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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______________ to ______________
Commission File Number 1-3548
ALLETE INC
(Exact name of registrant as specified in its charter)
Minnesota
 
41-0418150
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

30 West Superior Street
Duluth, Minnesota 55802-2093
(Address of principal executive offices)
(Zip Code)

(218) 279-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   x Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer    x             Accelerated Filer    ¨
Non-Accelerated Filer    ¨         Smaller Reporting Company    ¨
Emerging Growth Company    ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes   x No

Common Stock, without par value,
51,424,535 shares outstanding
as of September 30, 2018





Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ALLETE, Inc. Third Quarter 2018 Form 10-Q
2




Definitions

The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.
Abbreviation or Acronym
Term
AFUDC
Allowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods
ALLETE
ALLETE, Inc.
ALLETE Clean Energy
ALLETE Clean Energy, Inc. and its subsidiaries
ALLETE Properties
ALLETE Properties, LLC and its subsidiaries
ALLETE Transmission Holdings
ALLETE Transmission Holdings, Inc.
ATC
American Transmission Company LLC
Bison
Bison Wind Energy Center
Blanchard
Blanchard Solar Energy Facility
BNI Energy
BNI Energy, Inc. and its subsidiary
Boswell
Boswell Energy Center
Camp Ripley
Camp Ripley Solar Array
CO2
Carbon Dioxide
Company
ALLETE, Inc. and its subsidiaries
CIP
Conservation Improvement Program
Cliffs
Cleveland-Cliffs Inc.
CSAPR
Cross-State Air Pollution Rule
DC
Direct Current
EIS
Environmental Impact Statement
EITE
Energy-Intensive Trade-Exposed
EPA
United States Environmental Protection Agency
ERP Iron Ore
ERP Iron Ore, LLC
ESOP
Employee Stock Ownership Plan
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Form 10-K
ALLETE Annual Report on Form 10-K
Form 10-Q
ALLETE Quarterly Report on Form 10-Q
GAAP
Generally Accepted Accounting Principles in the United States of America
GHG
Greenhouse Gases
GNTL
Great Northern Transmission Line
Hibbard
Hibbard Renewable Energy Center
Husky Energy
Husky Energy Inc.
Invest Direct
ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
IRP
Integrated Resource Plan
Item ___
Item ___ of this Form 10-Q
kV
Kilovolt(s)
kW / kWh
Kilowatt(s) / Kilowatt-hour(s)
Laskin
Laskin Energy Center
Magnetation
Magnetation, LLC
Manitoba Hydro
Manitoba Hydro-Electric Board
MATS
Mercury and Air Toxics Standards
Mesabi Metallics
Mesabi Metallics Company, LLC (formerly Essar Steel Minnesota, LLC)

ALLETE, Inc. Third Quarter 2018 Form 10-Q
3




Abbreviation or Acronym
Term
Minnesota Power
An operating division of ALLETE, Inc.
Minnkota Power
Minnkota Power Cooperative, Inc.
MISO
Midcontinent Independent System Operator, Inc.
MMTP
Manitoba-Minnesota Transmission Project
Montana-Dakota Utilities
Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc.
MPCA
Minnesota Pollution Control Agency
MPUC
Minnesota Public Utilities Commission
MW / MWh
Megawatt(s) / Megawatt-hour(s)
NAAQS
National Ambient Air Quality Standards
NDPSC
North Dakota Public Service Commission
NOL
Net Operating Loss
NO2
Nitrogen Dioxide
NOX
Nitrogen Oxides
Northern States Power
Northern States Power Company, a subsidiary of Xcel Energy Inc.
Northshore Mining
Northshore Mining Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
Note ___
Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDES
National Pollutant Discharge Elimination System
NTEC
Nemadji Trail Energy Center
Oliver Wind I
Oliver Wind I Energy Center
Oliver Wind II
Oliver Wind II Energy Center
Palm Coast Park District
Palm Coast Park Community Development District in Florida
PolyMet
PolyMet Mining Corp.
PPA / PSA
Power Purchase Agreement / Power Sales Agreement
PPACA
Patient Protection and Affordable Care Act of 2010
PSCW
Public Service Commission of Wisconsin
SEC
Securities and Exchange Commission
Silver Bay Power
Silver Bay Power Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
SO2
Sulfur Dioxide
Square Butte
Square Butte Electric Cooperative, a North Dakota cooperative corporation
SWL&P
Superior Water, Light and Power Company
Taconite Harbor
Taconite Harbor Energy Center
TCJA
Tax Cuts and Job Act of 2017 (Public Law 115-97)
Tenaska
Tenaska Energy, Inc. and Tenaska Energy Holdings, LLC
Tonka Water
Tonka Equipment Company
Town Center District
Town Center at Palm Coast Community Development District in Florida
UPM Blandin
UPM, Blandin Paper Mill owned by UPM-Kymmene Corporation
U.S.
United States of America
U.S. Water Services
U.S. Water Services Holding Company and its subsidiaries
USS Corporation
United States Steel Corporation
WTG
Wind Turbine Generator



ALLETE, Inc. Third Quarter 2018 Form 10-Q
4




Forward-Looking Statements

Statements in this report that are not statements of historical facts are considered “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there can be no assurance that the expected results will be achieved. Any statements that express, or involve discussions as to, future expectations, risks, beliefs, plans, objectives, assumptions, events, uncertainties, financial performance, or growth strategies (often, but not always, through the use of words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “likely,” “will continue,” “could,” “may,” “potential,” “target,” “outlook” or words of similar meaning) are not statements of historical facts and may be forward-looking.

