ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
ALLETE, Inc. Second Quarter 2020 Form 10-Q
29
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of March 31,June 30, 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.
Financial Overview
The following net income discussion summarizes a comparison of the threesix months ended March 31,June 30, 2020, to the threesix months ended March 31,June 30, 2019. The trends and results for the first threesix months of 2020 may not be indicative of full year results for 2020 due to uncertainty regarding the extent and duration of the COVID-19 pandemic. (See Overview.)
Net income attributable to ALLETE for the threesix months ended March 31,June 30, 2020, was $66.3$86.4 million, or $1.28$1.67 per diluted share, compared to $70.5$104.7 million, or $1.37$2.02 per diluted share, for the same period in 2019. Net income in 2020 included reserves for interim rates of $8.3 million after-tax, or $0.16 per share, for the refund of interim rates collected through April 30, 2020, resulting from the MPUC’s approval of the resolution of Minnesota Power’s 2020 general rate case. (See Note 2. Regulatory Matters.) Net income in 2019 included a gain on the sale of U.S. Water Services of $9.9$11.1 million after-tax, or $0.19$0.21 per share, and U.S. Water Services results of operations amounted to a loss of $1.1 million after-tax, or $0.02 per share, in the first quarter. The full year gain on sale of U.S. Water Services in 2019 was $13.2 million after-tax, or $0.26 per share.2019.
Regulated Operations net income attributable to ALLETE was $57.5$68.6 million for the threesix months ended March 31,June 30, 2020, compared to $51.5$81.8 million for the same period in 2019. Net income at Minnesota Power was higherlower than 2019 primarily due toto: reserves for interim rates of $8.3 million after-tax for the implementationrefund of interim rates on January 1, 2020, increased cost recovery ridercollected through April 30, 2020; lower kWh sales to retail and municipal customers; lower revenue from Other Power Suppliers resulting from the expiration of a PSA; and the timing of fuel adjustment clause recoveries in 2019 with the adoption of a new fuel adjustment clause methodology for Minnesota utilities beginning in 2020 (see Note 2. Regulatory Matters), and the timing of income taxes. These increases were partially offset by higher expenses, and lower kWh sales to residential, commercial and municipal customers in 2020. Net income at SWL&P was lower than 2019 primarily due to fewer gas and kWh sales to commercial and residential customers resulting from warmer weather in 2020 comparedsimilar to 2019. Our after-tax equity earnings in ATC were similarhigher compared to 2019.2019 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints.
ALLETE Clean Energy net income attributable to ALLETE was $11.7$15.7 million for the threesix months ended March 31,June 30, 2020, compared to $5.8$7.7 million for the same period in 2019. Net income in 2020 included $2.3$3.8 million of additional production tax credits generated compared to 2019 higher revenue resulting from higher wind resources and availability, and earnings from the Glen Ullin and South Peak wind energy facilityfacilities which commenced operations in December 2019. Net income in2019 and April 2020, also included additional income tax benefit recorded in 2020 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.respectively. These increases were partially offset by higher depreciation expense.
U.S. Water Services net loss attributable to ALLETE was $1.1 million for threesix months ended March 31,June 30, 2019. ALLETE completed the sale of U.S. Water Services in the first quarter of 2019.
Corporate and Other net lossincome attributable to ALLETE was $2.9$2.1 million for the threesix months ended March 31,June 30, 2020, compared to net income of $14.3$16.3 million for the same period in 2019. Net income in 2019 included a gain on the sale of U.S. Water Services of $9.9$11.1 million after-tax. Net income in 2020 included lower earnings from marketable equity securities held in benefit trusts. Net income in 2020 also includedtrusts and additional income tax expense recorded in 2020 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
30
COMPARISON OF THE THREE MONTHSQUARTERS ENDED MARCH 31,JUNE 30, 2020 AND 2019
(See Note 10. Business Segments for financial results by segment.)
Regulated Operations
| | | | | | | | |
Quarter Ended June 30, | 2020 | 2019 |
Millions | | |
Operating Revenue – Utility | $200.8 | | $249.8 | |
Fuel, Purchased Power and Gas – Utility | 69.3 | | 87.9 | |
Transmission Services – Utility | 16.4 | | 19.2 | |
| | |
Operating and Maintenance | 48.0 | | 54.2 | |
Depreciation and Amortization | 41.9 | | 40.2 | |
Taxes Other than Income Taxes | 13.3 | | 12.5 | |
Operating Income | 11.9 | | 35.8 | |
Interest Expense | (14.7) | | (14.4) | |
Equity Earnings | 6.4 | | 4.8 | |
Other Income | 3.3 | | 2.8 | |
Income Before Income Taxes | 6.9 | | 29.0 | |
Income Tax Expense (Benefit) | (4.2) | | (1.3) | |
| | |
| | |
Net Income | $11.1 | | $30.3 | |
|
| | | | | | |
Three Months Ended March 31, | 2020 |
| 2019 |
|
Millions | | |
Operating Revenue – Utility |
| $265.3 |
|
| $282.2 |
|
Fuel, Purchased Power and Gas – Utility | 89.0 |
| 109.8 |
|
Transmission Services – Utility | 18.5 |
| 18.3 |
|
Operating and Maintenance | 49.3 |
| 47.7 |
|
Depreciation and Amortization | 41.7 |
| 39.8 |
|
Taxes Other than Income Taxes | 11.3 |
| 12.3 |
|
Operating Income | 55.5 |
| 54.3 |
|
Interest Expense | (14.6 | ) | (15.5 | ) |
Equity Earnings | 5.2 |
| 5.6 |
|
Other Income | 3.4 |
| 4.3 |
|
Income Before Income Taxes | 49.5 |
| 48.7 |
|
Income Tax Expense (Benefit) | (8.0 | ) | (2.8 | ) |
Net Income Attributable to ALLETE |
| $57.5 |
|
| $51.5 |
|
Operating Revenue – Utility decreased $16.9$49.0 million, or 20 percent, from 2019 primarily due to lower revenue from kWh sales, fuel adjustment clause recoveries, and cost recovery rider revenue as well as the regulatory outcome related to the resolution of Minnesota Power’s 2020 general rate case. (See Note 2. Regulatory Matters.)
Revenue from kWh sales decreased $27.0 million from 2019 reflecting lower sales to commercial, industrial and conservation improvement program recoveries,municipal customers as well as the expiration of a 100 MW PSA in April 2020, partially offset by higher sales to residential customers. Sales to commercial and industrial customers decreased primarily due to the implementationadverse impact of interim ratesthe COVID-19 pandemic on January 1,customer operations. Many commercial and industrial customers operated at reduced levels or were temporarily closed or idled during the second quarter of 2020 as a result of the COVID-19 pandemic and related governmental responses. In addition, USS Corporation indefinitely idled its Keetac plant and Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) Sales to municipal customers decreased from 2019 as a result of the expiration of a contract with a municipal customer in June 2019. Sales to residential customers increased cost recovery rider revenue.from 2019 primarily due to warmer weather in 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
Kilowatt-hours Sold | | | | | Variance | | |
Quarter Ended June 30, | 2020 | | 2019 | | Quantity | | % |
Millions | | | | | | | |
Regulated Utility | | | | | | | |
Retail and Municipal | | | | | | | |
Residential | 246 | | | 232 | | | 14 | | | 6.0 | % |
Commercial | 286 | | | 317 | | | (31) | | | (9.8) | % |
Industrial | 1,235 | | | 1,773 | | | (538) | | | (30.3) | % |
Municipal | 131 | | | 170 | | | (39) | | | (22.9) | % |
Total Retail and Municipal | 1,898 | | | 2,492 | | | (594) | | | (23.8) | % |
Other Power Suppliers | 706 | | | 714 | | | (8) | | | (1.1) | % |
Total Regulated Utility Kilowatt-hours Sold | 2,604 | | | 3,206 | | | (602) | | | (18.8) | % |
Revenue from electric sales to taconite customers accounted for 22 percent of consolidated operating revenue in 2020 (27 percent in 2019). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of consolidated operating revenue in 2020 (6 percent in 2019). Revenue from electric sales to pipelines and other industrial customers accounted for 7 percent of consolidated operating revenue in 2020 (8 percent in 2019).
Fuel adjustment clause revenue decreased $12.2$10.7 million due to lower fuel and purchased power costs attributable to retail and municipal customers, partially offset by the timing of fuel adjustment clause recoveries in 2019. Beginning in 2020, Minnesota utilities adopted a new fuel adjustment clause methodology. (See Note 2. Regulatory Matters.)
