NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2013
, Consolidated Balance Sheet was derived from audited financial statements but does not include all disclosures required by GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the period ended
June 30, 2014
, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31,
2014
. For further information, refer to the consolidated financial statements and notes included in our
2013
Form 10-K.
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Inventories.
Inventories are stated at the lower of cost or market. Amounts removed from inventory are recorded on an average cost basis.
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|
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|
|
|
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|
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Inventories
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
Fuel
|
|
$22.9
|
|
|
|
$13.1
|
|
Materials and Supplies
|
52.4
|
|
|
46.2
|
|
Total Inventories
|
|
$75.3
|
|
|
|
$59.3
|
|
|
|
|
|
|
|
|
|
|
Prepayments and Other Current Assets
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
Deferred Fuel Adjustment Clause
|
|
$20.3
|
|
|
|
$23.0
|
|
Restricted Cash
(a)
|
3.3
|
|
|
—
|
|
Other
|
8.6
|
|
|
12.1
|
|
Total Prepayments and Other Current Assets
|
|
$32.2
|
|
|
|
$35.1
|
|
|
|
(a)
|
Restricted Cash related to ALLETE Clean Energy’s wind energy facilities operating expense and capital distribution reserve requirements.
|
Other Non-Current Assets.
As of
June 30, 2014
, included in Other Non-Current Assets on the Consolidated Balance Sheet was restricted cash of
$4.9 million
related to ALLETE Clean Energy’s wind energy facilities debt service and other requirements. As of
December 31, 2013
, the Company had restricted cash of
$5.4 million
related to cash held in escrow pending the closing of the wind energy facilities acquisition, which was completed on January 30, 2014 (see Note 4. Acquisition).
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Other Current Liabilities
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
Customer Deposits
|
|
$22.8
|
|
|
|
$26.0
|
|
Power Purchase Agreements
(a)
|
12.7
|
|
|
—
|
|
Other
|
25.6
|
|
|
26.6
|
|
Total Other Current Liabilities
|
|
$61.1
|
|
|
|
$52.6
|
|
|
|
(a)
|
Power Purchase Agreements were acquired in conjunction with the ALLETE Clean Energy wind energy facilities acquisition on January 30, 2014 (see Note 4. Acquisition).
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
10
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Other Non-Current Liabilities
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
Asset Retirement Obligation
|
|
$93.0
|
|
|
|
$81.8
|
|
Power Purchase Agreements
(a)
|
93.4
|
|
|
—
|
|
Other
|
48.1
|
|
|
45.4
|
|
Total Other Non-Current Liabilities
|
|
$234.5
|
|
|
|
$127.2
|
|
|
|
(a)
|
Power Purchase Agreements were acquired in conjunction with the ALLETE Clean Energy wind energy facilities acquisition on January 30, 2014 (see Note 4. Acquisition).
|
Supplemental Statement of Cash Flows Information.
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For the Six Months Ended June 30,
|
2014
|
|
|
2013
|
|
Millions
|
|
|
|
Cash Paid During the Period for Interest – Net of Amounts Capitalized
|
|
$23.7
|
|
|
|
$22.8
|
|
Cash Paid During the Period for Income Taxes
|
|
$0.2
|
|
|
|
$0.6
|
|
Noncash Investing and Financing Activities
|
|
|
|
|
|
Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment
|
|
$3.6
|
|
|
$(28.2)
|
Capitalized Asset Retirement Costs
|
|
$0.6
|
|
|
|
$1.9
|
|
AFUDC – Equity
|
|
$3.8
|
|
|
|
$2.1
|
|
ALLETE Common Stock Contributed to the Pension Plan
|
|
$19.5
|
|
|
—
|
|
Subsequent Events.
The Company performed an evaluation of subsequent events for potential recognition and disclosure through the time of the financial statements issuance.
New Accounting Standards.
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.
In July 2013, the FASB issued an accounting standard update on the financial statement presentation of unrecognized tax benefits when an NOL carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for an NOL carryforward, a similar tax loss, or a tax credit carryforward. To the extent an NOL carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance was adopted in the first quarter of 2014, and did not have a material impact on our consolidated financial position, results of operations, or cash flows.
Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity
. In April 2014, the FASB issued an accounting standard update modifying the criteria for determining which disposals should be presented as discontinued operations and modifying the related disclosure requirements. Additionally, the new guidance requires that a business which qualifies as held for sale upon acquisition should be reported as discontinued operations. The new guidance will be effective beginning in the first quarter of 2015, and applies prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. This guidance is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
11
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue from Contracts with Customers.
In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance is effective for the Company beginning in the first quarter of 2017 using one of two prescribed retrospective methods. Early adoption is not permitted for public companies. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s consolidated financial statements.
NOTE 2. BUSINESS SEGMENTS
Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. Investments and Other is comprised primarily of BNI Coal, our coal mining operations in North Dakota, ALLETE Properties, our Florida real estate investment, and ALLETE Clean Energy, our business which acquired three wind energy facilities in January 2014, and is aimed at developing or acquiring capital projects that create energy solutions via wind, solar, biomass, midstream gas and oil infrastructure, among other energy-related projects. This segment also includes other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately
5,000
acres of land in Minnesota, and earnings on cash and investments.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
12
NOTE 2. BUSINESS SEGMENTS (Continued)
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Consolidated
|
|
Regulated Operations
|
|
Investments and Other
|
|
Millions
|
|
|
|
For the Quarter Ended June 30, 2014
|
|
|
|
Operating Revenue
|
|
$260.7
|
|
|
$229.6
|
|
|
$31.1
|
|
Fuel and Purchased Power Expense
|
83.6
|
|
83.6
|
|
—
|
|
Operating and Maintenance Expense
|
115.1
|
|
89.0
|
|
26.1
|
|
Depreciation Expense
|
33.8
|
|
29.6
|
|
4.2
|
|
Operating Income
|
28.2
|
|
27.4
|
|
0.8
|
|
Interest Expense
|
(13.5
|
)
|
(11.4
|
)
|
(2.1
|
)
|
Equity Earnings in ATC
|
5.2
|
|
5.2
|
|
—
|
|
Other Income (Expense)
|
1.9
|
|
2.0
|
|
(0.1
|
)
|
Income (Loss) Before Non-Controlling Interest and Income Taxes
|
21.8
|
|
23.2
|
|
(1.4
|
)
|
Income Tax Expense (Benefit)
|
4.9
|
|
5.7
|
|
(0.8
|
)
|
Net Income (Loss)
|
16.9
|
|
17.5
|
|
(0.6
|
)
|
Less: Non-Controlling Interest in Subsidiaries
|
0.1
|
|
—
|
|
0.1
|
|
Net Income (Loss) Attributable to ALLETE
|
|
$16.8
|
|
|
$17.5
|
|
$(0.7)
|
|
|
|
|
|
Consolidated
|
|
Regulated Operations
|
|
Investments and Other
|
|
Millions
|
|
|
|
For the Quarter Ended June 30, 2013
|
|
|
|
Operating Revenue
|
|
$235.6
|
|
|
$215.8
|
|
|
$19.8
|
|
Fuel and Purchased Power Expense
|
78.7
|
|
78.7
|
|
—
|
|
Operating and Maintenance Expense
|
103.8
|
|
82.8
|
|
21.0
|
|
Depreciation Expense
|
28.7
|
|
27.1
|
|
1.6
|
|
Operating Income (Loss)
|
24.4
|
|
27.2
|
|
(2.8
|
)
|
Interest Expense
|
(12.8
|
)
|
(10.4
|
)
|
(2.4
|
)
|
Equity Earnings in ATC
|
5.0
|
|
5.0
|
|
—
|
|
Other Income
|
1.5
|
|
1.1
|
|
0.4
|
|
Income (Loss) Before Non-Controlling Interest and Income Taxes
|
18.1
|
|
22.9
|
|
(4.8
|
)
|
Income Tax Expense (Benefit)
|
4.1
|
|
6.6
|
|
(2.5
|
)
|
Net Income (Loss)
|
14.0
|
|
16.3
|
|
(2.3
|
)
|
Less: Non-Controlling Interest in Subsidiaries
|
—
|
|
—
|
|
—
|
|
Net Income (Loss) Attributable to ALLETE
|
|
$14.0
|
|
|
$16.3
|
|
$(2.3)
|
|
|
|
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
13
NOTE 2. BUSINESS SEGMENTS (Continued)
|
|
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|
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Consolidated
|
|
Regulated Operations
|
|
Investments and Other
|
|
Millions
|
|
|
|
For the Six Months Ended June 30, 2014
|
|
|
|
Operating Revenue
|
|
$557.2
|
|
|
$493.8
|
|
|
$63.4
|
|
Fuel and Purchased Power Expense
|
179.8
|
|
179.8
|
|
—
|
|
Operating and Maintenance Expense
|
234.9
|
|
179.2
|
|
55.7
|
|
Depreciation Expense
|
66.0
|
|
58.4
|
|
7.6
|
|
Operating Income
|
76.5
|
|
76.4
|
|
0.1
|
|
Interest Expense
|
(26.3
|
)
|
(22.9
|
)
|
(3.4
|
)
|
Equity Earnings in ATC
|
10.3
|
|
10.3
|
|
—
|
|
Other Income
|
3.9
|
|
3.8
|
|
0.1
|
|
Income (Loss) Before Non-Controlling Interest and Income Taxes
|
64.4
|
|
67.6
|
|
(3.2
|
)
|
Income Tax Expense (Benefit)
|
13.7
|
|
16.2
|
|
(2.5
|
)
|
Net Income (Loss)
|
50.7
|
|
51.4
|
|
(0.7
|
)
|
Less: Non-Controlling Interest in Subsidiaries
|
0.4
|
|
—
|
|
0.4
|
|
Net Income (Loss) Attributable to ALLETE
|
|
$50.3
|
|
|
$51.4
|
|
$(1.1)
|
|
|
|
|
As of June 30, 2014
|
|
|
|
Total Assets
|
|
$3,895.6
|
|
|
$3,424.3
|
|
|
$471.3
|
|
Property, Plant and Equipment – Net
|
|
$3,020.4
|
|
|
$2,791.7
|
|
|
$228.7
|
|
Accumulated Depreciation
|
|
$1,288.9
|
|
|
$1,221.1
|
|
|
$67.8
|
|
Capital Additions
|
|
$341.7
|
|
|
$335.6
|
|
|
$6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Regulated Operations
|
|
Investments and Other
|
|
Millions
|
|
|
|
For the Six Months Ended June 30, 2013
|
|
|
|
Operating Revenue
|
|
$499.4
|
|
|
$457.2
|
|
|
$42.2
|
|
Fuel and Purchased Power Expense
|
165.2
|
|
165.2
|
|
—
|
|
Operating and Maintenance Expense
|
208.5
|
|
165.0
|
|
43.5
|
|
Depreciation Expense
|
56.9
|
|
53.9
|
|
3.0
|
|
Operating Income (Loss)
|
68.8
|
|
73.1
|
|
(4.3
|
)
|
Interest Expense
|
(25.1
|
)
|
(21.1
|
)
|
(4.0
|
)
|
Equity Earnings in ATC
|
10.2
|
|
10.2
|
|
—
|
|
Other Income
|
4.2
|
|
2.2
|
|
2.0
|
|
Income (Loss) Before Non-Controlling Interest and Income Taxes
|
58.1
|
|
64.4
|
|
(6.3
|
)
|
Income Tax Expense (Benefit)
|
11.6
|
|
16.0
|
|
(4.4
|
)
|
Net Income (Loss)
|
46.5
|
|
48.4
|
|
(1.9
|
)
|
Less: Non-Controlling Interest in Subsidiaries
|
—
|
|
—
|
|
—
|
|
Net Income (Loss) Attributable to ALLETE
|
|
$46.5
|
|
|
$48.4
|
|
$(1.9)
|
|
|
|
|
As of June 30, 2013
|
|
|
|
|
|
|
Total Assets
|
|
$3,350.9
|
|
|
$2,997.0
|
|
|
$353.9
|
|
Property, Plant and Equipment – Net
|
|
$2,397.2
|
|
|
$2,329.6
|
|
|
$67.6
|
|
Accumulated Depreciation
|
|
$1,202.8
|
|
|
$1,143.2
|
|
|
$59.6
|
|
Capital Additions
|
|
$100.2
|
|
|
$97.2
|
|
|
$3.0
|
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
14
NOTE 3. INVESTMENTS
Investments.