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are providing this cautionary statement to identify important factors that could cause our actual results to differ materially from those indicated in forward-looking statements made by or on behalf of ALLETE in this Form 10-Q, in presentations, on our website, in response to questions or otherwise. These statements are qualified in their entirety by reference to, and are accompanied by, the following important factors, in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements that could cause our actual results to differ materially from those indicated in the forward-looking statements:

our ability to successfully implement our strategic objectives;
global and domestic economic conditions affecting us or our customers;
changes in and compliance with laws and regulations;
changes in tax rates or policies or in rates of inflation;
the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;
weather conditions, natural disasters and pandemic diseases;
our ability to access capital markets and bank financing;
changes in interest rates and the performance of the financial markets;
project delays or changes in project costs;
changes in operating expenses and capital expenditures and our ability to raise revenues from our customers in regulated rates or sales price increases at our Energy Infrastructure and Related Services businesses;
the impacts of commodity prices on ALLETE and our customers;
our ability to attract and retain qualified, skilled and experienced personnel;
effects of emerging technology;
war, acts of terrorism and cybersecurity attacks;
our ability to manage expansion and integrate acquisitions;
population growth rates and demographic patterns;
wholesale power market conditions;
federal and state regulatory and legislative actions that impact regulated utility economics, including our allowed rates of return, capital structure, ability to secure financing, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities and utility infrastructure, recovery of purchased power, capital investments and other expenses, including present or prospective environmental matters;
effects of competition, including competition for retail and wholesale customers;
effects of restructuring initiatives in the electric industry;
the impacts on our Regulated Operations segment of climate change and future regulation to restrict the emissions of GHG;
effects of increased deployment of distributed low-carbon electricity generation resources;
the impacts of laws and regulations related to renewable and distributed generation;
pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;
our current and potential industrial and municipal customers’ ability to execute announced expansion plans;
real estate market conditions where our legacy Florida real estate investment is located may not improve;
the success of efforts to realize value from, invest in, and develop new opportunities in, our Energy Infrastructure and Related Services businesses; and
factors affecting our Energy Infrastructure and Related Services businesses, including fluctuations in the volume of customer orders, unanticipated cost increases, changes in legislation and regulations impacting the industries in which the customers served operate, the effects of weather, creditworthiness of customers, ability to obtain materials required to perform services, and changing market conditions.



ALLETE, Inc. Third Quarter 2018 Form 10-Q
5




Forward-Looking Statements (Continued)

Additional disclosures regarding factors that could cause our results or performance to differ from those anticipated by this report are discussed in Part I, Item 1A. Risk Factors of ALLETE’s 2017 Form 10-K, and in Part II, Item 1A. Risk Factors in this Form 10‑Q. Any forward‑looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can it assess the impact of each of these factors on the businesses of ALLETE or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by ALLETE in this Form 10-Q and in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
6




PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
 
September 30,
2018

 
December 31,
2017

Millions
 
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents

$128.0

 

$98.9

Accounts Receivable (Less Allowance of $2.6 and $2.1)
129.4

 
135.1

Inventories – Net
154.8

 
95.9

Prepayments and Other
27.2

 
37.6

Total Current Assets
439.4

 
367.5

Property, Plant and Equipment – Net
3,846.5

 
3,822.4

Regulatory Assets
370.6

 
384.7

Investment in ATC
126.0

 
118.7

Other Investments
51.7

 
53.1

Goodwill and Intangible Assets – Net
224.7

 
225.9

Other Non-Current Assets
104.4

 
107.7

Total Assets

$5,163.3

 

$5,080.0

Liabilities and Shareholders’ Equity
 
 
 
Liabilities
 
 
 
Current Liabilities
 
 
 
Accounts Payable

$131.8

 

$136.3

Accrued Taxes
53.9

 
50.0

Accrued Interest
15.5

 
17.6

Long-Term Debt Due Within One Year
56.6

 
64.1

Other
144.9

 
83.2

Total Current Liabilities
402.7

 
351.2

Long-Term Debt
1,461.7

 
1,439.2

Deferred Income Taxes
231.3

 
230.5

Regulatory Liabilities
512.3

 
532.0

Defined Benefit Pension and Other Postretirement Benefit Plans
173.6

 
191.8

Other Non-Current Liabilities
265.6

 
267.1

Total Liabilities
3,047.2

 
3,011.8

Commitments, Guarantees and Contingencies (Note 13)

 

Shareholders’ Equity
 
 
 
Common Stock Without Par Value, 80.0 Shares Authorized, 51.4 and 51.1 Shares Issued and Outstanding
1,421.1

 
1,401.4

Accumulated Other Comprehensive Loss
(27.3
)
 
(22.6
)
Retained Earnings
722.3

 
689.4

Total Shareholders’ Equity
2,116.1

 
2,068.2

Total Liabilities and Shareholders’ Equity

$5,163.3

 

$5,080.0

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
7




ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
2017
 
2018
2017
Millions Except Per Share Amounts
 
 
 
 
 
Operating Revenue
 
 
 
 
 
Contracts with Customers – Utility

$261.3


$277.6

 

$789.3


$824.1

Contracts with Customers – Non-utility
80.7

79.0

 
243.1

239.6

Other – Non-utility
6.0

5.9

 
17.9

17.7

Total Operating Revenue
348.0

362.5

 
1,050.3

1,081.4

Operating Expenses
 
 
 
