ALLETE, Inc. (NYSE:ALE) Q3 2020 Results Earnings Conference Call November 9, 2020 10:00 AM ET Company Participants Bethany Owen - President, Chief Executive Officer Steve Morris - Vice President, Controller, Chief Accounting Officer Bob Adams - Chief Financial Officer, Senior Vice President Frank Frederickson - Vice President of Customer Experience at Minnesota Power Conference Call Participants Chris Ellinghaus - Siebert Williams Brian Russo - Sidoti Kevin Fallon - Citadel Operator Good day and welcome to ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2020 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 (S ...

ALLETE, Inc. (NYSE:ALE) Q2 2020 Results Conference Call August 5, 2020 10:00 AM ET Company Participants Bethany Owen - President and Chief Executive Officer Robert Adams - Senior Vice President and Chief Financial Officer Steve Morris - Vice President, Controller and Chief Accounting Officer Frank Frederickson - Minnesota Power's Vice President of Customer Experience Conference Call Participants Brian Russo - Sidoti Operator Good day, and welcome to ALLETE Second Quarter 2020 Financial Results Call. Today's ...

Part I [Consolidated Financial Statements (Unaudited)](index=6&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20-%20Unaudited) The unaudited consolidated financial statements for the period ended June 30, 2020, show a decrease in net income and earnings per share, with total assets increasing due to investments in property, plant, and equipment, and lower operating revenues due to reduced industrial demand [Consolidated Balance Sheet](index=6&type=section&id=Consolidated%20Balance%20Sheet) ALLETE's total assets increased to **$5.76 billion** as of June 30, 2020, primarily driven by growth in Property, Plant and Equipment, while total liabilities also rose due to increased short-term debt Consolidated Balance Sheet Highlights (Millions) | Assets & Liabilities | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Total Current Assets** | $223.0 | $269.5 | | **Property, Plant and Equipment – Net** | $4,644.5 | $4,377.0 | | **Total Assets** | **$5,760.4** | **$5,482.8** | | **Total Current Liabilities** | $727.7 | $507.4 | | **Total Liabilities** | **$3,328.2** | **$3,147.2** | | **Total ALLETE Equity** | $2,265.7 | $2,231.9 | | **Total Liabilities and Equity** | **$5,760.4** | **$5,482.8** | [Consolidated Statement of Income](index=7&type=section&id=Consolidated%20Statement%20of%20Income) ALLETE reported a significant decrease in net income and diluted earnings per share for Q2 and the six months ended June 30, 2020, primarily due to lower operating revenue from utility contracts Consolidated Statement of Income Highlights (Unaudited, Millions except per share) | Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 | | :--- | :--- | :--- | :--- | :--- | | **Total Operating Revenue** | $243.2 | $290.4 | $554.8 | $647.6 | | **Operating Income** | $12.7 | $36.2 | $72.9 | $93.0 | | **Net Income Attributable to ALLETE** | $20.1 | $34.2 | $86.4 | $104.7 | | **Diluted Earnings Per Share** | $0.39 | $0.66 | $1.67 | $2.02 | [Consolidated Statement of Cash Flows](index=9&type=section&id=Consolidated%20Statement%20of%20Cash%20Flows) Cash from operating activities increased for the six months ended June 30, 2020, while investing activities saw a significant outflow for capital additions, contrasting with the prior year's proceeds from asset sales Cash Flow Summary (Six Months Ended June 30, Millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | **Cash from Operating Activities** | $144.5 | $95.2 | | **Cash from (for) Investing Activities** | $(487.4) | $46.0 | | **Cash from (for) Financing Activities** | $287.8 | $(13.6) | | **Change in Cash, Cash Equivalents and Restricted Cash** | $(55.1) | $127.6 | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail regulatory matters, significant clean energy investments, new debt issuances, and segment performance, highlighting the impact of the U.S. Water Services sale and ALLETE Clean Energy's growth - In the 2020 Minnesota General Rate Case, the MPUC approved a resolution resulting in a **4.1% rate increase** effective May 1, 2020, and a refund of **$11.7 million** in interim rates collected through April 2020[33](index=33&type=chunk) - ALLETE Clean Energy acquired the rights to the **~300 MW Caddo wind project** in Oklahoma from Apex Clean Energy for approximately **$8 million**[26](index=26&type=chunk) - The company entered into two new unsecured term loan agreements in Q1 and Q2 2020, totaling **$315 million**, to fund construction-related expenditures and for general corporate purposes[56](index=56&type=chunk)[58](index=58&type=chunk) Net Income by Business Segment (Six Months Ended June 30, Millions) | Segment | 2020 | 2019 | | :--- | :--- | :--- | | **Regulated Operations** | $68.6 | $81.8 | | **ALLETE Clean Energy** | $15.7 | $7.7 | | **U.S. Water Services** | — | $(1.1) | | **Corporate and Other** | $2.1 | $16.3 | | **Total Net Income** | **$86.4** | **$104.7** | [Management's Discussion and Analysis (MD&A)](index=29&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the financial results, attributing a decrease in net income to lower industrial kWh sales, interim rate refunds, and the absence of prior year asset sale gains, while maintaining a long-term focus on regulated utility and clean energy growth - Net income for the first six months of 2020 was **$86.4 million** ($1.67/share), compared to **$104.7 million** ($2.02/share) in 2019, with 2019 results including an **$11.1 million** after-tax gain on the sale of U.S. Water Services[120](index=120&type=chunk) - Regulated Operations' net income fell to **$68.6 million** from **$81.8 million** in H1 2019, primarily due to lower kWh sales and an **$8.3 million** after-tax reserve for interim rate refunds[121](index=121&type=chunk) - ALLETE Clean Energy's net income grew to **$15.7 million** from **$7.7 million** in H1 2019, driven by new wind facilities and increased production tax credits[121](index=121&type=chunk) - The company maintains its long-term annual EPS growth objective of **5% to 7%**, despite short-term negative impacts expected from the COVID-19 pandemic[160](index=160&type=chunk) [Comparison of Quarters Ended June 30, 2020 and 2019](index=31&type=section&id=Comparison%20of%20the%20Quarters%20Ended) Q2 2020 saw a **20%** decrease in Regulated Operations revenue due to reduced industrial kWh sales, while ALLETE Clean Energy's net income increased from new wind facilities and higher production tax credits Regulated Utility kWh Sold (Millions) | Customer Type | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Residential | 246 | 232 | 6.0% | | Commercial | 286 | 317 | (9.8)% | | Industrial | 1,235 | 1,773 | (30.3)% | | **Total Regulated Utility** | **2,604** | **3,206** | **(18.8)%** | - Regulated Operations revenue decreased by **$49.0 million (20%)** in Q2 2020, primarily due to lower kWh sales and a **$5.5 million** revenue reduction from reserves for interim rate refunds[124](index=124&type=chunk)[127](index=127&type=chunk) - ALLETE Clean Energy's operating revenue increased by **$2.2 million (14%)** in Q2 2020, driven by the new Glen Ullin and South Peak wind facilities[132](index=132&type=chunk) [Comparison of Six Months Ended June 30, 2020 and 2019](index=34&type=section&id=Comparison%20of%20the%20Six%20Months%20Ended) For the first six months of 2020, Regulated Operations revenue decreased due to lower industrial kWh sales, while ALLETE Clean Energy's net income more than doubled, and Corporate and Other net income fell sharply due to the absence of a prior year asset sale gain Regulated Utility kWh Sold (Millions) | Customer Type | Six Months 2020 | Six Months 2019 | % Change | | :--- | :--- | :--- | :--- | | Industrial | 3,137 | 3,587 | (12.5)% | | **Total Regulated Utility** | **6,157** | **6,760** | **(8.9)%** | - ALLETE Clean Energy's income tax benefit increased by **$4.3 million** in H1 2020, primarily due to production tax credits rising to **$8.0 million** from **$4.2 million** in H1 2019[150](index=150&type=chunk) - Corporate and Other net income dropped from **$16.3 million** in H1 2019 to **$2.1 million** in H1 2020, largely because the 2019 figure included an **$11.1 million** after-tax gain on the sale of U.S. Water Services[156](index=156&type=chunk) [Outlook](index=37&type=section&id=Outlook) ALLETE anticipates short-term negative impacts from COVID-19 but maintains its long-term EPS growth target, continuing its 'EnergyForward' strategy with significant capital expenditures for clean energy projects - Industrial customers have been significantly impacted by COVID-19, with USS Corporation idling its Keetac plant and Verso Corporation idling its Duluth paper mill indefinitely[166](index=166&type=chunk)[171](index=171&type=chunk)[175](index=175&type=chunk) - The company's next Integrated Resource Plan (IRP) filing has been extended to February 1, 