At
June 30, 2014
, our long-term investment portfolio included the real estate assets of ALLETE Properties, debt and equity securities consisting primarily of securities held in other postretirement plans to fund employee benefits, the cash equivalents within these plans, and other assets consisting primarily of land in Minnesota.
|
|
|
|
|
|
|
|
|
Other Investments
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
ALLETE Properties
|
|
$90.0
|
|
|
|
$89.9
|
|
Available-for-sale Securities
(a)
|
18.9
|
|
|
17.7
|
|
Cash Equivalents
(b)
|
3.4
|
|
|
34.2
|
|
Other
|
4.4
|
|
|
4.5
|
|
Total Other Investments
|
|
$116.7
|
|
|
|
$146.3
|
|
|
|
(a)
|
As of
June 30, 2014
, the aggregate amount of available-for-sale corporate debt securities maturing in one year or less was
$0.2 million
, in one year to less than three years was
$2.3 million
, in three years to less than five years was
$1.8 million
, and in five or more years was
$6.2 million
.
|
|
|
(b)
|
During the first three months of 2014, cash included in Other Investments was transferred to Cash and Cash Equivalents.
|
|
|
|
|
|
|
|
|
|
ALLETE Properties
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
Land Inventory Beginning Balance
|
|
$85.4
|
|
|
|
$86.5
|
|
Cost of Sales
|
(0.2
|
)
|
|
(1.5
|
)
|
Other
|
0.3
|
|
|
0.4
|
|
Land Inventory Ending Balance
|
85.5
|
|
|
85.4
|
|
Long-Term Finance Receivables (net of allowances of $0.6 and $0.6)
|
1.4
|
|
|
1.4
|
|
Other
|
3.1
|
|
|
3.1
|
|
Total Real Estate Assets
|
|
$90.0
|
|
|
|
$89.9
|
|
Land Inventory.
Land inventory is accounted for as held for use and is recorded at cost, unless the carrying value is determined not to be recoverable in accordance with the accounting standards for property, plant and equipment, in which case the land inventory is written down to fair value. Land values are reviewed for impairment on a quarterly basis and
no
impairments were recorded for the
six months ended June 30, 2014
(
none
for the year ended
December 31, 2013
).
Long-Term Finance Receivables.
As of
June 30, 2014
, long-term finance receivables were
$1.4 million
net of an allowance (
$1.4 million
net of an allowance as of
December 31, 2013
). Long-term finance receivables are collateralized by property sold, accrue interest at market-based rates and are net of an allowance for doubtful accounts. As of
June 30, 2014
, we had an allowance for doubtful accounts of
$0.6 million
(
$0.6 million
as of
December 31, 2013
).
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
Available-For-Sale Securities
|
Cost
|
Gain
|
Loss
|
Fair Value
|
Millions
|
|
|
|
|
June 30, 2014
|
$18.9
|
$0.4
|
$0.4
|
$18.9
|
December 31, 2013
|
$18.3
|
—
|
$0.6
|
$17.7
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
15
NOTE 3. INVESTMENTS (Continued)
|
|
|
|
|
|
Net
|
Gross Realized
|
Available-For-Sale Securities (Continued)
|
Proceeds
|
Gain
|
Loss
|
Millions
|
|
|
|
Quarter Ended June 30,
|
|
|
|
2014
|
$2.1
|
$0.2
|
—
|
2013
|
$0.2
|
—
|
—
|
Six Months Ended June 30,
|
|
|
|
2014
|
$2.7
|
$0.2
|
—
|
2013
|
$8.1
|
$0.8
|
—
|
NOTE 4. ACQUISITION
On
January 30, 2014
, ALLETE Clean Energy acquired wind energy facilities located in Lake Benton, Minnesota (
Lake Benton
), Storm Lake, Iowa (
Storm Lake
) and Condon, Oregon (
Condon
) from The AES Corporation (AES) for $
26.9
million. ALLETE Clean Energy also has an option to acquire a fourth wind energy facility from AES in Armenia Mountain, Pennsylvania (
Armenia Mountain
), in June 2015. The acquisition supports ALLETE’s strategy to pursue energy-centric initiatives through ALLETE Clean Energy that include less carbon intensive and more sustainable energy sources.
Lake Benton, Storm Lake and Condon have
104
MW,
77
MW and
50
MW of generating capability, respectively. Lake Benton and Storm Lake began commercial operations in 1998, while Condon began operations in 2002. All three wind energy facilities have PPAs in place for their entire output, which expire in various years between 2019 and 2032 (see Note 15. Commitments, Guarantees and Contingencies). Pursuant to the acquisition agreement, ALLETE Clean Energy has an option to acquire the
101
MW Armenia Mountain wind energy facility in June 2015. Armenia Mountain began operations in 2009.
ALLETE Clean Energy acquired a controlling interest in the limited liability company (LLC) which owns Lake Benton and Storm Lake, and a controlling interest in the LLC that owns Condon. The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition, as shown in the table below. During the second quarter of 2014, the Company recorded minor adjustments to certain assets and liabilities. The result of these adjustments had no impact on the results of operations for the period ended June 30, 2014. Fair value measurements were valued primarily using the discounted cash flow method.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
16
NOTE 4. ACQUISITION (Continued)
|
|
|
|
|
Millions
|
|
Assets Acquired
|
|
Cash and Cash Equivalents
|
|
$3.8
|
|
Other Current Assets
|
14.3
|
|
Property, Plant and Equipment – Net
|
156.9
|
|
Other Non-Current Assets
(a)
|
7.5
|
|
Total Assets Acquired
|
|
$182.5
|
|
Liabilities Assumed
|
|
Other Current Liabilities
(b)
|
|
$15.2
|
|
Long-Term Debt Due Within One Year
|
2.2
|
|
Long-Term Debt
|
21.1
|
|
Power Purchase Agreements
|
99.4
|
|
Other Non-Current Liabilities
|
10.6
|
|
Non-Controlling Interest
(c)
|
7.1
|
|
Total Liabilities and Non-Controlling Interest Assumed
|
155.6
|
|
Net Identifiable Assets Acquired
|
|
$26.9
|
|
|
|
(a)
|
Included in Other Non-Current Assets was
$0.3
million for the option to purchase Armenia Mountain in 2015, and goodwill of
$2.9
million; for tax purposes, the purchase price allocation resulted in no allocation to goodwill.
|
|
|
(b)
|
Other Current Liabilities included
$12.4
million related to the current liabilities portion of the Power Purchase Agreements.
|
|
|
(c)
|
The purchase price accounting valued the non-controlling interest of Lake Benton, Storm Lake and Condon at fair value using the discounted cash flow method. The non-controlling interest related to Lake Benton and Storm Lake was subsequently purchased by ALLETE Clean Energy.
|
ALLETE Clean Energy incurred
$1.4
million after-tax of acquisition-related costs during the first quarter of 2014, which were expensed when incurred and were recorded in Other Expenses on the Consolidated Statement of Income. The results of operations of this business from its acquisition date are included in the Investments and Other segment. The pro forma impact of this acquisition was not significant to the results of the Company for the six months ended June 30, 2014 or June 30, 2013.
On February 11, 2014, ALLETE Clean Energy purchased the non-controlling interest related to Lake Benton and Storm Lake for
$6.0
million. This was accounted for as an equity transaction, and no gain or loss was recognized in net income or other comprehensive income.
NOTE 5. DERIVATIVES
We have two variable-to-fixed interest rate swaps (Swaps), designated as cash flow hedges, in order to manage the interest rate risk associated with a
$75.0 million
Term Loan which represents approximately
6 percent
of the Company’s outstanding long-term debt as of
June 30, 2014
. (See Note 9. Short-Term and Long-Term Debt.) The Swaps have effective dates of August 25, 2011, and 2014, and mature on August 26, 2014 and August 25, 2015, respectively. The Swaps involve the receipt of the
one-month LIBOR
in exchange for fixed interest payments over the life of the agreements at
0.825 percent
and
0.75 percent
without an exchange of the underlying notional amount.
Cash flows from the Swaps are expected to be highly effective. If it is determined the Swaps cease to be effective, we will prospectively discontinue hedge accounting. When applicable, we use the shortcut method to assess hedge effectiveness. If the shortcut method is not applicable, we assess effectiveness using the “change-in-variable-cash-flows” method. Our assessments of hedge effectiveness resulted in no ineffectiveness recorded for the quarter and six months ended June 30, 2014.
As of
June 30, 2014
, the fair value of the Swaps was a
$0.5 million
liability (
$0.6 million
liability as of
December 31, 2013
) of which
$0.4 million
(
$0.3 million
as of
December 31, 2013
) was included in Other Non-Current Liabilities and
$0.1 million
(
$0.3 million
as of
December 31, 2013
) was included in Other Current Liabilities on the Consolidated Balance Sheet. Changes in the fair value of the Swaps were recorded in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheet. Cash flows from the Swaps are presented in the same category as the hedged item on the Consolidated Statement of Cash Flows. Amounts recorded in Other Comprehensive Income related to the Swaps will be recorded in earnings when the hedged transactions occur or when it is probable they will not occur. Gains or losses on the interest rate hedging transactions are reflected as a component of Interest Expense on the Consolidated Statement of Income.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
17
NOTE 6. 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 10. Fair Value to the consolidated financial statements in our
2013
Form 10-K.
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
June 30, 2014
, and
December 31, 2013
. 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 and may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2014
|
Recurring Fair Value Measures
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Millions
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investments
(a)
|
|
|
|
|
|
|
|
Available-for-sale – Equity Securities
|
|
$8.4
|
|
|
—
|
|
|
—
|
|
|
|
$8.4
|
|
Available-for-sale – Corporate Debt Securities
|
—
|
|
|
|
$10.5
|
|
|
—
|
|
|
10.5
|
|
Cash Equivalents
|
3.4
|
|
|
—
|
|
|
—
|
|
|
3.4
|
|
Total Fair Value of Assets
|
|
$11.8
|
|
|
|
$10.5
|
|
|
—
|
|
|
|
$22.3
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred Compensation
(b)
|
—
|
|
|
|
$17.8
|
|
|
—
|
|
|
|
$17.8
|
|
Derivatives – Interest Rate Swap
(c)
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
Total Fair Value of Liabilities
|
—
|
|
|
|
$18.3
|
|
|
—
|
|
|
|
$18.3
|
|
Total Net Fair Value of Assets (Liabilities)
|
|
$11.8
|
|
|
$(7.8)
|
|
—
|
|
|
|
$4.0
|
|
|
|
(a)
|
Included in Other Investments on the Consolidated Balance Sheet.
|
|
|
(b)
|
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
|
|
|
(c)
|
Included in Current Liabilities - Other and Other Non-Current Liabilities on the Consolidated Balance Sheet.