 
 
Fuel, Purchased Power and Gas – Utility
103.2

93.5

 
300.6

283.2

Transmission Services – Utility
17.9

18.9

 
53.1

53.1

Cost of Sales – Non-utility
38.7

36.0

 
108.6

105.9

Operating and Maintenance
80.3

81.1

 
253.6

251.4

Depreciation and Amortization
51.5

50.9

 
153.4

151.5

Taxes Other than Income Taxes
13.1

14.1

 
43.8

42.7

Total Operating Expenses
304.7

294.5

 
913.1

887.8

Operating Income
43.3

68.0

 
137.2

193.6

Other Income (Expense)
 
 
 
 
 
Interest Expense
(17.6
)
(16.6
)
 
(51.6
)
(50.5
)
Equity Earnings in ATC
4.0

5.9

 
13.0

17.3

Other
1.4

1.8

 
5.7

5.0

Total Other Expense
(12.2
)
(8.9
)
 
(32.9
)
(28.2
)
Income Before Income Taxes
31.1

59.1

 
104.3

165.4

Income Tax Expense (Benefit)
0.4

14.2

 
(8.7
)
34.6

Net Income

$30.7


$44.9

 

$113.0


$130.8

Average Shares of Common Stock
 
 
 
 
 
Basic
51.4

51.0

 
51.3

50.7

Diluted
51.6

51.2

 
51.5

50.9

Basic Earnings Per Share of Common Stock

$0.59


$0.88

 

$2.20


$2.58

Diluted Earnings Per Share of Common Stock

$0.59


$0.88

 

$2.19


$2.57

Dividends Per Share of Common Stock

$0.56


$0.535

 

$1.68


$1.605

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
8




ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Millions
 
 
 
 
 
 
 
Net Income

$30.7

 

$44.9

 

$113.0

 

$130.8

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Currency Translation Adjustments

 
0.1

 

 
(0.1
)
Unrealized Gain (Loss) on Securities
 
 
 
 
 
 
 
Net of Income Tax Expense of $–, $0.1, $– and $0.6

 
0.1

 
(0.1
)
 
0.8

Defined Benefit Pension and Other Postretirement Benefit Plans
 
 
 
 
 
 
 
Net of Income Tax Expense of $0.1, $0.1, $0.3 and $0.4
0.3

 
0.2

 
1.0

 
0.6

Total Other Comprehensive Income
0.3

 
0.4

 
0.9

 
1.3

Total Comprehensive Income

$31.0

 

$45.3

 

$113.9

 

$132.1

The accompanying notes are an integral part of these statements.


ALLETE, Inc. Third Quarter 2018 Form 10-Q
9




ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Millions
 
 
 
Operating Activities
 
 
 
Net Income

$113.0

 

$130.8

AFUDC – Equity
(0.9
)
 
(0.7
)
Income from Equity Investments – Net of Dividends
(1.3
)
 
(3.8
)
Depreciation Expense
149.3

 
147.4

Amortization of PSAs
(17.9
)
 
(17.7
)
Amortization of Other Intangible Assets and Other Assets
7.8

 
7.6

Deferred Income Tax Expense
(9.1
)
 
34.3

Share-Based and ESOP Compensation Expense
5.1

 
5.0

Defined Benefit Pension and Postretirement Benefit Expense
6.4

 
7.6

Provision for Interim Rate Refund
13.0

 

Provision for Tax Reform Refund
9.2

 

Bad Debt Expense
1.5

 
0.5

Changes in Operating Assets and Liabilities
 
 
 
Accounts Receivable
3.9

 
(9.6
)
Inventories
(12.6
)
 
5.3

Prepayments and Other
5.7

 
2.1

Accounts Payable
9.9

 
(2.6
)
Other Current Liabilities
21.2

 
2.7

Cash Contributions to Defined Benefit Pension Plans
(15.0
)
 
(1.7
)
Changes in Regulatory and Other Non-Current Assets
7.2

 
23.9

Changes in Regulatory and Other Non-Current Liabilities
1.7

 
(23.9
)
Cash from Operating Activities
298.1

 
307.2

Investing Activities
 
 
 
Proceeds from Sale of Available-for-sale Securities
9.3

 
5.2

Payments for Purchase of Available-for-sale Securities
(12.5
)
 
(5.9
)
Acquisitions of Subsidiaries – Net of Cash and Restricted Cash Acquired

 
(17.4
)
Investment in ATC
(5.0
)
 
(6.6
)
Additions to Property, Plant and Equipment
(201.0
)
 
(130.3
)
Other Investing Activities
1.4

 
3.3

Cash for Investing Activities
(207.8
)
 
(151.7
)
Financing Activities
 
 
 
Proceeds from Issuance of Common Stock
14.6

 
80.5

Proceeds from Issuance of Long-Term Debt
72.7

 
131.5

Repayments of Long-Term Debt
(59.5
)
 
(183.6
)
Acquisition-Related Contingent Consideration Payments

 
(19.7
)
Dividends on Common Stock
(86.2
)
 
(81.4
)
Other Financing Activities
(0.5
)
 
(1.6
)
Cash for Financing Activities
(58.9
)
 
(74.3
)
Change in Cash, Cash Equivalents and Restricted Cash
31.4

 
81.2

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
110.1

 
38.3

Cash, Cash Equivalents and Restricted Cash at End of Period

$141.5

 