2021, and will evaluate the potential early retirement of Boswell Units 3 and 4[182](index=182&type=chunk) - ALLETE Clean Energy is advancing major wind projects, including the **~300 MW Diamond Spring project** (completion late 2020) and the newly acquired **~300 MW Caddo project**[202](index=202&type=chunk)[203](index=203&type=chunk) - The company expects its 2020 effective tax rate to be a benefit of approximately **35% to 40%**, primarily due to federal production tax credits from wind energy generation[209](index=209&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2020, ALLETE maintained solid liquidity with available cash and credit lines, but faced a credit rating downgrade due to debt coverage concerns and increased capital expenditures for 2020 Capital Structure (Millions) | Component | June 30, 2020 | % of Total | | :--- | :--- | :--- | | ALLETE Equity | $2,265.7 | 52% | | Non-Controlling Interest | $166.5 | 4% | | Short-Term and Long-Term Debt | $1,899.0 | 44% | | **Total Capitalization** | **$4,331.2** | **100%** | - Capital expenditures for 2020 are expected to be approximately **$635 million**, an increase primarily due to the Caddo wind project[224](index=224&type=chunk) - On April 22, 2020, S&P Global Ratings downgraded ALLETE's long-term issuer credit rating to **BBB stable** from BBB+ outlook negative[222](index=222&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company manages commodity price risk through regulatory recovery mechanisms, credit risk through policies, and interest rate risk by limiting variable rate debt, with a **100 basis point** increase impacting pre-tax interest expense by **$4.3 million** - Exposure to price risk for coal, power, and natural gas is significantly mitigated by regulatory frameworks that allow for cost recovery from customers[230](index=230&type=chunk) - A hypothetical **100 basis point (1%)** increase in interest rates would increase annual pre-tax interest expense by approximately **$4.3 million** based on variable rate debt outstanding at June 30, 2020[233](index=233&type=chunk) [Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[234](index=234&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[235](index=235&type=chunk) Part II. Other Information [Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) This section updates risk factors, primarily focusing on the uncertain and material adverse effects of the COVID-19 pandemic on sales, revenue, capital markets, and supply chains, which could jeopardize project completion and tax credit qualification - The primary updated risk is the material adverse effect of the ongoing COVID-19 pandemic, whose extent and duration are uncertain[237](index=237&type=chunk) - The pandemic has led to reduced sales and revenue from commercial and industrial customers, including the indefinite idling of the Keetac plant (USS Corp) and the Duluth paper mill (Verso Corp)[239](index=239&type=chunk) - Potential disruptions in capital markets could increase borrowing costs or limit access to financing, and supply chain disruptions could adversely impact operations and jeopardize the ability to complete capital projects in time to qualify for production tax credits[241](index=241&type=chunk)

ALLETE, Inc. (NYSE:ALE) Q1 2020 Earnings Conference Call May 6, 2020 10:00 AM ET Company Participants Bethany Owen – President and Chief Executive Officer Bob Adams – Senior Vice President and Chief Financial Officer Steve Morris – Vice President, Controller and Chief Accounting Officer Frank Frederickson – Minnesota Power's Vice President of Customer Experience Conference Call Participants Brian Russo – Sidoti Sarah Akers – Wells Fargo Richard Sunderland – JPMorgan Operator Good day, and welcome to ALLETE ...

[Forward-Looking Statements](index=5&type=section&id=Forward%2DLooking%20Statements) This report's forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from discussed content, with no obligation for updates [Forward-Looking Statements](index=5&type=section&id=Forward%2DLooking%20Statements) This report's forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from discussed content, with no obligation for updates - The company has identified multiple significant factors that could cause actual results to differ materially from forward-looking statements, including strategic implementation, economic conditions, legal and regulatory changes, weather, capital market access, project delays, operating costs, commodity prices, talent retention, emerging technologies, war, terrorism, cyberattacks, expansion and integration, population growth, wholesale power markets, regulatory actions, competition, industry restructuring, climate change, distributed low-carbon generation, fuel and commodity pricing, customer expansion plans, and real estate market conditions[7](index=7&type=chunk) - The company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of the statement or to reflect the occurrence of unanticipated events[8](index=8&type=chunk) [PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS](index=5&type=section&id=ITEM%201.%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section presents ALLETE's unaudited consolidated financial statements as of March 31, 2020, detailing operations, accounting policies, regulatory matters, equity investments, fair value, debt, commitments, contingencies, earnings per share, income taxes, and pension plans [ALLETE CONSOLIDATED BALANCE SHEET](index=5&type=section&id=ALLETE%20CONSOLIDATED%20BALANCE%20SHEET) Consolidated Balance Sheet (Millions) | Millions | 2020 | 2019 | |:-------------------------------|:---------|:---------| | **Assets** | | | | Current Assets | | | | Cash and Cash Equivalents | $67.0 | $69.3 | | Accounts Receivable | 99.4 | 96.4 | | Inventories – Net | 79.0 | 72.8 | | Prepayments and Other | 29.4 | 31.0 | | Total Current Assets | 274.8 | 269.5 | | Property, Plant and Equipment – Net | 4,496.3 | 4,377.0 | | Regulatory Assets | 423.8 | 420.5 | | Equity Investments | 225.7 | 197.6 | | Other Non-Current Assets | 198.9 | 218.2 | | **Total Assets** | **$5,619.5** | **$5,482.8** | | **Liabilities and Equity** | | | | Liabilities | | | | Current Liabilities | | | | Accounts Payable | $164.4 | $165.2 | | Accrued Taxes | 63.0 | 50.8 | | Accrued Interest | 15.1 | 18.1 | | Long-Term Debt Due Within One Year | 323.0 | 212.9 | | Other | 57.6 | 60.4 | | Total Current Liabilities | 623.1 | 507.4 | | Long-Term Debt | 1,399.9 | 1,400.9 | | Deferred Income Taxes | 207.0 | 212.8 | | Regulatory Liabilities | 566.4 | 560.3 | | Defined Benefit Pension and Other Postretirement Benefit Plans | 161.4 | 172.8 | | Other Non-Current Liabilities | 288.7 | 293.0 | | **Total Liabilities** | **3,246.5** | **3,147.2** | [ALLETE CONSOLIDATED STATEMENT OF INCOME](index=7&type=section&id=ALLETE%20CONSOLIDATED%20STATEMENT%20OF%20INCOME) Consolidated Statement of Income (Millions, Except Per Share Amounts) | Millions Except Per Share Amounts | 2020 | 2019 | |:----------------------------------|:-------|:-------| | Operating Revenue | | | | Contracts with Customers – Utility | $265.3 | $282.2 | | Contracts with Customers – Non-utility | 43.5 | 72.1 | | Other – Non-utility | 2.8 | 2.9 | | Total Operating Revenue | 311.6 | 357.2 | | Operating Expenses | | | | Fuel, Purchased Power and Gas – Utility | 89.0 | 109.8 | | Transmission Services – Utility | 18.5 | 18.3 | | Cost of Sales – Non-utility | 16.9 | 30.6 | | Operating and Maintenance | 61.0 | 76.2 | | Depreciation and Amortization | 53.4 | 51.9 | | Taxes Other than Income Taxes | 12.6 | 13.6 | | Total Operating Expenses | 251.4 | 300.4 | | Operating Income | 60.2 | 56.8 | | Other Income (Expense) | | | | Interest Expense | (15.7) | (16.5) | | Equity Earnings | 5.2 | 5.6 | | Gain on Sale of U.S. Water Services | — | 20.1 | | Other | 1.0 | 7.4 | | Total Other Income (Expense) | (9.5) | 16.6 | | Income Before Income Taxes | 50.7 | 73.4 | | Income Tax Expense (Benefit) | (13.8) | 2.9 | | Net Income | 64.5 | 70.5 | | Net Loss Attributable to Non-Controlling Interest | (1.8) | — | | Net Income Attributable to ALLETE | $66.3 | $70.5 | | Average Shares of Common Stock | | | | Basic | 51.7 | 51.6 | | Diluted | 51.8 | 51.7 | | Basic Earnings Per Share of Common Stock | $1.28 | $1.37 | | Diluted Earnings Per Share of Common Stock | $1.28 | $1.37 | [ALLETE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME](index=9&type=section&id=ALLETE%20CONSOLIDATED%20STATEMENT%20OF%20COMPREHENSIVE%20INCOME) Consolidated Statement of Comprehensive Income (Millions) | Millions | 2020 | 2019 | |:----------------------------------------------------------------------------------|:------|:------| | Net Income | $64.5 | $70.5 | | Other Comprehensive Income (Loss) | | | | Unrealized Gain (Loss) on Securities | | | | Net of Income Tax Expense (Benefit) of $(0.1) and $– | (0.4) | 0.1 | | Defined Benefit Pension and Other Postretirement Benefit Plans | | | | Net of Income Tax Expense of $0.1 and $0.1 | 0.2 | — | | Total Other Comprehensive Income (Loss) | (0.2) | 0.1 | | Total Comprehensive Income | 64.3 | 70.6 | | Net Loss Attributable to Non-Controlling Interest | (1.8) | — | | Total Comprehensive Income Attributable to ALLETE | $66.1 | $70.6 | [ALLETE CONSOLIDATED STATEMENT OF CASH FLOWS](index=10&type=section&id=ALLETE%20CONSOLIDATED%20STATEMENT%20OF%20CASH%20FLOWS) Consolidated Statement of Cash Flows (Millions) | Millions | 2020 | 2019 | |:----------------------------------------------------------------------------------|:----------|:---------| | **Operating Activities** | | | | Net Income | $64.5 | $70.5 | | Cash from Operating Activities | 88.8 | 79.1 | | **Investing Activities** | | | | Payments for Equity Investments | (27.8) | (0.5) | | Proceeds from Sale of U.S. Water Services – Net of Transaction Costs and Cash Retained | — | 264.7 | | Additions to Property, Plant and Equipment | (154.3) | (89.3) | | Cash from (for) Investing Activities | (182.5) | 185.1 | | **Financing Activities** | | | | Proceeds from Issuance of Common Stock | 3.3 | 0.8 | | Proceeds from Issuance of Long-Term Debt | 110.0 | 100.0 | | Repayments of Long-Term Debt | (1.4) | (43.8) | | Dividends on Common Stock | (31.9) | (30.3) | | Cash from Financing Activities | 80.1 | 22.0 | | **Change in Cash, Cash Equivalents and Restricted Cash** | **(13.6)** | **286.2** | | Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 92.5 | 79.0 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $78.9 | $365.2 | [ALLETE CONSOLIDATED STATEMENT OF EQUITY](index=12&type=section&id=ALLETE%20CONSOLIDATED%20STATEMENT%20OF%20EQUITY) Consolidated Statement of Equity (Millions, Except Per Share Amounts) | Millions Except Per Share Amounts | March 2020 | 31, 2019 |\n|:------------------------------------------------------------------|:-----------|:---------|\n| **Common Stock** | | |\n| Balance, Beginning of Period | $1,436.7 | $1,428.5 |\n| Common Stock Issued | 5.0 | 2.6 |\n| Balance, End of Period | 1,441.7 | 1,431.1 |\n| **Accumulated Other Comprehensive Loss** | | |\n| Balance, Beginning of Period | (23.6) | (27.3) |\n| Other Comprehensive Income - Net of Income Taxes | | |\n| Unrealized Gain (Loss) on Debt Securities | (0.4) | 0.1 |\n| Defined Benefit Pension and Other Postretirement Plans | 0.2 | — |\n| Balance, End of Period | (23.8) | (27.2) |\n| **Retained Earnings** | | |\n| Balance, Beginning of Period | 818.8 | 754.6 |\n| Net Income Attributable to ALLETE | 66.3 | 70.5 |\n| Common Stock Dividends | (31.9) | (30.3) |\n| Balance, End of Period | 853.2 | 794.8 |\n| **Non-Controlling Interest in Subsidiaries** | | |\n| Balance, Beginning of Period | 103.7 | — |\n| Net Loss Attributable to Non-Controlling Interest | (1.8) | — |\n| Balance, End of Period | 101.9 | — |\n| **Total Equity** | **$2,373.0** | **$2,198.7** |\n| Dividends Per Share of Common Stock | $0.6175 | $0.5875 | [NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES](index=13&type=section&id=NOTE%201.%20OPERATIONS%20AND%20SIGNIFICANT%20ACCOUNTING%20POLICIES) - The company considers all investments with original maturities of three months or less to be cash equivalents; as of March 31, 2020, restricted cash included collateral deposits required by ALLETE Clean Energy loan agreements[16](index=16&type=chunk) Cash, Cash Equivalents and Restricted Cash (Millions) | | March 31, 2020 | December 31, 2019 | |:------------------------------------------------------------------------------|:---------------|:------------------| | Cash and Cash Equivalents | $67.0 | $69.3 | | Restricted Cash included in Prepayments and Other | 6.1 | 2.8 | | Restricted Cash included in Other Non-Current Assets | 5.8 | 20.4 | | Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $78.9 | $92.5 | - Inventories are measured at the lower of cost or net realizable value; regulated operations inventories are measured using the average cost or first-in, first-out method, while ALLETE Clean Energy and Corporate and Other inventories use average cost, first-in, first-out, or specific identification methods[17](index=17&type=chunk) Inventories – Net (Millions) | Inventories – Net | March 31, 2020 | December 31, 2019 | |:-----------------------|:---------------|:------------------| | Fuel | $31.4 | $25.9 | | Materials and Supplies | 47.6 | 46.9 | | Total Inventories – Net | $79.0 | $72.8 | - On March 10, 2020, ALLETE Clean Energy acquired rights to the Caddo wind project in Oklahoma for approximately **$8 million**, with additional payments due upon reaching certain milestones; the fully developed project is expected to sell energy to corporate customers under long-term power sales agreements[25](index=25&type=chunk) - Non-controlling interests represent the portion of equity and earnings of subsidiaries not attributable to ALLETE's equity holders; as of March 31, 2020, these amounts relate to the tax equity financing structure for ALLETE Clean Energy's **106-megawatt** Glen Ullin wind energy facility[26](index=26&type=chunk) - The new accounting standard "Credit Losses," effective January 1, 2020, was adopted by the company in the first quarter of 2020 with no material impact on the consolidated financial statements[28](index=28&type=chunk) [NOTE 2. REGULATORY MATTERS](index=17&type=section&id=NOTE%202.%20REGULATORY%20MATTERS) - Minnesota Power filed a retail rate increase request with the MPUC on November 1, 2019, seeking an average retail customer rate increase of approximately **10.6%**, projected to increase annual revenue by about **$66 million**; the MPUC approved an interim rate increase of **$36.1 million** annually effective January 1, 2020[31](index=31&type=chunk) - On April 23, 2020, Minnesota Power submitted a proposal to the MPUC to resolve the 2020 general rate case, including eliminating the current power marketing profit credit, reflecting actual power marketing profits in the fuel adjustment clause, and refunding approximately **$12 million** in interim rates to customers; the MPUC approved reducing the interim rate to **4.1%** effective May 1, 2020[32](index=32&type=chunk) - On March 24, 2020, the PSCW authorized utilities, including SWL&P, to defer COVID-19 related expenditures incurred to comply with government orders and ensure service provision; Minnesota Power has also requested MPUC authorization to track and defer incremental COVID-19 costs as a regulatory asset[35](index=35&type=chunk) - The Nemadji Trail Energy Center (NTEC) project's total cost is estimated at approximately **$700 million**, with ALLETE's share projected to be about **$350 million**; as of March 31, 2020, ALLETE has incurred approximately **$13 million** in project costs, and the project continues to face legal challenges, with the Minnesota Court of Appeals having reversed and remanded related agreements for MPUC re-evaluation[37](index=37&type=chunk) Regulatory Assets and Liabilities (Millions) | Regulatory Assets and Liabilities | March 31, 2020 | December 31, 2019 | |:----------------------------------|:---------------|:------------------| | **Non-Current Regulatory Assets** | | | | Defined Benefit Pension and Other Postretirement Benefit Plans | $211.1 | $212.9 | | Income Taxes | 121.0 | 123.4 | | Cost Recovery Riders | 34.1 | 24.7 | | Total Non-Current Regulatory Assets | $423.8 | $420.5 | | **Non-Current Regulatory Liabilities** | | | | Income Taxes | 397.1 | 407.2 | | Wholesale and Retail Contra AFUDC | 84.2 | 79.3 | | Plant Removal Obligations | 37.4 | 35.5 | | Total Non-Current Regulatory Liabilities | 566.4 | 560.3 | | **Total Regulatory Liabilities** | **$567.9** | **$562.2** | [NOTE 3. EQUITY INVESTMENTS](index=16&type=section&id=NOTE%203.%20EQUITY%20INVESTMENTS) - ALLETE, through its wholly-owned subsidiary ALLETE Transmission Holdings, holds approximately **8%** equity in ATC and accounts for it using the equity method; as of March 31, 2020, the company's equity investment in ATC was **$142.3 million**, with an anticipated additional investment of **$1.6 million** in 2020[42](index=42&type=chunk)[43](index=43&type=chunk) - ALLETE, through its wholly-owned subsidiary ALLETE South Wind, holds a **49%** equity interest in Nobles 2, which will own and operate a **250-megawatt** wind energy facility in southwest Minnesota; as of March 31, 2020, the company's equity investment in Nobles 2 was **$83.4 million**, with an anticipated additional investment of approximately **$65 million** in 2020[43](index=43&type=chunk) [NOTE 4. FAIR VALUE](index=16&type=section&id=NOTE%204.