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
18
NOTE 6. FAIR VALUE (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of December 31, 2013
|
Recurring Fair Value Measures
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Millions
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Investments
(a)
|
|
|
|
|
|
|
|
Available-for-sale – Equity Securities
|
|
$7.9
|
|
|
—
|
|
|
—
|
|
|
|
$7.9
|
|
Available-for-sale – Corporate Debt Securities
|
—
|
|
|
|
$9.8
|
|
|
—
|
|
|
9.8
|
|
Cash Equivalents
|
34.2
|
|
|
—
|
|
|
—
|
|
|
34.2
|
|
Total Fair Value of Assets
|
|
$42.1
|
|
|
|
$9.8
|
|
|
—
|
|
|
|
$51.9
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred Compensation
(b)
|
—
|
|
|
|
$16.8
|
|
|
—
|
|
|
|
$16.8
|
|
Derivatives – Interest Rate Swap
(c)
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
Total Fair Value of Liabilities
|
—
|
|
|
|
$17.4
|
|
|
—
|
|
|
|
$17.4
|
|
Total Net Fair Value of Assets (Liabilities)
|
|
$42.1
|
|
|
$(7.6)
|
|
—
|
|
|
|
$34.5
|
|
|
|
(a)
|
Included in Other Investments on the Consolidated Balance Sheet.
|
|
|
(b)
|
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
|
|
|
(c)
|
Included in Current Liabilities - Other and Other Non-Current Liabilities on the Consolidated Balance Sheet.
|
There was
no
activity in Level 3 during the
six months ended June 30, 2014 and 2013
.
The Company’s policy is to recognize transfers in and transfers out of a given level as of the actual date of the event or of the change in circumstances that caused the transfer. For the
six months ended June 30, 2014 and 2013
, there were
no
transfers in or out of Levels 1, 2 or 3.
Fair Value of Financial Instruments.
With the exception of the item listed in the table below, the estimated fair value of all financial instruments approximates the carrying amount. The fair value for the item listed below was based on quoted market prices for the same or similar instruments (Level 2).
|
|
|
|
|
Financial Instruments
|
Carrying Amount
|
|
Fair Value
|
Millions
|
|
|
|
Long-Term Debt, Including Current Portion
|
|
|
|
June 30, 2014
|
$1,327.6
|
|
$1,428.5
|
December 31, 2013
|
$1,110.2
|
|
$1,131.7
|
NOTE 7. REGULATORY MATTERS
Electric Rates.
Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, the FERC or the PSCW.
2010 Minnesota Rate Case.
Minnesota Power’s current retail rates are based on a 2011 MPUC retail rate order, effective June 1, 2011, that allows for a
10.38 percent
return on common equity and a
54.29 percent
equity ratio.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
19
NOTE 7. REGULATORY MATTERS (Continued)
FERC-Approved Wholesale Rates.
Minnesota Power’s non-affiliated municipal customers consist of
16
municipalities in Minnesota. SWL&P, a wholly-owned subsidiary of ALLETE, is a private utility in Wisconsin and also a customer of Minnesota Power. In April 2014, Minnesota Power amended its formula-based wholesale electric sales contract with the Nashwauk Public Utilities Commission, extending the term through June 30, 2026. The electric service agreements with the remaining 15 Minnesota municipal customers and SWL&P are effective through June 30, 2019. The rates included in these agreements are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate of return that is equal to our authorized rate of return for Minnesota retail customers (currently
10.38 percent
). The formula-based rate methodology also provides for a yearly true-up calculation for actual costs incurred. The contract terms include a termination clause requiring a
three
-year notice to terminate. Under the Nashwauk Public Utilities Commission agreement, no termination notice may be given prior to July 1, 2023. Under the agreements with the remaining 15 municipal customers and SWL&P, no termination notices may be given prior to June 30, 2016.
2012 Wisconsin Rate Case.
SWL&P’s current retail rates are based on a 2012 PSCW retail rate order, effective January 1, 2013, that allows for a
10.9 percent
return on common equity.
Transmission Cost Recovery Rider.
Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In November 2013, the MPUC approved Minnesota Power’s updated billing factor which allows Minnesota Power to charge retail customers on a current basis for the costs of constructing certain transmission facilities plus a return on the capital invested. We filed a petition on April 24, 2014, to include additional transmission investments and expenditures in customer billing rates.
Renewable Cost Recovery Rider.
The Bison Wind Energy Center in North Dakota currently consists of
292
MW of nameplate capacity and was completed in various phases through 2012. Customer billing rates for our Bison Wind Energy Center were approved by the MPUC in a December 2013 order. Construction of Bison 4, a
205
MW wind project in North Dakota, which is an addition to our Bison Wind Energy Center, commenced and is expected to be completed by the end of 2014. The total project investment for Bison 4 is estimated to be approximately
$345 million
, of which
$246.6 million
was spent through
June 30, 2014
. On January 17, 2014, the MPUC approved Minnesota Power’s petition seeking cost recovery for investments and expenditures related to Bison 4. We included Bison 4 as part of our renewable resources rider factor filing along with the Company’s other renewable projects in a filing on April 29, 2014, which, upon approval, will authorize updated rates to be included on customer bills.
Minnesota Power has also filed a petition on July 3, 2014 with the MPUC seeking cost recovery for investments and expenditures related to the restoration and repair of Thomson which was damaged during 2012. The total project investment for Thomson is estimated to be approximately
$90 million
, of which
$75.5 million
was spent through June 30, 2014. (See Note 15. Commitments, Guarantees and Contingencies.)
Integrated Resource Plan
.
In a November 2013 order, the MPUC approved Minnesota Power’s 2013 Integrated Resource Plan which details our “EnergyForward” strategic plan and includes an analysis of a variety of existing and future energy resource alternatives and a projection of customer cost impact by class. Significant elements of the “EnergyForward” plan include major wind investments in North Dakota, installation of emissions control technology at Boswell Unit 4, planning for the proposed GNTL, conversion of Laskin from coal to natural gas in 2015 and retiring Taconite Harbor Unit 3 in 2015.
Boswell Mercury Emissions Reduction Plan.
Minnesota Power is implementing a mercury emissions reduction project for Boswell Unit 4 in order to comply with the Minnesota Mercury Emissions Reduction Act and the Federal MATS rule. In August 2012, Minnesota Power filed its mercury emissions reduction plan for Boswell Unit 4 with the MPUC and the MPCA. The plan proposes that Minnesota Power install pollution controls by early 2016 to address both the Minnesota mercury emissions reduction requirements and the Federal MATS rule. Costs to implement the Boswell Unit 4 mercury emissions reduction plan are included in the estimated capital expenditures required for compliance with the MATS rule and are estimated to be approximately
$300 million
. In November 2013, the MPUC issued an order approving the Boswell Unit 4 mercury emissions reduction plan and cost recovery, establishing an environmental improvement rider. Also in November 2013, environmental intervenors filed a petition for reconsideration with the MPUC which was subsequently denied in an order dated January 17, 2014. Intervenors have appealed this order and the Company has filed a response to the appeal. In December 2013, Minnesota Power filed a petition with the MPUC to establish customer billing rates for the approved environmental improvement rider based on actual and estimated investments and expenditures, which was approved in an order dated July 2, 2014.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
20
NOTE 7. REGULATORY MATTERS (Continued)
Great Northern Transmission Line (GNTL)
.
Minnesota Power and Manitoba Hydro have proposed construction of the GNTL, an approximately
220
-mile
500
kV transmission line, between Manitoba and Minnesota’s Iron Range. The GNTL is subject to various federal and state regulatory approvals. In October 2013, a Certificate of Need application was filed with the MPUC with respect to the GNTL. In an order dated January 8, 2014, the MPUC determined that the Certificate of Need application was complete and referred the docket to an administrative law judge for a contested case proceeding. On April 15, 2014, Minnesota Power filed a route permit application with the MPUC and a request for a presidential permit to cross the U.S.-Canadian border with the U.S. Department of Energy. In an order dated July 2, 2014, the MPUC determined the route permit application to be complete. Manitoba Hydro must also obtain regulatory and governmental approvals related to new transmission lines and hydroelectric generation development in Canada. Upon receipt of all applicable permits and approvals, construction is anticipated to begin in 2016, and to be completed in 2020.
Regulatory Assets and Liabilities.
Our regulated utility operations are subject to the accounting guidance for Regulated Operations. We capitalize incurred costs which are probable of recovery in future utility rates as regulatory assets. Regulatory liabilities
represent amounts expected to be refunded or credited to customers in rates.
No regulatory assets or liabilities are currently earning a return.
The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable commission or over the corresponding period related to the asset or liability.
|
|
|
|
|
|
|
|
|
Regulatory Assets and Liabilities
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Millions
|
|
|
|
Current Regulatory Assets
(a)
|
|
|
|
Deferred Fuel
|
|
$20.3
|
|
|
|
$23.0
|
|
Total Current Regulatory Assets
|
20.3
|
|
|
23.0
|
|
Non-Current Regulatory Assets
|
|
|
|
Defined Benefit Pension and Other Postretirement Benefit Plans
(b)
|
161.6
|
|
|
164.1
|
|
Income Taxes
|
36.6
|
|
|
35.3
|
|
Asset Retirement Obligations
|
17.4
|
|
|
16.0
|
|
Cost Recovery Riders
(c)
|
45.7
|
|
|
39.6
|
|
PPACA Income Tax Deferral
|
5.0
|
|
|
5.0
|
|
Other
|
4.5
|
|
|
3.8
|
|
Total Non-Current Regulatory Assets
|
270.8
|
|
|
263.8
|
|
Total Regulatory Assets
|
|
$291.1
|
|
|
|
$286.8
|
|
|
|
|
|
Non-Current Regulatory Liabilities
|
|
|
|
Income Taxes
|
|
$17.3
|
|
|
|
$17.0
|
|
Plant Removal Obligations
|
21.5
|
|
|
19.7
|
|
Wholesale and Retail Contra AFUDC
|
30.1
|
|
|
19.7
|
|
Defined Benefit Pension and Other Postretirement Benefit Plans
(b)
|
15.5
|
|
|
16.3
|
|
Other
|
15.7
|
|
|
8.3
|
|
Total Non-Current Regulatory Liabilities
|
|
$100.1
|
|
|
|
$81.0
|
|
|
|
(a)
|
Current regulatory assets are included in Prepayments and Other on the Consolidated Balance Sheet.
|
|
|
(b)
|
Defined benefit pension and other postretirement items included in our Regulated Operations, which are otherwise required to be recognized in accumulated other comprehensive income, are recognized as regulatory assets or regulatory liabilities on the Consolidated Balance Sheet (see Note 14. Pension and Other Postretirement Benefit Plans).
|
|
|
(c)
|
The cost recovery rider regulatory asset is primarily due to capital expenditures related to our Bison Wind Energy Center and is recognized in accordance with the accounting standards for alternative revenue programs.
|
NOTE 8. INVESTMENT IN ATC
Our wholly-owned subsidiary, Rainy River Energy, owns approximately
8 percent
of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC rates are FERC-approved and are based on a
12.2 percent
return on common equity dedicated to utility plant. We account for our investment in ATC under the equity method of accounting.