$119.5

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
10




ALLETE
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Unaudited
 
Total Shareholders’
Equity
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Common
Stock
Millions
 
 
 
 
Balance as of December 31, 2017

$2,068.2


$689.4

$(22.6)

$1,401.4

Adjustments to Opening Balance – Net of Income Taxes (a)
0.5

6.1

(5.6
)

Balance as of January 1, 2018
2,068.7

695.5

(28.2
)
1,401.4

Comprehensive Income
 
 
 
 
Net Income
113.0

113.0



Other Comprehensive Income – Net of Income Taxes
 
 
 
 
Unrealized Loss on Debt Securities
(0.1
)

(0.1
)

Defined Benefit Pension and Other Postretirement Plans
1.0


1.0


Total Comprehensive Income
113.9

 
 
 
Common Stock Issued
19.7



19.7

Dividends Declared
(86.2
)
(86.2
)


Balance as of September 30, 2018

$2,116.1


$722.3

$(27.3)

$1,421.1

(a)
Reflects the impacts associated with the adoption of accounting standards concerning Financial Instruments, Revenue from Contracts with Customers and the Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. (See Note 1. Operations and Significant Accounting Policies.)

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
11




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2017, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the nine months ended September 30, 2018, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2018. For further information, refer to the Consolidated Financial Statements and notes included in our 2017 Form 10-K.

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. Restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement and U.S. Water Service’s 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 and PSAs, and 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 amount presented in the Consolidated Statement of Cash Flows. During the first quarter of 2018, the Company updated the presentation of its Consolidated Statement of Cash Flows to include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statement of Cash Flows. (See Recently Adopted Pronouncements - Statement of Cash Flows: Restricted Cash.)
Cash, Cash Equivalents and Restricted Cash
September 30,
2018

 
December 31,
2017

 
September 30,
2017

 
December 31,
2016

Millions
 
 
 
 
 
 
 
Cash and Cash Equivalents

$128.0

 

$98.9

 

$104.4

 

$27.5

Restricted Cash included in Prepayments and Other
4.8

 
2.6

 
6.5

 
2.2

Restricted Cash included in Other Non-Current Assets
8.7

 
8.6

 
8.6

 
8.6

Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows

$141.5

 

$110.1

 

$119.5

 

$38.3



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 U.S. Water Services and ALLETE Clean Energy segments, and Corporate and Other businesses are carried at an average cost, first-in, first-out or specific identification basis.
Inventories – Net
September 30,
2018

 
December 31,
2017

Millions
 
 
 
Fuel (a)

$27.3

 

$34.8

Materials and Supplies
44.0

 
46.5

Construction of Wind Energy Facility (b)
66.7

 

Raw Materials
3.1

 
2.8

Work in Progress
5.5

 
4.2

Finished Goods
9.0

 
8.3

Reserve for Obsolescence
(0.8
)
 
(0.7
)
Total Inventories – Net

$154.8

 

$95.9


(a)
Fuel consists primarily of coal inventory at Minnesota Power.
(b)
On February 28, 2018, Montana-Dakota Utilities exercised its option to purchase the Thunder Spirit II wind energy facility upon completion, resulting in a reclassification of the project costs from Property, Plant and Equipment – Net to Inventories – Net as ALLETE Clean Energy will not own the facility upon completion.



ALLETE, Inc. Third Quarter 2018 Form 10-Q
12




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Non-Current Assets
September 30,
2018

 
December 31,
2017

Millions
 
 
 
Contract Assets (a)

$31.1

 

$31.6

Finance Receivable
10.4

 
11.0

Other
62.9

 
65.1

Total Other Non-Current Assets

$104.4

 

$107.7


(a)
Contract Assets include payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.
Other Current Liabilities
September 30,
2018

 
December 31,
2017

Millions
 
 
 
Provision for Interim Rate Refund (a)

$36.7

 

Contract Liabilities (b)
22.7

 

$8.7

PSAs
15.4

 
24.5

Provision for Tax Reform Refund (c)
9.2

 

Contingent Consideration (d)
5.7

 

Other
55.2

 
50.0

Total Other Current Liabilities

$144.9

 

$83.2


(a)
Provision for Interim Rate Refund is expected to be refunded to Minnesota Power’s regulated retail customers in the first quarter of 2019 and includes $20.8 million of discounts provided to EITE customers that will be offset against interim rate refunds as of September 30, 2018 ($8.6 million as of December 31, 2017). (See Note 6. Regulatory Matters.)
(b)
Contract Liabilities include deposits received as a result of entering into contracts with our customers prior to completing our performance obligations.
(c)
Provision for Tax Reform Refund is expected to be refunded to Minnesota Power customers in the first quarter of 2019 and SWL&P customers in 2019 pending the outcome of SWL&P’s rate filing with the PSCW. (See Note 6. Regulatory Matters.)
(d)
Contingent Consideration relates to the estimated fair value of the earnings-based payment resulting from the U.S. Water Services acquisition. (See Note 5. Fair Value.)
Other Non-Current Liabilities
September 30,
2018

 
December 31,
2017

Millions
 
 
 
Asset Retirement Obligation

$138.3

 

$122.7

PSAs
80.0

 
89.5

Contingent Consideration (a)

 
5.4

Other
47.3

 
49.5

Total Other Non-Current Liabilities

$265.6

 

$267.1


(a)
Contingent Consideration relates to the estimated fair value of the earnings-based payment resulting from the U.S. Water Services acquisition. (See Note 5. Fair Value.)

