NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2021, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. The presentation of certain prior period amounts on the Consolidated Financial Statements have been adjusted for comparative purposes. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the nine months ended September 30, 2022, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2022. For further information, refer to the Consolidated Financial Statements and notes included in our 2021 Form 10-K.
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of September 30, 2022, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under ALLETE Clean Energy loan and tax equity financing agreements. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under an ALLETE Clean Energy loan agreement as well as PSAs. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.
| | | | | | | | | | | | | | | | | | | | | | | |
| Cash, Cash Equivalents and Restricted Cash | September 30,
2022 | | December 31,
2021 | | September 30,
2021 | | December 31,
2020 |
| Millions | | | | | | | |
| Cash and Cash Equivalents | $42.1 | | | $45.1 | | | $59.0 | | | $44.3 | |
| Restricted Cash included in Prepayments and Other | 4.2 | | | 0.3 | | | 4.1 | | | 0.8 | |
| Restricted Cash included in Other Non-Current Assets | 2.3 | | | 2.3 | | | 2.3 | | | 20.1 | |
| Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $48.6 | | | $47.7 | | | $65.4 | | | $65.2 | |
Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations segment are carried at an average cost or first-in, first-out basis. Inventories in our ALLETE Clean Energy segment and Corporate and Other businesses are carried at an average cost, first-in, first-out or specific identification basis.
| | | | | | | | | | | |
| Inventories – Net | September 30,
2022 | | December 31,
2021 |
| Millions | | | |
Fuel (a) | $36.2 | | | $18.7 | |
| Materials and Supplies | 70.6 | | | 56.1 | |
Renewable Energy Facilities Under Development (b) | 365.4 | | | 22.9 | |
| | | |
| | | |
| | | |
| Total Inventories – Net | $472.2 | | | $97.7 | |
(a) Fuel consists primarily of coal inventory at Minnesota Power.
(b) Renewable Energy Facilities Under Development consists primarily of project costs related to ALLETE Clean Energy’s Northern Wind, Rock Aetna, and Red Barn wind projects which are expected to be sold in late 2022 and early 2023, respectively. (See Other Current Liabilities.)
ALLETE, Inc. Third Quarter 2022 Form 10-Q
11
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| | | | | | | | | | | |
| Other Non-Current Assets | September 30,
2022 | | December 31,
2021 |
| Millions | | | |
Contract Assets (a) | $21.5 | | | $23.3 | |
| | | |
| Operating Lease Right-of-use Assets | 13.9 | | | 16.4 | |
| ALLETE Properties | 17.6 | | | 19.4 | |
| Restricted Cash | 2.3 | | | 2.3 | |
| Other Postretirement Benefit Plans | 66.5 | | | 64.8 | |
| Other | 79.8 | | | 86.7 | |
| Total Other Non-Current Assets | $201.6 | | | $212.9 | |
(a) Contract Assets consist of payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.
| | | | | | | | | | | |
| Other Current Liabilities | September 30,
2022 | | December 31,
2021 |
| Millions | | | |
| | | |
Customer Deposits (a) | $111.7 | | | $27.2 | |
| PSAs | 6.1 | | | 12.6 | |
| | | |
| | | |
| | | |
Manufactured Gas Plant (b) | 17.8 | | | 12.8 | |
| Fuel Adjustment Clause | — | | | 5.0 | |
| Operating Lease Liabilities | 3.7 | | | 4.8 | |
Redeemable Non-Controlling Interest (c) | — | | | 30.6 | |
| Other | 49.2 | | | 40.0 | |
| Total Other Current Liabilities | $188.5 | | | $133.0 | |
(a) Primarily related to deposits received by ALLETE Clean Energy for the Northern Wind, Rock Aetna and Red Barn wind projects which are expected to be sold in late 2022 and early 2023, respectively. (See Inventories – Net.)
(b) The manufactured gas plant represents the current liability for remediation of a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P.
(c) Amount reclassified from Non-Controlling Interest in Subsidiaries resulting from the exercise of an option to buy out a non-controlling interest, which was paid in the first quarter of 2022.
| | | | | | | | | | | |
| Other Non-Current Liabilities | September 30,
2022 | | December 31,
2021 |
| Millions | | | |
Asset Retirement Obligation (a) | $197.2 | | | $184.5 | |
| PSAs | 28.4 | | | 39.5 | |
| | | |
Manufactured Gas Plant (b) | 0.2 | | | 5.2 | |
| Operating Lease Liabilities | 10.0 | | | 11.6 | |
| Other | 33.0 | | | 40.0 | |
| Total Other Non-Current Liabilities | $268.8 | | | $280.8 | |
(a)The asset retirement obligation is primarily related to our Regulated Operations and is funded through customer rates over the life of the related assets. Additionally, BNI Energy funds its obligation through its cost-plus coal supply agreements for which BNI Energy has recorded a receivable of $28.5 million in Other Non-Current Assets on the Consolidated Balance Sheet as of September 30, 2022, ($28.5 million as of December 31, 2021).
(b)The manufactured gas plant represents the non-current liability for remediation of a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
12
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| Other Income | 2022 | 2021 | | 2022 | 2021 |
| Millions | | | | | |
Pension and Other Postretirement Benefit Plan Non-Service Credits (a) | $1.9 | | $1.6 | | | $7.2 | | $4.4 | |
| Interest and Investment Income (Loss) | (0.4) | | (0.1) | | | (1.3) | | 1.7 | |
| AFUDC - Equity | 0.7 | | 0.6 | | | 2.4 | | 1.7 | |
PSA Liability (b) | — | | — | | | 10.2 | | — | |
| Other | 0.1 | | (1.1) | | | (2.1) | | (1.7) | |
| Total Other Income | $2.3 | | $1.0 | | | $16.4 | | $6.1 | |
(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 10. Pension and Other Postretirement Benefit Plans.)
(b)The gain on removal of the PSA liability for the Northern Wind project upon decommissioning of the legacy wind energy facility assets, which was fully offset by a reserve for an anticipated loss on the sale of the Northern Wind project.
Supplemental Statement of Cash Flows Information.
| | | | | | | | | | | |
| Nine Months Ended September 30, | 2022 | | 2021 |
| Millions | | | |
| Cash Paid for Interest – Net of Amounts Capitalized | $60.5 | | $54.9 |
| | | |
| Noncash Investing and Financing Activities | | | |
| | | |
| Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment | $2.4 | | $(12.1) |
Reclassification of Property, Plant and Equipment to Inventory (a) | $99.8 | | — |
| Capitalized Asset Retirement Costs | $9.0 | | $3.5 |
| AFUDC–Equity | $2.4 | | $1.7 |
| | | |
| | | |
| | | |
| | | |
(a)The decommissioning of the existing Northern Wind assets resulted in a reclassification from Property, Plant and Equipment – Net to Inventories – Net in the second quarter of 2022 as they are being sold to a subsidiary of Xcel Energy Inc. In the third quarter of 2022, safe harbor equipment was transferred to the project entity resulting in an additional reclassification from Property, Plant and Equipment - Net to Inventories - Net.