As of June 30, 2014
, our equity investment in ATC was
$118.8 million
(
$114.6 million
at
December 31, 2013
). In the first six months of
2014
, we invested
$2.3 million
in ATC, and on
July 30, 2014
,
we invested an additional
$0.8 million
. We expect to make additional investments of approximately
$2.7 million
in
2014
to maintain our current ownership of ATC.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
21
NOTE 8. INVESTMENT IN ATC (Continued)
|
|
|
|
|
ALLETE’s Investment in ATC
|
|
Millions
|
|
Equity Investment Balance as of December 31, 2013
|
|
$114.6
|
|
Cash Investments
|
2.3
|
|
Equity in ATC Earnings
|
10.3
|
|
Distributed ATC Earnings
|
(8.4
|
)
|
Equity Investment Balance as of June 30, 2014
|
|
$118.8
|
|
ATC’s summarized financial data for the quarter and
six months ended June 30, 2014 and 2013
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
ATC Summarized Financial Data
|
June 30,
|
|
June 30,
|
Income Statement Data
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Millions
|
|
|
|
|
|
|
|
Revenue
|
$160.0
|
|
$152.1
|
|
$323.3
|
|
|
$303.9
|
|
Operating Expense
|
74.4
|
|
69.9
|
|
153.0
|
|
139.7
|
|
Other Expense
|
21.9
|
|
20.9
|
|
43.5
|
|
42.4
|
|
Net Income
|
$63.7
|
|
$61.3
|
|
$126.8
|
|
|
$121.8
|
|
ALLETE’s Equity in Net Income
|
|
$5.2
|
|
|
$5.0
|
|
|
$10.3
|
|
|
|
$10.2
|
|
In November 2013, a group of MISO industrial customer organizations filed a complaint with the FERC requesting, among other things, a reduction in the base return on equity used by MISO transmission owners, including ATC, to
9.15%
. ATC's current authorized return on equity is
12.2%
. Any change to ATC's return on equity and capital structure could result in lower equity earnings in ATC and dividends from ATC in the future. We own approximately
8 percent
of ATC and estimate that for every
50
basis point reduction in ATC’s allowed return on equity our equity earnings in ATC would be impacted annually by approximately
$0.5 million
on an after-tax basis.
NOTE 9. SHORT-TERM AND LONG-TERM DEBT
Short-Term Debt.
As of
June 30, 2014
, total short-term debt outstanding was
$10.8 million
(
$27.2 million
as of
December 31, 2013
) and consisted of long-term debt due within one year. Short-term debt as of
December 31, 2013
, included
$18.0 million
of long-term debt that matured in January 2014.
Long-Term Debt.
As of
June 30, 2014
, total long-term debt outstanding was
$1,316.8 million
(
$1,083.0 million
as of
December 31, 2013
). In conjunction with ALLETE Clean Energy’s January 30, 2014 wind energy facilities acquisition, ALLETE Clean Energy assumed $
23.3 million
of long-term debt, including $
2.2 million
due within one year (see Note 4. Acquisition). Subsequent to June 30, 2014, we redeemed
$111.0 million
of pollution control bonds, at par, which were due on July 1, 2022.
During the first six months of 2014, we issued
$215.0 million
of ALLETE first mortgage bonds (Bonds) in the private placement market in four series as shown below:
|
|
|
|
|
Issue Date
|
Maturity Date
|
Principal Amount
|
Interest Rate
|
March 4, 2014
|
March 15, 2024
|
$60 Million
|
3.69%
|
March 4, 2014
|
March 15, 2044
|
$40 Million
|
4.95%
|
June 26, 2014
|
July 15, 2022
|
$75 Million
|
3.40%
|
June 26, 2014
|
July 15, 2044
|
$40 Million
|
5.05%
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
22
NOTE 9. SHORT-TERM AND LONG-TERM DEBT (Continued)
The Company has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision; however, each series of bonds is redeemable at par, including, in each case, accrued and unpaid interest, six months prior to the maturity date. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. The Company intends to use the proceeds from the sale of the Bonds to refinance debt, fund utility capital expenditures and/or for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.
On June 27, 2014, we agreed to sell
$160.0 million
of the Company's first mortgage bonds (September Bonds) to certain institutional buyers in the private placement market. The September Bonds will be 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. The September Bonds will be issued on or about September 16, 2014, in three series as follows:
|
|
|
|
Maturity Date
|
Principal Amount
|
Interest Rate
|
September 15, 2021
|
$60 Million
|
3.02%
|
September 15, 2029
|
$50 Million
|
3.74%
|
September 15, 2044
|
$50 Million
|
4.39%
|
The Company has the option to prepay all or a portion of the September Bonds at its discretion, subject to a make-whole provision; however, each series of bonds is redeemable at par, including, in each case, accrued and unpaid interest, six months prior to the maturity date. The September Bonds are subject to additional terms and conditions which are customary for these types of transactions. The Company intends to use the proceeds from the sale of the September Bonds to fund utility capital expenditures and/or for general corporate purposes.
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
June 30, 2014
, our ratio was approximately
0.48 to 1.00
. Failure to meet this covenant would give rise to an event of default if not cured after notice from a 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. As of
June 30, 2014
, ALLETE was in compliance with its financial covenants.
NOTE 10. OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Millions
|
|
|
|
|
|
|
|
|
AFUDC – Equity
|
|
|
$2.0
|
|
|
|
$1.0
|
|
|
|
$3.8
|
|
|
|
$2.1
|
|
Gain on Sale of Available-for-sale Securities
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
0.8
|
|
Investments and Other Income (Expense)
|
|
(0.3
|
)
|
|
0.5
|
|
|
(0.1
|
)
|
|
1.3
|
|
Total Other Income
|
|
|
$1.9
|
|
|
|
$1.5
|
|
|
|
$3.9
|
|
|
|
$4.2
|
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
23
NOTE 11. INCOME TAX EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Millions
|
|
|
|
|
|
|
|
|
Current Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
Federal
(a)
|
|
—
|
|
|
$(0.2)
|
|
—
|
|
|
—
|
|
State
(a)
|
|
$0.1
|
|
—
|
|
|
$0.1
|
|
—
|
|
Total Current Tax Expense (Benefit)
|
|
$0.1
|
|
$(0.2)
|
|
$0.1
|
|
—
|
|
Deferred Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
$2.9
|
|
|
|
$3.6
|
|
|
|
$9.2
|
|
|
|
$8.2
|
|
State
|
|
2.0
|
|
|
0.9
|
|
|
4.7
|
|
|
3.8
|
|
Investment Tax Credit Amortization
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
Total Deferred Tax Expense
|
|
4.8
|
|
|
4.3
|
|
|
13.6
|
|
|
11.6
|
|
Total Income Tax Expense
|
|
|
$4.9
|
|
|
|
$4.1
|
|
|
|
$13.7
|
|
|
|
$11.6
|
|
|
|
(a)
|
For the quarter and six months ended June 30, 2014, the federal and state current tax expense reflected the utilization of NOL carryforwards from prior periods. The federal and state NOLs remaining after utilization in 2014 will be carried forward to offset future taxable income. For the quarter and six months ended June 30, 2013, the federal and state current tax benefit was due to federal and state NOLs which resulted from the bonus depreciation provision of the American Taxpayer Relief Act of 2012.
|
For the
six months ended June 30, 2014
, the effective tax rate was
21.3 percent
(
20.0 percent
for the
six months ended June 30, 2013
). The effective tax rate deviated from the statutory rate of approximately
41 percent
primarily due to deductions for AFUDC–Equity, investment tax credits, production tax credits and depletion.
Uncertain Tax Positions.
As of
June 30, 2014
, we had gross unrecognized tax benefits of
$1.2 million
(
$1.2 million
as of
December 31, 2013
). Of the total gross unrecognized tax benefits,
$0.2 million
represents the amount of unrecognized tax benefits included in 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 is no longer subject to federal examination for years before 2010, or state examination for years before 2005.
In September 2013, the U.S. Treasury issued final regulations addressing the tax consequences associated with the acquisition, production and improvement of tangible property. The regulations are generally effective for tax years beginning January 1, 2014. As ALLETE has adopted certain utility-specific guidance for deductible repairs previously issued by the IRS, the final regulation did not have a material impact on our consolidated financial statements.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
24
NOTE 12. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss), net of tax, for the
quarters ended June 30, 2014 and 2013
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses on Available-for-sale Securities
|
Defined Benefit Pension, Other Postretirement Items
|
Gains and Losses on Cash Flow Hedge
|
Total
|
Millions
|
|
|
|
|
For the Quarter Ended June 30, 2014
|
|
|
|
|
Beginning Accumulated Other Comprehensive Loss
|
$(0.1)
|
$(16.4)
|
$(0.3)
|
$(16.8)
|
Other Comprehensive Income Before Reclassifications
|
0.3
|
|
—
|
|
—
|
|
0.3
|
|
Amounts Reclassified From Accumulated Other Comprehensive Income (Loss)
|
(0.1
|
)
|
0.3
|
|
—
|
|
0.2
|
|
Net Other Comprehensive Income
|
0.2
|
|
0.3
|
|
—
|
|
0.5
|
|
Ending Accumulated Other Comprehensive Income (Loss)
|
$0.1
|
$(16.1)
|
$(0.3)
|
$(16.3)
|
|
|
|
|
|
For the Quarter Ended June 30, 2013
|
|
|
|
|
Beginning Accumulated Other Comprehensive Loss
|
$(0.1)
|
$(21.2)
|
$(0.3)
|
$(21.6)
|
Other Comprehensive Income (Loss) Before Reclassifications
|
0.1
|
(2.6)
|
—
|
|
(2.5)
|
Amounts Reclassified From Accumulated Other Comprehensive Loss
|
—
|
|
3.1
|
—
|
|
3.1
|
Net Other Comprehensive Income
|
0.1
|
|
0.5
|
—
|
|
0.6
|
Ending Accumulated Other Comprehensive Loss
|
—
|
|
$(20.7)
|
$(0.3)
|
$(21.0)
|
Reclassifications from accumulated other comprehensive income (loss) for the
quarters ended June 30, 2014 and 2013
, were as follows:
|
|
|
|
|
|
|
Quarter Ended
|
Quarter Ended
|
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
|
June 30,
|
June 30,
|
|
2014
|
2013
|
Millions
|
|
|
Unrealized Gains on Available-for-sale Securities
(a)
|
$0.2
|
—
|
|
Income Taxes
(b)
|
(0.1
|
)
|
—
|
|
Total, Net of Income Taxes
|
$0.1
|
—
|
|
|
|
|
Amortization of Defined Benefit Pension and Other Postretirement Items
|
|
|
Prior Service Costs
(c)
|
$0.1
|
$0.7
|
Actuarial Gains and Losses
(c)
|
(0.6
|
)
|
(5.8
|
)
|
Total
|
(0.5
|
)
|
(5.1
|
)
|
Income Taxes
(b)
|
0.2
|
|
2.0
|
|
Total, Net of Income Taxes
|
$(0.3)
|
$(3.1)
|
Total Reclassifications
|
$(0.2)
|
$(3.1)
|
|
|
(a)
|
Included in Other Income (Expense) – Other on the Consolidated Statement of Income.
|
|
|
(b)
|
Included in Income Tax Expense on the Consolidated Statement of Income.
|
|
|
(c)
|
Defined benefit pension and other postretirement benefit items excluded from our Regulated Operations are recognized in accumulated other comprehensive loss and are subsequently reclassified out of accumulated other comprehensive loss as components of net periodic pension and other postretirement benefit expense (see Note 14. Pension and Other Postretirement Benefit Plans).
