Operations and Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Operations and Significant Accounting Policies [Text Block]

OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of September 30, 2019, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement. In prior periods presented, the amounts also include U.S. Water Services' standby letters of credit. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under an ALLETE Clean Energy loan agreement, PSAs and construction projects. In prior periods presented, the amounts also include deposits from a SWL&P customer in aid of future capital expenditures. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.

Cash, Cash Equivalents and Restricted Cash	September 30, 2019		December 31, 2018		September 30, 2018		December 31, 2017
Millions
Cash and Cash Equivalents		$100.3		$69.1		$128.0		$98.9
Restricted Cash included in Prepayments and Other	3.4		1.3		4.8		2.6
Restricted Cash included in Other Non-Current Assets	31.5		8.6		8.7		8.6
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows		$135.2		$79.0		$141.5		$110.1

Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations segment are carried at an average cost or first-in, first-out basis. Inventories in our ALLETE Clean Energy segment and Corporate and Other businesses are carried at an average cost, first-in, first-out or specific identification basis.

Inventories – Net	September 30, 2019		December 31, 2018
Millions
Fuel (a)		$37.8		$26.0
Materials and Supplies	46.8		44.2
Raw Materials (b)	—		2.8
Work in Progress (b)	—		6.1
Finished Goods (b)	—		8.4
Reserve for Obsolescence (b)	—		(0.8		)
Total Inventories – Net		$84.6		$86.7

(a) Fuel consists primarily of coal inventory at Minnesota Power.

(b) On March 26, 2019, ALLETE completed the sale of U.S. Water Services which resulted in the removal of the related inventory items from the Consolidated Balance Sheet.

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Non-Current Assets	September 30, 2019		December 31, 2018
Millions
Contract Assets (a)		$28.6		$30.7
Finance Receivable (b)	—		10.4
Operating Lease Right-of-use Assets (c)	30.4		—
ALLETE Properties	22.4		24.4
Other	110.2		86.9
Total Other Non-Current Assets		$191.6		$152.4

(a) Contract Assets consist of payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.

(b) Finance Receivable related to the 2016 sale of Ormond Crossings and Lake Swamp, which was collected in the second quarter of 2019.     

(c) See Leases.

Other Current Liabilities	September 30, 2019		December 31, 2018
Millions
Provision for Interim Rate Refund (a)	—			$40.0
PSAs		$12.3	12.6
Contract Liabilities (b)	—		7.6
Provision for Tax Reform Refund (c)	0.3		10.7
Contingent Consideration (d)	—		3.8
Operating Lease Liabilities (e)	7.1		—
Other	39.0		53.8
Total Other Current Liabilities		$58.7		$128.5

(a) Provision for Interim Rate Refund was refunded to Minnesota Power’s retail customers in the second quarter of 2019.

(b) Contract Liabilities consisted of deposits received as a result of entering into contracts with customers prior to completing performance obligations.

(c) Provision for Tax Reform Refund related to the income tax benefits of the TCJA in 2018 was refunded to Minnesota Power customers in the first quarter of 2019 and will be refunded to SWL&P customers in 2019 and 2020.

(d) Contingent Consideration related to the earnings-based payment resulting from the U.S. Water Services acquisition was paid in the first quarter of 2019.

(e) See Leases.

Other Non-Current Liabilities	September 30, 2019		December 31, 2018
Millions
Asset Retirement Obligation		$157.4		$138.6
PSAs	67.7		76.9
Operating Lease Liabilities (a)	23.3		—
Other	44.7		47.1
Total Other Non-Current Liabilities		$293.1		$262.6

(a) See Leases.

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.

Nine Months Ended September 30,	2019		2018
Millions
Cash Paid for Interest – Net of Amounts Capitalized		$53.5		$52.9
Recognition of Right-of-use Assets and Lease Liabilities (a)	$30.4		—
Noncash Investing and Financing Activities
Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment	$6.3		$(14.4)
Reclassification of Property, Plant and Equipment to Inventory (b)	—			$46.3
Capitalized Asset Retirement Costs		$16.6		$15.4
AFUDC–Equity		$1.9		$0.9

(a) See Leases.

(b) In February 2018, Montana-Dakota Utilities exercised its option to purchase the Thunder Spirit II wind energy facility upon completion, resulting in a reclassification from Property, Plant and Equipment – Net to Inventories – Net for project costs incurred in the prior year.

New Accounting Pronouncements.

Recently Adopted Pronouncements

Disclosure Update and Simplification. In November 2018, the SEC adopted amendments to certain disclosure requirements. The amendments adopted include requirements that interim financial statements should include comparative statements for the same period in the prior financial year, except that the requirement for comparative balance sheet information may be satisfied by presenting the year-end balance sheet. It further includes a requirement analyzing the changes in each caption of shareholders’ equity either separately in a note or on the face of the financial statement. These amendments were effective for ALLETE in the first quarter of 2019. We have included the presentation of our Statement of Shareholders’ Equity to meet these requirements.