Non-Controlling Interest in Subsidiaries. Non-controlling interest in subsidiaries on the Consolidated Balance Sheet and net loss attributable to non-controlling interest on the Consolidated Statement of Income represent the portion of equity ownership and earnings, respectively, of subsidiaries that are not attributable to equity holders of ALLETE. These amounts are primarily related to the tax equity financing structures for ALLETE Clean Energy’s 106 MW Glen Ullin, 80 MW South Peak, 303 MW Diamond Spring and 303 MW Caddo wind energy facilities as well as ALLETE’s equity investment in the 250 MW Nobles 2 wind energy facility.
Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the date of the financial statements issuance.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
13
NOTE 2. REGULATORY MATTERS
Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2021 Form 10-K, with additional disclosure provided in the following paragraphs.
Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable, and environmental investments and expenditures. Revenue from cost recovery riders was $19.5 million for the nine months ended September 30, 2022 ($29.2 million for the nine months ended September 30, 2021).
2022 Minnesota General Rate Case. On November 1, 2021, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 18 percent for retail customers. The rate filing seeks a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $108 million in additional revenue. In orders dated December 30, 2021, the MPUC accepted the filing as complete and authorized an annual interim rate increase beginning January 1, 2022, with approximately $80 million expected to be collected in cash and approximately $8 million of interim rates for residential customers deferred with a final determination on recovery at the end of the rate case.
On September 1, 2022, the administrative law judge (ALJ) issued a report containing recommendations that if adopted in whole by the MPUC would result in an increase in rates of approximately $76 million on an annualized basis. On September 23, 2022, Minnesota Power filed exceptions totaling approximately $30 million to the ALJ’s report contesting certain recommendations. A final decision by the MPUC is expected in early 2023. Management has evaluated the need for a reserve for interim rate refunds and concluded that a reserve is not necessary as of September 30, 2022. We cannot predict the level of final rates that may be authorized by the MPUC.
2022 Wisconsin General Rate Case. On June 1, 2022, SWL&P refiled its rate increase request with the PSCW seeking an average increase of 3.6 percent for retail customers. The filing seeks an overall return on equity of 10.4 percent and a 55 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $4.3 million in additional revenue.
Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place to charge retail customers on a current basis for the costs of certain renewable investments and expenditures, including a return on the capital invested. Current customer billing rates for the renewable cost recovery rider were approved by the MPUC in a 2020 order. On February 2, 2022, Minnesota Power submitted its 2022 renewable factor filing, which included a request to recover a regulatory asset of $3.8 million related to the recognition of production tax credits due to a metering error at Bison. If the filing is approved, Minnesota Power would be authorized to include updated billing rates on customer bills; any portion disallowed would be charged to earnings.
Fuel Adjustment Clause. In 2020, Minnesota Power filed its fuel adjustment forecast for 2021, which was approved by the MPUC in a December 2020 order, subject to the annual prudence review and true-up filing in 2022. During 2021, Minnesota Power incurred higher fuel and purchased power costs than those forecasted in its May 2020 filing, which resulted in the recognition of an approximately $56 million regulatory asset through December 31, 2021. Minnesota Power submitted its annual true-up filing and a significant events filing in March 2022 requesting recovery of these under-collected fuel adjustment clause recoveries. No parties objected to the request; recovery of the regulatory asset began in April 2022 and will continue through mid-2023. The MPUC approved recovery of the regulatory asset in an order dated July 5, 2022.
Minnesota Power has also incurred higher fuel and purchased power costs in 2022 than those factored in its fuel adjustment forecast filed in May 2021 for 2022, which resulted in the recognition of an approximately $23 million regulatory asset as of September 30, 2022. Minnesota Power filed a significant events filing in June 2022 requesting recovery of the under-collected fuel adjustment clause recoveries that are expected for 2022 from August 2022 through December 2022. No parties objected to the request and higher rates were implemented in August 2022 to recover the expected under-collection of fuel adjustment clause recoveries, subject to final approval by the MPUC which is expected in 2023.
Conservation Improvement Program. On April 1, 2022, Minnesota Power submitted its 2021 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $1.9 million based upon MPUC procedures, which was recognized in the second quarter of 2022 upon approval by the MPUC at a hearing on June 30, 2022. In 2021, a CIP financial incentive of $2.4 million was recognized in the third quarter upon approval by the MPUC of Minnesota Power’s 2020 CIP consolidated filing. CIP financial incentives are recognized in the period in which the MPUC approves the filing.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
14
NOTE 2. REGULATORY MATTERS (Continued)
2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in the fourth quarter of 2022.
Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidance for the effect of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.
| | | | | | | | | | | | | |
| Regulatory Assets and Liabilities | September 30,
2022 | | December 31,
2021 | | |
| Millions | | | | | |
Current Regulatory Assets (a) | | | | | |
| Fuel Adjustment Clause | $38.7 | | | — | | | |
| Total Current Regulatory Assets | 38.7 | | | — | | | |
| Non-Current Regulatory Assets | | | | | |
| Defined Benefit Pension and Other Postretirement Benefit Plans | 217.0 | | | $226.4 | | | |
| Income Taxes | 99.3 | | | 104.7 | | | |
| Cost Recovery Riders | 39.6 | | | 63.2 | | | |
| Asset Retirement Obligations | 34.9 | | | 33.1 | | | |
| Fuel Adjustment Clause | 22.9 | | | 56.4 | | | |
Manufactured Gas Plant | 17.7 | | | 17.0 | | | |
| PPACA Income Tax Deferral | 4.2 | | | 4.3 | | | |
| | | | | |
| | | | | |
| Residential Customer Interim Rate Adjustment | 5.9 | | | — | | | |
| Other | 5.6 | | | 6.7 | | | |
| Total Non-Current Regulatory Assets | 447.1 | | | 511.8 | | | |
| Total Regulatory Assets | $485.8 | | | $511.8 | | | |
| | | | | |
Current Regulatory Liabilities (b) | | | | | |
| Fuel Adjustment Clause | — | | | $5.0 | | | |
| | | | | |
| Transmission Formula Rates Refund | $5.1 | | | 3.1 | | | |
| Other | 0.1 | | | 0.5 | | | |
| Total Current Regulatory Liabilities | 5.2 | | | 8.6 | | | |
| Non-Current Regulatory Liabilities | | | | | |
| Income Taxes | 338.0 | | | 353.4 | | | |
| Wholesale and Retail Contra AFUDC | 81.5 | | | 83.7 | | | |
| Plant Removal Obligations | 58.8 | | | 52.6 | | | |
| North Dakota Investment Tax Credits | 13.4 | | | 12.2 | | | |
| Defined Benefit Pension and Other Postretirement Benefit Plans | 23.5 | | | 28.1 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Boswell Units 1 and 2 Net Plant and Equipment | 5.1 | | | 0.4 | | | |
| Regulated Land Sales | 2.2 | | | — | | | |
| Other | 4.9 | | | 5.7 | | | |
| Total Non-Current Regulatory Liabilities | 527.4 | | | 536.1 | | | |
| Total Regulatory Liabilities | $532.6 | | | $544.7 | | | |
(a)Current regulatory assets are presented within Prepayments and Other on the Consolidated Balance Sheet.