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
25
NOTE 12. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)
Changes in accumulated other comprehensive income (loss), net of tax, for the
six months ended June 30, 2014 and 2013
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains and Losses on Available-for-sale Securities
|
Defined Benefit Pension, Other Postretirement Items
|
Gains and Losses on Cash Flow Hedge
|
Total
|
Millions
|
|
|
|
|
For the Six Months Ended June 30, 2014
|
|
|
|
|
Beginning Accumulated Other Comprehensive Loss
|
$(0.1)
|
$(16.7)
|
$(0.3)
|
$(17.1)
|
Other Comprehensive Income Before Reclassifications
|
0.3
|
|
—
|
|
—
|
|
0.3
|
|
Amounts Reclassified From Accumulated Other Comprehensive Income (Loss)
|
(0.1
|
)
|
0.6
|
|
—
|
|
0.5
|
|
Net Other Comprehensive Income
|
0.2
|
|
0.6
|
|
—
|
|
0.8
|
|
Ending Accumulated Other Comprehensive Income (Loss)
|
$0.1
|
$(16.1)
|
$(0.3)
|
$(16.3)
|
|
|
|
|
|
For the Six Months Ended June 30, 2013
|
|
|
|
|
Beginning Accumulated Other Comprehensive Loss
|
$(0.1)
|
$(21.5)
|
$(0.4)
|
$(22.0)
|
Other Comprehensive Income (Loss) Before Reclassifications
|
0.6
|
|
(5.5
|
)
|
0.1
|
|
(4.8
|
)
|
Amounts Reclassified From Accumulated Other Comprehensive Loss
|
(0.5
|
)
|
6.3
|
|
—
|
|
5.8
|
|
Net Other Comprehensive Income
|
0.1
|
|
0.8
|
|
0.1
|
|
1.0
|
|
Ending Accumulated Other Comprehensive Loss
|
—
|
|
$(20.7)
|
$(0.3)
|
$(21.0)
|
Reclassifications from accumulated other comprehensive income (loss) for the
six months ended June 30, 2014 and 2013
, were as follows:
|
|
|
|
|
|
|
Six Months Ended
|
Six Months Ended
|
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
|
June 30,
|
June 30,
|
|
2014
|
2013
|
Millions
|
|
|
Unrealized Gains on Available-for-sale Securities
(a)
|
$0.2
|
$0.8
|
Income Taxes
(b)
|
(0.1
|
)
|
(0.3
|
)
|
Total, Net of Income Taxes
|
$0.1
|
$0.5
|
|
|
|
Amortization of Defined Benefit Pension and Other Postretirement Items
|
|
|
Prior Service Costs
(c)
|
$0.2
|
$1.2
|
Actuarial Gains and Losses
(c)
|
(1.2
|
)
|
(11.5
|
)
|
Total
|
(1.0
|
)
|
(10.3
|
)
|
Income Taxes
(b)
|
0.4
|
|
4.0
|
|
Total, Net of Income Taxes
|
$(0.6)
|
$(6.3)
|
Total Reclassifications
|
$(0.5)
|
$(5.8)
|
|
|
(a)
|
Included in Other Income (Expense) – Other on the Consolidated Statement of Income.
|
|
|
(b)
|
Included in Income Tax Expense on the Consolidated Statement of Income.
|
|
|
(c)
|
Defined benefit pension and other postretirement benefit items excluded from our Regulated Operations are recognized in accumulated other comprehensive loss and are subsequently reclassified out of accumulated other comprehensive loss as components of net periodic pension and other postretirement benefit expense (see Note 14. Pension and Other Postretirement Benefit Plans).
|
ALLETE, Inc. Second Quarter 2014 Form 10-Q
26
NOTE 13. 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 outstanding stock options, non-vested restricted stock units, performance share awards granted under our Executive Long-Term Incentive Compensation Plan and common shares under the forward sale agreement (described below). For the quarters and
six months ended June 30, 2014 and 2013
,
zero
options to purchase shares of common stock were excluded from the computation of diluted earnings per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
2013
|
|
|
Reconciliation of Basic and Diluted
|
|
|
Dilutive
|
|
|
|
|
|
Dilutive
|
|
|
Earnings Per Share
|
Basic
|
|
Securities
|
|
Diluted
|
|
Basic
|
|
Securities
|
|
Diluted
|
Millions Except Per Share Amounts
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to ALLETE
|
|
$16.8
|
|
|
|
|
|
$16.8
|
|
|
|
$14.0
|
|
|
|
|
|
$14.0
|
|
Average Common Shares
|
42.1
|
|
|
0.2
|
|
|
42.3
|
|
|
39.4
|
|
|
0.2
|
|
|
39.6
|
|
Earnings Per Share
|
|
$0.40
|
|
|
|
|
|
$0.40
|
|
|
|
$0.36
|
|
|
|
|
|
$0.35
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to ALLETE
|
|
$50.3
|
|
|
|
|
|
$50.3
|
|
|
|
$46.5
|
|
|
|
|
|
$46.5
|
|
Average Common Shares
|
41.7
|
|
|
0.2
|
|
|
41.9
|
|
|
39.2
|
|
|
0.1
|
|
|
39.3
|
|
Earnings Per Share
|
|
$1.21
|
|
|
|
|
|
$1.20
|
|
|
|
$1.19
|
|
|
|
|
|
$1.18
|
|
Forward Sale Agreement and Issuance of Common Stock.
On February 26, 2014, ALLETE entered into a confirmation of forward sale agreement (Agreement) with a forward counterparty in connection with a public offering of
2.8 million
shares of ALLETE common stock. The use of an equity forward transaction substantially eliminates future equity market price risk by fixing a common equity offering sales price under the then existing market conditions, while mitigating immediate share dilution resulting from the offering by postponing the actual issuance of common stock until funds are needed in accordance with our capital investment strategy.
Pursuant to the Agreement, the forward counterparty (or its affiliate) borrowed
2.8 million
shares of ALLETE common stock (borrowed shares) from third parties and sold them to the underwriters. ALLETE has the right to elect physical, cash or net share settlement under the forward sales agreement, for all or a portion of its obligations under the Agreement. In the event that ALLETE elects physical settlement of the Agreement, it will deliver shares of its common stock in exchange for cash proceeds at the then-applicable forward sale price. The forward sale price is initially
$48.01
per share, subject to adjustment as provided in the Agreement. The Agreement provides for settlement at any time on or prior to March 1, 2015. ALLETE expects to physically settle the Agreement in its entirety by delivering
2.8 million
shares of its common stock. As of
June 30, 2014
, the Agreement has not been settled in whole or in part.
In connection with the public offering of the
2.8 million
shares, ALLETE granted the underwriters an option to purchase up to an additional
0.4 million
shares of ALLETE common stock (the option shares). The underwriters exercised the option in full and on March 4, 2014, the Company issued and sold the option shares to the underwriters at a price to ALLETE equal to the initial forward sale price for proceeds of
$20.2 million
.
The equity forward transaction was reflected in ALLETE’s diluted earnings per share using the treasury stock method, which resulted in
no
material dilutive impact to ALLETE’s diluted earnings per share for the quarter or six months ended June 30, 2014. Prior to a settlement date, any dilutive effect of the Agreement on our earnings per share would only occur during periods when the average market price per share of our common stock is above the per share adjusted forward sales price described above.
The equity forward transaction has
no
initial fair value since it was entered into at the then market price of the common stock. ALLETE will not receive any proceeds with respect to the borrowed shares until the equity forward transaction is settled, and at that time the proceeds, if any, will be recorded in equity. The equity forward transaction is accounted for as an equity instrument in accordance with the accounting guidance for distinguishing liabilities from equity and the guidance for derivatives. Under the accounting guidance, the transaction qualifies for an exception from derivative accounting because the forward sale transaction is indexed to ALLETE’s stock.
Contributions to Pension.
On January 10, 2014, ALLETE contributed
0.4 million
shares of ALLETE common stock to its pension plan. These shares of ALLETE common stock were contributed in reliance upon an exemption available pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and had an aggregate value of
$19.5 million
when contributed.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
27
NOTE 14. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Other
Postretirement
|
Components of Net Periodic Benefit Expense (Income)
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Millions
|
|
|
|
|
|
|
|
For the Quarter Ended June 30,
|
|
|
|
|
|
|
|
Service Cost
|
|
$2.1
|
|
|
|
$2.5
|
|
|
|
$0.8
|
|
|
|
$1.0
|
|
Interest Cost
|
7.5
|
|
|
6.5
|
|
|
1.9
|
|
|
1.7
|
|
Expected Return on Plan Assets
|
(9.5
|
)
|
|
(8.8
|
)
|
|
(2.6
|
)
|
|
(2.4
|
)
|
Amortization of Prior Service Credits
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(0.7
|
)
|
Amortization of Net Loss
|
3.5
|
|
|
5.4
|
|
|
0.1
|
|
|
0.4
|
|
Net Periodic Benefit Expense (Income)
|
|
$3.6
|
|
|
|
$5.6
|
|
|
$(0.4)
|
|
—
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
|
|
|
|
|
Service Cost
|
|
$4.2
|
|
|
|
$5.0
|
|
|
|
$1.7
|
|
|
|
$2.0
|
|
Interest Cost
|
14.9
|
|
|
13.0
|
|
|
3.7
|
|
|
3.4
|
|
Expected Return on Plan Assets
|
(19.1
|
)
|
|
(17.6
|
)
|
|
(5.2
|
)
|
|
(4.9
|
)
|
Amortization of Prior Service Costs (Credits)
|
0.1
|
|
|
0.1
|
|
|
(1.2
|
)
|
|
(1.3
|
)
|
Amortization of Net Loss
|
7.1
|
|
|
10.7
|
|
|
0.2
|
|
|
0.8
|
|
Net Periodic Benefit Expense (Income)
|
|
$7.2
|
|
|
|
$11.2
|
|
|
$(0.8)
|
|
—
|
|
Employer Contributions.
For the
six months ended June 30, 2014
,
$19.5 million
of ALLETE common stock was contributed to our defined benefit pension plan (
no contributions
for the
six months ended June 30, 2013
). For the
six months ended June 30, 2014
, we made
no
contributions to our other postretirement benefit plan (
$10.8 million
for the
six months ended June 30, 2013
). We do
not
expect to make any additional contributions to our defined benefit pension plan in
2014
, and we do
not
expect to make any contributions to our other postretirement benefit plan in
2014
.
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Power Purchase 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.
Square Butte PPA.
Minnesota Power has a PPA with Square Butte that extends through 2026 (Agreement). It provides a long-term supply of energy to customers in our electric service territory and enables Minnesota Power to meet reserve requirements. Square Butte, a North Dakota cooperative corporation, owns a
455
MW coal-fired generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power, a North Dakota cooperative corporation whose Class A members are also members of Square Butte. Minnkota Power serves as the operator of the Unit and also purchases power from Square Butte.
Minnesota Power is obligated to pay its pro rata share of Square Butte’s costs based on Minnesota Power’s entitlement to Unit output. Our output entitlement under the Agreement is
50 percent
for the remainder of the contract, subject to the provisions of the Minnkota Power sales agreement described below. Minnesota Power’s payment obligation will be suspended if Square Butte fails to deliver any power, whether produced or purchased, for a period of one year. Square Butte’s costs consist primarily of debt service, operating and maintenance, depreciation and fuel expenses.
As of June 30, 2014
, Square Butte had total debt outstanding of
$405.7 million
. Annual debt service for Square Butte is expected to be approximately
$44 million
in each of the years
2014
through
2018
, of which Minnesota Power’s obligation is
50 percent
. Fuel expenses are recoverable through our fuel adjustment clause and include the cost of coal purchased from BNI Coal, under a long-term contract.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
28
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Power Purchase Agreements (Continued)
Minnesota Power’s cost of power purchased from Square Butte during the
six months ended June 30, 2014
, was
$29.8 million
(
$33.0 million
for the
six months ended June 30, 2013
). 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
$5.2 million
during the
six months ended June 30, 2014
(
$5.3 million
for the
six months ended June 30, 2013
). 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 Sales Agreement.
In December 2009, Minnesota Power entered into a power sales agreement with Minnkota Power. Under the power sales agreement, Minnesota Power will sell a portion of its output 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. This sales agreement commenced June 1, 2014.
Minnkota Power PPA.
In December 2012, Minnesota Power entered into a long-term PPA with Minnkota Power. Under this agreement, Minnesota Power will purchase
50
MW of capacity and the energy associated with that capacity over the term June 2016 through May 2020. The agreement includes a fixed capacity charge and energy pricing that escalates at a fixed rate annually over the term.
Oliver Wind I and II PPAs.
In 2006 and 2007, Minnesota Power entered into two long-term wind PPAs with an affiliate of NextEra Energy, Inc. to purchase the output from Oliver Wind I (
50
MW) and Oliver Wind II (
48
MW)—wind facilities located near Center, North Dakota. Each agreement is for
25
years and provides for the purchase of all output from the facilities at fixed energy prices. There are
no
fixed capacity charges, and we only pay for energy as it is delivered to us.