ALLETE, Inc. Second Quarter 2020 Form 10-Q
31
COMPARISON OF THE QUARTERS ENDED JUNE 30, 2020 AND 2019 (Continued)
Regulated Operations (Continued)
Revenue decreased $5.5 million primarily due to reserves for interim rates of $11.7 million recorded for interim rates collected from January 2020 through April 2020 as a result of the regulatory outcome related to the resolution of Minnesota Power’s 2020 general rate case. This decrease was partially offset by higher rates resulting from Minnesota Power’s rate case. (See Note 2. Regulatory Matters.)
Cost recovery rider revenue decreased $4.6 million primarily due to additional production tax credits recognized by Minnesota Power. If production tax credits are recognized at a level above those assumed in Minnesota Power’s base rates, a decrease in cost recovery rider revenue is recognized to offset the impact of higher production tax credits on income tax expense.
Operating Expenses decreased $25.1 million, or 12 percent, from 2019.
Fuel, Purchased Power and Gas – Utility expense decreased $18.6 million, or 21 percent, from 2019 primarily due to lower kWh sales. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause.
Transmission Services – Utility expense decreased $2.8 million, or 15 percent, from 2019 primarily due to lower MISO-related expense.
Operating and Maintenance expensedecreased $6.2 million, or 11 percent, from 2019 primarily due to lower expenses for planned maintenance outages at our generation facilities, benefit expenses and employee expenses as well as a decrease in conservation improvement program expenses. These decreases were partially offset by rate case-related expenses and higher bad debt expense.
Depreciation and Amortization expense increased $1.7 million, or 4 percent, from 2019 primarily due to additional property, plant and equipment in service.
Equity Earnings increased $1.6 million, or 33 percent, from2019 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints. (See Outlook – Regulated Operations – Transmission – Investment in ATC.)
Income Tax Benefit increased $2.9 million from 2019 primarily due to lower pre-tax income. We expect our annual effective tax rate in 2020 to be a higher income tax benefit than in 2019 primarily due to lower pre-tax income.
ALLETE Clean Energy
| | | | | | | | |
Quarter Ended June 30, | 2020 | 2019 |
Millions | | |
Operating Revenue | | |
Contracts with Customers – Non-utility | $14.8 | $12.5 |
Other – Non-utility (a) | 2.8 | | 2.9 | |
Operating and Maintenance | 7.8 | | 8.2 | |
Depreciation and Amortization | 8.9 | | 6.6 | |
Taxes and Other | 0.9 | | 0.5 | |
Operating Income (Loss) | — | | 0.1 | |
Interest Expense | (0.5) | | (0.8) | |
Other Income | — | | — | |
Loss Before Income Taxes | (0.5) | | (0.7) | |
Income Tax Expense (Benefit) | (1.3) | | (2.6) | |
Net Income | 0.8 | | 1.9 | |
Net Loss Attributable to Non-Controlling Interest | (3.2) | | — | |
Net Income Attributable to ALLETE | $4.0 | | $1.9 | |
(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs.
Operating Revenue increased $2.2 million, or 14 percent, from 2019 primarily due to revenue from the Glen Ullin and South Peak wind energy facilities which commenced operations in December 2019 and April 2020, respectively.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
32
COMPARISON OF THE QUARTERS ENDED JUNE 30, 2020 AND 2019 (Continued)
ALLETE Clean Energy (Continued)
| | | | | | | | | | | | | | |
| Quarter Ended June 30, | | | |
| 2020 | | 2019 | |
Production and Operating Revenue | kWh | Revenue | kWh | Revenue |
Millions | | | | |
Wind Energy Regions | | | | |
East | 57.1 | | $5.1 | | 64.0 | | $5.8 | |
Midwest | 207.4 | | 7.7 | | 191.5 | | 7.8 | |
| | | | |
West | 202.5 | | 4.8 | | 22.7 | | 1.8 | |
| | | | |
Total Production and Operating Revenue | 467.0 | | $17.6 | | 278.2 | | $15.4 | |
Depreciation and Amortizationexpense increased $2.3 million, or 35 percent, from 2019 primarily due to additional property, plant and equipment in service related to the Glen Ullin and South Peak wind energy facilities.
Income Tax Benefit decreased $1.3 million from 2019 primarily due to additional taxable income from the Glen Ullin and South Peak wind energy facilities and additional income tax expense recorded in 2020 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate. These decreases were partially offset by additional production tax credits generated in 2020. The income tax benefit in 2020 reflected production tax credits generated of $3.8 million compared to $2.2 million in 2019.
Net Loss Attributable to Non-Controlling Interest increased $3.2 million from 2019 reflecting net losses attributable to non-controlling interest for the Glen Ullin and South Peak wind energy facilities.
Corporate and Other
Operating Revenue decreased $0.4 million, or 2 percent, from 2019 primarily due to the timing of 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 in 2020 compared to 2019.
Net Income increased $3.0 million from 2019 primarily due to higher earnings from marketable equity securities held in benefit trusts in 2020 and additional income tax benefit as GAAP requires the recognition of income tax expense at the estimated annual effective tax rate. These increases were partially offset by additional gain on the sale of U.S. Water Services in 2019 resulting from the finalization of working capital. Net income at BNI Energy was $2.5 million in 2020 compared to $1.7 million in 2019 reflecting higher earnings from marketable equity securities held in benefit trusts in 2020. The net loss at ALLETE Properties was $0.5 million in 2020 and in 2019.
Income Taxes – Consolidated
For the quarter ended June 30, 2020, the effective tax rate was a benefit of 102.4 percent (benefit of 16.3 percent for the quarter ended June 30, 2019). The 2020 increase in tax benefit was primarily due to lower pre-tax income. The estimated annual effective tax rate can differ from what a quarterly effective tax rate would otherwise be on a standalone basis, and this may cause quarter to quarter differences in the timing of income taxes.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
33
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019
(See Note 10. Business Segments for financial results by segment.)
Regulated Operations
| | | | | | | | |
Six Months Ended June 30, | 2020 | 2019 |
Millions | | |
Operating Revenue – Utility | $466.1 | | $532.0 | |
Fuel, Purchased Power and Gas – Utility | 158.3 | | 197.7 | |
Transmission Services – Utility | 34.9 | | 37.5 | |
| | |
Operating and Maintenance | 97.3 | | 101.9 | |
Depreciation and Amortization | 83.6 | | 80.0 | |
Taxes Other than Income Taxes | 24.6 | | 24.8 | |
Operating Income | 67.4 | | 90.1 | |
Interest Expense | (29.3) | | (29.9) | |
Equity Earnings | 11.6 | | 10.4 | |
Other Income | 6.7 | | 7.1 | |
Income Before Income Taxes | 56.4 | | 77.7 | |
Income Tax Expense (Benefit) | (12.2) | | (4.1) | |
| | |
| | |
Net Income Attributable to ALLETE | $68.6 | | $81.8 | |
Operating Revenue – Utility decreased $65.9 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.
Revenue from kWh sales decreased $9.0$35.7 million from 2019 reflecting lower sales to residential commercial, industrial and municipal customers.customers as well as the expiration of a 100 MW PSA in April 2020. Sales to residential and commercial customers decreased from 2019 primarily due to warmer weather in the first quarter of 2020. Sales to commercial and industrial customers decreased primarily due to the adverse impact of the COVID-19 pandemic on customer operations. Many commercial and industrial customers operated at reduced levels or were temporarily closed or idled during the second quarter of 2020 as a result of the COVID-19 pandemic and related governmental responses. In addition, USS Corporation indefinitely idled its Keetac plant and Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) Sales to municipal customers decreased from 2019 as a result of the expiration of a contract with a municipal customer in June 2019. Sales to industrial customers increased primarily due to additional sales to Silver Bay Power, which ceased self-generation in the third quarter of 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
Kilowatt-hours Sold | | | | | Variance | | |
Six Months Ended June 30, | 2020 | | 2019 | | Quantity | | % |
Millions | | | | | | | |
Regulated Utility | | | | | | | |
Retail and Municipal | | | | | | | |
Residential | 567 | | | 581 | | | (14) | | | (2.4) | % |
Commercial | 638 | | | 683 | | | (45) | | | (6.6) | % |
Industrial | 3,137 | | | 3,587 | | | (450) | | | (12.5) | % |
Municipal | 287 | | | 373 | | | (86) | | | (23.1) | % |
Total Retail and Municipal | 4,629 | | | 5,224 | | | (595) | | | (11.4) | % |
Other Power Suppliers | 1,528 | | | 1,536 | | | (8) | | | (0.5) | % |
Total Regulated Utility Kilowatt-hours Sold | 6,157 | | | 6,760 | | | (603) | | | (8.9) | % |
|
| | | | | | | | | | | |
Kilowatt-hours Sold | | | | | Quantity | | % |
Three Months Ended March 31, | 2020 |
| | 2019 |
| | Variance | | Variance |
Millions | | | | | | | |
Regulated Utility | | | | | | | |
Retail and Municipal | | | | | | | |
Residential | 321 |
| | 349 |
| | (28 | ) | | (8.0 | )% |
Commercial | 352 |
| | 366 |
| | (14 | ) | | (3.8 | )% |
Industrial | 1,902 |
| | 1,814 |
| | 88 |
| | 4.9 | % |
Municipal | 156 |
| | 203 |
| | (47 | ) | | (23.2 | )% |
Total Retail and Municipal | 2,731 |
| | 2,732 |
| | (1 | ) | | — |
|
Other Power Suppliers | 822 |
| | 822 |
| | — |
| | — |
|
Total Regulated Utility Kilowatt-hours Sold | 3,553 |
| | 3,554 |
| | (1 | ) | | — |
|
Revenue from electric sales to taconite customers accounted for 2624 percent of consolidated operating revenue in 2020 (22(24 percent in 2019). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of consolidated operating revenue in 2020 (5 percent in 2019). Revenue from electric sales to pipelines and other industrial customers accounted for 7 percent of consolidated operating revenue in 2020 (7(8 percent in 2019).