(b)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
15
NOTE 3. ACQUISITIONS
2022 Activity
New Energy. On April 15, 2022, a wholly-owned subsidiary of ALLETE acquired 100 percent of the membership interests of New Energy for a purchase price of $165.5 million. Total consideration of approximately $158.8 million was paid in cash on the acquisition date, which is net of cash acquired and debt assumed. New Energy, which is headquartered in Annapolis, Maryland, is a renewable energy development company with a primary focus on solar and storage facilities while also offering comprehensive operations, maintenance and asset management services. The acquisition of New Energy is consistent with ALLETE’s stated strategy of additional investment in renewable energy and related infrastructure across North America to support the Company’s sustainability-in-action strategy while providing potential long-term earnings growth.
The acquisition was accounted for as a business combination and the purchase price was allocated based on the preliminary estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition, as shown in the following table. The allocation of the purchase price is subject to judgment and the preliminary estimated fair value of the assets acquired and the liabilities assumed may be adjusted when the valuation analysis is complete in subsequent periods. Preliminary estimates subject to adjustment in subsequent periods relate primarily to working capital; subsequent adjustments could impact the amount of goodwill recorded. Fair value measurements were valued primarily using the discounted cash flow method and replacement cost basis. The goodwill recorded is primarily attributable to the highly skilled workforce of New Energy and synergies expected to arise as a result of the acquisition.
Since the acquisition in April 2022, aggregate revenue was $39.9 million. The Company has not presented separate results of operations since closing or combined pro forma financial information of the Company and New Energy since the beginning of 2021, as the results of operations for New Energy are not material to the Company's consolidated financials.
| | | | | | | | |
| Millions | | | | |
| Assets Acquired | | | | |
| Cash and Cash Equivalents | | | | $3.9 | |
| Accounts Receivable | | | | 1.4 | |
Inventory (a) | | | | 25.3 | |
| Other Current Assets | | | | 12.6 | |
| Property, Plant and Equipment - Net | | | | 16.4 | |
Goodwill (b) | | | | 155.1 | |
| Other Non-Current Assets | | | | 2.1 | |
| Total Assets Acquired | | | | $216.8 | |
| Liabilities Assumed | | | | |
| Current Liabilities | | | | $23.6 | |
| Long-Term Debt Due Within One Year | | | | 28.3 | |
| Long-Term Debt | | | | 5.9 | |
| Other Non-Current Liabilities | | | | 0.2 | |
| Total Liabilities Assumed | | | | $58.0 | |
| Net Identifiable Assets Acquired | | | | $158.8 | |
(a)Includes $11.6 million of purchase price accounting for certain projects under development at the time of acquisition.
(b)For tax purpose, the purchase price allocation resulted in $155.1 million of deductible goodwill.
During the third quarter of 2022, the Company recorded purchase accounting adjustments related to the acquisition of New Energy which resulted in an increase to net liabilities of $6.2 million, current assets increased by $1.4 million and goodwill increased by $4.8 million.
Acquisition-related costs were $2.6 million after-tax, expensed as incurred during 2022 and recorded in Operating and Maintenance on the Consolidated Statement of Income.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
16
NOTE 4. EQUITY INVESTMENTS
Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting.
| | | | | |
| ALLETE’s Investment in ATC | |
| Millions | |
| Equity Investment Balance as of December 31, 2021 | $154.5 | |
| Cash Investments | 5.1 | |
| Equity in ATC Earnings | 13.8 | |
| Distributed ATC Earnings | (13.1) | |
| Amortization of the Remeasurement of Deferred Income Taxes | 1.0 | |
| Equity Investment Balance as of September 30, 2022 | $161.3 | |
ATC’s authorized return on equity was 10.02 percent, or 10.52 percent including an incentive adder for participation in a regional transmission organization, based on a 2020 FERC order which was subject to various outstanding legal challenges related to the return on equity calculation and refund period ordered by the FERC. On August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded the 2020 FERC order back to FERC. As a result of this decision, ATC recorded a reserve in the third quarter of 2022 for anticipated refunds to its customers for approximately $31 million of which our share was $2.4 million pre-tax. We cannot predict the return on equity FERC will ultimately authorize in the remanded proceeding.
In addition, the FERC issued a Notice of Proposed Rulemaking in April 2021 proposing to limit the 50 basis point incentive adder for participation in a regional transmission organization to only the first three years of membership in such an organization. If this proposal is adopted, our equity in earnings from ATC would be reduced by approximately $1 million pre-tax annually.
Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that owns and operates a 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. We account for our investment in Nobles 2 under the equity method of accounting.
| | | | | |
| ALLETE’s Investment in Nobles 2 | |
| Millions | |
| Equity Investment Balance as of December 31, 2021 | $163.5 | |
| |
Equity in Nobles 2 Earnings (a) | (0.7) | |
| Distributed Nobles 2 Earnings | (3.8) | |
| Equity Investment Balance as of September 30, 2022 | $159.0 | |
(a)The Company also recorded net loss attributable to non-controlling interest of $7.5 million related to its investment in Nobles 2.
NOTE 5. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 6. Fair Value to the Consolidated Financial Statements in our 2021 Form 10-K.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
17
NOTE 5. FAIR VALUE (Continued)
The following tables set forth, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2022, and December 31, 2021. Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value as of September 30, 2022 |
| Recurring Fair Value Measures | Level 1 | | Level 2 | | Level 3 | | Total |
| Millions | | | | | | | |
| Assets | | | | | | | |
Investments (a) | | | | | | | |
| Available-for-sale – Equity Securities | $6.9 | | | — | | | — | | | $6.9 | |
Available-for-sale – Corporate and Governmental Debt Securities (b) | — | | | $5.4 | | | — | | | 5.4 | |
| Cash Equivalents | 3.4 | | | — | | | — | | | 3.4 | |
| Total Fair Value of Assets | $10.3 | | | $5.4 | | | — | | | $15.7 | |
| | | | | | | |
| Liabilities | | | | | | | |
Deferred Compensation (c) | — | | | $14.8 | | | — | | | $14.8 | |
| | | | | | | |
| | | | | | | |
| Total Fair Value of Liabilities | — | | | $14.8 | | | — | | | $14.8 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | Fair Value as of December 31, 2021 |
| Recurring Fair Value Measures | Level 1 | | Level 2 | | Level 3 | | Total |
| Millions | | | | | | | |
| Assets | | | | | | | |
Investments (a) | | | | | | | |
| Available-for-sale – Equity Securities | $8.9 | | | — | | | — | | | $8.9 | |
| Available-for-sale – Corporate and Governmental Debt Securities | — | | | $6.2 | | | — | | | 6.2 | |
| Cash Equivalents | 2.5 | | | — | | | — | | | 2.5 | |
| Total Fair Value of Assets | $11.4 | | | $6.2 | | | — | | | $17.6 | |
| | | | | | | |
| Liabilities | | | | | | | |
Deferred Compensation (c) | — | | | $18.0 | | | — | | | $18.0 | |
| | | | | | | |
| Total Fair Value of Liabilities | — | | | $18.0 | | | — | | | $18.0 | |
| | | | | | | |
(a)Included in Other Non-Current Assets on the Consolidated Balance Sheet.
(b)As of September 30, 2022, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $0.7 million, in one year to less than three years was $2.6 million, in three years to less than five years was $1.4 million and in five or more years was $0.6 million.