%20FAIR%20VALUE) - The company primarily uses the market approach for recurring fair value measurements, prioritizing observable inputs, with a three-level hierarchy where Level 1 uses unadjusted quoted prices for identical assets or liabilities in active markets and Level 3 uses unobservable inputs[44](index=44&type=chunk) Recurring Fair Value Measures (Millions) | Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | |:------------------------------|:--------|:--------|:--------|:------| | **March 31, 2020** | | | | | | Assets | | | | | | Available-for-sale – Equity Securities | $8.4 | — | — | $8.4 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $9.3 | — | 9.3 | | Cash Equivalents | 0.8 | — | — | 0.8 | | Total Fair Value of Assets | $9.2 | $9.3 | — | $18.5 | | Liabilities | | | | | | Deferred Compensation | — | $19.3 | — | $19.3 | | Total Fair Value of Liabilities | — | $19.3 | — | $19.3 | | Total Net Fair Value of Assets (Liabilities) | $9.2 | $(10.0) | — | $(0.8) | | **December 31, 2019** | | | | | | Assets | | | | | | Available-for-sale – Equity Securities | $11.1 | — | — | $11.1 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $9.7 | — | 9.7 | | Cash Equivalents | 0.9 | — | — | 0.9 | | Total Fair Value of Assets | $12.0 | $9.7 | — | $21.7 | | Liabilities | | | | | | Deferred Compensation | — | $21.2 | — | $21.2 | | Total Fair Value of Liabilities | — | $21.2 | — | $21.2 | | Total Net Fair Value of Assets (Liabilities) | $12.0 | $(11.5) | — | $0.5 | Fair Value of Financial Instruments (Millions) | Financial Instruments | Carrying Amount | Fair Value | |:----------------------------------------------------|:----------------|:-----------| | Long-Term Debt, Including Long-Term Debt Due Within One Year |\n| March 31, 2020 | $1,731.3 | $1,880.2 |\n| December 31, 2019 | $1,622.6 | $1,791.8 | - As of March 31, 2020, and December 31, 2019, there were no indicators of impairment for non-financial assets such as equity method investments, land inventory, and property, plant and equipment[47](index=47&type=chunk) [NOTE 5. SHORT-TERM AND LONG-TERM DEBT](index=18&type=section&id=NOTE%205.%20SHORT%2DTERM%20AND%20LONG%2DTERM%20DEBT) Short-Term and Long-Term Debt (Millions) | | Principal | Unamortized Debt Issuance Costs | Total | |:-------------------|:----------|:--------------------------------|:---------| | **March 31, 2020** | | | | | Short-Term Debt | $323.3 | $(0.3) | $323.0 | | Long-Term Debt | 1,408.0 | (8.1) | 1,399.9 | | Total Debt | $1,731.3 | $(8.4) | $1,722.9 | | **December 31, 2019** | | | | | Short-Term Debt | $213.3 | $(0.4) | $212.9 | | Long-Term Debt | 1,409.3 | (8.4) | 1,400.9 | | Total Debt | $1,622.6 | $(8.8) | $1,613.8 | - As of March 31, 2020, the company had **$66.3 million** in outstanding letters of credit and **$0.2 million** in outstanding credit line draws[49](index=49&type=chunk) - On January 10, 2020, ALLETE entered into a **$200 million** unsecured term loan agreement, with **$110 million** borrowed as of March 31, 2020, for construction-related expenditures, maturing on February 10, 2021[50](index=50&type=chunk) - On March 26, 2020, ALLETE agreed to sell **$140 million** of first mortgage bonds to institutional purchasers, issued in two series maturing in 2030 and 2050, with interest rates of **2.50%** and **3.30%**, respectively[51](index=51&type=chunk) - On April 8, 2020, ALLETE entered into a **$115 million** unsecured term loan agreement and immediately borrowed **$95 million** for general corporate purposes, maturing on April 7, 2021[52](index=52&type=chunk) - The company's long-term debt agreements contain customary covenants, with the most restrictive financial covenant requiring a debt to total capitalization ratio not exceeding **0.65 to 1.00**; as of March 31, 2020, this ratio was **0.43 to 1.00**, and the company was in compliance with all financial covenants[53](index=53&type=chunk) [NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES](index=19&type=section&id=NOTE%206.%20COMMITMENTS%2C%20GUARANTEES%20AND%20CONTINGENCIES) - Minnesota Power's cost of power purchased from Square Butte was **$20.1 million** in the first quarter of 2020, down from **$20.5 million** in the same period of 2019[56](index=56&type=chunk) - Minnesota Power has entered into multiple short-term power sales agreements to sell **300 megawatts** of energy in 2020 and 2021, addressing potential customer energy demand uncertainty due to the COVID-19 pandemic[58](index=58&type=chunk) - The Great Northern Transmission Line (GNTL) project's total cost within the U.S. is estimated at approximately **$700 million**, with Minnesota Power's share projected to be about **$325 million**; as of March 31, 2020, **$647.7 million** in project costs have been incurred, with **$344.6 million** recovered from a Manitoba Hydro subsidiary, and GNTL is expected to be in service by mid-2020[62](index=62&type=chunk) - The company's operations are subject to environmental regulations by federal, state, and local authorities; Minnesota Power is adjusting its generation portfolio to reduce reliance on coal and has installed cost-effective emission control technologies[65](index=65&type=chunk) - Under the Affordable Clean Energy Rule, Minnesota Power will work with the MPCA and the Minnesota Department of Commerce to develop a state implementation plan to limit carbon dioxide emissions from coal-fired power plants, with compliance costs expected to be significant[74](index=74&type=chunk)[75](index=75&type=chunk) - Compliance costs for coal ash management facilities are estimated to be between **$65 million** and **$120 million** over the next 15 years; compliance costs for the three unlined ash ponds at Boswell are currently unknown due to a court ruling[81](index=81&type=chunk)[82](index=82&type=chunk) - As of March 31, 2020, the company has accrued approximately **$7 million** for remediation costs at a former gas plant site in Superior, Wisconsin, with remediation expected to continue through 2023[83](index=83&type=chunk) - ALLETE Clean Energy's existing wind energy facilities have **$59.6 million** in outstanding letters of credit, primarily serving as collateral for power sales agreements[84](index=84&type=chunk) - BNI Energy has **$67.7 million** in performance bonds for mine reclamation obligations, which are not expected to be drawn upon[85](index=85&type=chunk) - ALLETE Properties has **$4.1 million** in performance bonds and letters of credit with governmental entities, primarily related to development and maintenance obligations[86](index=86&type=chunk) - The company does not anticipate that the outcome of existing litigation and audits will have a material impact on its financial position, results of operations, or cash flows[88](index=88&type=chunk) [NOTE 7. EARNINGS PER SHARE AND COMMON STOCK](index=23&type=section&id=NOTE%207.%20EARNINGS%20PER%20SHARE%20AND%20COMMON%20STOCK) - Basic earnings per share is calculated based on the weighted-average number of common shares outstanding for each period; any difference between basic and diluted earnings per share arises from unvested restricted stock units and performance share awards granted under executive long-term incentive compensation plans[89](index=89&type=chunk) Reconciliation of Basic and Diluted Earnings Per Share (Millions, Except Per Share Amounts) | Reconciliation of Basic and Diluted Earnings Per Share | Basic | 2020 Dilutive Securities | Diluted | Basic | 2019 Dilutive Securities | Diluted | |:-------------------------------------------------------|:------|:-------------------------|:--------|:------|:-------------------------|:--------| | Three Months Ended March 31, | | | | | | | | Net Income Attributable to ALLETE | $66.3 | | $66.3 | $70.5 | | $70.5 | | Average Common Shares | 51.7 | 0.1 | 51.8 | 51.6 | 0.1 | 51.7 | | Earnings Per Share | $1.28 | | $1.28 | $1.37 | | $1.37 | [NOTE 8. INCOME TAX EXPENSE](index=24&type=section&id=NOTE%208.%20INCOME%20TAX%20EXPENSE) Income Tax Expense (Benefit) (Millions) | | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:--------------------------------------|:----------------------------------|:----------------------------------| | Current Income Tax Expense | | | | Federal | — | — | | State | — | $0.3 | | Total Current Income Tax Expense | — | $0.3 | | Deferred Income Tax Expense (Benefit) | | | | Federal | $(17.6) | $(9.7) | | State | 4.0 | 12.5 | | Investment Tax Credit Amortization | (0.2) | (0.2) | | Total Deferred Income Tax Expense (Benefit) | $(13.8) | $2.6 | | Total Income Tax Expense (Benefit) | $(13.8) | $2.9 | - For the first quarter of 2020, the effective tax rate was a **27.2%** benefit (compared to a **4.0%** expense in the prior-year period), primarily influenced by production tax credits[94](index=94&type=chunk) Reconciliation of Taxes from Federal Statutory Rate to Total Income Tax Expense (Millions) | Reconciliation of Taxes from Federal Statutory Rate to Total Income Tax Expense | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:--------------------------------------------------------------------------------|:----------------------------------|:----------------------------------| | Income Before Income Taxes | $50.7 | $73.4 | | Statutory Federal Income Tax Rate | 21% | 21% | | Income Taxes Computed at Statutory Federal Rate | $10.6 | $15.4 | | Increase (Decrease) in Income Tax Due to: | | |\n| State Income Taxes – Net of Federal Income Tax Benefit | 3.2 | 10.1 |\n| Production Tax Credits | (23.8) | (16.3) |\n| Regulatory Differences – Excess Deferred Tax | (4.4) | (3.2) |\n| U.S. Water Services Sale of Stock Basis Difference | — | 2.4 |\n| Share-Based Compensation | (0.1) | (0.9) |\n| Other | 0.7 | (4.6) |\n| Total Income Tax Expense (Benefit) | $(13.8) | $2.9 | - As of March 31, 2020, the company had **$1.4 million** in total unrecognized tax benefits, of which **$0.6 million** would favorably impact the effective income tax rate if recognized[95](index=95&type=chunk) - ALLETE and its subsidiaries file consolidated federal income tax returns and both consolidated and separate state income tax returns; the company has no open federal or state audits[96](index=96&type=chunk) [NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS](index=25&type=section&id=NOTE%209.