Fuel adjustment clause revenue decreased $22.9 million due to lower fuel and purchased power costs attributable to retail and municipal customers, partially offset by the timing of fuel adjustment clause recoveries in 2019. Beginning in 2020, Minnesota utilities adopted a new fuel adjustment clause methodology. (See Note 2. Regulatory Matters.)
ALLETE, Inc. Second Quarter 2020 Form 10-Q
34
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2020 AND 2019 (Continued)
Regulated Operations (Continued)
Conservation improvement program recoveries decreased $2.1$3.7 million from 2019 primarily due to a decrease in related expenditures. (See Operating Expenses - Operating and Maintenance.)
COMPARISON OF THE THREE MONTHS ENDED MARCH 31,Revenue increased $3.5 million due to higher rates in May 2020 AND 2019 (Continued)
Regulated Operations (Continued)
Interim retail rates for Minnesota Power, subject to refund, were approved by the MPUC and became effective January 1,June 2020 resulting from the resolution of Minnesota Power’s 2020 general rate case. As part of the resolution, interim rates collected from January 2020 through April 2020 were offset with reserves for interim rates which are expected to be refunded in revenuethe third quarter of $9.0 million.2020. (See Note 2. Regulatory Matters.)
Cost recovery rider revenue increased $2.3 million primarily due to higher expenditures related to the construction of the GNTL.
Operating Expenses decreased $18.1$43.2 million, or 810 percent, from 2019.
Fuel, Purchased Power and Gas – Utility expense decreased $20.8$39.4 million, or 1920 percent, from 2019 primarily due to lower kWh sales, purchased power prices and fuel costs. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause.
Transmission Services – Utility expense decreased $2.6 million, or 7 percent, from 2019 primarily due to lower MISO-related expense.
Operating and Maintenance expense increased $1.6decreased $4.6 million, or 35 percent, from 2019 primarily due to higher contract and professional service expenses and materials purchased for generation facilities, partially offset by a $2.1 million decrease in conservation improvement program expenses, lower expenses for planned maintenance outages at our generation facilities and lower salary, benefit and other employee-related expenses. These decreases were partially offset by rate case-related expenses and higher bad debt expense.
Depreciation and Amortization expense increased $1.9$3.6 million, or 5 percent, from 2019 primarily due to additional property, plant and equipment in service.
Taxes Other than Income TaxesEquity Earnings decreased $1.0increased $1.2 million, or 812 percent, from2019 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints. (See Outlook – Regulated Operations – Transmission – Investment in ATC.)
Income Tax Benefit increased $8.1 million from 2019 primarily due to lower property tax expenses resulting from lower estimated taxable market values.
Income Tax Benefit increased $5.2 million from 2019 primarily due to higher production tax credits.pre-tax income. We expect our annual effective tax rate in 2020 to be a higher income tax benefit than in 2019 primarily due to lower pre-tax income.
ALLETE Clean Energy
| | | | | | | | |
Six Months Ended June 30, | 2020 | 2019 |
Millions | | |
Operating Revenue | | |
Contracts with Customers – Non-utility | $32.1 | $27.1 |
Other – Non-utility (a) | 5.6 | | 5.8 | |
Operating and Maintenance | 16.0 | | 15.4 | |
Depreciation and Amortization | 17.1 | | 13.1 | |
Taxes and Other | 1.6 | | 1.1 | |
Operating Income | 3.0 | | 3.3 | |
Interest Expense | (1.0) | | (1.6) | |
Other Income | 0.2 | | 1.8 | |
Income Before Income Taxes | 2.2 | | 3.5 | |
Income Tax Expense (Benefit) | (8.5) | | (4.2) | |
Net Income | 10.7 | | 7.7 | |
Net Loss Attributable to Non-Controlling Interest | (5.0) | | — | |
Net Income Attributable to ALLETE | $15.7 | | $7.7 | |
|
| | | | | | |
Three Months Ended March 31, | 2020 |
| 2019 |
|
Millions | | |
Operating Revenue | | |
Contracts with Customers – Non-utility | $17.3 | $14.6 |
Other – Non-utility (a) | 2.8 |
| 2.9 |
|
Operating and Maintenance | 8.2 |
| 7.2 |
|
Depreciation and Amortization | 8.2 |
| 6.5 |
|
Taxes and Other | 0.7 |
| 0.6 |
|
Operating Income | 3.0 |
| 3.2 |
|
Interest Expense | (0.5 | ) | (0.8 | ) |
Other Income | 0.2 |
| 1.8 |
|
Income Before Income Taxes | 2.7 |
| 4.2 |
|
Income Tax Expense (Benefit) | (7.2 | ) | (1.6 | ) |
Net Income | 9.9 |
| 5.8 |
|
Net Loss Attributable to Non-Controlling Interest | (1.8 | ) | — |
|
Net Income Attributable to ALLETE |
| $11.7 |
|
| $5.8 |
|
(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs. | |
(a) | Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs. |
Operating Revenue increased $2.6$4.8 million, or 15 percent, from 2019 primarily due to revenue from the Glen Ullin and South Peak wind energy facilityfacilities which commenced operations in December 2019 as well as higher wind resources and availability compared to 2019.April 2020, respectively.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
35
COMPARISON OF THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2020 AND 2019 (Continued)
ALLETE Clean Energy (Continued)
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2020 | 2019 |
Production and Operating Revenue | kWh | Revenue | kWh | Revenue |
Millions | | | | |
Wind Energy Regions | | | | |
East | 78.6 |
|
| $7.1 |
| 80.4 |
|
| $7.4 |
|
Midwest | 244.4 |
| 8.5 |
| 212.9 |
| 9.0 |
|
West | 141.8 |
| 4.5 |
| 13.4 |
| 1.1 |
|
Total Production and Operating Revenue | 464.8 |
|
| $20.1 |
| 306.7 |
|
| $17.5 |
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | |
| 2020 | | 2019 | |
Production and Operating Revenue | kWh | Revenue | kWh | Revenue |
Millions | | | | |
Wind Energy Regions | | | | |
East | 135.7 | | $12.2 | | 144.4 | | $13.2 | |
Midwest | 451.8 | | 16.2 | | 404.4 | | 16.8 | |
| | | | |
West | 344.3 | | 9.3 | | 36.1 | | 2.9 | |
| | | | |
Total Production and Operating Revenue | 931.8 | | $37.7 | | 584.9 | | $32.9 | |
Operating and Maintenance
expense increased $1.0 million, or 14 percent, from 2019 primarily due to operating and maintenance expenses for the Glen Ullin wind energy facility which commenced operations in December 2019.
Depreciation and Amortization expense increased $1.7$4.0 million, or 2631 percent, from 2019 primarily due to additional property, plant and equipment in service related to the Glen Ullin and South Peak wind energy facility which commenced operations in December 2019.facilities.
Other Income decreased $1.6 million from 2019 reflecting various individually immaterial items.
Income Tax Benefit increased $5.6$4.3 million from 2019 primarily due to additional production tax credits generated in 2020 and additional income tax benefit recorded in 2020 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.compared to 2019. The income tax benefit in 2020 reflected production tax credits generated of $4.2$8.0 million compared to $1.9$4.2 million in 2019.
Net Loss Attributable to Non-Controlling Interest increased $1.8$5.0 million from 2019 reflecting net losses attributable to non-controlling interest for the Glen Ullin and South Peak wind energy facility which commenced operations in December 2019.facilities.