(c)Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instruments approximates the carrying amount. The fair value of the item listed in the following table was based on quoted market prices for the same or similar instruments (Level 2).
| | | | | | | | | | | |
| Financial Instruments | Carrying Amount | | Fair Value |
| Millions | | | |
Short-Term and Long-Term Debt (a) | | | |
| September 30, 2022 | $1,970.2 | | $1,804.1 |
| December 31, 2021 | $1,986.4 | | $2,192.6 |
(a)Excludes unamortized debt issuance costs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, land inventory, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the quarter and nine months ended September 30, 2022, and the year ended December 31, 2021, there were no indicators of impairment for these non-financial assets.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
18
NOTE 5. FAIR VALUE (Continued)
We continue to monitor changes in the broader energy markets along with wind resource expectations that could indicate impairment at ALLETE Clean Energy wind energy facilities upon contract expirations. A continued decline in energy prices or lower wind resource expectations could result in a future impairment.
NOTE 6. SHORT-TERM AND LONG-TERM DEBT
The following tables present the Company’s short-term and long-term debt as of September 30, 2022, and December 31, 2021:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 | Principal | | Unamortized Debt Issuance Costs | | Total |
| Millions | | | | | |
| Short-Term Debt | $308.8 | | | $(0.2) | | $308.6 | |
| Long-Term Debt | 1,661.4 | | | (8.4) | | 1,653.0 | |
| Total Debt | $1,970.2 | | | $(8.6) | | $1,961.6 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | Principal | | Unamortized Debt Issuance Costs | | Total |
| Millions | | | | | |
| Short-Term Debt | $214.4 | | | $(0.2) | | $214.2 | |
| Long-Term Debt | 1,772.0 | | | (8.8) | | 1,763.2 | |
| Total Debt | $1,986.4 | | | $(9.0) | | $1,977.4 | |
We had $33.2 million outstanding in standby letters of credit and $92.0 million outstanding draws under our lines of credit as of September 30, 2022 ($31.5 million in standby letters of credit and $159.7 million outstanding draws as of December 31, 2021).
On February 28, 2022, ALLETE entered into an unsecured term loan agreement (February Term Loan) to borrow up to $175 million. No draws were made on the February Term Loan, which was subsequently terminated in April 2022.
On March 24, 2022, ALLETE entered into a $170 million unsecured term loan agreement (March Term Loan). The Term Loan is due March 23, 2023, and may be repaid at any time. Interest is payable monthly at a rate per annum equal to SOFR plus 0.75 percent. Proceeds from the Term Loan were used for general corporate purposes.
On August 9, 2022, ALLETE issued $75 million of its First Mortgage Bonds (Bonds) to certain institutional buyers in the private placement market. The Bonds, which bear interest at 4.54 percent, will mature in August 2032 and pay interest semi-annually in February and August of each year, commencing on February 9, 2023. ALLETE has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. Proceeds from the sale of the Bonds were used to fund utility capital investment and for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.
Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00, measured quarterly. As of September 30, 2022, our ratio was approximately 0.39 to 1.00. Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. ALLETE has no significant restrictions on its ability to pay dividends from retained earnings or net income. As of September 30, 2022, ALLETE was in compliance with its financial covenants.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
19
NOTE 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Power Purchase and Sale Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined that either we have no variable interest in the PPAs or, where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required. These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses or receive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.
Our PPAs are summarized in Note 8. Commitments, Guarantees and Contingencies to the Consolidated Financial Statements in our 2021 Form 10-K, with additional disclosure provided in the following paragraphs.
Square Butte PPA. As of September 30, 2022, Square Butte had total debt outstanding of $192.7 million. Fuel expenses are recoverable through Minnesota Power’s fuel adjustment clause and include the cost of coal purchased from BNI Energy under a long-term contract. Minnesota Power’s cost of power purchased from Square Butte during the nine months ended September 30, 2022, was $63.8 million ($60.3 million for the same period in 2021). This reflects Minnesota Power’s pro rata share of total Square Butte costs based on the 50 percent output entitlement. Included in this amount was Minnesota Power’s pro rata share of interest expense of $3.7 million ($4.3 million for the same period in 2021). Minnesota Power’s payments to Square Butte are approved as a purchased power expense for ratemaking purposes by both the MPUC and the FERC.
Minnkota Power PSA. Minnesota Power has a PSA with Minnkota Power, which commenced in 2014. Under the PSA, Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power, resulting in Minnkota Power’s net entitlement increasing and Minnesota Power’s net entitlement decreasing until Minnesota Power’s share is eliminated at the end of 2025. Of Minnesota Power’s 50 percent output entitlement, Minnesota Power sold to Minnkota Power approximately 32 percent in 2022 and 28 percent in 2021.
Coal, Rail and Shipping Contracts. Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirements through December 2025. Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2024. The costs of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s retail and municipal utility customers through the fuel adjustment clause.
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.
We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have been obtained. We anticipate that with many state and federal environmental regulations and requirements finalized, or to be finalized in the near future, potential expenditures for future environmental matters may be material and require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.
We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers.
Air. The electric utility industry is regulated both at the federal and state level to address air emissions. Minnesota Power’s thermal generating facilities mainly burn low-sulfur western sub-bituminous coal. All of Minnesota Power’s coal-fired generating facilities are equipped with pollution control equipment such as scrubbers, baghouses and low NOX technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with emission requirements.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
20
NOTE 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Cross-State Air Pollution Rule (CSAPR). The CSAPR requires certain states in the eastern half of the U.S., including Minnesota, to reduce power plant emissions that contribute to ozone or fine particulate pollution in other states. The CSAPR does not require installation of controls but does require facilities have sufficient allowances to cover their emissions on an annual basis. These allowances are allocated to facilities from each state’s annual budget, and can be bought and sold. Based on our review of the NOX and SO2 allowances issued and pending issuance, we currently expect generation levels and emission rates will result in continued compliance with the CSAPR. The EPA’s CSAPR Update Rule issued in March 2021 revising the 2016 CSAPR Update does not apply to the state of Minnesota and is therefore not currently projected to affect Minnesota Power’s CSAPR compliance. Minnesota Power will continue to monitor ongoing CSAPR rulemakings and compliance implementation, including the EPA’s Good Neighbor Rule proposed on April 6, 2022, to modify certain aspects of the CSAPR’s program scope and extent.
National Ambient Air Quality Standards (NAAQS). The EPA is required to review the NAAQS every five years. If the EPA determines that a state’s air quality is not in compliance with the NAAQS, the state is required to adopt plans describing how it will reduce emissions to attain the NAAQS. Minnesota Power actively monitors NAAQS developments and compliance costs for existing standards or proposed NAAQS revisions are not currently expected to be material. The EPA is currently reviewing the secondary NAAQS for NOx and SO2, as well as particulate matter. In June 2021, the EPA announced it will reconsider the December 2020 final rule retaining the 2012 particulate matter NAAQS. A proposed rulemaking was anticipated in August 2022, with a final rule in March 2023, but none has been issued at this time. The EPA also announced in October 2021 that it was reconsidering the 2020 Ozone NAAQS rule finalized in December 2020, and issued a policy assessment on April 28, 2022, recommending retention of the current standard. A proposed Ozone NAAQS rule is expected in the first half of 2023.
