refunded in the third and fourth quarters of 2020.
20162018 Wisconsin General Rate Case.SWL&P’s current retail rates are based on a 2017December 2018 PSCW retail rate order effective August 14, 2017, that allows for a 10.5 percent return on common equity of 10.4 percent and a 5555.0 percent equity ratio. SWL&P’s retail rates prior to August 14, 2017, were based on a 2012The PSCW retail rate order that provided for a 10.9 percent return on equity. The 2017 PSCW retail rate order authorizeshad directed SWL&P to collectfile its next general rate case in 2020; however, the PSCW granted an extension request made by SWL&P to delay filing its next general rate case until on average a 2.9 percent increase 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,or before December 20, 2022. SWL&P expectsrequested the extension primarily due to collect additional revenueimpacts of $2.5 million.the COVID-19 pandemic.
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.)
TaconiteThe ongoing COVID-19 pandemic and Iron Concentraterelated governmental responses has led to a disruption of economic activity, and could result in an extended disruption of economic activity. This disruption has resulted in reduced sales and revenue from industrial customers as many industrial customers operated at reduced levels or were temporarily closed or idled during 2020. In addition, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Verso Corporation.) The current disruption of economic activity or an extended disruption of economic activity may lead to additional adverse impacts on our taconite and paper, pulp and secondary wood products, pipeline and other industrial 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.
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.
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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.
Outlook (Continued)
Industrial Customers and Prospective Additional Load (Continued)
USS CorporationNorthshore Mining. In 2015, USS Corporation temporarily idled its Minnesota Ore Operations - Keetac plant in Keewatin, Minnesota, and a portion of its Minnesota Ore Operations - Minntac plant in Mountain Iron, Minnesota. These actions were due to high inventory levels and ongoing adjustment of its steel producing operations throughout North America. Global influences in the market, including a higher level of imports, unfairly traded products and reduced steel prices, were cited as having an impact. USS Corporation returned its Minntac plant to full production in 2015, and in the first quarter of 2017, USS Corporation restarted its Keetac plant. USS Corporation has the capability to produce approximately 5 million tons and 15 million tons of taconite annually at its Keetac and Minntac plants, respectively.
United Taconite. On May 16, 2017, Cliffs announced that productioncompleted constructed of a fully fluxed taconite pellet has started at its United Taconite facility. The product replaces a flux pellet previously made at Cliffs’ indefinitely idled Empire operation in Michigan. United Taconite has the capability to produce approximately 5 million tons of taconite annually.
Northshore Mining. Cliffs has announced that it is investing further in Minnesota ore operations, specifically it plans to invest approximately $75 million through 2020 to expand capacity for producing direct reduced-grade pellets at Northshore Mining. The additional direct reduced-grade pellets could be sold commercially or used to supply Cliff’s planned hot briquetted iron production plant in Toledo, Ohio.Ohio, in 2020, which utilizes direct reduced-grade pellets from Northshore Mining. In April 2020, Cliffs announced that, based on market conditions, it would be temporarily idling Northshore Mining. Cliffs idled production at Northshore Mining in April 2020 and resumed normal production at the facility in August 2020. Northshore Mining has the capability to produce approximately 6 million tons annually. Minnesota Power has a long-term PSA through 2031 with Silver Bay Power, which provides the majority of the electric service requirements for Northshore Mining. (See Silver Bay Power.)
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.
ERPUSS Corporation. In April 2020, USS Corporation stated it would idle its Keetac facility in Keewatin, Minnesota, in response to the sudden and dramatic decline in business conditions resulting from the COVID-19 pandemic. In addition, in May 2020, USS Corporation announced that production was expected to be temporarily reduced at its Minntac Plant in Mountain Iron, Ore / MagnetationMinnesota. USS Corporation resumed normal production at its Minntac Plant beginning in late July 2020 and resumed operations at its Keetac facility in December 2020. USS Corporation has the capability to produce approximately 15 million and 5 million tons annually at its Minntac and Keetac plants, respectively.
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).
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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.
UPM Blandin. On October 24, 2017, UPM-Kymmene Corporation announced that in light of the global market situation for graphic papers, and to sustain its competitiveness and leading position in the market, it planned to permanently close the smaller of UPM Blandin’s two paper machines located in Grand Rapids, Minnesota; the closure was completed in the fourth quarter of 2017. Paper production related to the other paper machine is planned to continue at UPM Blandin. Minnesota Power provides electric and steam service to UPM Blandin.
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.