Manitoba Hydro PPAs.
Minnesota Power has a long-term PPA with Manitoba Hydro that 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. In addition, Minnesota Power has a separate long-term PPA with Manitoba Hydro to purchase 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.
In May 2011, Minnesota Power and Manitoba Hydro signed an additional long-term PPA. The PPA provides for Manitoba Hydro to sell
250
MW of capacity and energy to Minnesota Power for
15
years beginning in 2020. The agreement is subject to construction of additional transmission capacity between Manitoba and the U.S., along with construction of new hydroelectric generating capacity in Manitoba. The capacity price is adjusted annually until 2020 by a change in a governmental inflationary index. The energy price is based on a formula that includes an annual fixed price component adjusted for a change in a governmental inflationary index and a natural gas index, as well as market prices.
North Dakota Wind Development
.
Minnesota Power uses the
465
-mile,
250
kV DC transmission line that runs from Center, North Dakota, to Duluth, Minnesota to transport increasing amounts of wind energy from North Dakota while gradually phasing out coal-based electricity delivered to our system over this transmission line from Square Butte’s lignite coal-fired generating unit.
Our
292
MW Bison Wind Energy Center, located in North Dakota, was completed in various phases through 2012. Customer billing rates for our Bison Wind Energy Center were approved by the MPUC in a December 2013 order.
Construction of Bison 4, a
205
MW wind project in North Dakota which is an addition to our Bison Wind Energy Center, has commenced and is expected to be completed by the end of 2014. The total project investment for Bison 4 is estimated to be approximately
$345 million
, of which
$246.6 million
was spent through
June 30, 2014
. On January 17, 2014, the MPUC approved Minnesota Power’s petition seeking cost recovery for investments and expenditures related to Bison 4. We included Bison 4 as part of our renewable resources rider factor filing along with the Company’s other renewable projects in a filing on April 29, 2014, which, upon approval, will authorize updated rates to be included on customer bills.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
29
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Hydro Operations.
In June 2012, record rainfall and flooding occurred near Duluth, Minnesota and surrounding areas. The flooding impacted Minnesota Power’s St. Louis River hydro system, particularly Thomson, which had damage to the forebay canal and flooding at the facility. Minnesota Power worked closely with the appropriate regulatory bodies which oversee the hydro system operations, including dams and reservoirs, to restore Thomson and to rebuild the forebay embankment. Minnesota Power continues restoration and upgrade work at the Thomson facility and completed rebuilding the forebay embankment. Minnesota Power anticipates partial generation at Thomson in the third quarter of 2014. Work is ongoing towards returning to full generation late in 2014 and improving the spillway capacity at the Thomson dam in 2015. Total project costs are estimated to be approximately
$90 million
, of which
$75.5 million
was spent through
June 30, 2014
. A request seeking cost recovery of investments and expenditures related to the restoration and repair of Thomson through a renewable resources rider was filed with the MPUC on July 3, 2014.
Coal, Rail and Shipping Contracts.
We have coal supply agreements providing for the purchase of a significant portion of our coal requirements with expiration dates through December 2015. We also have coal transportation agreements in place for the delivery of a significant portion of our coal requirements with expiration dates through December 2015. Currently, Minnesota Power is in discussions regarding the extension of our coal supply and transportation contracts beyond 2015. Our minimum annual payment obligation under these supply and transportation agreements is
$17.7 million
for the remainder of
2014
and
$4.0 million
for
2015
. Our minimum annual payment obligation will increase when annual nominations are made for coal deliveries in future years. The delivered costs of fuel for Minnesota Power’s generation are recoverable from Minnesota Power’s utility customers through the fuel adjustment clause.
Leasing Agreements.
BNI Coal is obligated to make lease payments for a dragline totaling
$2.8 million
annually for the lease term, which expires in 2027. BNI Coal has the option at the end of the lease term to renew the lease at fair market value, to purchase the dragline at fair market value, or to surrender the dragline and pay a
$3.0 million
termination fee. We also lease other properties and equipment under operating lease agreements with terms expiring through 2021. The aggregate amount of minimum lease payments for all operating leases is
$12.1 million
in
2014
,
$11.5 million
in
2015
,
$9.5 million
in
2016
,
$8.7 million
in
2017
,
$7.4 million
in
2018
and
$29.2 million
thereafter.
Transmission
. We continue to make investments in Upper Midwest transmission opportunities that strengthen or enhance the regional transmission grid. This includes the CapX2020 initiative, investments in our own transmission assets, investments in other regional transmission assets (individually or in combination with others), and our investment in ATC.
Transmission Investments.
Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In November 2013, the MPUC approved Minnesota Power’s updated billing factor which allows Minnesota Power to charge retail customers on a current basis for the costs of constructing certain transmission facilities plus a return on the capital invested. We filed a petition on April 24, 2014, to include additional transmission investments and expenditures in customer billing rates.
CapX2020.
Minnesota Power is a participant in the CapX2020 initiative which represents an effort to ensure electric transmission and distribution reliability in Minnesota and the surrounding region for the future. CapX2020, which consists of electric cooperatives and municipal and investor-owned utilities, including Minnesota’s largest transmission owners, has assessed the transmission system and projected growth in customer demand for electricity through 2020.
Minnesota Power is currently participating in the construction of
one
CapX2020 transmission line project. Minnesota Power also participated in
two
CapX2020 projects which were previously completed and placed into service in 2011 and 2012. In June 2011, the MPUC approved the route permit for the Minnesota portion of the Fargo to St. Cloud project, which is currently under construction and expected to be in service by 2015. The North Dakota permitting process was completed in August 2012.
Based on projected costs of the
three
transmission line projects and the allocation agreements among participating utilities, in total Minnesota Power plans to invest between
$100 million
and
$110 million
in the CapX2020 initiative through 2015, of which
$91.0 million
was spent through June 30, 2014. As future CapX2020 projects are identified, Minnesota Power may elect to participate on a project-by-project basis.
Great Northern Transmission Line (GNTL).
As a condition of the long-term PPA signed in May 2011 with Manitoba Hydro, construction of additional transmission capacity is required. As a result, Minnesota Power and Manitoba Hydro proposed construction of the GNTL, an approximately
220
-mile
500
kV transmission line, between Manitoba and Minnesota’s Iron Range in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainable energy.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
30
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Transmission (Continued)
The GNTL is subject to various federal and state regulatory approvals. In October 2013, a Certificate of Need application was filed with the MPUC with respect to the GNTL. In an order dated January 8, 2014, the MPUC determined the Certificate of Need application was complete and referred the docket to an administrative law judge for a contested case proceeding. On April 15, 2014, Minnesota Power filed a route permit application with the MPUC and a request for a presidential permit to cross the U.S.-Canadian border with the U.S. Department of Energy. In an order dated July 2, 2014, the MPUC determined the route permit application to be complete. Manitoba Hydro must also obtain regulatory and governmental approvals related to new transmission lines and hydroelectric generation development in Canada. Upon receipt of all applicable permits and approvals, construction is anticipated to begin in 2016, and to be completed in 2020. Total project cost in the U.S., including substation work, is estimated to be between $
500 million
and $
650 million
, depending on the final route of the line. Minnesota Power is expected to have majority ownership of the transmission line.
Environmental Matters
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. Currently, a number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements are under consideration by both Congress and the EPA. Minnesota Power’s fossil fuel facilities will likely be subject to regulation under these proposals. Our intention is to reduce our exposure to these requirements by reshaping our generation portfolio over time to reduce our reliance on coal.
We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits to conduct such operations have been obtained. Due to expected future restrictive environmental requirements imposed through legislation and/or rulemaking, we anticipate that potential expenditures for environmental matters will be material and will require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible ranges of future 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 become 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 charged to expense 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 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 NO
X
technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with applicable emission requirements.
New Source Review (NSR).
In August 2008, Minnesota Power received a Notice of Violation (NOV) from the EPA asserting violations of the NSR requirements of the Clean Air Act at Boswell Units 1, 2, 3 and 4 and Laskin Unit 2. The NOV asserts that seven projects undertaken at these coal-fired plants between the years 1981 and 2000 should have been reviewed under the NSR requirements and that Boswell Unit 4’s Title V permit was violated. In April 2011, Minnesota Power received a NOV alleging that two projects undertaken at Rapids Energy Center in 2004 and 2005 should have been reviewed under the NSR requirements and that the Rapids Energy Center’s Title V permit was violated.
Minnesota Power reached a settlement with the EPA regarding these NOVs and entered into a Consent Decree which was filed with the U.S. District Court for the District of Minnesota (Court) on July 16, 2014 and notice of the Consent Decree was published in the Federal Register July 22, 2014. Before it becomes effective, the Consent Decree must be approved by the Court after a 30-day public comment period that will end on August 21, 2014. The Consent Decree covers Minnesota Power’s Boswell, Laskin, Taconite Harbor, and Rapids Energy Centers. The Consent Decree provides for more stringent emissions limits at all affected units, and the option of refueling, retrofits, or retirements at some units. It also includes the addition of 200 megawatts of wind energy. Minnesota Power will also be required to spend
$4.2 million
on environmental mitigation projects over the next five years. Under the terms of the Consent Decree, Minnesota Power will also pay a
$1.4 million
civil penalty. In the second quarter of 2014, the Company recorded a liability and corresponding expense associated with the environmental mitigation projects. A liability for the civil penalty was recognized in 2013.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
31
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Since 2005, the Company has, and will, invest more than
$600 million
to reduce sulfur dioxide, nitrogen oxide, mercury and particulate matters emissions at its thermal generation facilities, and in 2012 placed in service over
200
MW of renewable wind energy, which fulfills certain obligations under the Consent Decree. In addition, Minnesota Power’s EnergyForward plan also addresses many of the requirements included in the Consent Decree. Under the EnergyForward plan Minnesota Power intends to: 1) retire Taconite Harbor Unit 3, 2) convert Laskin from coal to natural gas, and 3) install emission controls at Boswell Unit 4.
The Consent Decree further requires that, by no later than December 31, 2018, Boswell Units 1 and 2 must be retired, refueled, repowered, or emissions rerouted to an existing Boswell scrubber. Minnesota Power estimates that if the Units are not retired, capital expenditures could range between
$20 million
to
$40 million
. We are evaluating our options with regard to the future course of action at our Boswell Units 1 and 2 facilities to comply with the Consent Decree, as well as future anticipated environmental regulations. We are required to inform the EPA no later than December 31, 2016 whether we will retire, refuel, repower or reroute Boswell Units 1 and 2. We believe that future capital expenditures or costs to retire would likely be eligible for recovery in rates over time subject to regulatory approval in a rate proceeding.
Cross-State Air Pollution Rule (CSAPR).
In July 2011, the EPA issued the CSAPR, to address long-range transport of particulate matter and ozone by requiring reductions in SO
2
and NO
X
from electric generating companies in the eastern half of the United States, including Minnesota. However, in August 2012, the U.S. Court of Appeals for the District of Columbia Circuit (Circuit Court of Appeals) vacated the CSAPR, ordering that the CAIR remain in effect while a CSAPR replacement rule was promulgated. That decision was appealed and, in April 2014, the U.S. Supreme Court reversed the decision, remanding the case to the Circuit Court of Appeals for further proceedings consistent with the U.S. Supreme Court decision. On June 25, 2014, the EPA made a motion to the Circuit Court of Appeals to have the court’s stay of the CSAPR lifted and further asking the court to delay the CSAPR compliance deadlines by three years.
The CSAPR would not directly require the installation of controls. Instead, the rule would require facilities to have sufficient emission allowances to cover their emissions on an annual basis. These allowances would be allocated to facilities from each state’s annual budget and could be bought and sold. The CSAPR requirements, if the stay is lifted and the EPA’s motion to toll compliance deadlines is granted, would go into effect in 2015 (Phase I) and 2017 (Phase 2).