U.S. Water Services
| | | | | | | | |
Six Months Ended June 30, | 2020 | 2019 |
Millions | | |
Operating Revenue | — | $33.4 |
| | |
Net Loss Attributable to ALLETE | — | $(1.1) |
|
| | |
Three Months Ended March 31, | 2020 | 2019 |
Millions | | |
Operating Revenue | — | $33.4 |
Net Loss Attributable to ALLETE | — | $(1.1) |
Operating Revenue was $33.4 million for the threesix months ended March 31,June 30, 2019. ALLETE completed the sale of U.S. Water Services in the first quarter of 2019.
Net Loss Attributable to ALLETE was $1.1 million for the threesix months ended March 31,June 30, 2019. ALLETE completed the sale of U.S. Water Services in the first quarter of 2019.
Corporate and Other
Operating Revenue increased $2.1$1.7 million, or 93 percent, from 2019 primarily due to higher revenue at BNI Energy, which operates under cost-plus fixed fee contracts, as a result of higher expenses and more tons sold in 2020 compared to 2019.2019, partially offset by the timing of land sales at ALLETE Properties.
Net LossIncome Attributable to ALLETE was $2.9$2.1 million in 2020 compared to net income $14.3of $16.3 million in 2019. Net income in 2019 included a gain on the sale of U.S. Water Services of $9.9$11.1 million after-tax. Net income in 2020 included lower earnings from marketable equity securities held in benefit trusts. Net income in 2020 also includedtrusts and additional income tax expense recorded in 2020 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate. Net income at BNI Energy was $0.7$3.2 million in 2020 compared to $1.9$3.6 million in 2019, reflecting lower earnings from marketable equity securities held in benefit trusts in 2020. The net loss at ALLETE Properties was $0.5$1.0 million in 2020 compared to a net loss of $0.6$1.1 million in 2019.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
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COMPARISON OF THE THREESIX MONTHS ENDED MARCH 31,JUNE 30, 2020 AND 2019 (Continued)
Income Taxes – Consolidated
For the threesix months ended March 31,June 30, 2020, the effective tax rate was a benefit of 27.237.8 percent (expense(benefit of 4.01.8 percent for the threesix months ended March 31,June 30, 2019). The effective tax rate for 2020 was a higher benefit primarily due to 2019 including a higher tax rate on and higher pre-tax income resulting from the gain on the sale of U.S. Water Services in 2019.
We expect our annual effective tax rate in 2020 to be a higher benefit as compared to 2019 primarily due to higher production tax credits generated by ALLETE Clean Energy in 2020 and lower pre-tax income as 2019 reflected the gain on sale of U.S. Water Services.income. The effective rate deviated from the combined statutory rate of approximately 28 percent primarily due to production tax credits. (See Note 8. Income Tax Expense.)
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under GAAP involve management’s judgment about subjective factors and estimates, the effects of which are inherently uncertain. Accounting measurements that we believe are most critical to our reported results of operations and financial condition include: regulatory accounting, pension and postretirement health and life actuarial assumptions, impairment of long-lived assets, and taxation. These policies are reviewed with the Audit Committee of our Board of Directors on a regular basis and summarized in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Form 10-K.
OUTLOOK
For additional information see our 2019 Form 10-K.
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 long-term objectives of achieving average annual earnings per share growth of 5 percent to 7 percent, and providing a dividend payout competitive with our industry. Regulated Operations is projected to have average annual earnings growth of 4 percent to 5 percent over the long-term. ALLETE Clean Energy and our Corporate and Other businesses are projected to have average annual earnings growth of at least 15 percent over the long-term. Our annual earnings per share is expected to be negatively impacted in the short-term by the ongoing COVID-19 pandemic and related disruptions; however, the Company expects it will be able to maintain its stated financial objectives for average annual earnings per share growth over the long-term (next five years). (See Part II, Item 1A. Risk Factors.)
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 ALLETE Clean Energy and our Corporate and Other businesses to complement its regulated businesses, balance exposure to the utility’s industrial customers and provide potential long-term earnings growth. ALLETE expects net income from Regulated Operations to be approximately 80 percent of total consolidated net income in 2020. Over the next several years, the contribution of ALLETE Clean Energy and our 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. (See 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.
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OUTLOOK (Continued)
Regulatory Matters. Entities within our Regulated Operations segment are under the jurisdiction of the MPUC, FERC, PSCW and NDPSC. See Note 2. Regulatory Matters for discussion of regulatory matters within these jurisdictions.
2020 Minnesota General Rate Case. OnIn November 1, 2019, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 10.6 percent for retail customers. The rate filing seekssought a return on equity of 10.05 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would generatehave generated approximately $66 million in additional revenue. In orders dated December 23, 2019, the MPUC accepted the filing as complete and authorized an annual interim rate increase of $36.1 million that began January 1, 2020. We cannot predict the level of final rates that may be authorized by the MPUC.
On April 23, 2020, Minnesota Power filed a request with the MPUC that proposesproposed a resolution forof Minnesota Power’s 2020 general rate case. Key components of our proposal includeincluded removing the current 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 of approximately $12 million ($9 million as of March 31, 2020,);2020; increasing ongoing customer rates 4.1 percent compared to the 5.8 percent increase reflected in current interim rates; and a provision that Minnesota Power would not file another rate case until at least MarchNovember 1, 2021, unless certain events occur. Minnesota Power would withdraw its general rate case upon approval of this filing and proposed resolution by the MPUC. At a hearing on AprilIn an order dated June 30, 2020, the MPUC approved lowering current interim ratesMinnesota Power’s petition and proposal to 4.1 percent effectiveresolve and withdraw the general rate case. Effective May 1, 2020, as requested by Minnesota Powercustomer rates were set at an increase of 4.1 percent with the removal of the power marketing margin credit from base rates. Actual power marketing margins will be reflected in this filing. A final decisionthe fuel adjustment clause on Minnesota Power’s full proposal in this filing is expected inan ongoing basis. As of June 2020. At this time, we are unable to predict whether the MPUC will ultimately approve this filing and proposed resolution, and thus, as of March 31,30, 2020, we have not recorded reserves for interim rates.rates of $11.7 million were recorded, which are expected to be refunded to customers in the third quarter of 2020.
2018 Wisconsin General Rate Case. SWL&P’s current retail rates are based on a December 2018 PSCW order that allows for a return on equity of 10.4 percent and a 55.0 percent equity ratio. The PSCW has ordereddirected SWL&P to file a general rate case in 2020.2020; however, on July 24, 2020, SWL&P filed a waiver and extension request with the PSCW to delay filing its next general rate case on or before December 20, 2022, primarily due to impacts of the COVID-19 pandemic.
Industrial Customers and Prospective Additional Load.
Industrial Customers. Electric power is one of several key inputs in the taconite mining, paper, pulp and secondary wood products, pipeline and other industries. Approximately 5451 percent of our regulated utility kWh sales in the threesix months ended March 31,June 30, 2020, were made to our industrial customers (51(53 percent in the threesix months ended March 31,June 30, 2019). These customers and their markets have been impacted by the ongoing COVID-19 pandemic. (See Part II, Item 1A. Risk Factors.)
The ongoing COVID-19 pandemic and related federal and state governmentgovernmental responses has led to a disruption of economic activity, and could result in an extended disruption of economic activity. This disruption is expected to resulthas resulted in reduced sales and revenue from industrial customers. The states of Minnesota and Wisconsin issued stay-at-home or shelter-in-place orders in March 2020 that remain in effect, andcustomers as many non-essential commercial and industrial customers are operatingoperated at reduced levels or arewere temporarily closed or idled.idled during the second quarter of 2020. In addition, Cliffs temporarily idled its Northshore Mining operation, Hibbing Taconite temporarily idled production and USS Corporation indefinitely idled its Keetac plant as well as announced a temporary partial shutdown atand Verso Corporation indefinitely idled its Minntac plant, each of which are served by Minnesota Power.paper mill in Duluth, Minnesota. (See Northshore Mining, Hibbing TaconiteUSS Corporation and USSVerso 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. Steel produced from these North American facilities is used primarily in the manufacture of automobiles, appliances, pipe and tube products for the gas and oil industry, and in the construction industry. Historically, less than 10 percent of Minnesota taconite production has been exported outside of North America.
OUTLOOK (Continued)
Industrial Customers and Prospective Additional Load (Continued)
There has been a general historical correlation between U.S. steel production and Minnesota taconite production. The American Iron and Steel Institute, an association of North American steel producers, reported that U.S. raw steel production operated at approximately 8167 percent of capacity during the first threesix months of 2020 compared to 8281 percent in the first threesix months of 2019; however, the American Iron and Steel Institute also reported that U.S. raw steel production in the last week of AprilJuly 2020 had decreased towas approximately 5160 percent of capacity. The World Steel Association, an association of steel producers, national and regional steel industry associations, and steel research institutes representing approximately 85 percent of world steel production, projected in October 2019June 2020 that U.S. steel consumption in 2020 will increasedecrease by approximately one23 percent compared to 2019; however, this projection was made before the COVID-19 pandemic2019.