%20PENSION%20AND%20OTHER%20POSTRETIREMENT%20BENEFIT%20PLANS) Components of Net Periodic Benefit Cost (Credit) (Millions) | Components of Net Periodic Benefit Cost (Credit) | 2020 | 2019 | 2020 | 2019 | |:-------------------------------------------------|:-------|:-------|:-------|:------| | Three Months Ended March 31, | | | | | | Service Cost | $2.6 | $2.3 | $0.8 | $1.0 | | Non-Service Cost Components | | | | | | Interest Cost | 7.0 | 8.0 | 1.3 | 1.9 | | Expected Return on Plan Assets | (10.7) | (11.0) | (2.5) | (2.6) | | Amortization of Prior Service Credits | — | — | (2.0) | (0.4) | | Amortization of Net Loss | 3.2 | 1.8 | 0.3 | 0.1 | | Net Periodic Benefit Cost (Credit) | $2.1 | $1.1 | $(2.1) | — | - For the three months ended March 31, 2020, the company contributed **$10.7 million** in cash to its defined benefit pension plans, with no additional contributions expected in 2020; no contributions were made to other postretirement benefit plans during the same period, and none are expected in 2020[98](index=98&type=chunk) [NOTE 10. BUSINESS SEGMENTS](index=25&type=section&id=NOTE%2010.%20BUSINESS%20SEGMENTS) - The company reports three reportable segments: Regulated Operations, ALLETE Clean Energy, and U.S. Water Services; Regulated Operations includes Minnesota Power, SWL&P, and the investment in ATC; ALLETE Clean Energy focuses on developing, acquiring, and operating clean renewable energy projects; U.S. Water Services was sold in March 2019[99](index=99&type=chunk)[100](index=100&type=chunk) Operating Revenue (Millions) | Operating Revenue | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:------------------------------|:----------------------------------|:----------------------------------| | Regulated Operations | $265.3 | $282.2 | | ALLETE Clean Energy | 20.1 | 17.5 | | U.S. Water Services | — | 33.4 | | Corporate and Other | 26.2 | 24.1 | | Total Operating Revenue | $311.6 | $357.2 | Net Income (Loss) Attributable to ALLETE (Millions) | Net Income (Loss) Attributable to ALLETE | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:-----------------------------------------|:----------------------------------|:----------------------------------| | Regulated Operations | $57.5 | $51.5 | | ALLETE Clean Energy | 11.7 | 5.8 |\n| U.S. Water Services | — | (1.1) |\n| Corporate and Other | (2.9) | 14.3 |\n| Total Net Income Attributable to ALLETE | $66.3 | $70.5 | Assets (Millions) | Assets | March 31, 2020 | December 31, 2019 | |:------------------------|:---------------|:------------------| | Regulated Operations | $4,145.5 | $4,130.8 | | ALLETE Clean Energy | 1,099.6 | 1,001.5 | | Corporate and Other | 374.4 | 350.5 | | Total Assets | $5,619.5 | $5,482.8 | [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=27&type=section&id=ITEM%202.%2E%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section discusses ALLETE's financial condition and operating results as of March 31, 2020, comparing them to the prior year, highlighting COVID-19 impacts, segment performance, strategic goals, accounting policies, outlook, and liquidity [OVERVIEW](index=27&type=section&id=OVERVIEW) - For the three months ended March 31, 2020, the COVID-19 pandemic had no material impact on the company's financial position, results of operations, or cash flows, but first-quarter trends and results may not be indicative of full-year performance due to ongoing uncertainty[104](index=104&type=chunk) - The company's operations are segmented into Regulated Operations (including Minnesota Power, SWL&P, and the investment in ATC), ALLETE Clean Energy (focused on clean renewable energy projects), and Corporate and Other (including BNI Energy, the investment in Nobles 2, ALLETE Properties, etc.); U.S. Water Services was sold in March 2019[105](index=105&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) [Financial Overview](index=28&type=section&id=Financial%20Overview) Net Income Attributable to ALLETE and Diluted Earnings Per Share (Millions, Except Per Share Amounts) | Indicator | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | |:------------------------------------|:----------------------|:----------------------| | Net Income Attributable to ALLETE | $66.3 | $70.5 | | Diluted Earnings Per Share | $1.28 | $1.37 | - 2019 net income included a **$9.9 million** after-tax gain (**$0.19** per share) from the sale of U.S. Water Services, and a **$1.1 million** operating loss (**$0.02** per share) from U.S. Water Services[109](index=109&type=chunk) - Net income from Regulated Operations increased from **$51.5 million** in 2019 to **$57.5 million** in 2020, primarily due to the implementation of interim rates, increased cost recovery rider revenue, and the timing of fuel adjustment clause recoveries[110](index=110&type=chunk) - ALLETE Clean Energy's net income increased from **$5.8 million** in 2019 to **$11.7 million** in 2020, primarily driven by additional production tax credits, higher wind resources and availability, and earnings from the Glen Ullin wind energy facility[111](index=111&type=chunk) - Net income from Corporate and Other decreased from **$14.3 million** in 2019 to a **$2.9 million** loss in 2020, primarily due to the 2019 gain on the sale of U.S. Water Services, reduced gains on available-for-sale equity securities, and additional income tax expense in 2020[113](index=113&type=chunk) [COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019](index=29&type=section&id=COMPARISON%20OF%20THE%20THREE%20MONTHS%20ENDED%20MARCH%2031%2C%202020%20AND%202019) [Regulated Operations](index=29&type=section&id=Regulated%20Operations) Regulated Operations Financial Performance (Millions) | Three Months Ended March 31, | 2020 | 2019 | |:--------------------------------------------|:-------|:-------| | Operating Revenue – Utility | $265.3 | $282.2 | | Fuel, Purchased Power and Gas – Utility | 89.0 | 109.8 | | Transmission Services – Utility | 18.5 | 18.3 | | Operating and Maintenance | 49.3 | 47.7 | | Depreciation and Amortization | 41.7 | 39.8 | | Taxes Other than Income Taxes | 11.3 | 12.3 | | Operating Income | 55.5 | 54.3 | | Interest Expense | (14.6) | (15.5) | | Equity Earnings | 5.2 | 5.6 | | Other Income | 3.4 | 4.3 | | Income Before Income Taxes | 49.5 | 48.7 | | Income Tax Expense (Benefit) | (8.0) | (2.8) | | Net Income Attributable to ALLETE | $57.5 | $51.5 | - Utility operating revenue decreased by **$16.9 million** year-over-year, primarily due to reduced fuel adjustment clause recoveries, lower kilowatt-hour sales revenue, and decreased energy conservation improvement program recoveries, partially offset by interim rates implemented January 1, 2020, and increased cost recovery rider revenue[115](index=115&type=chunk) - Fuel adjustment clause revenue decreased by **$12.2 million**, primarily due to lower fuel and purchased power costs for retail and municipal customers; kilowatt-hour sales revenue decreased by **$9 million**, mainly due to lower residential, commercial, and municipal sales, partially offset by increased industrial sales[116](index=116&type=chunk) Kilowatt-hours Sold (Million kWh) | Kilowatt-hours Sold | 2020 | 2019 | Quantity Variance | % Variance | |:--------------------|:------|:------|:------------------|:-----------| | Residential | 321 | 349 | (28) | (8.0)% | | Commercial | 352 | 366 | (14) | (3.8)% | | Industrial | 1,902 | 1,814 | 88 | 4.9% | | Municipal | 156 | 203 | (47) | (23.2)% | | Total Retail and Municipal | 2,731 | 2,732 | (1) | — | | Other Power Suppliers | 822 | 822 | — | — | | Total Regulated Utility Kilowatt-hours Sold | 3,553 | 3,554 | (1) | — | - Operating expenses decreased by **$18.1 million**, or **8%**, year-over-year; fuel, purchased power, and gas expenses decreased by **$20.8 million**, or **19%**, primarily due to lower purchased power prices and fuel costs; operating and maintenance expenses increased by **$1.6 million**, or **3%**, mainly due to higher contract and professional services and increased material purchases for generation facilities; depreciation and amortization expenses increased by **$1.9 million**, or **5%**; taxes other than income taxes decreased by **$1 million**, or **8%**; income tax benefit increased by **$5.2 million**, primarily due to higher production tax credits[119](index=119&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk) [ALLETE Clean Energy](index=30&type=section&id=ALLETE%20Clean%20Energy) ALLETE Clean Energy Financial Performance (Millions) | Millions | 2020 | 2019 | |:----------------------------------------|:------|:------| | Operating Revenue | | | | Contracts with Customers – Non-utility | $17.3 | $14.6 | | Other – Non-utility | 2.8 | 2.9 | | Operating and Maintenance | 8.2 | 7.2 | | Depreciation and Amortization | 8.2 | 6.5 | | Taxes and Other | 0.7 | 0.6 | | Operating Income | 3.0 | 3.2 | | Interest Expense | (0.5) | (0.8) | | Other Income | 0.2 | 1.8 | | Income Before Income Taxes | 2.7 | 4.2 | | Income Tax Expense (Benefit) | (7.2) | (1.6) | | Net Income | 9.9 | 5.8 | | Net Loss Attributable to Non-Controlling Interest | (1.8) | — | | Net Income Attributable to ALLETE | $11.7 | $5.8 | - Operating revenue increased by **$2.6 million**, or **15%**, year-over-year, primarily due to revenue from the Glen Ullin wind energy facility (placed in service December 2019) and higher wind resources and availability[123](index=123&type=chunk) Wind Energy Production and Operating Revenue (Million kWh/Millions) | Production and Operating Revenue | 2020 kWh | 2020 Revenue | 2019 kWh | 2019 Revenue | |:---------------------------------|:---------|:-------------|:---------|:-------------| | Wind Energy Regions | | | | | | East | 78.6 | $7.1 | 80.4 | $7.4 | | Midwest | 244.4 | 8.5 | 212.9 | 9.0 | | West | 141.8 | 4.5 | 13.4 | 1.1 | | Total Production and Operating Revenue | 464.8 | $20.1 | 306.7 | $17.5 | - Operating and maintenance expenses increased by **$1 million**, or **14%**, year-over-year, primarily due to operating and maintenance expenses for the Glen Ullin wind energy facility; depreciation and amortization expenses increased by **$1.7 million**, or **26%**; income tax benefit increased by **$5.6 million**, primarily due to additional production tax credits generated in 2020[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) - Net loss attributable to non-controlling interest increased by **$1.8 million** year-over-year, reflecting the net loss from the Glen Ullin wind energy facility[128](index=128&type=chunk) [U.S. Water Services](index=31&type=section&id=U.S.%20Water%20Services) U.S. Water Services Financial Performance (Millions) | Three Months Ended March 31, | 2020 | 2019 | |:--------------------------------|:------|:-------| | Operating Revenue | — | $33.4 | | Net Loss Attributable to ALLETE | — | $(1.1) | - ALLETE completed the sale of U.S. Water Services in the first quarter of 2019, resulting in no related operating revenue or net loss in 2020[129](index=129&type=chunk)[130](index=130&type=chunk) [Corporate and Other](index=31&type=section&id=Corporate%20and%20Other) - Operating revenue increased by **$2.1 million**, or **9%**, year-over-year, primarily due to increased revenue at BNI Energy, which operates under a cost-plus fixed fee contract and benefited from higher fees and tons sold[131](index=131&type=chunk) - Net loss attributable to ALLETE was **$2.9 million** (compared to net income of **$14.3 million** in the prior-year period), primarily due to the 2019 after-tax gain of **$9.9 million** from the sale of U.S. Water Services, reduced gains on available-for-sale equity securities, and additional income tax expense in 2020[132](index=132&type=chunk) [Income Taxes – Consolidated](index=32&type=section&id=Income%20Taxes%20%E2%80%93%20Consolidated) - For the three months ended March 31, 2020, the effective tax rate was a **27.2%** benefit (compared to a **4.0%** expense in the prior-year period), primarily due to a higher tax rate and higher income before income taxes resulting from the 2019 sale of U.S. Water Services[133](index=133&type=chunk) - The annual effective tax rate for 2020 is expected to be higher than 2019, primarily due to increased production tax credits generated by ALLETE Clean Energy in 2020 and lower income before income taxes[134](index=134&type=chunk) [CRITICAL ACCOUNTING POLICIES](index=32&type=section&id=CRITICAL%20ACCOUNTING%20POLICIES) - The company considers the most critical accounting measurements to its reported results of operations and financial position to include: regulatory accounting, actuarial assumptions for pension and postretirement health and life, impairment of long-lived assets, and income taxes[134](index=134&type=chunk) [OUTLOOK](index=32&type=section&id=OUTLOOK) - ALLETE's long-term goal is to achieve average annual earnings per share growth of **5% to 7%** and provide an industry-competitive dividend payout; Regulated Operations is projected to achieve long-term average annual earnings growth of **4% to 5%**, while ALLETE Clean Energy and Corporate and Other businesses are expected to achieve long-term average annual earnings growth of at least **15%**[136](index=136&type=chunk) - Net income from Regulated Operations is expected to comprise approximately **80%** of total consolidated net income in 2020; the contribution to net income from ALLETE Clean Energy and Corporate and Other businesses is projected to increase in future years[136](index=136&type=chunk) [Regulated Operations](index=32&type=section&id=Regulated%20Operations) - Minnesota Power's long-term strategy is to be the leading electric provider in northeastern Minnesota by delivering safe, reliable, and cost-competitive electric energy while adhering to environmental permit conditions and renewable energy requirements[137](index=137&type=chunk) - Minnesota Power filed a retail rate increase request on November 1, 2019, seeking an average retail customer rate increase of approximately **10.6%**, and was approved for an interim rate increase of **$36.1 million** annually effective January 1, 2020[139](index=139&type=chunk) - SWL&P's current retail electric rates are based on a December 2018 PSCW order allowing a **10.4%** return on equity and a **55.0%** equity ratio; the PSCW has requested SWL&P to file a general rate case in 2020[141](index=141&type=chunk) - The COVID-19 pandemic is expected to result in reduced sales and revenue from commercial, municipal, and industrial customers, and increased bad debt from residential and commercial customers; Cliffs, Hibbing Taconite, and USS Corporation have idled portions of their mining operations temporarily or indefinitely[142](index=142&type=chunk) - There is a historical correlation between U.S. steel production and Minnesota iron ore production; the American Iron and Steel Institute reported that U.S. raw steel production for the last week of April 2020 had fallen to approximately **51%** of capacity[144](index=144&type=chunk) - Minnesota Power is executing its EnergyForward strategic plan to ensure reliability, preserve affordability, and further improve environmental performance, including investments in wind, solar, natural gas, and hydro generation, and the construction of additional transmission capacity[156](index=156&type=chunk) - The Nemadji Trail Energy Center (NTEC) project's total cost is estimated at approximately **$700 million**, with ALLETE's share projected to be about **$350 million**; the project continues to face legal challenges, with the Minnesota Supreme Court having accepted review[157](index=157&type=chunk) - Minnesota Power anticipates that approximately **50%** of its energy will be supplied by renewable sources by 2021[158](index=158&type=chunk) - The Great Northern Transmission Line (GNTL) project is expected to be in service by mid-2020; the total project cost within the U.S. is estimated at approximately **$700 million**, with Minnesota Power's share projected to be about **$325 million**[168](index=168&type=chunk)[169](index=169&type=chunk) - ALLETE plans additional investments in ATC through general capital calls, with ATC's 10-year transmission assessment (2019-2028) identifying **$2.9 billion to $3.6 billion** in required transmission system investments[171](index=171&type=chunk) [ALLETE Clean Energy](index=37&type=section&id=ALLETE%20Clean%20Energy) - ALLETE Clean Energy currently owns and operates approximately **740 megawatts** of wind generation capacity across six states, with about **300 megawatts** of wind facilities under construction; the company's strategy includes safe, reliable, optimized, and profitable operation of existing facilities, and growth through acquisitions or project development[172](index=172&type=chunk)[174](index=174&type=chunk)[175](index=175&type=chunk) - The company has invested in equipment to meet production tax credit safe harbor provisions, providing an opportunity to develop approximately **1,000 megawatts** of qualifying wind projects by 2022; the company will also invest approximately **$80 million** for production tax credit recertification of