EPA Good Neighbor Plan for 2015 Ozone NAAQS. On April 6, 2022, the EPA published a proposed rule, the Good Neighbor Plan, to address regional ozone transport for the 2015 Ozone NAAQS by reducing NOx emissions during the period of May 1 through September 30 (ozone season). This rule is intended to address certain good neighbor or interstate transport provisions of the Clean Air Act relative to the 2015 Ozone NAAQS. In the justification for the proposed rule, the EPA asserted that 26 states, including Minnesota, are modeled as significant contributors to downwind states’ challenges in attaining or maintaining ozone NAAQS compliance within their state borders. The Good Neighbor Plan proposes to resolve this interstate transport issue by implementing a variety of NOx reduction strategies, including federal implementation plan requirements, NOx emission limitations, and ozone season allowance program requirements, beginning with the 2023 ozone season. The proposed rule would apply to fossil-fuel fired power plants in 25 states and certain other industrial sources in 23 states. Implementation of the rule would occur in part through changes to the existing CSAPR program.
Minnesota Power reviewed the proposed rule, assessed its potential impacts and submitted public comments to the EPA on June 21, 2022. Concerns noted by Minnesota Power and other entities included the technical accuracy of the EPA’s assumptions and methods used to identify Minnesota as a significant contributor state, as well as the proposed rule’s intended timeline. Anticipated compliance costs related to the Good Neighbor Plan cannot yet be estimated; however, the costs could be material, including costs of additional NOx controls, emission allowance program participation, or operational changes, if any are required. Minnesota Power would seek recovery of additional costs through a rate proceeding. The EPA intends to issue a final rule in early 2023.
EPA National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial and Institutional Boilers and Process Heaters (Industrial Boiler MACT) Rule. A final rule issued by the EPA for Industrial Boiler MACT became effective in 2012 with compliance required at major existing sources in 2016. Minnesota Power’s Hibbard Renewable Energy Center and Rapids Energy Center are subject to this rule. Compliance with the Industrial Boiler MACT Rule consisted largely of adjustments to fuels and operating practices and compliance costs were not material. Subsequent to this initial rulemaking, litigation from 2016 through 2018 resulted in court orders directing that the EPA reconsider certain aspects of the regulation including the basis for and numerical value of several different emission limits. On October 6, 2022, the EPA published a final rule in the Federal Register incorporating these changes. The rule will become effective on December 5, 2022 and impose a 3-year compliance deadline of December 5, 2025. Minnesota Power is actively reviewing this new regulation to assess if any changes are needed to achieve compliance. Compliance costs associated with the new Industrial Boiler MACT Rule cannot yet be estimated; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
21
NOTE 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Climate Change. The scientific community generally accepts that emissions of GHG are linked to global climate change which creates physical and financial risks. Physical risks could include, but are not limited to: increased or decreased precipitation and water levels in lakes and rivers; increased or other changes in temperatures; and changes in the intensity and frequency of extreme weather events. These all have the potential to affect the Company’s business and operations. We are addressing climate change by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customers’ requirements:
•Expanding renewable power supply for both our operations and the operations of others;
•Providing energy conservation initiatives for our customers and engaging in other demand side management efforts;
•Improving efficiency of our generating facilities;
•Supporting research of technologies to reduce carbon emissions from generating facilities and carbon sequestration efforts;
•Evaluating and developing less carbon intensive future generating assets such as efficient and flexible natural gas-fired generating facilities;
•Managing vegetation on right-of-way corridors to reduce potential wildfire or storm damage risks; and
•Practicing sound forestry management in our service territories to create landscapes more resilient to disruption from climate-related changes, including planting and managing long-lived conifer species.
EPA Regulation of GHG Emissions. In 2019, the EPA finalized several separate rulemakings regarding regulating carbon emissions from electric utility generating units. These rulemakings included repealing the Clean Power Plan (CPP) and adopting the Affordable Clean Energy Rule under Section 111(d) of the Clean Air Act (CAA) to regulate CO2 emissions at existing coal-fired power plants. The CPP was first announced as a proposed rule under Section 111(d) of the CAA for existing power plants entitled “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Generating Units”. The Affordable Clean Energy Rule established emissions guidelines for states to use when developing plans to limit CO2 coal-fired power plants. The EPA also published regulations for the state implementation of the Affordable Clean Energy Rule and other Section 111(d) rules. Affected facilities for Minnesota Power included Boswell Units 3 and 4, and Taconite Harbor Units 1 and 2, which are currently economically idled.
On January 19, 2021, the D.C. Circuit issued an opinion vacating the Affordable Clean Energy Rule and remanded the Affordable Clean Energy Rule back to the EPA for further consideration, consistent with the D.C. Circuit’s finding that the EPA erred in interpreting the CAA, pending rehearing or appeal. Four petitions for review of the D.C. Circuit’s opinion were subsequently granted by the U.S. Supreme Court on October 29, 2021, consolidated under West Virginia v. EPA et al. On June 30, 2022, the U.S. Supreme Court released its opinion in favor of West Virginia and aligned parties. The Supreme Court found the EPA’s CPP structure of generation shifting to be disallowed under Section 111(d) of the CCA on grounds of the major questions doctrine. The court did not opine upon the regulatory approach the EPA proposed in the Affordable Clean Energy Rule. The petitions were remanded to the D.C. Circuit. The EPA has indicated that it intends to issue a proposed rule in early 2023 with a new set of emission guidelines for states to follow in submitting state plans to establish and implement standards of performance for GHG emissions from existing fossil fuel-fired electric generating units. Minnesota Power will continue to monitor any related guidelines and rulemakings issued by the EPA or state regulatory authorities.
On April 22, 2021, the Biden Administration announced a goal to reach 100 percent carbon pollution-free electricity by 2035 as part of the Nationally Determined Contributions pledge, which is part of an international effort to limit global warming. At this time, no specific regulatory pathway to achieve these reductions has been proposed. Minnesota Power will continue to monitor these developments.
Minnesota had already initiated several measures consistent with those called for under the now repealed CPP and vacated Affordable Clean Energy Rule. Minnesota Power continues implementing its EnergyForward strategic plan that provides for significant emission reductions and diversifying its electricity generation mix to include more renewable and natural gas energy. We are unable to predict the GHG emission compliance costs we might incur as a result of a replacement for the Affordable Clean Energy Rule or other future laws, regulations or administrative policies; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
22
NOTE 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Additionally on January 13, 2021, the EPA issued a rulemaking to apply CO2 emission New Source Performance Standards (NSPS) to new, modified and reconstructed fossil fuel-fired electric generating units under Section 111(b) of the CAA. Currently, the EPA is a performing a comprehensive review of the Section 111(b) GHG NSPS for electric generating units, with a notice of proposed rulemaking expected in early 2023. Minnesota Power is monitoring the NSPS final rule and any further Section 111(b) developments including their potential impact to the Company. The proposed combined-cycle natural gas-fired generating facility, NTEC, is expected to meet these NSPS requirements.
Water. The Clean Water Act requires NPDES permits be obtained from the EPA (or, when delegated, from individual state pollution control agencies) for any wastewater discharged into navigable waters. We have obtained all necessary NPDES permits, including NPDES storm water permits for applicable facilities, to conduct our operations.