ALLETE, Inc. Third Quarter 2018 Form 10-Q
13




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.
Nine Months Ended September 30,
2018

 
2017

Millions
 
 
 
Cash Paid for Interest – Net of Amounts Capitalized

$52.9

 

$51.4

Noncash Investing and Financing Activities
 

 
 

Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment
$(14.4)
 

$1.2

Reclassification of Property, Plant and Equipment to Inventory (a)

$46.3

 

Capitalized Asset Retirement Costs

$15.4

 

$19.7

AFUDC–Equity

$0.9

 

$0.7

ALLETE Common Stock Contributed to the Pension Plans

 

$13.5


(a)
On February 28, 2018, Montana-Dakota Utilities exercised its option to purchase the Thunder Spirit II wind energy facility upon completion, resulting in a reclassification of the project costs from Property, Plant and Equipment – Net to Inventories – Net as ALLETE Clean Energy will not own the facility upon completion.

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

Revenue.

Contracts with Customers Utility includes sales from our regulated operations for generation, transmission and distribution of electric service, and distribution of water and gas services to our customers. Also included is an immaterial amount of regulated steam generation that is used by customers in the production of paper and pulp.

Contracts with Customers Non-utility includes sales of goods and services to customers from ALLETE Clean Energy, U.S. Water Services and our Corporate and Other businesses.

Other Non-utility is the non-cash adjustments to revenue recognized by ALLETE Clean Energy for the amortization of differences between contract prices and estimated market prices for PSAs that were assumed during the acquisition of various wind energy facilities.

Revenue Recognition

Revenue is recognized upon transfer of control of promised goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. Revenue is recognized net of allowance for returns and any taxes collected from customers, which are subsequently remitted to the appropriate governmental authorities. We account for shipping and handling activities that occur after the customer obtains control of goods as a cost rather than an additional performance obligation thereby recognizing revenue at time of shipment and accruing shipping and handling costs when control transfers to our customers. We have a right to consideration from our customers in an amount that corresponds directly with the value to the customer for our performance completed to date; therefore, we may recognize revenue in the amount to which we have a right to invoice.

Nature of Revenue Streams

Utility

Residential and Commercial includes sales for electric, gas or water service to customers, who have implied contracts with the utility, under rates governed by the MPUC, PSCW or FERC. Customers are billed on a monthly cycle basis and revenue is recognized for electric, gas or water service delivered during the billing period. Revenue is accrued for service provided but not yet billed at period end. Performance obligations with these customers are satisfied at time of delivery to customer meters and simultaneously consumed.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
14




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue (Continued)

Municipal includes sales to 16 non-affiliated municipal customers in Minnesota under long-term wholesale electric contracts. All wholesale electric contracts include a termination clause requiring a three-year notice to terminate. These contracts have termination dates ranging from 2019 through at least 2032, with a majority of contracts effective through at least 2024. Performance obligations with these customers are satisfied at the time energy is delivered to an agreed upon municipal substation or meter.

Industrial includes sales recognized from contracts with customers in the taconite mining, iron concentrate, paper, pulp and secondary wood products, pipeline and other industries. Industrial sales accounted for approximately 50 percent of total regulated utility kWh sales for the nine months ended September 30, 2018. Within industrial revenue, Minnesota Power has 9 Large Power Customer contracts, each serving requirements of 10 MW or more of customer load. These contracts automatically renew past the contract term unless a four-year advanced written notice is given. Large Power Customer contracts have earliest termination dates ranging from 2022 through 2026. We satisfy our performance obligations for these customers at the time energy is delivered to an agreed upon customer substation. Revenue is accrued for energy provided but not yet billed at period end. Based on current contracts with industrial customers, we expect to recognize minimum revenue for the fixed contract components of approximately $70 million per annum through 2019, $50 million in 2020 and 2021, $30 million in 2022 and $40 million for aggregate years thereafter, which reflects the termination notice period in these contracts. When determining minimum revenue, we assume that customer contracts will continue under the contract renewal provision; however, if long-term contracts are renegotiated and subsequently approved by the MPUC or there are changes within our industrial customer class, these amounts may be impacted. Contracts with customers that contain variable pricing or quantity components are excluded from the expected minimum revenue amounts.
 
Other Power Suppliers includes the sale of energy under long-term PSAs with two customers as well as MISO market and liquidation sales. Expiration dates of these PSAs range from 2020 through 2026. Performance obligations with these customers are satisfied at the time energy is delivered to an agreed upon delivery point defined in the contract (generally the MISO pricing node). Based on current contracts with two customers, we expect to recognize minimum revenue for fixed contract components of approximately $10 million per annum through 2019. Other power supplier contracts that extend beyond 2020 contain variable pricing components that prevent us from estimating future minimum revenue, and therefore are not included.

Other Revenue includes all remaining individually immaterial revenue streams for Minnesota Power and SWL&P, and is comprised of steam sales to paper and pulp mills, wheeling revenue and other sources. Revenue for steam sales to customers is recognized at the time steam is delivered and simultaneously consumed. Revenue is recognized at the time each performance obligation is satisfied.