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OUTLOOK (Continued)
Industrial Customers and the World Steel Association announced in April 2020 that it had decided to postpone its U.S. steel consumption update projection typically released in April each year due to continuing disruption caused by the COVID-19 pandemic.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. (See Note 6. Commitments, Guarantees and Contingencies.) 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.
Northshore Mining. Cliffs is currently constructing a hot briquetted iron production plant in Toledo, Ohio, and had begun shipping direct reduced-grade pellets form Northshore Mining to the Toledo plant in anticipation of the planned start of operations in mid-2020. On2020. In March 19, 2020, following guidelines from the office of the Governor of Ohio regarding the COVID-19 pandemic, Cliffs temporarily shut down construction activities at its hot briquetted iron project site. OnIn April 13, 2020, Cliffs announced that, based on current market conditions, it willwould be temporarily idling production at two of its iron ore mining operations, Northshore Mining in Minnesota and Tilden Mine in Michigan. Cliffs idled production at Northshore Mining in April 2020 and plansis expected to restart the facility byand be at full production in August 2020. In June 2020, subjectCliffs announced that it was resuming construction of its hot briquetted iron project in Toledo, Ohio, with construction expected to business conditions.be completed in the fourth quarter of 2020. Northshore Mining has the capability to produce approximately 6 million tons annually. Minnesota Power has a 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 PSA through 2031. Silver Bay Power supplies approximately 90 MW of load to Northshore Mining, an affiliate of Silver Bay Power, which had previously been served predominately through self-generation by Silver Bay Power. Starting in 2016, Minnesota Power supplied Silver Bay Power with at least 50 MW of energy and Silver Bay Power had the option to purchase additional energy from Minnesota Power as it transitioned away from self-generation. In the third quarter of 2019, Silver Bay Power ceased self-generation and Minnesota Power began supplying the full energy requirements for Silver Bay Power.
USS Corporation. In April 2020, USS Corporation stated it would indefinitely 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, onin May 1, 2020, USS Corporation announced reducedthat production was expected to be temporarily reduced at its Minntac Plant in Mountain Iron, Minnesota untilMinnesota. USS Corporation increased production at its Minntac Plant beginning in late July 2020. No update was provided regarding its Keetac facility. USS Corporation has the capability to produce approximately 20 million tons annually at its Minntac and Keetac plants.
Hibbing Taconite. OnIn April 20, 2020, ArcelorMittal announced that Hibbing Taconite in Hibbing, Minnesota, would idle production until July 2020 due to the COVID-19 pandemic. Hibbing Taconite is expected to resume production in August 2020. Hibbing Taconite has the capability to produce approximately 8 million tons annually.
Paper, Pulp and Secondary Wood Products. The North American paper and pulp industry 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 the declining demand. In addition, the ongoing COVID-19 pandemic and related federal and state government responses couldhave adversely impactimpacted these customers’ operations and resultresulted in lower operating levels than expected as well as the indefinite shutdown of Verso Corporations’ paper mill in Duluth, Minnesota. (See Verso Corporation.) These customers could continue to be adversely impacted by the COVID-19 pandemic resulting in lower operating levels than expected or the temporary idling or indefinite shutdown of other facilities.
Boise. On April 1, 2020, Packaging Corporation of America announced an idling of both paper machines and the sheet-converting operation at its Jackson Mill in Alabama for the months of May and June 2020. As part of that announcement, Packaging Corporation of America also stated that the company's Boise paper mill in International Falls, Minnesota, which is a customer of Minnesota Power, willwould continue to operate at capacity during thisthe same period.
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OUTLOOK (Continued)
Industrial Customers and Prospective Additional Load (Continued)
Verso Corporation. In June 2020, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. Verso Corporation stated the decision was due to the accelerated decline in graphic paper demand resulting from the COVID-19 pandemic and that it will explore alternatives for the mill including restarting if market conditions improve, marketing for sale or closing permanently.
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. OnIn September 30, 2019, Husky Energy announced that it had received the required permit approvals to begin reconstruction. On April 20, In June 2020, Husky Energy announced that rebuild construction at the refinery had been suspendedresumed following a suspension in March 2020 due to the COVID-19 pandemic. Husky Energy did not provide a timeline for when construction would resume. TheThe facility remains at minimal operations,. and the refinery is not expected to resume normal operations until 2022.
Prospective Additional Load. Minnesota Power is pursuing new wholesale and retail loads in and around its service territory. Currently, several companies in northeastern Minnesota continue to progress in the development of natural resource-based projects that represent long-term growth potential and load diversity for Minnesota Power. We cannot predict the outcome of these projects.
PolyMet. PolyMet is planning to start a new copper-nickel and precious metal (non-ferrous) mining operation in northeastern Minnesota. In 2015, PolyMet announced the completion of the final EIS by state and federal agencies, which was subsequently published in the Federal Register and Minnesota Environmental Quality Board Monitor. The Minnesota Department of Natural Resources (DNR) and the U.S. Army Corps of Engineers have both issued final Records of Decision, finding the final EIS adequate.
In 2016, PolyMet submitted applications for water-related permits with the DNR and MPCA, an air quality permit with the MPCA, and a state permit to mine application with the DNR detailing its operational plans for the mine. In June 2018, the U.S. Forest Service and PolyMet closed on a land exchange, which resulted 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. On February 11, 2020, PolyMet announced it had filed a petition for further review with the Minnesota Supreme Court seeking to overturn the Minnesota Court of Appeals decision, which was accepted for review by the Minnesota Supreme Court on March 25, 2020. Minnesota Power could supply between 45 MW and 50 MW of load under a 10‑year10-year power supply contract with PolyMet that would begin upon start-up of operations.
EnergyForward. Minnesota Power is executing EnergyForward, a strategic plan for 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 of certain coal-fired generating facilities.
Integrated Resource Plan. In a 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for the economic idling of Taconite Harbor Units 1 and 2 and the ceasing of coal-fired operations at Taconite Harbor in 2020, directed Minnesota Power to retire Boswell Units 1 and 2 no later than 2022, required an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal, and required Minnesota Power to conduct requests for proposal for additional wind, solar and demand response resource additions. Minnesota Power retired Boswell Units 1 and 2 in the fourth quarter of 2018. The MPUC also has required a baseload retirement evaluation in Minnesota Power’s next IRP filing analyzing its existing fleet, including potential early retirement scenarios of Boswell Units 3 and 4, as well as a securitization plan. Minnesota Power’s next IRP filing w due October 1, 2020; however, on May 29, 2020, Minnesota Power filed a request to extend the deadline for submitting its next IRP filing citing the COVID-19 pandemic. On July 30, 2020, the MPUC granted an extension of the deadline for submission until February 1, 2021, with interim reports due in the fourth quarter of 2020.
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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 a 250 MW natural gas capacity dedication agreement. The natural gas capacity dedication agreement was subject to MPUC approval of the construction of NTEC, a 525 MW to 550 MW combined-cycle natural gas‑firedgas-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 an order dated January 24, 2019, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication agreement. Separately, the MPUC required a baseload retirement evaluation in Minnesota Power’s next IRP filing analyzing its existing fleet, including potential early retirement scenarios of Boswell Units 3 and 4, as well as a securitization plan. On December 23, 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 worksheet before reassessing the agreements. On January 22, 2020, Minnesota Power filed a petition for further review with the Minnesota Supreme Court requesting that it review and overturn the Minnesota Court of Appeals decision, which petition was accepted for review by the Minnesota Supreme Court on March 18, 2020. On January 8, 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 approximately $700 million, of which ALLETE’s portion is expected to be approximately $350 million. ALLETE’s portion of NTEC project costs incurred through March 31,June 30, 2020, is approximately $13$14 million.
OUTLOOK (Continued)
EnergyForward (Continued)
Integrated Resource Plan. In a 2016 order, the MPUC approved Minnesota Power’s 2015 IRP with modifications. The order accepted Minnesota Power’s plans for the economic idling of Taconite Harbor Units 1 and 2 and the ceasing of coal-fired operations at Taconite Harbor in 2020, directed Minnesota Power to retire Boswell Units 1 and 2 no later than 2022, required an analysis of generation and demand response alternatives to be filed with a natural gas resource proposal, and required Minnesota Power to conduct requests for proposal for additional wind, solar and demand response resource additions. Minnesota Power retired Boswell Units 1 and 2 in the fourth quarter of 2018. Minnesota Power’s next IRP filing is due October 1, 2020. (See Note 2. 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 and expects approximately 50 percent of its energy will be supplied by renewable energy sources by 2021.
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 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.
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 solar energy projects in Minnesota. (See Note 2. Regulatory Matters.)
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 approvedOn June 30, 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs.costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard.