Steam Electric Power Generating Effluent Limitations Guidelines. In 2015, the EPA issued revised federal effluent limitation guidelines (ELG) for steam electric power generating stations under the Clean Water Act. It set effluent limits and prescribed BACT for several wastewater streams, including flue gas desulphurization (FGD) water, bottom ash transport water and coal combustion landfill leachate. In 2017, the EPA announced a two-year postponement of the ELG compliance date of November 1, 2018, to November 1, 2020, while the agency reconsidered the bottom ash transport water (BATW) and FGD wastewater provisions. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded back to the EPA portions of the ELG that allowed for continued discharge of legacy wastewater and leachate. On October 13, 2020, the EPA published a final ELG Rule allowing re-use of bottom ash transport water in FGD scrubber systems with limited discharges related to maintaining system water balance. The rule sets technology standards and numerical pollutant limits for discharges of bottom ash transport water and FGD wastewater. Compliance deadlines depend on subcategory, with compliance generally required as soon as possible, beginning after October 13, 2021, but no later than December 31, 2025, or December 31, 2028, in some specific cases. The rule also established new subcategories for retiring high-flow and low-utilization units, and established a voluntary incentives program for FGD wastewater. In accordance with the January 2021 Executive Order 13990, the EPA was mandated to conduct a review of actions and polices taken during the prior administration, including the 2020 ELG Rule. On September 14, 2021, the EPA published a notice of availability for preliminary effluent guidelines program plan. In the plan, the EPA confirmed the agency is initiating a rulemaking process to strengthen wastewater pollution limitations from FGD and bottom ash transport water discharges while the 2020 ELG Rule remains in effect. The EPA is expected to publish a proposed rule in November 2022.
Under the 2020 ELG rule, most bottom ash transport water discharge to surface waters must cease no later than December 31, 2025, except for small discharges needed to retain water balance. The majority of bottom ash transport will either need to be re-used in a closed-loop process or routed to a FGD scrubber. FGD wastewater is required to meet stringent water quality standards for discharge to surface water.
Bottom ash transport and FGD wastewater ELG’s are not currently expected to have a significant impact on Minnesota Power operations. Boswell Energy Center, where ELG’s are primarily applicable, completed conversion to dry bottom ash handling and installed a FGD dewatering system in September 2022. The dry conversion projects eliminated bottom ash transport water and minimized wastewater from the FGD system. Re-use and onsite consumption is planned for the remaining FGD waste stream and for dewatering legacy wastewater from Boswell’s existing impoundments. Water re-use and consumption activities are expected to eliminate the need for surface water discharges prior to the current ELG Rule deadline of December 31, 2025.
The EPA’s additional reconsideration of legacy wastewater and leachate discharge requirements has the potential to impact leachate discharges associated with the closed impoundment at the Laskin and Taconite Harbor Energy Center Dry Ash Landfill. In its spring 2022 Unified Agenda, the EPA announced it intends to consolidate consideration of legacy wastewater and leachate with the ELG/FGD and BATW proposed rulemaking expected in November 2022. It is unknown at this time if the rule revisions will include new requirements for these waste streams.
At this time, we estimate no additional material compliance costs for ELG bottom ash water and FGD requirements. Compliance costs we might incur related to other ELG waste streams (e.g., leachate) or other potential future water discharge regulations at Minnesota Power facilities cannot be estimated; however, the costs could be material, including costs associated with wastewater treatment and re-use. Minnesota Power would seek recovery of additional costs through a rate proceeding.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
23
NOTE 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Permitted Water Discharges – Sulfate. In 2017, the MPCA released a draft water quality standard in an attempt to update Minnesota’s existing 10 mg/L sulfate limit for waters used for the production of wild rice with the proposed rulemaking heard before an administrative law judge (ALJ). In 2018, the ALJ rejected significant portions of the proposed rulemaking and the MPCA subsequently withdrew the rulemaking. The existing 10 mg/L limit remains in place, but the MPCA is currently prohibited under state law from listing wild rice waters as impaired or requiring sulfate reduction technology.
In April 2021, the MPCA’s proposed list of impaired waters submitted pursuant to the Clean Water Act was partially rejected by the EPA due to the absence of wild rice waters listed for sulfate impairment. The EPA transmitted a final list of 32 EPA-added wild rice waters to the MPCA on November 5, 2021. This list could subsequently be used to set sulfate limits in discharge permits for power generation facilities and municipal and industrial customers, including paper and pulp facilities, and mining operations. At this time we are unable to determine the specific impacts these developments may have on Minnesota Power operations, if any. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Solid and Hazardous Waste. The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We are required to notify the EPA of hazardous waste activity and, consequently, routinely submit reports to the EPA.
Coal Ash Management Facilities. Minnesota Power produces the majority of its coal ash at Boswell, with small amounts of ash generated at Hibbard Renewable Energy Center. Ash storage and disposal methods include storing ash in clay-lined onsite impoundments (ash ponds), disposing of dry ash in a lined dry ash landfill, applying ash to land as an approved beneficial use, and trucking ash to state permitted landfills.
Coal Combustion Residuals from Electric Utilities (CCR). In 2015, the EPA published the final rule regulating CCR as nonhazardous waste under Subtitle D of the Resource Conservation and Recovery Act (RCRA) in the Federal Register. The rule includes additional requirements for new landfill and impoundment construction as well as closure activities related to certain existing impoundments. Costs of compliance for Boswell and Laskin are expected to be incurred primarily over the next 15 years and be between approximately $65 million and $120 million. Compliance costs for CCR at Taconite Harbor are not expected to be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Minnesota Power continues to work on minimizing costs through evaluation of beneficial re-use and recycling of CCR and CCR-related waters. In 2017, the EPA announced its intention to formally reconsider the CCR rule under Subtitle D of the RCRA. In March 2018, the EPA published the first phase of the proposed rule revisions in the Federal Register. In 2018, the EPA finalized revisions to elements of the CCR rule, including extending certain deadlines by two years, the establishment of alternative groundwater protection standards for certain constituents and the potential for risk-based management options at facilities based on site characteristics. In 2018, a U.S. District Court for the District of Columbia decision vacated specific provisions of the CCR rule. The court decision resulted in a change to the status of three existing clay-lined impoundments at Boswell that must now be considered unlined. The EPA proposed additional rule revisions in 2019 to address outstanding issues from litigation and closure timelines for unlined impoundments, respectively. The first of these rules, CCR Part A Rule, was finalized in September 2020. The Part A Rule revision requires unlined impoundments to cease disposal of waste as soon as technically feasible but no later than April 11, 2021. Minnesota Power sought EPA approval under the Part A Rule to extend the closure date for two active Boswell impoundments in November 2020. Upon completion of dry ash conversion activities, Boswell ceased disposal in both impoundments on September 17, 2022 and formally withdrew the CCR Part A Application. The EPA acknowledged the Part A variance application withdrawal on September 20, 2022, and indicated it has updated the webpage to show Boswell has ceased waste disposal in impoundments. The EPA also indicated that no further EPA review of Boswell’s Part A variance application will occur. Both impoundments are now inactive and have initiated closure.
Additionally, the EPA released a proposed Part B rulemaking in February 2020 addressing options for beneficial reuse of CCR materials, alternative liner demonstrations, and other CCR regulatory revisions. Portions of the Part B Rule addressing alternative liner equivalency standards were finalized in November 2020. According to the EPA’s spring 2022 regulatory agenda, finalization of the remainder of the proposed Part B Rule is expected in early 2023. Expected compliance costs at Boswell due to the court decision and subsequent rule revisions are reflected in our estimate of compliance costs for the CCR rule noted previously. Minnesota Power would seek recovery of additional costs through a rate proceeding.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
24
NOTE 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Other Environmental Matters.