So long as the Circuit Court of Appeals’ stay of the CSAPR remains in effect, the CAIR regulations continue to apply. Like the CSAPR, the CAIR regulations are intended to address long-range transport of particulate matter and ozone by means of an emissions trading program. Minnesota participation in the CAIR was stayed by EPA administrative action while the EPA promulgated a replacement rule. If the Circuit Court of Appeals lifts its stay of the CSAPR or otherwise upholds the CSAPR on remand, the CSAPR will likely become effective for Minnesota, but compliance deadlines may be extended to allow time for the State of Minnesota to develop its compliance plan.
Since 2006, we have significantly reduced emissions at our Laskin, Taconite Harbor and Boswell generating units. Based on our expected generation, these emission reductions would have satisfied Minnesota Power’s SO
2
and NO
X
emission compliance obligations with respect to the EPA-allocated CSAPR allowances for 2013. We are unable to predict any additional compliance costs we might incur as a result of the CSAPR.
Regional Haze.
The federal Regional Haze Rule requires states to submit SIPs to the EPA to address regional haze visibility impairment in 156 federally-protected parks and wilderness areas. Under the first phase of the Regional Haze Rule, certain large stationary sources, built between 1962 and 1977, with emissions contributing to visibility impairment, are required to install emission controls, known as Best Available Retrofit Technology (BART). We have two steam units, Boswell Unit 3 and Taconite Harbor Unit 3, subject to BART requirements.
The MPCA requested that companies with BART-eligible units complete and submit a BART emissions control retrofit study, which was completed for Taconite Harbor Unit 3 in November 2008. The retrofit work completed in 2009 at Boswell Unit 3 meets the BART requirements for that unit. In December 2009, the MPCA approved the Minnesota SIP for submittal to the EPA for its review and approval. The Minnesota SIP incorporates information from the BART emissions control retrofit studies that were completed as requested by the MPCA.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
32
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Due to legal challenges at both the state and federal levels, there is currently no applicable compliance deadline for the Regional Haze Rule. If additional regional haze related controls are ultimately required, Minnesota Power will have up to five years from the final rule promulgation date to bring Taconite Harbor Unit 3 into compliance. As part of our 2013 Integrated Resource Plan, which was approved by the MPUC in November 2013, we plan to retire Taconite Harbor Unit 3 in 2015. We believe that the Taconite Harbor Unit 3 retirement will be accomplished before any compliance deadline takes effect.
Mercury and Air Toxics Standards (MATS) Rule (formerly known as the Electric Generating Unit Maximum Achievable Control Technology (MACT) Rule).
Under Section 112 of the Clean Air Act, the EPA is required to set emission standards for hazardous air pollutants (HAPs) for certain source categories. The EPA published the final MATS rule in the Federal Register in February 2012, addressing such emissions from coal-fired utility units greater than 25 MW. There are currently 187 listed HAPs that the EPA is required to evaluate for establishment of MACT standards. In the final MATS rule, the EPA established categories of HAPs, including mercury, trace metals other than mercury, acid gases, dioxin/furans, and organics other than dioxin/furans. The EPA also established emission limits for the first three categories of HAPs, and work practice standards for the remaining categories. Affected sources must be in compliance with the rule by April 2015. States have the authority to grant sources a one-year extension. Minnesota Power was notified by the MPCA that it has approved Minnesota Power’s request for an additional year extending the date of compliance for the Boswell Unit 4 environmental upgrade to April 1, 2016. Compliance at Boswell Unit 4 to address the final MATS rule is expected to result in capital expenditures of approximately
$300 million
through 2016, of which
$102.3 million
was spent through
June 30, 2014
. Our minimum payment obligation for the environmental upgrade is
$104.7 million
for 2014 and
$72.5 million
for 2015. Our “EnergyForward” plan, which was approved as part of our 2013 Integrated Resource Plan by the MPUC in an order dated November 12, 2013, also includes the conversion of Laskin Units 1 and 2 to natural gas in 2015, to position the Company for MATS compliance. On January 9, 2014, the MPCA approved Minnesota Power’s application to extend the deadline for Taconite Harbor Unit 3 to comply with MATS to June 1, 2015, in order to align the Unit 3 retirement with MISO’s resource planning year.
EPA National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial and Institutional Boilers and Process Heaters.
In March 2011, a final rule was published in the Federal Register for Industrial Boiler Maximum Achievable Control Technology (Industrial Boiler MACT). The rule was stayed by the EPA in May 2011, to allow the EPA time to consider additional comments received. The EPA re-proposed the rule in December 2011. In January 2012, the United States District Court for the District of Columbia ruled that the EPA stay of the Industrial Boiler MACT was unlawful, effectively reinstating the March 2011 rule and associated compliance deadlines. A final rule based on the December 2011 proposal, which supersedes the March 2011 rule, became effective in December 2012. Major existing sources have until January 31, 2016, to achieve compliance with the final rule. Minnesota Power’s Hibbard Renewable Energy Center and Rapids Energy Center are subject to this rule. We expect compliance to consist largely of adjustments to our operating practices; therefore costs for complying with the final rule are not expected to be material at this time.
Minnesota Mercury Emissions Reduction Act.
In order to comply with the 2006 Minnesota Mercury Emissions Reduction Act, Minnesota Power must implement a mercury emissions reduction project for Boswell Unit 4 by December 31, 2018. The Boswell Unit 4 environmental upgrade discussed above, which is required to be completed by April 1, 2016 (see Mercury and Air Toxics Standards (MATS) Rule), will fulfill the requirements of the Minnesota Mercury Emissions Reduction Act. Costs to implement the Boswell Unit 4 mercury emissions reduction plan are included in the estimated capital expenditures required for compliance with the MATS rule discussed above (see Mercury and Air Toxics Standards (MATS) Rule).
Proposed and Finalized 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 NAAQS, the state is required to adopt plans describing how it will reduce emissions to attain the NAAQS. These state plans often include more stringent air emission limitations on sources of air pollutants than the NAAQS. Four NAAQS have either recently been revised or are currently proposed for revision, as described below.
Ozone NAAQS.
The EPA has proposed to more stringently control emissions that result in ground level ozone. In January 2010, the EPA proposed to revise the 2008 eight-hour ozone standard and to adopt a secondary standard for the protection of sensitive vegetation from ozone-related damage. The EPA was scheduled to decide upon the 2008 eight-hour ozone standard in July 2011, but has since announced that it is deferring revision of this standard until late 2014 or beyond. Consequently, the costs for complying with the final ozone NAAQS cannot be estimated at this time.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
33
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Particulate Matter NAAQS.
The EPA finalized the Particulate Matter NAAQS in September 2006. Since then, the EPA has established more stringent 24-hour average fine particulate matter (PM
2.5
) and annual PM
2.5
standards; the 24-hour coarse particulate matter standard has remained unchanged. The District of Columbia Circuit Court of Appeals remanded the annual PM
2.5
standard to the EPA, requiring consideration of lower annual standard values. The EPA proposed new PM
2.5
standards in June 2012.
In December 2012, the EPA issued a final rule implementing a more stringent annual PM
2.5
standard, while retaining the current 24-hour PM
2.5
standard. To implement the new more stringent annual PM
2.5
standard, the EPA is also revising aspects of relevant monitoring, designation and permitting requirements. New projects and permits must comply with the new more stringent standard, and compliance with the NAAQS at the facility level is generally demonstrated by modeling.
Under the final rule, states will be responsible for additional PM
2.5
monitoring, which will likely be accomplished by relocating or repurposing existing monitors. The EPA asked states to submit attainment designations by December 2013, based on already available monitoring data. The EPA believes that most U.S. counties already meet the new standard and plans to finalize designations of attainment by December 2014. For those counties that the EPA does not designate as having already met the requirements of the new standard, specific dates for required attainment will depend on technology availability, state permitting goals, potential legal challenges and other factors. Minnesota is anticipating that it will retain attainment status; however, Minnesota sources may ultimately be required to reduce their emissions to assist with attainment in neighboring states. Accordingly, the costs for complying with the final Particulate Matter NAAQS cannot be estimated at this time.
SO
2
and NO
2
NAAQS.
During 2010, the EPA finalized one-hour NAAQS for SO
2
and NO
2
. Ambient monitoring data indicates that Minnesota will likely be in compliance with these new standards; however, the one-hour SO
2
NAAQS also may require the EPA to evaluate modeling data to determine attainment. The EPA notified states that their infrastructure SIPs for maintaining attainment of the standard were required to be submitted to the EPA for approval by June 2013. However, the State of Minnesota has delayed completing the documents pending receipt of EPA guidance to states for preparing the SIP submittal. Guidance was expected in 2013 and has been delayed.
In late 2011, the MPCA initiated modeling activities that included approximately 65 sources within Minnesota that emit greater than 100 tons of SO
2
per year. However, in April 2012, the MPCA notified Minnesota Power that such modeling had been suspended as a result of the EPA’s announcement that the June 2013 SIP submittals would no longer require modeling demonstrations for states, such as Minnesota, where ambient monitors indicate compliance with the new standard. The MPCA is awaiting updated EPA guidance and will communicate with affected sources once the MPCA has more information on how the state will meet the EPA’s SIP requirements. Currently, compliance with these new NAAQS is expected to be required as early as 2017. The costs for complying with the final standards cannot be estimated at this time.
Climate Change.
The scientific community generally accepts that emissions of GHG are linked to global climate change. Climate change 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 temperatures; and changes in the intensity and frequency of extreme weather events. These all have the potential to affect the Company’s business and operations. We are addressing climate change by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customers’ requirements:
|
|
•
|
Expanding our renewable energy supply;
|
|
|
•
|
Providing energy conservation initiatives for our customers and engaging in other demand side efforts;
|
|
|
•
|
Improving efficiency of our energy generating facilities;
|
|
|
•
|
Supporting research of technologies to reduce carbon emissions from generation facilities and carbon sequestration efforts; and
|
|
|
•
|
Evaluating and developing less carbon intensive future generating assets such as efficient and flexible natural gas generating facilities.
|
President Obama’s Climate Action Plan.
In June 2013, President Obama announced a Climate Action Plan (CAP) that calls for implementation of measures that reduce GHG emissions in the U.S., emphasizing means such as expanded deployment of renewable energy resources, energy and resource conservation, energy efficiency improvements and a shift to fuel sources that have lower emissions. Certain portions of the CAP directly address electric utility GHG emissions.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
34
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
EPA Regulation of GHG Emissions.
In May 2010, the EPA issued the Prevention of Significant Deterioration (PSD) and Title V Greenhouse Gas Tailoring Rule (Tailoring Rule). The Tailoring Rule establishes permitting thresholds required to address GHG emissions for new facilities, existing facilities that undergo major modifications and other facilities characterized as major sources under the Clean Air Act’s Title V program. For our existing facilities, the rule does not require amending our existing Title V operating permits to include GHG requirements. However, GHG requirements are likely to be added to our existing Title V operating permits by the MPCA as these permits are renewed or amended.
In late 2010, the EPA issued guidance to permitting authorities and affected sources to facilitate incorporation of the Tailoring Rule permitting requirements into the Title V and PSD permitting programs. The guidance stated that the project-specific, top-down Best Available Control Technology (BACT) determination process used for other pollutants will also be used to determine BACT for GHG emissions. Through sector-specific white papers, the EPA also provided examples and technical summaries of GHG emission control technologies and techniques the EPA considers available or likely to be available to sources. It is possible that these control technologies could be determined to be BACT on a project-by-project basis.