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 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. Minnesota Power is currently pursuing a modernization and capacity upgrade of its DC transmission system to continue providing reliable operations and additional system capabilities.
Minnesota Power has an approved cost recovery rider for certain renewable investments and expenditures. The cost recovery rider allows Minnesota Power to charge retail customers on a current basis for the costs of certain renewable investments plus a return on the capital invested. Updated customer billing rates for the renewable cost recovery rider were provisionally approved by the MPUC in a November 2018 order.
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OUTLOOK (Continued)
EnergyForward (Continued)
Nobles 2 PPA. In the third quarter of 2018, Minnesota Power and Nobles 2 signed an amended long-term PPA that provides for Minnesota Power to purchase the energy and associated capacity from a 250 MW wind energy facility in southwestern Minnesota for a 20-year period beginning in 2020. 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 construction of the wind energy facility. (See Note 3. Equity Investments.)
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. The PPA is subject to the construction of the GNTL and MMTP. (See Note 6. Commitments, Guarantees and Contingencies.) The capacity price is adjusted annually until 2020 by the change in a governmental inflationary index.through May 2035. 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 beginning in 2020.through June 2040. The pricing under this PPA is based on forward market prices. The PPA is subject to the construction of the GNTL and MMTP. (See Note 6. Commitments, Guarantees and Contingencies.)
OUTLOOK (Continued)
EnergyForward (Continued)
The fifth PPA provides for Minnesota Power to purchase 50 MW of capacity from Manitoba Hydro at fixed prices. The PPA began in June 2017 and expires in May 2020.
Transmission. We continue to make investments in transmission opportunities that strengthen or enhance the transmission grid or take advantage of our geographical location between sources of renewable energy and end users. These include the GNTL, investments to enhance our own transmission facilities, investments in other transmission assets (individually or in combination with others) and our investment in ATC.
Great Northern Transmission Line. As a condition of the 250-MW long-term PPA entered into with Manitoba Hydro, construction of additional transmission capacity iswas required. As a result, Minnesota Power is constructingconstructed the GNTL, an approximately 220‑mile220-mile 500-kV transmission line between Manitoba and Minnesota’s Iron Range that was proposed by Minnesota Power and Manitoba Hydro in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainable energy.
In a 2016 order, the MPUC approved the route permit for On June 1, 2020, Minnesota Power placed the GNTL and in 2016, the U.S. Departmentinto service with project costs of Energy issued a presidential permit to cross the U.S.-Canadian border, which was the final major regulatory approval needed before construction in the U.S. could begin. Construction activities commenced in the first quarter of 2017, and$307.1 million incurred by Minnesota Power expects the GNTL to be in-servicethrough June 30, 2020. Total project costs, including those costs contributed by mid-2020. The total project cost in the U.S., including substation work, is estimated to be approximately $700 million, of which Minnesota Power’s portion is expected to be approximately $325 million; the difference will be recovered from a subsidiary of Manitoba Hydro, as non-shareholder contributions to capital. Total project costs of $647.7 million have been incurred through March 31,June 30, 2020 of which $344.6 million has been recovered from a subsidiary oftotaled $657.0 million. Also on June 1, 2020, Manitoba Hydro. (See Note 6. Commitments, Guarantees and Contingencies.)Hydro placed the MMTP into service.
Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. As of March 31,June 30, 2020, our equity investment in ATC was $142.3$145.6 million ($141.6 million as of December 31, 2019). In the threesix months ended March 31,June 30, 2020, we invested $0.4$1.1 million in ATC, and on April 30,July 31, 2020, we invested an additional $0.8 million. We expect to make additional investments of $1.6$0.8 million in 2020.
ATC’s authorized return on equity is 9.8810.02 percent, or 10.3810.52 percent including an incentive adder for participation in a regional transmission organization, based on a May 21, 2020, FERC order that granted rehearing of a November 2019 FERC order. In this order, the FERCwhich had reduced the base return on equity for regional transmission organizations as recommended byto 9.88 percent, or 10.38 percent including an administrative law judge with refunds ordered for prior periods. Multiple parties to the complaint have filed requests for rehearing of the FERC order.incentive adder.
ATC’s 10-year transmission assessment, which covers the years 2019 through 2028, identifies a need for between $2.9 billion and $3.6 billion in transmission system investments. These investments by ATC, if undertaken, are expected to be funded through a combination of internally generated cash, debt and investor contributions. As opportunities arise, we plan to make additional investments in ATC through general capital calls based upon our pro rata ownership interest in ATC.
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OUTLOOK (Continued)
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 six states, approximately 740 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300600 MW of wind energy facilities under construction or development that it will own and operate with long-term PSAs in place. 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 and production tax credit requalification of existing facilities.
OUTLOOK (Continued)
ALLETE Clean Energy (Continued)
ALLETE Clean Energy will pursue growth through acquisitions or project development. ALLETE Clean Energy is targeting acquisitions of existing facilities up to 200 MW each, which have long-term PSAs in place for the facilities’ output. At this time, ALLETE Clean Energy expects acquisitions or development of new facilities will be primarily wind or solar facilities in North America. ALLETE Clean Energy is also targeting the development of new facilities up to 200 MW each, which will have long‑termlong-term PSAs in place for the output or may be sold upon completion.
Federal production tax credit qualification is important to the economics of project development, and ALLETE Clean Energy has invested in equipment to meet production tax credit safe harbor provisions which provides an opportunity to seek development of up to approximately 1,000 MW of production tax credit qualified wind projects through 2022. ALLETE Clean Energy will also invest approximately $80 million through 2020 for production tax credit requalification of up to approximately 500 WTGs at its Storm Lake I, Storm Lake II, Lake Benton and Condon wind energy facilities. We anticipate annual production tax credits relating to these projects of approximately $20$17 million in 2020, $17 million to $22 million annually in 2021 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. (See Part II, Item 1A. Risk Factors.)
In 2018, ALLETE Clean Energy announced that it will build, own and operate the South Peak wind project, an 80 MW wind energy facility in Montana, pursuant to a 15-year PSA with NorthWestern Corporation; construction was completed and tax equity funding of $67.8 million in cash, net of issuance costs, was received in the second quarter of 2020.
In May 2019, ALLETE Clean Energy acquired the Diamond Spring wind project in Oklahoma from Apex Clean Energy. ALLETE Clean Energy will build, own and operate the approximately 300 MW wind energy facility. The Diamond Spring wind project is fully contracted to sell wind power under long-term power sales agreements. Construction is expected to be completed in late 2020.
On March 10, 2020, ALLETE Clean Energy acquired the rights to the approximately 300 MW Caddo wind project in Oklahoma from Apex Clean Energy for approximately $8 million with additional payments required to be made at defined milestones. The full development of this approximately 300 MW wind project wouldwill involve the sale of energy to corporate customers under long-term power sales agreements.PSAs.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
43
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 740 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. The current mix of PSA expiration and geographic location for existing facilities is as follows:
| | | | | | | | | | | | | | |
Wind Energy Facility | Location | Capacity MW | PSA MW | PSA Expiration |
Armenia Mountain | East | 101 | 100% | 2024 |
Chanarambie/Viking | Midwest | 98 | | |
PSA 1 (a) | | | 12% | 2023 |
PSA 2 | | | 88% | 2023 |
Condon | West | 50 | 100% | 2022 |
Glen Ullin | West | 106 | 100% | 2039 |
Lake Benton | Midwest | 104 | 100% | 2028 |
South Peak | West | 80 | 100% | 2035 |
Storm Lake I | Midwest | 108 | 100% | 2027 |
Storm Lake II | Midwest | 77 | | |
PSA 1 | | | 90% | 2022 |
PSA 2 | | | 10% | 2032 |
Other | Midwest | 17 | 100% | 2028 |
|
| | | | |
Wind Energy Facility | Location | Capacity MW | PSA MW | PSA Expiration |
Armenia Mountain | East | 101 | 100% | 2024 |
Chanarambie/Viking | Midwest | 98 | | |
PSA 1 (a) | | | 12% | 2023 |
PSA 2 | | | 88% | 2023 |
Condon | West | 50 | 100% | 2022 |
Glen Ullin | West | 106 | 100% | 2039 |
Lake Benton | Midwest | 104 | 100% | 2028 |
South Peak | West | 80 | 100% | 2035 |
Storm Lake I | Midwest | 108 | 100% | 2027 |
Storm Lake II | Midwest | 77 | | |
PSA 1 | | | 90% | 2022 |
PSA 2 | | | 10% | 2032 |
Other | Midwest | 17 | 100% | 2028 |
| |
(a) | The PSA expiration assumes the exercise of all renewal options that ALLETE Clean Energy has the sole right to exercise. |
(a)The PSA expiration assumes the exercise of all renewal options that ALLETE Clean Energy has the sole right to exercise.