Alternative Programs includes revenue that is driven by factors outside of our regulated entities’ control or as a result of the achievement of certain objectives, such as CIP financial incentives. This revenue is accounted for in accordance with the accounting standards for alternative revenue programs which allow for the recognition of revenue under an alternative revenue program if the program is established by an order from the utility’s regulatory commission, the order allows for automatic adjustment of future rates, the amount of revenue recognized is objectively determinable and probable of recovery, and the revenue will be collected within 24 months following the end of the annual period in which it is recognized. CIP financial incentives are recognized in the period in which the MPUC approves the filing, which is typically mid-year.

Non-utility

ALLETE Clean Energy

Long-term PSA revenue includes all sales recognized under long-term contracts for production, curtailment, capacity and associated renewable energy credits from ALLETE Clean Energy wind energy facilities. Expiration dates of these PSAs range from 2018 through 2032. Performance obligations for these contracts are satisfied at the time energy is delivered to an agreed upon point, or production is curtailed at the request of the customer, at specified prices. Revenue from the sale of renewable energy credits is recognized at the same time the related energy is delivered to the customer when sold to the same party.

Other is the non-cash adjustments to revenue recognized by ALLETE Clean Energy for the amortization of differences between contract prices and estimated market prices on assumed PSAs. As part of wind energy facility acquisitions, ALLETE Clean Energy assumed various PSAs that were above or below estimated market prices at the time of acquisition; the resulting differences between contract prices and estimated market prices are amortized to revenue over the remaining PSA term.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
15




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue (Continued)

U.S. Water Services

Point-in-time revenue is recognized for purchases by customers for chemicals, consumable equipment (e.g., filters, pumps and valves) or related maintenance and repair services as the customer’s usage and needs change over time. These goods and services are purchased on an as-needed basis by customers and therefore revenue can be variable. Products are shipped to the customer in accordance with the terms of the purchase order, and performance obligations are satisfied at the time of shipment of goods or when services are rendered to the customer.

Contract includes monthly revenue from contracts with customers to provide chemicals, consumable equipment and services to meet customer needs during the contract period. As agreed with the customer, a fixed amount is invoiced based on the goods and services to be provided under the contract. The duration of these contracts generally range in length from three months to five years and automatically renew. A 30-day notice is required to terminate such contracts without penalty after contract execution. Performance obligations are satisfied during the period as goods and service are delivered in accordance with the terms of the contract.

Capital Project includes the sale of equipment and other components assembled to create a water treatment system for a customer. These projects are provided under contracts at an agreed upon price to meet a customer's specifications and typically take less than one year to complete. In general, progress payments are received throughout the project period and are recorded as contract liabilities until performance obligations are satisfied at the time the equipment and other components are delivered to the customer’s site.

Corporate and Other

Long-term Contract encompasses the sale and delivery of coal to customer generation facilities. Revenue is recognized on a monthly basis at the cost of production plus a specified profit per ton of coal delivered to the customer. Coal sales are secured under long-term coal supply agreements extending through 2037. Performance obligations are satisfied during the period as coal is delivered to customer generation facilities.

Other primarily includes revenue from BNI Energy unrelated to coal, the sale of real estate from ALLETE Properties, and non‑rate base steam generation that is sold for use during production of paper and pulp. Performance obligations are satisfied when control transfers to the customer.

Payment Terms

Payment terms and conditions vary across our businesses. Aside from taconite-producing Large Power Customers, payment terms generally require payment to be made within 15 to 30 days from the end of the period that the service has been rendered or goods provided. In the case of its taconite-producing Large Power Customers, as permitted by the MPUC, Minnesota Power requires weekly payments for electric usage based on monthly energy usage estimates. These customers receive estimated bills based on Minnesota Power’s estimate of the customers’ energy usage, forecasted energy prices and fuel adjustment clause estimates. Minnesota Power’s taconite-producing Large Power Customers have generally predictable energy usage on a weekly basis and any differences that occur are trued-up the following month. Due to the timing difference of revenue recognition from the timing of invoicing and payment, the customer receives credit for the time value of money; however, we have determined that our contracts do not include a significant financing component as the period between when we transfer the service to the customer and when they pay for such service is minimal.

Assets Recognized From the Costs to Obtain a Contract with a Customer

We recognize as an asset the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We expense incremental costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. As of September 30, 2018, we have $31.1 million of assets recognized for costs incurred to obtain contracts with our customers ($31.6 million as of December 31, 2017). Management determined the amount of costs to be recognized as assets based on actual costs incurred and paid to obtain and fulfill these contracts to provide goods and services to our customers. Assets recognized to obtain contracts are amortized on a straight-line basis over the contract term as a non-cash reduction to revenue. For the nine months ended September 30, 2018, and 2017, we recognized $1.9 million of non-cash amortization.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
16




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Pronouncements.

Recently Adopted Pronouncements

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued an update allowing for a one-time reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the TCJA. With the enactment of the new federal tax rates in 2017, entities were required to adjust deferred tax assets and liabilities to reflect the lower federal rate with the effect of this reduction impacting income from continuing operations in the period of enactment, even in instances where the related income tax effects of items were originally recognized in other comprehensive income. As such, companies were left with stranded tax effects in accumulated other comprehensive income that did not reflect the appropriate tax rate. This guidance is effective in the first quarter of 2019 with early adoption permitted. The Company elected to early adopt this guidance in the first quarter of 2018 which resulted in a reduction of $5.7 million to Accumulated Other Comprehensive Loss and a corresponding increase to Retained Earnings for the reclassification of the stranded income tax effects.

