Regulatory Matters

3 Months Ended

Mar. 31, 2023

REGULATORY MATTERS

Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2022 Form 10-K, with additional disclosure provided in the following paragraphs.

Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable, and environmental investments and expenditures. Revenue from cost recovery riders was $16.4 million for the three months ended March 31, 2023 ($6.5 million for the three months ended March 31, 2022).

2022 Minnesota General Rate Case. On November 1, 2021, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 18 percent for retail customers. The rate filing sought a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $108 million in additional revenue.

In an order dated February 28, 2023, the MPUC made determinations regarding Minnesota Power’s general rate case including allowing a return on common equity of 9.65 percent and a 52.50 percent equity ratio. Upon commencement of final rates, we expect additional revenue from base rates of approximately $60 million and an additional $10 million in revenue recognized under cost recovery riders on an annualized basis, subject to final written order and reconsideration. On March 20, 2023, Minnesota Power filed a petition for reconsideration with the MPUC requesting reconsideration and clarification of certain decisions in the MPUC’s order. Minnesota Power’s petition included requesting reconsideration of the ratemaking treatment of the Taconite Harbor Energy Center and the Company’s prepaid pension asset as well as clarification on interim rate treatment for sales to certain customers that did not operate during 2022. The MPUC denied the requests for reconsideration at a hearing on April 27, 2023, and provided clarification in support of Minnesota Power’s treatment of certain customers that did not operate during 2022. Final rates are expected to commence in the third quarter of 2023; interim rates will be collected through this period with reserves recorded as necessary. Minnesota Power has recorded a reserve for an interim rate refund of $23.5 million pre-tax as of March 31, 2023 ($18.4 million as of December 31, 2022), which is subject to MPUC approval of Minnesota Power’s refund calculation.

Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place to charge retail customers on a current basis for the costs of certain renewable investments and expenditures, including a return on the capital invested. Current customer billing rates for the renewable cost recovery rider were approved by the MPUC in an order dated January 24, 2023. On March 29, 2023, Minnesota Power submitted its latest renewable factor filing. If the filing is approved, Minnesota Power would be authorized to include updated billing rates on customer bills.

Fuel Adjustment Clause. Minnesota Power incurred higher fuel and purchased power costs in 2022 than those factored in its fuel adjustment forecast filed in May 2021 for 2022, which resulted in the recognition of an approximately $13 million regulatory asset as of March 31, 2023, and December 31, 2022. Minnesota Power requested recovery of the regulatory asset as part of its annual true-up filing submitted to the MPUC on March 1, 2023.

Conservation Improvement Program. On April 3, 2023, Minnesota Power submitted its 2022 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $2.2 million based upon MPUC procedures, which will be recognized upon approval by the MPUC. In 2022, a CIP financial incentive of $1.9 million was recognized in the second quarter upon approval by the MPUC of Minnesota Power’s 2021 CIP consolidated filing. CIP financial incentives are recognized in the period in which the MPUC approves the filing.

NOTE 2. REGULATORY MATTERS (Continued)

Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting standards for the effects of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.


Regulatory Assets and Liabilities	March 31, 2023	December 31, 2022
Millions
Current Regulatory Assets (a)
Fuel Adjustment Clause	$15.3	$25.6
Total Current Regulatory Assets	$15.3	$25.6
Non-Current Regulatory Assets
Defined Benefit Pension and Other Postretirement Plans	$225.2	$225.9
Income Taxes	95.3	97.6
Cost Recovery Riders	42.2	41.2
Asset Retirement Obligations	36.1	35.6
Taconite Harbor Energy Center (b)	29.7	—
Fuel Adjustment Clause	15.5	14.5
Manufactured Gas Plant	14.5	15.1
PPACA Income Tax Deferral	4.1	4.1


Other	6.5	7.0
Total Non-Current Regulatory Assets	$469.1	$441.0


Current Regulatory Liabilities (c)

Provision for Interim Rate Refund (d)	$23.5	$18.4
Transmission Formula Rates Refund	$3.7	4.9
Other	3.1	0.1
Total Current Regulatory Liabilities	$30.3	$23.4
Non-Current Regulatory Liabilities
Income Taxes	$326.2	$332.5
Wholesale and Retail Contra AFUDC	80.0	80.7
Plant Removal Obligations	61.6	60.0
North Dakota Investment Tax Credits	16.8	16.9
Defined Benefit Pension and Other Postretirement Benefit Plans	15.7	17.6
Fuel Adjustment Clause	5.3	—


Boswell Units 1 and 2 Net Plant and Equipment	6.7	6.7
Non-Jurisdictional Land Sales	9.2	7.5
Other	4.9	4.2
Total Non-Current Regulatory Liabilities	$526.4	$526.1

(a)Current regulatory assets are presented within Prepayments and Other on the Consolidated Balance Sheet.

(b)In the first quarter of 2023, Minnesota Power retired Taconite Harbor Units 1 and 2. The remaining net book value was reclassified from property, plant and equipment to a regulatory asset on the Consolidated Balance Sheet when the units were retired. Minnesota Power expects to receive recovery of the remaining net book value from customers.

(c)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.

(d)See 2022 Minnesota General Rate Case.