OUTLOOK (Continued)
Corporate and Other.
BNI Energy. BNI Energy anticipates selling 4.64.4 million tons of lignite coal in 2020 (4.1 million tons were sold in 2019) and has sold 1.22.1 million tons for the threesix months ended March 31,June 30, 2020 (1.1(2.2 million tons were sold for the threesix months ended March 31,June 30, 2019). BNI Energy operates under cost-plus fixed fee agreements extending through December 31, 2037.
Investment in Nobles 2. Our wholly-owned subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that will own and operate a 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. The wind energy facility will be built in Nobles County, Minnesota, and is expected to be completed in late 2020, with an estimated total project cost of approximately $350 million to $400 million. In the fourth quarter of 2019, we entered into a tax equity funding agreement to finance approximately $116 million of the project costs. We account for our investment in Nobles 2 under the equity method of accounting. As of March 31,June 30, 2020, our equity investment in Nobles 2 was $83.4$121.5 million ($56.0 million at December 31, 2019). In the threesix months ended March 31,June 30, 2020, we invested $27.4$65.5 million in Nobles 2, and in AprilJuly 2020 we invested an additional $21.7$15.0 million. We expect to make approximately $65$35 million in additional investments in 2020.
ALLETE Properties. ALLETE Properties represents our legacy Florida real estate investment. ALLETE Properties’ major project in Florida is Town Center at Palm Coast, with approximately 800 acres of land available for sale. In addition to this project, ALLETE Properties has approximately 600 acres of other land available for sale. Market conditions can impact land sales and could result in our inability to cover our cost basis and operating expenses including fixed carrying costs such as community development district assessments and property taxes.
Our strategy incorporates the possibility of a bulk sale of the entire ALLETE Properties portfolio. Proceeds from a bulk sale would be strategically deployed to support growth initiatives at our 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.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
44
OUTLOOK (Continued)
Income Taxes.
ALLETE’s aggregate federal and multi-state statutory tax rate is approximately 28 percent for 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,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 2535 percent to 3040 percent for 2020 primarily due to 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 10 years due to production tax credits attributable to our wind energy generation.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position. ALLETE is well-positioned to meet the Company’s liquidity needs; however, the Company is monitoring capital markets and other financing sources in light of the ongoing COVID-19 pandemic. (See Part II, 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 March 31,June 30, 2020, we had cash and cash equivalents of $67.0$25.7 million, $340.5$383.5 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 $90 million available for borrowing under a $200 million term loan entered into in January 2020 and a debt-to-capital ratio of 4244 percent. (See Working Capital.)
In addition, ALLETE has agreed to sellissued $140 million of the Company's first mortgage bonds to be issued on or before August 3, 2020, and onin April 8, 2020, ALLETE entered into a $115 million term loan agreement with $95 million borrowed upon execution. (See Note 5. Short-Term and Long-Term Debt.) On April 29, 2020, we received approximately $70$67.8 million in cash, net of issuance costs, from a third-party investor as part of a tax equity financing for ALLETE Clean Energy’s South Peak wind energy facility. The Company also has approximately $116 million in commitments from tax equity partners for our investment in Nobles 2, and the Company is actively seeking tax equity funding for ALLETE Clean Energy’s Diamond Spring and Caddo wind project.projects.
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Capital Structure. ALLETE’s capital structure is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | % | | December 31, 2019 | | % |
Millions | | | | | | | |
ALLETE Equity | $2,265.7 | | | 52 | | | $2,231.9 | | | 56 | |
Non-Controlling Interest in Subsidiaries | 166.5 | | | 4 | | | 103.7 | | | 3 | |
Short-Term and Long-Term Debt | 1,899.0 | | | 44 | | | 1,622.6 | | | 41 | |
| | | | | | | |
| $4,331.2 | | | 100 | | | $3,958.2 | | | 100 | |
|
| | | | | | | | | | | |
| March 31, 2020 |
| | % | | December 31, 2019 |
| | % |
Millions | | | | | | | |
ALLETE Equity |
| $2,271.1 |
| | 55 | |
| $2,231.9 |
| | 56 |
Non-Controlling Interest | 101.9 |
| | 3 | | 103.7 |
| | 3 |
Long-Term Debt (Including Long-Term Debt Due Within One Year) | 1,731.3 |
| | 42 | | 1,622.6 |
| | 41 |
|
| $4,104.3 |
| | 100 | |
| $3,958.2 |
| | 100 |
Cash Flows. Selected information from the Consolidated Statement of Cash Flows is as follows:
| | | | | | | | | | | |
For the Six Months Ended June 30, | 2020 | | 2019 |
Millions | | | |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period | $92.5 | | | $79.0 | |
Cash Flows from (used for) | | | |
Operating Activities | 144.5 | | | 95.2 | |
Investing Activities | (487.4) | | | 46.0 | |
Financing Activities | 287.8 | | | (13.6) | |
Change in Cash, Cash Equivalents and Restricted Cash | (55.1) | | | 127.6 | |
Cash, Cash Equivalents and Restricted Cash at End of Period | $37.4 | | | $206.6 | |
ALLETE, Inc. Second Quarter 2020 Form 10-Q
45
|
| | | | | | | |
For the Three Months Ended March 31, | 2020 |
| | 2019 |
|
Millions | | | |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period |
| $92.5 |
| |
| $79.0 |
|
Cash Flows from (used for) | | | |
Operating Activities | 88.8 |
| | 79.1 |
|
Investing Activities | (182.5 | ) | | 185.1 |
|
Financing Activities | 80.1 |
| | 22.0 |
|
Change in Cash, Cash Equivalents and Restricted Cash | (13.6 | ) | | 286.2 |
|
Cash, Cash Equivalents and Restricted Cash at End of Period |
| $78.9 |
| |
| $365.2 |
|
LIQUIDITY AND CAPITAL RESOURCES (Continued)Cash Flows (Continued)
Operating Activities. Cash from operating activities was slightly higher in 2020 compared to 2019 as cash2019. Cash from operating activities in 2019 included higher non-cash earnings resulting from the gain on sale of U.S. Water Services, the refund of Minnesota Power’s provisionprovisions for interim rates and tax reform, and the impact of U.S. Water Services prior to its sale. Cash from operating activities in 2020 reflected lower collections of accounts receivable due to timing and lower cash collected from current cost recovery riders.
Investing Activities. Cash used for investing activities was higher in 2020 compared to 2019. Cash from investing activities in 2019 included proceeds received from the sale of U.S. Water Services. Cash used for investing activities in 2020 included higher additions to property, plant and equipment and additional payments for equity method investments compared to 2019.
Financing Activities. Cash from financing activities was higher in 2020 compared to 2019 primarily due to higher proceeds from the issuance of long-term debt, proceeds from a tax equity financing (non-controlling interest in subsidiaries) and lower repayments of long-term debt in 2020.debt.
Working Capital. Additional working capital, if and when needed, generally is provided by consolidated bank lines of credit and the issuance of securities, including long-term debt, common stock and commercial paper. As of March 31,June 30, 2020, we had consolidated bank lines of credit aggregating $407.0 million ($407.0 million as of December 31, 2019), the majority of which expire in January 2024. We had $66.3$23.5 million outstanding in standby letters of credit and $0.2 millionno outstanding draws under our lines of credit as of March 31,June 30, 2020 ($62.0 million in standby letters of credit and no outstanding draws as of December 31, 2019). In addition, as of March 31,June 30, 2020, we had 3.63.5 million original issue shares of our common stock available for issuance through Invest Direct, our direct stock purchase and dividend reinvestment plan, and 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets.Markets, as amended most recently in May 2020. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs. In July 2019, we filed Registration Statement No. 333-232905, pursuant to which the remaining shares under this agreement will continue to be offered for sale, from time to time.
Securities. During the threesix months ended March 31,June 30, 2020, we issued 0.10.2 million shares of common stock through Invest Direct, the Employee Stock Purchase Plan, and the Retirement Savings and Stock Ownership Plan, resulting in net proceeds of $3.3$7.9 million (0.1(0.2 million shares were issued for the threesix months ended March 31,June 30, 2019, resulting in net proceeds of $0.8$1.5 million). These shares of common stock were registered under Registration Statement Nos. 333-231030, 333-211075, 333-183051 and 333-162890.
Financial Covenants. See Note 5. Short-Term and Long-Term Debt for information regarding our financial covenants.
Pension and Other Postretirement Benefit Plans. Management considers various factors when making funding decisions, such as regulatory requirements, actuarially determined minimum contribution requirements and contributions required to avoid benefit restrictions for the defined benefit pension plans. (See Note 9. Pension and Other Postretirement Benefit Plans.)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Off-Balance Sheet Arrangements. Off-balance sheet arrangements are summarized in our 2019 Form 10-K, with additional disclosure in Note 6. Commitments, Guarantees and Contingencies.