Leases. In 2016, the FASB issued an accounting standard update which revised the existing guidance for leases. Under the revised guidance, lessees are required to recognize right-of-use assets and lease liabilities on the Consolidated Balance Sheet for leases with terms greater than 12 months. The new standard also requires additional qualitative and quantitative disclosures by lessees and lessors to enable users of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The accounting for leases by lessors and the recognition, measurement and presentation of expenses and cash flows from leases is not expected to significantly change as a result of the new guidance. The Company adopted this guidance in the first quarter of 2019 using the optional transition method and the package of practical expedients, which allowed for the adoption of the standard as of January 1, 2019, without restating previously disclosed information. Management elected the optional transition method of adoption due to the overall immateriality of the balance sheet gross up in the period of adoption. The package of practical expedients allowed management to not reassess the lease classification for leases, including those that had expired during the periods presented or that still existed at the time of adoption. We have included additional disclosures in the notes to the consolidated financial statements. (See Leases.)

Leases. We determine if a contract is, or contains, a lease at inception and recognize a right-of-use asset and lease liability for all leases with a term greater than 12 months. Our right-of-use assets and lease liabilities for operating leases are included in Other Non-Current Assets, Other Current Liabilities and Other Non-Current Liabilities, respectively, in our Consolidated Balance Sheet. We currently do not have any finance leases.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and lease liabilities are recognized at the commencement date based on the estimated present value of lease payments over the lease term. As our leases do not provide an explicit rate, we determine the present value of future lease payments based on our estimated incremental borrowing rate using information available at the lease commencement date. The operating lease right-of-use asset includes lease payments to be made during the lease term and any lease incentives, as applicable.

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leases (Continued)

Our leases may include options to extend or buy out the lease at certain points throughout the term, and if it is reasonably certain that we will exercise that option at lease commencement, we include those rental payments in our calculation of the right-of-use asset and lease liability. Lease and rent expense is recognized on a straight-line basis over the lease term. Leases with a term of 12 months or less are not recognized on the Consolidated Balance Sheet.

The majority of our operating leases are for heavy equipment, vehicles and land with fixed monthly payments which we group into two categories: Vehicles and Equipment; and Land and Other. Our largest operating lease is for the dragline at BNI Energy which includes a termination payment at the end of the lease term if we do not exercise our purchase option. The amount of this payment is $3 million and is included in the right-of-use assets and lease liabilities recorded. None of our other leases contain residual value guarantees.

Additional information on the components of lease cost and presentation of cash flows were as follows:

	Quarter Ended		Nine Months Ended
	September 30,		September 30,
	2019		2019
Millions
Operating Lease Cost		$2.0		$6.7
Other Information:
Operating Cash Flows From Operating Leases		$2.0		$6.7

Additional information related to leases was as follows:

	September 30,
	2019
Millions
Balance Sheet Information Related to Leases:
Other Non-Current Assets		$30.4
Total Operating Lease Right-of-use Assets		$30.4
Other Current Liabilities		$7.1
Other Non-Current Liabilities	23.3
Total Operating Lease Liabilities		$30.4
Weighted Average Remaining Lease Term (Years):
Operating Leases - Vehicles and Equipment	4
Operating Leases - Land and Other	28
Weighted Average Discount Rate:
Operating Leases - Vehicles and Equipment	3.7		%
Operating Leases - Land and Other	4.1		%

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Leases (Continued)

Maturities of lease liabilities were as follows:

	September 30, 2019
Millions
2019		$2.2
2020	7.9
2021	6.1
2022	4.9
2023	3.1
Thereafter	9.4
Total Lease Payments Due	33.6
Less: Imputed Interest	3.2
Total Lease Obligations	30.4
Less: Current Lease Obligations	7.1
Long-term Lease Obligations		$23.3

Sale of U.S. Water Services. On February 8, 2019, the Company entered into a stock purchase agreement providing for the sale of U.S. Water Services to a subsidiary of Kurita Water Industries Ltd. On March 26, 2019, ALLETE completed the sale and received approximately $265 million in cash at closing, net of transaction costs and cash retained. The Company recognized a gain on the sale of U.S. Water Services of $11.1 million after-tax in 2019.

ALLETE Clean Energy Asset Acquisition. On May 3, 2019, ALLETE Clean Energy acquired the Diamond Spring wind project in Oklahoma from Apex Clean Energy. ALLETE Clean Energy will build, own and operate the approximately 300 MW wind energy facility. The Diamond Spring wind project is fully contracted to sell wind power to Walmart Inc., Smithfield Foods, Inc. and Starbucks Corporation under long-term power sales agreements. Construction is expected to begin in late 2019 and be completed in late 2020.

Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the date of the financial statements issuance.