existing wind energy facilities[176](index=176&type=chunk) - These projects are expected to generate approximately **$20 million** in production tax credits annually in 2020, **$17 million to $22 million** annually from 2021 through 2027, and gradually decline thereafter through 2030[176](index=176&type=chunk) - On March 10, 2020, ALLETE Clean Energy acquired rights to the Caddo wind project in Oklahoma for approximately **$8 million**, which, when fully developed, will involve selling energy to corporate customers[178](index=178&type=chunk) [Corporate and Other](index=39&type=section&id=Corporate%20and%20Other) - BNI Energy expects to sell **4.6 million tons** of lignite in 2020 (compared to **4.1 million tons** sold in 2019), with **1.2 million tons** sold as of March 31, 2020; BNI Energy operates under a cost-plus fixed fee agreement effective through December 31, 2037[181](index=181&type=chunk) - ALLETE's investment in Nobles 2 is **$83.4 million**, with an anticipated additional investment of approximately **$65 million** in 2020; the Nobles 2 wind energy facility is expected to be completed by late 2020, with total project costs estimated between **$350 million** and **$400 million**[182](index=182&type=chunk) - ALLETE Properties represents the company's real estate investments in Florida, with its primary project being the Town Center in Palm Coast, holding approximately **800 acres** of land available for sale; the company's strategy includes selling the entire ALLETE Properties portfolio in bulk, with proceeds supporting growth initiatives in Regulated Operations and ALLETE Clean Energy[183](index=183&type=chunk)[184](index=184&type=chunk) [Income Taxes](index=39&type=section&id=Income%20Taxes) - ALLETE's combined federal and multi-state statutory tax rate is approximately **28%**; the effective tax rate for 2020 is expected to be a benefit of approximately **25% to 30%**, primarily due to federal production tax credits generated from wind energy production[185](index=185&type=chunk) - The effective tax rate is expected to be below the combined statutory rate for the next 10 years due to production tax credits generated from wind energy production[185](index=185&type=chunk) [LIQUIDITY AND CAPITAL RESOURCES](index=39&type=section&id=LIQUIDITY%20AND%20CAPITAL%20RESOURCES) - ALLETE's liquidity position is strong, but the company is closely monitoring capital markets and other financing sources in response to the COVID-19 pandemic; as of March 31, 2020, the company had **$67 million** in cash and cash equivalents, **$340.5 million** in available consolidated credit, and **2.9 million** shares of common stock available for issuance[186](index=186&type=chunk)[187](index=187&type=chunk) - The company has agreed to sell **$140 million** of first mortgage bonds and entered into a **$115 million** term loan agreement on April 8, 2020; on April 29, 2020, the company received approximately **$70 million** in cash from third-party investors as part of a tax equity financing for ALLETE Clean Energy's South Peak wind energy facility[187](index=187&type=chunk) ALLETE Capital Structure (Millions) | | March 31, 2020 | % | December 31, 2019 | % | |:--------------------------------------------------------------|:---------------|:----|:------------------|:----| | ALLETE Equity | $2,271.1 | 55 | $2,231.9 | 56 | | Non-Controlling Interest | 101.9 | 3 | 103.7 | 3 | | Long-Term Debt (Including Long-Term Debt Due Within One Year) | 1,731.3 | 42 | 1,622.6 | 41 | | Total | $4,104.3 | 100 | $3,958.2 | 100 | Selected Cash Flow Statement Information (Millions) | For the Three Months Ended March 31, | 2020 | 2019 | |:--------------------------------------------------------------------|:----------|:---------| | Cash, Cash Equivalents and Restricted Cash at Beginning of Period | $92.5 | $79.0 | | Cash Flows from (used for) Operating Activities | 88.8 | 79.1 | | Cash Flows from (for) Investing Activities | (182.5) | 185.1 | | Cash Flows from Financing Activities | 80.1 | 22.0 | | Change in Cash, Cash Equivalents and Restricted Cash | (13.6) | 286.2 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $78.9 | $365.2 | - Cash flows from operating activities in 2020 were slightly higher than 2019, with increased cash outflows from investing activities and increased cash outflows from financing activities[190](index=190&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk) - As of March 31, 2020, the company had **$407 million** in consolidated bank credit facilities, with the majority maturing in January 2024; the company also had **3.6 million** shares of common stock available for issuance, and **2.9 million** shares available through a distribution agreement[193](index=193&type=chunk) - In the first quarter of 2020, the company issued **0.1 million** shares of common stock, generating net proceeds of **$3.3 million**[194](index=194&type=chunk) - The company's long-term debt agreements contain customary covenants, with the most restrictive financial covenant requiring a debt to total capitalization ratio not exceeding **0.65 to 1.00**; as of March 31, 2020, this ratio was **0.43 to 1.00**, and the company was in compliance with all financial covenants[195](index=195&type=chunk) Credit Ratings | Credit Ratings | S&P Global Ratings | Moody's | |:-----------------------|:-------------------|:--------| | Issuer Credit Rating | BBB | Baa1 | | Commercial Paper | A-2 | P-2 | | First Mortgage Bonds | (a) | A2 | - On April 22, 2020, S&P Global Ratings lowered ALLETE's long-term issuer credit rating from BBB+ (negative outlook) to **BBB (stable)** and affirmed its short-term rating of **A-2**[198](index=198&type=chunk) - Capital expenditures for 2020 are projected to be approximately **$535 million**, but the company is evaluating and may adjust them to mitigate the impact of the COVID-19 pandemic; as of March 31, 2020, total capital expenditures were **$161.8 million**[200](index=200&type=chunk) [OTHER](index=41&type=section&id=OTHER) - The company's operations are subject to environmental regulations by federal, state, and local authorities; Minnesota Power is adjusting its generation portfolio to reduce reliance on coal and has installed cost-effective emission control technologies[201](index=201&type=chunk) - As of March 31, 2020, ALLETE had **1,352** employees, with **1,328** being full-time; labor agreements for Minnesota Power and SWL&P expire on April 30, 2023, and February 1, 2021, respectively, while BNI Energy's labor agreement expires on March 31, 2023[202](index=202&type=chunk)[203](index=203&type=chunk) [NEW ACCOUNTING PRONOUNCEMENTS](index=42&type=section&id=NEW%20ACCOUNTING%20PRONOUNCEMENTS) - New accounting pronouncements are discussed in Note 1, "Operations and Significant Accounting Policies"[204](index=204&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=42&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section discloses ALLETE's market risks, including securities investment, commodity price, power marketing, and interest rate risks, managed through regulatory frameworks, diverse contracts, and market monitoring [SECURITIES INVESTMENTS](index=42&type=section&id=SECURITIES%20INVESTMENTS) - As of March 31, 2020, the company's available-for-sale securities portfolio primarily consisted of securities held in other postretirement plans to fund employee benefits[205](index=205&type=chunk) [COMMODITY PRICE RISK](index=42&type=section&id=COMMODITY%20PRICE%20RISK) - The price risk associated with electricity and fuel (primarily coal and related transportation) costs incurred by the company's regulated utility operations, and purchased power and natural gas costs within its Wisconsin regulated service territory, is significantly mitigated through current rate-making processes and regulatory frameworks[206](index=206&type=chunk) - The company prudently manages customer price risk by entering into power, coal and related transportation costs (Minnesota Power), and natural gas (SWL&P) purchase contracts with varying terms and durations[206](index=206&type=chunk) [POWER MARKETING](index=42&type=section&id=POWER%20MARKETING) - Minnesota Power's power marketing activities involve purchasing energy in the wholesale market to meet its regulated service territory's energy requirements and selling excess available energy and purchased power; the company manages credit risk by establishing credit approval processes and monitoring counterparty limits[207](index=207&type=chunk)[208](index=208&type=chunk) [INTEREST RATE RISK](index=42&type=section&id=INTEREST%20RATE%20RISK) - The company manages its exposure to changes in interest rates by structuring the issuance and maturities of fixed-rate debt, limiting the amount of variable-rate debt, and continuously monitoring changes in market interest rates; the company may also use derivative financial instruments, such as interest rate swaps, to hedge interest rate risk[209](index=209&type=chunk) - As