Credit Ratings. Access to reasonably priced capital markets is dependent in part on credit and ratings. Our securities have been rated by S&P Global Ratings and by Moody’s. Rating agencies use both quantitative and qualitative measures in determining a company’s credit rating. These measures include business risk, liquidity risk, competitive position, capital mix, financial condition, predictability of cash flows, management strength and future direction. Some of the quantitative measures can be analyzed through a few key financial ratios, while the qualitative ones are more subjective. Our current credit ratings are listed in the following table:
|
| | | | | | | |
Credit Ratings | S&P Global Ratings | Moody’s |
Issuer Credit Rating | BBB | Baa1 |
Commercial Paper | A-2 | P-2 |
First Mortgage Bonds | (a) | A2 |
| |
(a) | Not rated by S&P Global Ratings. |
(a) Not rated by S&P Global Ratings.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
46
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Credit Ratings (Continued)
On April 22, 2020, S&P Global Ratings downgraded ALLETE’s long-term issuer credit rating to BBB stable from BBB+ outlook negative and affirmed its short-term rating at A-2. S&P Global Ratings noted the impacts of debt coverage ratios going forward along with the lack of a revenue decoupling mechanism at Minnesota Power combined with the large commercial and industrial presence in its service territory as its rationale for the downgrade.
The disclosure of these credit ratings is not a recommendation to buy, sell or hold our securities. Ratings are subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Capital Requirements.Our capital expenditures for 2020 are now expected to be approximately $535 million; however,$635 million. The increase from the 2020 capital expenditures projected in our 2019 Form 10-K is primarily due to the Caddo wind project. (See Outlook – ALLETE Clean Energy.) The Company is also evaluating its planned capital expenditures and may make adjustments to mitigate impacts of the ongoing COVID-19 pandemic, if appropriate. At this time, we do not have an update to the amount of capital expenditures expected in 2020 due to uncertainty regarding the extent and duration of the COVID-19 pandemic. For the threesix months ended March 31,June 30, 2020, capital expenditures totaled $161.8$356.1 million ($85.1249.3 million for the threesix months ended March 31,June 30, 2019). The expenditures were primarily made in the Regulated Operations and ALLETE Clean Energy segments.
OTHER
Environmental Matters.
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have been promulgated by both the EPA and state 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 6. Commitments, Guarantees and Contingencies.)
Employees.
As of March 31,June 30, 2020, ALLETE had 1,3521,355 employees, of which 1,3281,332 were full-time.
Minnesota Power and SWL&P have an aggregate of 471 employees who are members of International Brotherhood of Electrical Workers (IBEW) Local 31. The current labor agreements with IBEW Local 31 expire on April 30, 2023, for Minnesota Power and February 1, 2021, for SWL&P.
BNI Energy has 181183 employees, of which 135136 are subject to a labor agreement with IBEW Local 1593. The current labor agreement with IBEW Local 1593 expires on March 31, 2023.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Note 1. Operations and Significant Accounting Policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES INVESTMENTS
Available-for-Sale Securities. As of March 31,June 30, 2020,, our available-for-sale securities portfolio consisted primarily of securities held in other postretirement plans to fund employee benefits.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
47
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
COMMODITY PRICE RISK
Our regulated utility operations incur costs for power and fuel (primarily coal and related transportation) in Minnesota, and power and natural gas purchased for resale in our regulated service territory in Wisconsin. Minnesota Power’s exposure to price risk for these commodities is significantly mitigated by the current ratemaking process and regulatory framework, which allows recovery of fuel costs in excess of those included in base rates or distribution of savings in fuel costs to ratepayers. SWL&P’s exposure to price risk for natural gas is significantly mitigated by the current ratemaking process and regulatory framework, which allows the commodity cost to be passed through to customers. We seek to prudently manage our customers’ exposure to price risk by entering into contracts of various durations and terms for the purchase of power and coal and related transportation costs (Minnesota Power), and natural gas (SWL&P).
POWER MARKETING
Minnesota Power’s power marketing activities consist of: (1) purchasing energy in the wholesale market to serve its regulated service territory when energy requirements exceed generation output; and (2) selling excess available energy and purchased power. From time to time, Minnesota Power may have excess energy that is temporarily not required by retail and municipal customers in our regulated service territory. Minnesota Power actively sells any excess energy to the wholesale market to optimize the value of its generating facilities.
We are exposed to credit risk primarily through our power marketing activities. We use credit policies to manage credit risk, which includes utilizing an established credit approval process and monitoring counterparty limits.
INTEREST RATE RISK
We are exposed to risks resulting from changes in interest rates as a result of our issuance of variable rate debt. We manage our interest rate risk by varying the issuance and maturity dates of our fixed rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. We may also enter into derivative financial instruments, such as interest rate swaps, to mitigate interest rate exposure. Interest rates on variable rate long-term debt are reset on a periodic basis reflecting prevailing market conditions. Based on the variable rate debt outstanding as of March 31,June 30, 2020,, an increase of 100 basis points in interest rates would impact the amount of pre-tax interest expense by $2.6$4.3 million. This amount was determined by considering the impact of a hypothetical 100 basis point increase to the average variable interest rate on the variable rate debt outstanding as of June 30, 2020.
March 31, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of March 31,June 30, 2020,, evaluations were performed, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, on the effectiveness of the design and operation of ALLETE’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)). Based upon those evaluations, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are effective to provide assurance that information required to be disclosed in ALLETE’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
ITEM 4. CONTROLS AND PROCEDURES (Continued)
Changes in Internal Controls. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
48
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding material legal and regulatory proceedings, see Note 4. Regulatory Matters and Note 9. Commitments, Guarantees and Contingencies to the Consolidated Financial Statements in our 2019 Form 10-K and Note 2. Regulatory Matters and Note 6. Commitments, Guarantees and Contingencies herein. Such information is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Our 2019 Form 10-K includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors disclosed in Part I, Item 1A. Risk Factors of our 2019 Form 10-K.
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 spread and have implemented our 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. The governors of Minnesota and Wisconsin issued executive orders in March 2020 in response to the COVID-19 pandemic which restricted economic activity in these states. The state of Minnesota continues to have restrictions that remain in effect through at least August 12, 2020, while the state of Wisconsin’s order was overturned in May 2020 and has not been replaced. 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. The states of Minnesota and Wisconsin issued stay-at-home or shelter-in-place orders in March 2020 that remain in effect, and many non-essentialMany commercial and industrial customers arewere operating at reduced levels or arewere temporarily closed or idled.idled during the second quarter of 2020. In addition, as a result of the COVID-19 pandemic, Cliffs temporarily idled its Northshore Mining operation, Hibbing Taconite temporarily idled production and USS Corporation indefinitely idled its Keetac plant as well as announced a temporary partial shutdown atand Verso Corporation indefinitely idled its Minntac plant, each of which are served by Minnesota Power.paper mill in Duluth, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) The current disruption of economic activity or an extended disruption of economic activity may lead to additional adverse impacts on our taconite mining, 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 wavedwaived 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.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
49
ITEM 1A. RISK FACTORS (Continued)
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 (Continued)
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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-Q.
ITEM 5. OTHER INFORMATION
None.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
50
ITEM 6. EXHIBITS
|
| | | | | | | |
Exhibit Number |
| | |
| | Term Loan Agreement dated as of April 6, 2020, among ALLETE, Inc., as Borrower, the Lenders party hereto, U.S. Bank National Association, as Administrative Agent and CoBank, ACB, J.P. Morgan Chase Bank, N.A. and Bank of America, N.A., as Co-Documentation Agents and U.S. Bank National Association as Lead Arranger and Book Runner. |
| | |
| | |
| | |
| | |
| | |
101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | XBRL Schema |
101.CAL | | XBRL Calculation |
101.DEF | | XBRL Definition |
101.LAB | | XBRL Label |
101.PRE | | XBRL Presentation |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
ALLETE agrees to furnish to the SEC upon request any instrument with respect to long-term debt that ALLETE has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K.
ALLETE, Inc. Second Quarter 2020 Form 10-Q
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | |
| | ALLETE, INC. |
| | |
| | |
| | |
| | |
May 6,August 5, 2020 | | /s/ Robert J. Adams |
| | Robert J. Adams |
| | Senior Vice President and Chief Financial Officer |
| | (Principal Financial Officer) |
| | |
| | |
| | |
| | |
May 6,August 5, 2020 | | /s/ Steven W. Morris |
| | Steven W. Morris |
| | Vice President, Controller and Chief Accounting Officer |
| | (Principal Accounting Officer) |
ALLETE, Inc. FirstSecond Quarter 2020 Form 10-Q
4652