Nashwauk Public Utilities Commission. Mesabi Metallics is a retail customer of the Nashwauk Public Utilities Commission, and Minnesota Power has a wholesale electric contract with the Nashwauk Public Utilities Commission for electric service through at least December 2032. Mesabi Metallics filed for bankruptcy protection in July 2016, under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. On June 13, 2017, the bankruptcy court approved a settlement plan for a consortium led by Chippewa Capital Partners LLC to take control of the project, subject to certain stipulations. On December 22, 2017, Mesabi Metallics emerged from bankruptcy under the ownership of Chippewa Capital Partners LLC.
Outlook (Continued)
Industrial Customers and Prospective Additional Load (Continued)
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.
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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.
Integrated Resource Plan. In 2015, Minnesota Power filed its 2015 IRP with the MPUC which contained steps in its EnergyForward strategic plan, and included an analysis of a variety of existing and future energy resource alternatives and a projection of customer cost impact by class. In a July 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for Taconite Harbor, 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 request for proposals for additional wind, solar and demand response resource additions subject to further MPUC approvals. In October 2016, Minnesota Power announced that Boswell Units 1 and 2 will be retired in 2018 as part of its EnergyForward strategic plan. In an order dated September 19, 2017, the MPUC approved Minnesota Power’s request to extend the next IRP filing deadline until October 1, 2019. (See Note 4. Regulatory Matters.)
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.)
Outlook (Continued)
EnergyForward (Continued)
Minnesota Solar Energy Standard. Minnesota law requires at least 1.5Power also has a goal of delivering 100 percent of total retail electric sales, excluding sales to certain customers, to be generated by solarcarbon-free 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 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-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.2050. (See EnergyForward.)
Minnesota Power has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard. Currently, there is no approved customer billing rate for solar costs.
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.
Updated customer billing rates for the renewableMinnesota Power has an approved cost recovery rider which includesfor certain renewable investments and expenditures related to Bison, were approved by the MPUC in an order dated November 8, 2017, whichexpenditures. 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.
In a November 2016 order, Updated customer billing rates were approved by the MPUC directed Minnesota Power to attribute all North Dakota investment tax credits realized from Bison to Minnesota Power regulated retail customers. As a result of the adverse regulatory outcome, Minnesota Power recorded a regulatory liability, and a reduction in Operating Revenue of approximately $15 million in 2016. The North Dakota investment tax credits previously recognized as income tax credits in Corporate and Other were reversed in 2016 resulting in an $8.8 million charge to net income in 2016. In December 2016, Minnesota Power submitted a request for reconsideration with the MPUC. In an order dated February 14, 2017, the MPUC decided to reconsider its November 2016 order.
In an order dated December 7, 2017, the MPUC modified its November 2016 order to allow Minnesota Power to account for North Dakota investment tax credits based on the long-standing regulatory precedents of stand-alone allocation methodology of accounting for income taxes. As a result of the favorable regulatory outcome, Minnesota Power recorded a reduction in its regulatory liability and an increase in Operating Revenue of approximately $14 million in 2017. The North Dakota investment tax credits were reestablished as income tax credits in Corporate and Other, resulting in a $7.9 million increase to net income in 2017.10, 2020.
The stand-alone method provides that income taxes (and credits) are calculated as if Minnesota Power was the only entity included in ALLETE’s consolidated federal and unitary state income tax returns. Minnesota Power has recorded a regulatory liability for North Dakota investment tax credits generated by its jurisdictional activity and expected to be realized in the future. North Dakota investment tax credits attributable to ALLETE’s apportionment and income of ALLETE’s other subsidiaries are included in Corporate and Other operations.
Outlook (Continued)
EnergyForward (Continued)
Tenaska PPA. On May 10, 2017, Nobles 2 PPA. Minnesota Power and an affiliate of Tenaska signedNobles 2 have a long-term PPA that provides for Minnesota Power to purchase the energy and associated capacity from a 250 MW wind energy facility in southwestsouthwestern Minnesota for a 20-year period beginning in 2020.through 2040. The agreement provides for the purchase of output from the facility at fixed energy prices. There are no fixed capacity charges, and Minnesota Power will only pay for energy as it is delivered. This agreement is subject to MPUC approval of the construction of a 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative(See Corporate and a subsidiary of ALLETE, and construction of the wind energy facility. (See Note 4. Regulatory Matters.Other – Investment in Nobles 2.)
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.
The fourththird PPA provides for Minnesota Power to purchase up to 133 MW of energy from Manitoba Hydro for 20 years beginningthrough June 2040. (See Note 8. Commitments, Guarantees and Contingencies.)
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.)
The fifth PPA provides foroutput purchased by Minnesota Power and a 40 kW solar array that is owned and operated by Minnesota Power. SWL&P also plans to purchase 50construct a 470 kW solar array in 2021 as part of a community solar garden in Superior, Wisconsin, which was approved by the PSCW on October 7, 2020.