Manufactured Gas Plant Site. We are reviewing and addressing environmental conditions at a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P. SWL&P has been working with the Wisconsin Department of Natural Resources (WDNR) in determining the extent and location of contamination at the site and surrounding properties. As of September 30, 2022, we have recorded a liability of approximately $18 million for remediation costs at this site. SWL&P has recorded the site as an associated regulatory asset as we expect recovery of these remediation costs to be allowed by the PSCW. Remediation costs are expected to be incurred through 2024.
Other Matters.
Letters of Credit and Surety Bonds.
We have multiple credit facility agreements in place that provide the ability to issue standby letters of credit to satisfy contractual security requirements across our businesses. As of September 30, 2022, we had $227.6 million of outstanding letters of credit issued, including those issued under our revolving credit facility.
Regulated Operations. As of September 30, 2022, we had $18.1 million outstanding in standby letters of credit at our Regulated Operations which are pledged as security to MISO and a state agency.
ALLETE Clean Energy. ALLETE Clean Energy’s wind energy facilities have various PSAs in place for some or all of their output that expire in various years between 2024 and 2039. As of September 30, 2022, ALLETE Clean Energy has $173.8 million outstanding in standby letters of credit, the majority of which are pledged as security under these PSAs and PSAs for wind energy facilities under development. ALLETE Clean Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.
Corporate and Other.
BNI Energy. As of September 30, 2022, BNI Energy had surety bonds outstanding of $82.4 million related to the reclamation liability for closing costs associated with its mine and mine facilities. Although its coal supply agreements obligate the customers to provide for the closing costs, additional assurance is required by federal and state regulations. BNI Energy’s total reclamation liability is currently estimated at $82.1 million. BNI Energy does not believe it is likely that any of these outstanding surety bonds will be drawn upon.
Investment in Nobles 2. The Nobles 2 wind energy facility requires standby letters of credit as security for certain contractual obligations. As of September 30, 2022, ALLETE South Wind has $11.8 million outstanding in standby letters of credit, related to its portion of the security requirements relative to its ownership in Nobles 2. We do not believe it is likely that any of these outstanding letters of credit will be drawn upon.
South Shore Energy. As of September 30, 2022, South Shore Energy had $23.9 million outstanding in standby letters of credit pledged as security in connection with the development of NTEC. South Shore Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.
Legal Proceedings.
We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base and cost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations or cash flows.
Minnesota Power was named in a lawsuit where a contractor performing work at one of its facilities experienced an injury and subsequently filed a lawsuit seeking compensatory damages. In the second quarter of 2022, Minnesota Power reached an agreement to settle the lawsuit with the plaintiff. The settlement was covered by the Company’s insurance coverage, subject to a deductible which has been previously expensed. The settlement, which was recorded in the financial statements for the quarter ended March 31, 2022, did not have a material impact on our financial position or results of operations.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
25
NOTE 8. EARNINGS PER SHARE AND COMMON STOCK
We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from non-vested restricted stock units and performance share awards granted under our Executive Long-Term Incentive Compensation Plan.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2022 | | | | | | 2021 | | |
| Reconciliation of Basic and Diluted | | | Dilutive | | | | | | Dilutive | | |
| Earnings Per Share | Basic | | Securities | | Diluted | | Basic | | Securities | | Diluted |
| Millions Except Per Share Amounts | | | | | | | | | | | |
| Quarter ended September 30, | | | | | | | | | | | |
| Net Income Attributable to ALLETE | $33.7 | | | | | $33.7 | | | $27.6 | | | | | $27.6 | |
| Average Common Shares | 57.1 | | | 0.1 | | | 57.2 | | | 52.4 | | | 0.1 | | | 52.5 | |
| Earnings Per Share | $0.59 | | | | | $0.59 | | | $0.53 | | | | | $0.53 | |
| Nine Months Ended September 30, | | | | | | | | | | | |
| Net Income Attributable to ALLETE | $137.6 | | | | | $137.6 | | | $107.3 | | | | | $107.3 | |
| Average Common Shares | 55.5 | | | 0.1 | | | 55.6 | | | 52.3 | | | — | | | 52.3 | |
| Earnings Per Share | $2.48 | | | | | $2.48 | | | $2.05 | | | | | $2.05 | |
On April 5, 2022, ALLETE issued and sold approximately 3.7 million shares of ALLETE common stock. Net proceeds of approximately $224 million were received from the sale of shares. Proceeds were used primarily to fund the acquisition of New Energy and capital investments at ALLETE Clean Energy.
NOTE 9. INCOME TAX EXPENSE
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Millions | | | | | | | | |
Current Income Tax Expense (a) | | | | | | | | |
| Federal | | — | | | — | | | — | | | — | |
| State | | $0.2 | | | $0.1 | | | $0.3 | | | $0.1 | |
| Total Current Income Tax Expense | | $0.2 | | | $0.1 | | | $0.3 | | | $0.1 | |
| Deferred Income Tax Expense (Benefit) | | | | | | | | |
Federal (b) | | $(8.4) | | $(5.8) | | $(20.7) | | $(26.3) |
State (c) | | 1.1 | | 0.9 | | 1.4 | | 7.3 |
| Investment Tax Credit Amortization | | (0.1) | | (0.1) | | (0.4) | | (0.4) |
| Total Deferred Income Tax Benefit | | $(7.4) | | $(5.0) | | $(19.7) | | $(19.4) |
| Total Income Tax Benefit | | $(7.2) | | $(4.9) | | $(19.4) | | $(19.3) |
(a)For the three and nine months ended September 30, 2022 and 2021, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of certain tax legislation. Federal and state NOLs are being carried forward to offset current and future taxable income.
(b)For the three and nine months ended September 30, 2022 and 2021, the federal income tax benefit is primarily due to production tax credits.
(c)For the nine months ended September 30, 2022, the state impact includes the benefit of deferred repricing as a result of the New Energy acquisition.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
26
NOTE 9. INCOME TAX EXPENSE (Continued)
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.
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| Quarter Ended | Nine Months Ended |
| Reconciliation of Taxes from Federal Statutory | September 30, | September 30, |
| Rate to Total Income Tax Expense | 2022 | | 2021 | 2022 | | 2021 |
| Millions | | | | | | |
| Income Before Income Taxes | $19.6 | | | $19.2 | | $74.7 | | | $69.9 | |
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| Statutory Federal Income Tax Rate | 21 | % | | 21 | % | 21 | % | | 21 | % |
| Income Taxes Computed at Statutory Federal Rate | $4.1 | | | $4.0 | | $15.7 | | | $14.7 | |
| Increase (Decrease) in Income Tax Due to: | | | | | | |
| State Income Taxes (Credit) – Net of Federal Income Tax Benefit | 1.1 | | | 0.7 | | 6.6 | | | 5.8 | |
| Deferred Revaluation – Net of Federal Income Tax Benefit | — | | | — | | (5.2) | | | — | |
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| Production Tax Credits | (9.7) | | | (9.5) | | (34.4) | | | (36.6) | |
| Investment Tax Credits | (3.2) | | | — | | (3.2) | | | — | |
| Regulatory Differences – Excess Deferred Tax | (1.5) | | | (2.1) | | (6.7) | | | (6.7) | |
| Non-Controlling Interest in Subsidiaries | 1.4 | | | 0.8 | | 8.4 | | | 3.9 | |
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| Other | 0.6 | | | 1.2 | | (0.6) | | | (0.4) | |
| Total Income Tax Benefit | $(7.2) | | $(4.9) | $(19.4) | | $(19.3) |
For the nine months ended September 30, 2022, the effective tax rate was a benefit of 26.0 percent (benefit of 27.6 percent for the nine months ended September 30, 2021). The effective tax rate for 2022 and 2021 was primarily impacted by production tax credits.