In June 2014, the U.S. Supreme Court invalidated the aspect of the Tailoring Rule that established lower permitting thresholds for GHG than for other pollutants subject to PSD. However, the court also upheld the EPA’s power to require BACT for GHG from sources already subject to regulation under PSD. Minnesota Power’s coal-fired generating facilities are already subject to regulation under PSD, so we anticipate that ultimately PSD for GHG will apply to our facilities, but the timing of the promulgation of a replacement for the Tailoring Rule is uncertain. The PSD applies to existing facilities only when they undertake a major modification that increases emissions. We are unable to predict the compliance costs that we might incur.
In March 2012, the EPA announced a proposed rule to apply CO
2
emission New Source Performance Standards (NSPS), under Section 111(b) of the Clean Air Act, to new fossil fuel-fired electric generating units. The proposed NSPS would have applied only to new or re-powered units. Based on the volume of comments received, the EPA announced its intent to re-propose the rule. In September 2013, the EPA retracted its March 2012 proposal and announced the release of a revised NSPS for new or re-powered utility CO
2
emissions.
In June 2014, the EPA announced a proposed rule under Section 111(d) of the Clean Air Act for existing power plants entitled “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Generating Units”
(Clean Power Plan or CPP). The EPA intends to finalize such rules by June 1, 2015. In the Clean Power Plan, the EPA proposes to set state-specific rate-based goals for CO
2
emissions from the power sector that the EPA maintains are achievable if a state undertakes a combination of measures across its power sector that constitute the EPA’s guideline for a Best System of Emission Reductions (BSER).
The EPA proposed that BSER is comprised of four building blocks: 1) improved fossil fuel power plants efficiency, 2) increased reliance on low-emitting power sources by generating more electricity from existing natural gas combined cycle units, 3) building more or preserving existing zero- and low-emitting power sources, including renewables and nuclear energy and 4) more efficient electricity use by consumers.
The EPA then established state goals, expressed as a carbon intensity target in CO
2
tons per megawatt hour, by estimating the achievability of the building blocks in each state. Using 2012 emissions data, the EPA derived interim goals for states to be met over the years 2020-2029, as well as a final goal to be met in 2030 and thereafter. Under the CPP, each state would be required to develop a state implementation plan by June 30, 2016 intended to achieve the state carbon intensity goals.
Minnesota Power is currently evaluating the CPP as it relates to the State of Minnesota and its potential impact on the Company. Comments to the EPA on the CPP are due in October 2014.
Minnesota has already initiated several measures consistent with those called for under the CAP and CPP. Minnesota Power has also announced its “EnergyForward” strategic plan that provides for significant emission reductions and diversifying its electricity generation mix to include more renewable and natural gas energy (see Regulated Operations -
EnergyForward
).
We are unable to predict the GHG emission compliance costs we might incur; however, the costs could be material. We would seek recovery of any additional costs through cost recovery riders or in a general rate case.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
35
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Minnesota’s Next Generation Energy Act of 2007.
On April 14, 2014, a U.S. District Court for the District of Minnesota ruled that part of Minnesota’s Next Generation Act of 2007 violated the Commerce Clause of the U.S. Constitution. The portions of the law which were ruled unconstitutional prohibited the importation of power from a new CO
2
-producing facility outside of Minnesota and prohibited the entry into new long-term power purchase agreements that would increase CO
2
emissions in Minnesota. State officials have appealed the decision.
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.
Clean Water Act - Aquatic Organisms.
In April 2011, the EPA announced proposed regulations under Section 316(b) of the Clean Water Act that set standards applicable to cooling water intake structures for the protection of aquatic organisms. The proposed regulations would require existing large power plants and manufacturing facilities that withdraw greater than 25 percent of water from adjacent water bodies for cooling purposes, and have a design intake flow of greater than 2 million gallons per day, to limit the number of aquatic organisms that are killed when they are pinned against the facility’s intake structure or that are drawn into the facility’s cooling system. The final pre-Federal Register publication of the Section 316(b) rule was issued on May 19, 2014 with Federal Register publication still pending. As it stands, the Section 316(b) standards will be implemented through NPDES permits issued to the covered facilities with compliance timing dependent on individual NPDES renewal schedules. We are in the process of assessing the compliance costs and there remains the possibility they could be material. We would seek recovery of any additional costs through cost recovery riders or in a general rate case.
Steam Electric Power Generating Effluent Guidelines.
In April 2013, the EPA announced proposed revisions to the federal effluent guidelines for steam electric power generating stations under the Clean Water Act. Instead of proposing a single rule, the EPA proposed eight “options,” of which four are “preferred”. The proposed revisions would set limits on the level of toxic materials in wastewater discharged from seven waste streams: flue gas desulfurization wastewater, fly ash transport water, bottom ash transport water, combustion residual leachate, non-chemical metal cleaning wastes, coal gasification wastewater, and wastewater from flue gas mercury control systems. As part of this proposed rulemaking, the EPA is considering imposing rules to address “legacy” wastewater currently residing in ponds as well as rules to impose stringent best management practices for discharges from active coal combustion residual surface impoundments. The EPA’s proposed rulemaking would base effluent limitations on what can be achieved by available technologies. The proposed rule was published in the Federal Register in June 2013, with public comments due in September 2013. The EPA has agreed to issue the final rule by September 30, 2015. Compliance with the final rule, as proposed, would be required no later than July 1, 2022. We are reviewing the proposed rule and evaluating its potential impacts on our operations. We are unable to predict the compliance costs we might incur related to these or other potential future water discharge regulations; however, the costs could be material, including costs associated with retrofits for bottom ash handling, pond dewatering, pond closure, and wastewater treatment and/or reuse. We would seek recovery of any additional costs through cost recovery riders or in a general rate case.
Solid and Hazardous Waste.
The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We are required to notify the EPA of hazardous waste activity and, consequently, routinely submit the necessary reports to the EPA.
Coal Ash Management Facilities.
Minnesota Power generates coal ash at all five of its coal-fired electric generating facilities. Two facilities store ash in onsite impoundments (ash ponds) with engineered liners and containment dikes. Another facility stores dry ash in a landfill with an engineered liner and leachate collection system. Two facilities generate a combined wood and coal ash that is either land applied as an approved beneficial use or trucked to state permitted landfills. In June 2010, the EPA proposed regulations for coal combustion residuals generated by the electric utility sector. The proposal sought comments on three general regulatory schemes for coal ash. The EPA has committed to determine whether or not a final rule will be issued under Subtitle D of Resource Conservation and Recovery Act (RCRA) (non-hazardous) or Subtitle C of RCRA (hazardous) by December 19, 2014, and may publish the final rule at that time, or announce its schedule for such publication. We are unable to predict the compliance costs we might incur; however, the costs could be material. We would seek recovery of any additional costs through cost recovery riders or in a general rate case.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
36
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Other Matters
BNI Coal.
As of
June 30, 2014
, BNI Coal had surety bonds outstanding of
$47.5 million
related to the reclamation liability for closing costs associated with its mine and mine facilities. Although the coal supply agreements obligate the customers to provide for the closing costs, additional assurance is required by federal and state regulations. In addition to the surety bonds, BNI Coal has secured a letter of credit for an additional
$2.6 million
to provide for BNI Coal’s total reclamation liability, which is currently estimated at
$49.3 million
. BNI Coal does not believe it is likely that any of these outstanding surety bonds or the letter of credit will be drawn upon.
ALLETE Clean Energy.
In January 2014, ALLETE Clean Energy acquired three wind energy facilities–Lake Benton, Storm Lake and Condon–from AES. All three wind energy facilities have PPAs in place for their entire output, which expire in various years between 2019 and 2032. (See Note 4. Acquisition.)
Bonneville Power Administration (Bonneville).
Condon has entered into a long-term PPA with Bonneville. Under this agreement, Bonneville has the right and obligation to purchase the output of the facility through September 2022. The agreement contains a fixed price per MWh which is adjusted annually for inflation.
Northern States Power Company (NSP).
Lake Benton has entered into a long-term PPA with NSP where NSP purchases the output and capacity of the facility through June 2028. The agreement includes a fixed price per MWh, subject to a curtailment provision and scheduled price changes.
Interstate Power and Light Company (IPL).
Storm Lake has entered into two long-term PPAs with IPL through April 2019 and June 2032, respectively. Under these agreements, IPL purchases approximately
219,000
and
26,000
MWh of energy, respectively, which in the aggregate is the expected annual output of the facility. Both PPAs have fixed prices per MWh throughout the contract terms, subject to scheduled price changes.
ALLETE Properties.
As of
June 30, 2014
, ALLETE Properties, through its subsidiaries, had surety bonds outstanding and letters of credit to governmental entities totaling
$10.2 million
primarily related to development and maintenance obligations for various projects. The estimated cost of the remaining development work is approximately
$7.4 million
. ALLETE Properties does not believe it is likely that any of these outstanding surety bonds or letters of credit will be drawn upon.
Community Development District Obligations.
In March 2005, the Town Center District issued
$26.4 million
of tax-exempt,
6
percent capital improvement revenue bonds and in May 2006, the Palm Coast Park District issued
$31.8 million
of tax-exempt,
5.7 percent
special assessment bonds. The capital improvement revenue bonds and the special assessment bonds are payable over
31
years (by May 1, 2036 and 2037, respectively) and are secured by special assessments on the benefited land. The bond proceeds were used to pay for the construction of a portion of the major infrastructure improvements in each district and to mitigate traffic and environmental impacts. The assessments were billed to the landowners beginning in November 2006 for Town Center and November 2007 for Palm Coast Park. To the extent that we still own land at the time of the assessment, we will incur the cost of our portion of these assessments, based upon our ownership of benefited property. At
June 30, 2014
, we owned
73 percent
of the assessable land in the Town Center District (
73 percent
at
December 31, 2013
) and
93 percent
of the assessable land in the Palm Coast Park District (
93 percent
at
December 31, 2013
). At these ownership levels, our annual assessments are approximately
$1.4 million
for Town Center and
$2.1 million
for Palm Coast Park. As we sell property, the obligation to pay special assessments will pass to the new landowners. In accordance with accounting guidance, these bonds are not reflected as debt on our Consolidated Balance Sheet.
Legal Proceedings.
United Taconite Lawsuit.
In January 2011, the Company was named as a defendant in a lawsuit in the Sixth Judicial District for the State of Minnesota by one of our customer’s (United Taconite, LLC) property and business interruption insurers. In October 2006, United Taconite experienced a fire as a result of the failure of certain electrical protective equipment. The equipment at issue in the incident was not owned, designed, or installed by Minnesota Power, but Minnesota Power had provided testing and calibration services related to the equipment. The lawsuit alleges approximately
$20 million
in damages related to the fire. In response to a Motion for Summary Judgment by Minnesota Power, the Sixth Judicial District for the State of Minnesota dismissed all of plaintiffs’ claims in an August 2013 order. In October 2013, the plaintiffs appealed the decision to the Minnesota Court of Appeals. The Company has filed a response to the appeal and the appeal was heard by the Minnesota Court of Appeals on May 21, 2014. A decision is expected in the third quarter of 2014. As of
June 30, 2014
, a potential loss is not currently probable or reasonably estimable.
ALLETE, Inc. Second Quarter 2014 Form 10-Q
37
NOTE 15. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Other Matters (Continued)
Notice of Potential Clean Air Act Citizen Lawsuit.
In July 2013, the Sierra Club submitted to Minnesota Power a notice of intent to file a citizen suit under the Clean Air Act, which it supplemented in March 2014. This notice of intent alleged violations of opacity and other permit requirements at our Boswell, Laskin, and Taconite Harbor energy centers. Minnesota Power intends to vigorously defend any lawsuit that may be filed by the Sierra Club. We are unable to predict the outcome of this matter. Accordingly, an accrual related to any damages that may result from the notice of intent has not been recorded as of
June 30, 2014
, because a potential loss is not currently probable or reasonably estimable.
Other.
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.