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. In March 2017, the FASB issued an accounting standard update to improve the presentation of net periodic pension and postretirement benefit costs. Under the guidance, an entity is required to present the service cost component of the net periodic benefit cost in the same income statement line as other employee compensation costs arising from services rendered during the period. The guidance also allows only the service cost component of the periodic cost to be eligible for capitalization on a prospective basis. The other components of net periodic expense must be presented separately from the line item that includes the service cost and must be excluded from the operating income subtotal. The Company adopted the guidance in the first quarter of 2018 and retrospectively adjusted the presentation of the service cost component and the other components of net periodic costs in the Consolidated Statement of Income. The retrospective adjustments for the quarter and nine months ended September 30, 2017, were as follows: Operating and Maintenance increased $1.1 million and $3.2 million, respectively, Cost of Sales – Non-utility decreased $0.1 million and $0.2 million, respectively, resulting in an increase of $1.0 million and $3.0 million, respectively to Other Income (Expense) – Other. There was no impact to net income as a result of adoption.

Financial Instruments. In 2016, the FASB issued an accounting standard update which requires entities to measure equity investments at fair value and recognize any changes in fair value in net income unless the investments qualify for the practicability exception. The practicability exception will be available for equity investments that do not have readily determinable fair values. The update was adopted by the Company in the first quarter of 2018 which resulted in a cumulative-effect transition adjustment reducing Retained Earnings by $0.1 million, including the tax effect, for the previously unrealized loss on available-for-sale equity securities in Accumulated Other Comprehensive Loss as of December 31, 2017.

Classification of Certain Cash Receipts and Cash Payments. In 2016, the FASB issued an accounting standard update which addressed the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero‑coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments of this update were adopted by the Company in the first quarter of 2018. There was no impact to the Consolidated Statement of Cash Flows as a result of adoption.

Statement of Cash Flows: Restricted Cash. In 2016, the FASB issued an accounting standard update related to the presentation of restricted cash in the Company’s Consolidated Statement of Cash Flows. The update requires that the Consolidated Statement of Cash Flows explain the change during the period in cash, cash equivalents and restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statement of Cash Flows. This guidance update was adopted by the Company in the first quarter of 2018 and was applied retrospectively to the periods presented in the Consolidated Statement of Cash Flows which resulted in a net increase in cash from financing activities of $4.3 million for the nine months ended September 30, 2017. Additional disclosure, including a reconciliation of the beginning-of-period and end-of-period cash on hand to the statement of cash flows, is included in this note. (See Cash, Cash Equivalents and Restricted Cash.)


ALLETE, Inc. Third Quarter 2018 Form 10-Q
17




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements (Continued)

Revenue from Contracts with Customers. In 2014, the FASB issued amended revenue recognition guidance that clarifies the principles for recognizing revenue from contracts with customers by providing a single comprehensive model to determine the measurement of revenue and timing of recognition. The guidance requires an entity to recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled to in exchange for those goods or services. The guidance 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 regarding customer contracts, significant judgments and changes in those judgments, and the assets recognized from the costs to obtain or fulfill a contract are required. The Company adopted this accounting guidance in the first quarter of 2018 and elected to apply the modified retrospective method of adoption to all contracts as of the date of initial application. The financial impact to the consolidated financial statements as a result of adoption of the new standard is immaterial. Based on the nature of the contracts with our customers and our related performance obligations which transfer control, a $0.5 million after-tax cumulative‑effect transition adjustment was made to increase the opening balance of Retained Earnings. We have included additional disclosures in the notes to the consolidated financial statements including additional information on the Company’s revenue streams and related performance obligations required to be satisfied in order to recognize revenue. (See Revenue Recognition.)

Practical Expedients

The following practical expedients were used by the Company as part of the adoption of the new revenue recognition guidance:
We have a right to consideration from our customers in an amount that corresponds directly with the value to such customer for performance completed to date; therefore, we may recognize revenue in the amount to which we have a right to invoice.
We do not adjust the promised amount of consideration for the effects of a significant financing component as at contract inception we expect that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Where applicable, we adopted this guidance using the portfolio approach in which contracts that have similar characteristics were reviewed as a portfolio. The effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying the guidance to each individual contract.
We recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that would otherwise have been recognized is one year or less.

Recently Issued Pronouncements

Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued updated guidance which simplifies the measurement of goodwill impairment by removing step two of the goodwill impairment test that requires the determination of the fair value of individual assets and liabilities of a reporting unit. The updated guidance requires goodwill impairment to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective for the Company beginning in the first quarter of 2020, with early adoption permitted on a prospective basis.

Leases. In 2016, the FASB issued an accounting standard update which revises the existing guidance for leases. Under the revised guidance, lessees will be required to recognize a “right-of-use” asset and a lease liability for all leases with a term greater than 12 months. The new standard also requires additional quantitative and qualitative 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 are not expected to significantly change as a result of the new guidance. As of September 30, 2018, the Company has reviewed substantially all of its leases for its regulated businesses, completing the preliminary evaluations of the impact of this guidance. Our review and analysis of the Company’s energy infrastructure and related services and corporate and other businesses is nearly complete as well. Based on our preliminary assessment, we expect to recognize right-of-use assets and lease liabilities of approximately $65 million at adoption, which represents the discounted future minimum operating lease payments. The Company plans to adopt and implement the new guidance, utilizing the additional optional transition method and package of practical expedients, by recognizing a cumulative effect adjustment to retained earnings on the Consolidated Balance Sheet, if necessary, in the period of adoption. Management continues to evaluate the need for additional qualitative and quantitative disclosures to meet the requirements of the new standard following adoption. The revised guidance is effective for the Company beginning in the first quarter of 2019.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
18




NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes. Under SEC Staff Accounting Bulletin 118 (SAB 118), which was issued in December 2017, companies are allowed up to one year to complete the required analyses and accounting for the TCJA. SAB 118 requires companies to disclose which tax positions are considered complete, which tax positions are considered provisional and which tax provisions reflect prior law. At December 31, 2017, we were reasonably able to estimate the effects of the TCJA, and therefore recorded provisional amounts associated with the changes under the TCJA. The provisional amounts incorporated assumptions made based upon the Company’s interpretation of the TCJA. On August 21, 2018, the Internal Revenue Service provided initial guidance for handling changes surrounding the executive compensation deduction, which resulted in recording additional income tax expense of $0.9 million in the third quarter of 2018. The full-year additional income tax expense related to this guidance is expected to be $1.1 million. As the Company receives additional clarification and implementation guidance, any additional adjustments would be included in income from operations as an adjustment to income tax expense. The accounting for the TCJA is still considered provisional while we complete our analysis.

Consolidated Statement of Income. In the third quarter of 2018, we recognized a $4.4 million reduction in revenue for MISO rates that were billed in 2017 and are expected to be credited to customers in 2019. We have evaluated the effect of this out-of-period adjustment on the quarter and nine months ended September 30, 2018, as well as on the previous interim and annual periods in which they should have been recognized, and concluded that this adjustment is not material to any of the periods affected.


NOTE 2. INVESTMENTS

Investments. As of September 30, 2018, the investment portfolio included the legacy 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
September 30,
2018

 
December 31,
2017

Millions
 
 
 
ALLETE Properties

$25.4

 

$26.4

Available-for-sale Securities (a)
21.0

 
19.1

Cash Equivalents
1.5

 
3.8

Other
3.8

 
3.8

Total Other Investments

$51.7

 

$53.1


(a)
As of September 30, 2018, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $1.8 million, in one year to less than three years was $3.5 million, in three years to less than five years was $1.9 million and in five or more years was $1.1 million.

Available-for-Sale Securities. We account for our available-for-sale securities portfolio in accordance with the guidance for certain investments in debt and equity securities. Our available-for-sale securities portfolio consisted primarily of securities held in other postretirement plans to fund employee benefits. Gross realized and unrealized gains and losses on our available-for-sale securities were immaterial for the quarter and nine months ended September 30, 2018, and 2017.


NOTE 3. ACQUISITIONS

The following acquisition is consistent with ALLETE’s stated strategy of investing in energy infrastructure and related services businesses to complement its regulated businesses, balance exposure to business cycles and changing demand, and provide potential long-term earnings growth. The pro forma impact of the following acquisition was not significant to the results of the Company for the nine months ended September 30, 2018, and 2017.

2017 Activity.

Tonka Water. In September 2017, U.S. Water Services acquired 100 percent of Tonka Water. Total consideration for the transaction was $19.2 million, including a working capital adjustment. Consideration of $19.0 million was paid in cash on the acquisition date and a working capital adjustment of $0.2 million was paid in the fourth quarter of 2017. Tonka Water is a supplier of municipal and industrial water treatment systems that expands U.S. Water Services’ geographic and customer markets.

ALLETE, Inc. Third Quarter 2018 Form 10-Q
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NOTE 3. ACQUISITIONS (Continued)

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. The purchase price accounting, which was finalized in 2018, is reflected in the following table. Fair value measurements were valued primarily using the discounted cash flow method and replacement cost basis.
Millions
 
Assets Acquired
 
Accounts Receivable

$5.1

Other Current Assets
5.1

Trade Names (a)
0.9

Goodwill (a)(b)
16.9

Other Non-Current Assets
0.2

Total Assets Acquired

$28.2

Liabilities Assumed
 
Current Liabilities

$9.0

Total Liabilities Assumed

$9.0

Net Identifiable Assets Acquired

$19.2

(a) Presented within Goodwill and Intangible Assets – Net on the Consolidated Balance Sheet. (See Note 4. Goodwill and Intangible Assets.)
(b)
Recognized goodwill is attributable to the assembled workforce and anticipated synergies. For tax purposes, the purchase price allocation resulted in $4.1 million of deductible goodwill.

Acquisition-related costs were immaterial, expensed as incurred during 2017 and recorded in Operating and Maintenance on the Consolidated Statement of Income.


NOTE 4. GOODWILL AND INTANGIBLE ASSETS

The aggregate carrying amount of goodwill was $148.5 million as of September 30, 2018, and $148.3 million as of December 31, 2017.

Balances of intangible assets, net, excluding goodwill as of September 30, 2018, are as follows:
 
December 31,
2017

 
Additions
 
 Amortization
 
September 30,
2018

Millions
 
 
 
 
 
 
 
Intangible Assets
 
 
 
 
 
 
 
Definite-Lived Intangible Assets
 
 
 
 
 
 
 
Customer Relationships

$54.7

 

$0.2

 
$(3.2)
 

$51.7

Developed Technology and Other (a)
6.3

 
2.5

 
(0.9)
 
7.9

Total Definite-Lived Intangible Assets
61.0

 
2.7