Uncertain Tax Positions. As of September 30, 2022, we had gross unrecognized tax benefits of $1.3 million ($1.3 million as of December 31, 2021). Of the total gross unrecognized tax benefits, $0.6 million represents the amount of unrecognized tax benefits included on the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.
ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2018, or state examination for years before 2017. Additionally, the statute of limitations related to the federal tax credit carryforwards will remain open until those credits are utilized in subsequent returns.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
27
NOTE 10. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
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| | Pension | | Other
Postretirement |
| Components of Net Periodic Benefit Cost (Credit) | 2022 | | 2021 | | 2022 | | 2021 |
| Millions | | | | | | | |
| Quarter Ended September 30, | | | | | | | |
| Service Cost | $2.1 | | | $2.7 | | | $0.8 | | | $0.9 | |
Non-Service Cost Components (a) | | | | | | | |
| Interest Cost | 6.9 | | | 6.1 | | | 1.1 | | | 1.1 | |
| Expected Return on Plan Assets | (10.4) | | | (10.8) | | | (2.4) | | | (2.4) | |
| Amortization of Prior Service Credits | — | | | — | | | (1.8) | | | (1.9) | |
| Amortization of Net Loss | 2.8 | | | 4.7 | | | 0.1 | | | 0.7 | |
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| Net Periodic Benefit Cost (Credit) | $1.4 | | | $2.7 | | | $(2.2) | | $(1.6) |
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| Nine Months Ended September 30, | | | | | | | |
| Service Cost | $6.9 | | | $8.2 | | | $2.3 | | | $2.7 | |
Non-Service Cost Components (a) | | | | | | | |
| Interest Cost | 20.4 | | | 18.4 | | | 3.3 | | | 3.3 | |
| Expected Return on Plan Assets | (31.1) | | | (32.5) | | | (7.2) | | | (7.3) | |
| Amortization of Prior Service Credits | (0.1) | | | (0.1) | | | (5.6) | | | (5.7) | |
| Amortization of Net Loss | 8.6 | | | 14.1 | | | 0.3 | | | 2.2 | |
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| Net Periodic Benefit Cost (Credit) | $4.7 | | | $8.1 | | | $(6.9) | | $(4.8) |
(a)These components of net periodic benefit cost (credit) are included in the line item “Other” under Other Income (Expense) on the Consolidated Statement of Income.
Employer Contributions. For the nine months ended September 30, 2022, we made no contributions to the defined benefit pension plans ($10.3 million for the nine months ended September 30, 2021); we do not expect to make any contributions to our defined benefit pension plans in 2022. For the nine months ended September 30, 2022 and 2021, we made no contributions to our other postretirement benefit plans; we do not expect to make any contributions to our other postretirement benefit plans in 2022.
NOTE 11. BUSINESS SEGMENTS
We present two reportable segments: Regulated Operations and ALLETE Clean Energy. We measure performance of our operations through budgeting and monitoring of contributions to consolidated net income by each business segment.
Regulated Operations includes three operating segments which consist of our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC. ALLETE Clean Energy is our business focused on developing, acquiring and operating clean and renewable energy projects. We also present Corporate and Other which includes BNI Energy, our coal mining operations in North Dakota, New Energy, a renewable energy development company, ALLETE Properties, our legacy Florida real estate investment, along with our investment in Nobles 2, South Shore Energy, our non-rate regulated, Wisconsin subsidiary developing NTEC, other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, land holdings in Minnesota, and earnings on cash and investments.
ALLETE, Inc. Third Quarter 2022 Form 10-Q
28
NOTE 11. BUSINESS SEGMENTS (Continued)
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| Quarter Ended | | Nine Months Ended |
| September 30, | | September 30, |
| | 2022 | 2021 | | 2022 | 2021 |
| Millions | | | | | |
| Operating Revenue | | | | | |
| Regulated Operations | | | | | |
| Residential | $40.1 | | $37.0 | | | $136.7 | | $118.0 | |
| Commercial | 49.0 | | 44.3 | | | 141.7 | | 124.7 | |
| Municipal | 9.8 | | 14.4 | | | 31.9 | | 38.5 | |
| Industrial | 147.3 | | 139.7 | | | 445.7 | | 407.8 | |
| Other Power Suppliers | 46.7 | | 41.2 | | | 124.6 | | 116.9 | |
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| Other | 29.7 | | 28.2 | | | 79.7 | | 82.3 | |
| Total Regulated Operations | 322.6 | | 304.8 | | | 960.3 | | 888.2 | |
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| ALLETE Clean Energy | | | | | |
| Long-term PSA | 14.4 | | 14.0 | | | 58.7 | | 50.8 | |
| Other | 1.2 | | 2.9 | | | 6.3 | | 8.6 | |
| Total ALLETE Clean Energy | 15.6 | | 16.9 | | | 65.0 | | 59.4 | |
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| Corporate and Other | | | | | |
| Long-term Contract | 23.5 | | 20.3 | | | 67.5 | | 63.4 | |
| Sale of Renewable Development Projects | 22.1 | | — | | | 36.6 | | — | |
| Other | 4.5 | | 3.4 | | | 15.5 | | 9.2 | |
| Total Corporate and Other | 50.1 | | 23.7 | | | 119.6 | | 72.6 | |
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| Total Operating Revenue | $388.3 | | $345.4 | | | $1,144.9 | | $1,020.2 | |
| Net Income (Loss) Attributable to ALLETE | | | | | |
| Regulated Operations | $38.3 | | $32.9 | | | $119.4 | | $99.4 | |
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| ALLETE Clean Energy | (7.3) | | (0.8) | | | 15.0 | | 11.7 | |
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Corporate and Other (a) | 2.7 | | (4.5) | | | 3.2 | | (3.8) | |
| Total Net Income Attributable to ALLETE | $33.7 | | $27.6 | | | $137.6 | | $107.3 | |
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(a)Net Income in 2022 includes a $5.7 million after-tax expense as a result of purchase price accounting related to projects under development at the time of acquisition and $2.6 million after-tax of transaction costs related to the acquisition of New Energy.
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| September 30,
2022 | December 31,
2021 |
| Millions | | |
| Assets | | |
| Regulated Operations | $4,307.3 | | $4,289.4 | |
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| ALLETE Clean Energy | 1,893.2 | | 1,719.4 | |
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| Corporate and Other | 657.5 | | 426.2 | |
| Total Assets | $6,858.0 | | $6,435.0 | |
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ALLETE, Inc. Third Quarter 2022 Form 10-Q
29