Income Tax Expense

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Tax Expense [Text Block]

INCOME TAX EXPENSE

Income Tax Expense
Year Ended December 31	2022	2021	2020
Millions
Current Income Tax Expense (a)
Federal	$1.2	—	—
State	6.1	—	—
Total Current Income Tax Expense	$7.3	—	—
Deferred Income Tax Expense (Benefit)
Federal (b)	$(32.8)	$(37.2)	$(51.5)
State (c)	(5.2)	10.8	8.6
Investment Tax Credit Amortization	(0.5)	(0.5)	(0.5)
Total Deferred Income Tax Expense (Benefit)	$(38.5)	$(26.9)	$(43.4)
Total Income Tax Expense (Benefit)	$(31.2)	$(26.9)	$(43.4)

(a)For the years ended December 31, 2021 and 2020, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of certain tax legislation. Federal and state NOLs are being carried forward to offset current and future taxable income. For the year ended December 31, 2022, federal NOLs were fully utilized and production tax credits were used to partially offset federal taxable income.

(b)For the years ended December 31, 2022, 2021 and 2020, the federal tax benefit is primarily due to production tax credits.

(c)For the year ended December 31, 2022, the state impact includes the benefit of deferred repricing as a result of the New Energy acquisition.

NOTE 11. INCOME TAX EXPENSE (Continued)

Reconciliation of Taxes from Federal Statutory
Rate to Total Income Tax Expense
Year Ended December 31	2022		2021		2020
Millions
Income Before Non-Controlling Interest and Income Taxes	$100.1		$110.9		$109.4
Statutory Federal Income Tax Rate	21	%	21	%	21	%
Income Taxes Computed at Statutory Federal Rate	$21.0		$23.3		$23.0
Increase (Decrease) in Tax Due to:
State Income Taxes	8.6		8.6		6.5
Deferred Income Tax Revaluation	(7.9)		—		—
Production Tax Credits	(50.7)		(53.5)		(62.7)
Investment Tax Credits	(4.1)		—		—
Regulatory Differences – Excess Deferred Tax Benefit (a)	(9.1)		(9.5)		(9.9)
Non-Controlling Interest	11.2		6.3		2.7
AFUDC - Equity	(1.1)		(1.0)		(0.8)
Other	0.9		(1.1)		(2.2)
Total Income Tax Benefit	$(31.2)		$(26.9)		$(43.4)

(a)Excess deferred income taxes are being returned to customers under both the Average Rate Assumption Method and amortization periods as approved by regulators. (See Note 4. Regulatory Matters.)

The effective tax rate was a benefit of 31.2 percent for 2022 (benefit of 24.3 percent for 2021; benefit of 39.7 percent for 2020). The 2022 and 2021 effective tax rates were primarily impacted by production tax credits and non-controlling interests in subsidiaries. The 2020 effective tax rate was primarily impacted by production tax credits.

Deferred Income Tax Assets and Liabilities
As of December 31	2022	2021
Millions
Deferred Income Tax Assets
Employee Benefits and Compensation	$46.4	$44.5
Property-Related	61.9	54.8
NOL Carryforwards	16.7	67.5
Capital Loss Carryforwards	13.1	—
Tax Credit Carryforwards	548.7	509.1
Power Sales Agreements	13.7	16.5
Regulatory Liabilities	95.5	101.5
Other	28.1	18.0
Gross Deferred Income Tax Assets	824.1	811.9
Deferred Income Tax Asset Valuation Allowance	(60.2)	(69.0)
Total Deferred Income Tax Assets	$763.9	$742.9
Deferred Income Tax Liabilities
Deferred Gain	$7.9	$7.9
Property-Related	661.7	680.8
Regulatory Asset for Benefit Obligations	57.7	54.9
Unamortized Investment Tax Credits	30.0	30.5
Partnership Basis Differences	126.0	106.3
Fuel Adjustment Clause	10.7	14.3
Regulatory Assets	28.0	30.0
Total Deferred Income Tax Liabilities	$922.0	$924.7
Net Deferred Income Taxes (a)	$158.1	$181.8

(a)Recorded as a net Deferred Income Tax liability on the Consolidated Balance Sheet.

NOTE 11. INCOME TAX EXPENSE (Continued)

NOL and Tax Credit Carryforwards
As of December 31	2022	2021
Millions
Federal NOL Carryforwards (a)	—	$177.3
Federal Tax Credit Carryforwards	$464.5	$416.4
Federal Capital Loss (a)	$35.1	—
State NOL Carryforwards (a)	$323.0	$506.9
State Tax Credit Carryforwards (b)	$24.5	$24.2
State Capital Loss (a)	$83.2	—

(a)Pre-tax amounts.

(b)Net of a $59.6 million valuation allowance as of December 31, 2022 ($68.6 million as of December 31, 2021).

The federal NOL, capital loss and tax credit carryforward periods expire between 2026 and 2043. We expect to fully utilize the federal NOL, capital loss and tax credit carryforwards; therefore, no federal valuation allowance has been recognized as of December 31, 2022. The pre-apportioned state NOL, capital loss and tax credit carryforward periods expire between 2023 and 2046. We have established a valuation allowance against certain state NOL, capital loss and tax credits that we do not expect to utilize before their expiration.

Gross Unrecognized Income Tax Benefits	2022	2021	2020
Millions
Balance at January 1	$1.3	$1.4	$1.4
Additions for Tax Positions Related to the Current Year	—	—	0.1
Reductions for Tax Positions Related to Prior Years	—	(0.1)	(0.1)
Balance as of December 31	$1.3	$1.3	$1.4

Unrecognized tax benefits are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the “more-likely-than-not” criteria. The unrecognized tax benefit balance includes permanent tax positions which, if recognized would affect the annual effective income tax rate. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The gross unrecognized tax benefits as of December 31, 2022, included $0.6 million of net unrecognized tax benefits which, if recognized, would affect the annual effective income tax rate.

As of December 31, 2022, we had immaterial accrued interest (none as of December 31, 2021, and 2020) related to unrecognized tax benefits included on the Consolidated Balance Sheet due to our NOL carryforwards. We classify interest related to unrecognized tax benefits as interest expense and tax-related penalties in operating expenses on the Consolidated Statement of Income. Interest expense related to unrecognized tax benefits on the Consolidated Statement of Income was immaterial in 2022, 2021 and 2020. There were no penalties recognized in 2022, 2021 or 2020. The unrecognized tax benefit amounts have been presented as an increase to the net deferred tax liability on the Consolidated Balance Sheet.

No material changes to unrecognized tax benefits are expected during the next 12 months.

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 currently under examination by the state of Wisconsin for the tax years 2018 through 2020. ALLETE has no open federal audits, and is no longer subject to federal examination for years before 2019 or state examination for years before 2018. Additionally, the statute of limitations related to the federal tax credit carryforwards will remain open until those credits are utilized in subsequent returns.