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.
Energy Infrastructure and Related Services.
ALLETE Clean Energy.
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in four states, approximately 535 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. 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 Clean Energy believes the market for renewable energy in North America is robust, driven by several factors including environmental regulation, tax incentives, societal expectations and continual technology advances. State renewable portfolio standards, and state or federal regulations to limit GHG emissions 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.
Outlook (Continued)
ALLETE Clean Energy (Continued)
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.)
On January 3, 2017,In 2018, ALLETE Clean Energy announced that it will develop awould build, own and operate the South Peak wind project, an 80 MW wind energy facility of upin Montana, pursuant to 50 MW after securing a 25-year15-year PSA with Montana-Dakota Utilities, which includes an option to purchase the facility upon completion. We expect Montana-Dakota Utilities to exercise the optionNorthWestern Corporation; construction was completed and tax equity funding of $67.8 million in cash, net of issuance costs, was received in the firstsecond quarter of 2018;2020.
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 |
(a)The PSA expiration assumes the exercise of four one-year renewal options that ALLETE Clean Energy has the sole right to exercise.
U.S. Water Services.
U.S. Water Services provides integrated water management for industryNon-cash amortization to revenue recognized by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage and improve efficiency. U.S. Water Services is located in 49 states and Canada, and has an established base of approximately 4,900 customers. U.S. Water Services differentiates itself from the competition by developing synergies between established solutions in engineering, equipment and chemical water treatment, and helping customers achieve efficient and sustainable use of their water and energy systems. U.S. Water Services is a leading providerALLETE Clean Energy relates to the biofuels industry,amortization of differences between contract prices and also servesestimated market prices on assumed PSAs. As part of wind energy facility acquisitions, ALLETE Clean Energy assumed various PSAs that were above or below estimated market prices at the commercialtime of acquisition; the resulting differences between contract prices and institutional markets, foodestimated market prices are amortized to revenue over the remaining PSA term. Non-cash amortization is expected to be approximately $11.5 million annually in 2021 through 2023, $5.5 million annually in 2024 through 2027, 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.decreasing thereafter through 2032.
Outlook (Continued)
U.S. Water Services (Continued)
Our strategy is to grow U.S. Water Services’ presence in North America by adding customers, products, markets and new geographies. We believe water scarcity and a growing emphasis on conservation will continue to drive significant growth in the industrial, commercial and governmental sectors leading to organic revenue growth for U.S. Water Services. U.S. Water Services also expects to pursue periodic strategic tuck-in acquisitions with a purchase price in the $10 million to $50 million range. Priority will be given to acquisitions which expand its geographic reach, add new technology, or deepen its capabilities to serve its expanding customer base.
On September 1, 2017, U.S. Water Services acquired Tonka Water for total consideration of $19.2 million. Tonka Water is a supplier of municipal and industrial water treatment systems that will expand U.S. Water Services’ geographic and customer markets.
U.S. Water Services expects cash flow from operations of approximately $15 million in 2018 ($12 million in 2017).
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
In recent years, market conditions for real estate in Florida have required us to review our land inventories for impairment. In 2015, the Company reevaluated its strategy related to the real estate assets of ALLETE Properties in response to market conditions and transaction activity. The revised strategy incorporated the possibility of a bulk sale of its entire portfolio. Proceeds from a bulk sale would be strategically deployed to support growth in ALLETE Clean Energy and U.S. Water Services, collectively our Energy Infrastructure and Related Services businesses. ALLETE Properties also continues to pursue sales of individual parcels over time. ALLETE Properties will continue to maintain key entitlements and infrastructure without making additional investments or acquisitions.
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.
We expect the federal income tax rate change of the TCJA to result in lower income tax expense on an ongoing basis for our Regulated Operations, ALLETE Clean Energy and U.S. Water Services segments as well as our Corporate and Other businesses. The lower income tax expense for our Regulated Operations segment is expected to be mostly offset by lower revenue as most of the benefit is expected to be passed back to customers through lower rates. 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.
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 | |
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.
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.
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.)
Securities Investments.
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).
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.
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
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
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.
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.
Item 10. Directors, Executive Officers and Corporate Governance
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
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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:
Item 13. Certain Relationships and Related Transactions, and Director Independence
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
ALLETE or its subsidiaries are obligors under various long-term debt instruments including, but not limited to, the following:
Item 16. Form 10-K Summary
None.
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.
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.
Opinions on the Financial Statements and Internal Control over Financial Reporting
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.
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.
The accompanying notes are an integral part of these statements.