of March 31, 2020, based on outstanding variable-rate debt, a **100-basis point** increase in interest rates would increase pre-tax interest expense by **$2.6 million**[209](index=209&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=42&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section assesses ALLETE's disclosure controls and procedures effectiveness as of March 31, 2020, and states no material changes occurred in internal controls during the reporting period [Evaluation of Disclosure Controls and Procedures](index=42&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - As of March 31, 2020, the company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated and concluded that disclosure controls and procedures were effective in ensuring information required for reports filed under the Securities Exchange Act is timely recorded, processed, summarized, and reported[210](index=210&type=chunk) [Changes in Internal Controls](index=43&type=section&id=Changes%20in%20Internal%20Controls) - There were no changes in the company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[211](index=211&type=chunk) [PART II. OTHER INFORMATION](index=43&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. LEGAL PROCEEDINGS](index=43&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section refers to Notes 4 and 9 in the 2019 10-K, and Notes 2 and 6 in this report, for information on significant legal and regulatory proceedings - For information regarding significant legal and regulatory proceedings, refer to Note 4, "Regulatory Matters," and Note 9, "Commitments, Guarantees and Contingencies," in the company's 2019 Form 10-K, and Note 2, "Regulatory Matters," and Note 6, "Commitments, Guarantees and Contingencies," in this report[212](index=212&type=chunk) [ITEM 1A. RISK FACTORS](index=43&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section updates 2019 10-K risk factors, emphasizing potential significant adverse impacts of the COVID-19 pandemic on business, including economic disruption, reduced sales, increased bad debt, limited capital access, and supply chain interruptions - The company may be materially adversely affected by the ongoing COVID-19 pandemic, whose ultimate impact is unpredictable due to the uncertain scope and duration of the outbreak[213](index=213&type=chunk) - The COVID-19 pandemic has caused widespread impacts on the global economy, the company's employees, customers, contractors, and suppliers, and could lead to prolonged disruptions in economic activity, reducing sales and revenue from commercial, municipal, and industrial customers, and increasing bad debt from residential and commercial customers[214](index=214&type=chunk)[215](index=215&type=chunk) - The pandemic could increase borrowing costs in capital markets or affect the company's ability to access capital markets or other financing sources; capital market performance also impacts the value of pension and other postretirement benefit plan trust assets, with declining market values increasing funding requirements for benefit plans[216](index=216&type=chunk) - Supply chain disruptions or a lack of available financing could jeopardize the company's ability to timely complete certain capital projects to qualify for production tax credits[216](index=216&type=chunk) - The company cannot predict the ultimate impact of the COVID-19 pandemic or whether it will materially affect its liquidity, financial position, results of operations, and cash flows[217](index=217&type=chunk) [ITEM 2. UNREGISTERED

ALLETE, Inc. (NYSE:ALE) Q4 2019 Earnings Conference Call February 13, 2020 10:00 AM ET Company Participants Alan Hodnik – Executive Chairman Bethany Owen – President and Chief Executive Officer Steve Morris – Vice President, Controller and Chief Accounting Officer Bob Adams – Senior Vice President and Chief Financial Officer Conference Call Participants Brian Russo – Sidoti Agostina Colaco – Mizuho Securities Chris Ellinghaus – Siebert Williams Vedula Murti – Avon Capital Kevin Fallon – Citadel Operator Goo ...

Part I [Business Overview](index=8&type=section&id=Item%201.%20Business) ALLETE, Inc. is an energy company with core operations in regulated utilities and renewable energy Consolidated Operating Revenue by Segment | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Regulated Operations | 84% | 71% | 75% | | ALLETE Clean Energy | 5% | 11% | 6% | | U.S. Water Services | 3% | 11% | 11% | | Corporate and Other | 8% | 7% | 8% | - On March 26, 2019, the company sold its U.S. Water Services segment for approximately **$270 million** in cash, net of costs[12](index=12&type=chunk)[69](index=69&type=chunk) [Regulated Operations](index=9&type=section&id=Regulated%20Operations) This segment serves retail and industrial customers, with industrial sales representing **54%** of total regulated utility kWh sales in 2019, and is transitioning to **50%** renewable energy by 2021 Regulated Utility Kilowatt-hours Sold (Millions) | Customer Type | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Residential | 1,130 | 1,140 | 1,096 | | Commercial | 1,390 | 1,426 | 1,420 | | Industrial | 7,277 | 7,261 | 7,327 | | Municipal | 672 | 798 | 799 | | Other Power Suppliers | 3,185 | 3,953 | 4,039 | | **Total** | **13,654** | **14,578** | **14,681** | - Industrial customers, primarily in taconite mining, paper, and pipeline industries, accounted for **54%** of total regulated utility kWh sales in 2019. Taconite customers alone represented **69%** of industrial sales[16](index=16&type=chunk)[17](index=17&type=chunk) - The company is constructing the Great Northern Transmission Line (GNTL), a 500-kV line to connect with Manitoba Hydro, expected to be in-service by mid-2020 with a total project cost of approximately **$700 million**[42](index=42&type=chunk)[43](index=43&type=chunk) - Minnesota Power filed a retail rate increase request in November 2019 seeking an average increase of **10.6%**, which would generate approximately **$66 million** in additional annual revenue. An interim increase of **$36.1 million** was authorized effective January 1, 2020[50](index=50&type=chunk) [ALLETE Clean Energy](index=17&type=section&id=ALLETE%20Clean%20Energy) This segment develops and operates renewable energy projects, owning **660 MW** of wind capacity with an additional **380 MW** under construction, all supported by long-term Power Sales Agreements - The segment owns and operates approximately **660 MW** of wind energy and has another **380 MW** under construction, all with long-term Power Sales Agreements (PSAs) in place[64](index=64&type=chunk) Operating Wind Energy Facilities (as of Dec 31, 2019) | Facility | Region | Capacity (MW) | PSA Expiration | | :--- | :--- | :--- | :--- | | Armenia Mountain | East | 101 | 2024 | | Chanarambie/Viking | Midwest | 98 | 2023 | | Condon | West | 50 | 2022 | | Glen Ullin | West | 106 | 2039 | | Lake Benton | Midwest | 104 | 2028 | | Storm Lake I | Midwest | 108 | 2027 | | Storm Lake II | Midwest | 77 | 2020 / 2032 | | Other | Midwest | 17 | 2028 | [U.S. Water Services](index=18&type=section&id=U.S.%20Water%20Services) The U.S. Water Services segment, which provided integrated water management solutions, was sold on March 26, 2019, for **$270 million** in cash, resulting in a **$13.2 million** after-tax gain - The company completed the sale of U.S. Water Services on March 26, 2019, for approximately **$270 million** in cash, resulting in a **$13.2 million** after-tax gain[69](index=69&type=chunk) [Corporate and Other](index=18&type=section&id=Corporate%20and%20Other) This segment includes BNI Energy, a lignite coal supplier with long-term contracts, a **49%** equity investment in the Nobles 2 wind project, and ALLETE Properties' real estate investments - BNI Energy produces about **4 million tons** of lignite coal annually under cost-plus fixed fee agreements that extend through December 31, 2037[70](index=70&type=chunk) - The company holds a **49%** equity interest in Nobles 2, a **250 MW** wind energy facility under construction in Minnesota, with an expected completion in late 2020[71](index=71&type=chunk) - ALLETE Properties holds approximately **807 acres** in its Town Center at Palm Coast project and an additional **600 acres** of other land available for sale in Florida[72](index=72&type=chunk)[73](index=73&type=chunk) [Environmental Matters](index=19&type=section&id=Environmental%20Matters) The company is subject to extensive environmental regulations and is reshaping its generation portfolio to reduce coal reliance, anticipating potentially material future environmental expenditures - The company is reshaping its generation portfolio to reduce reliance on coal and has installed cost-effective emission control technology to comply with environmental regulations[76](index=76&type=chunk) - Accruals for environmental matters are recorded when a liability is probable and reasonably estimable. The company anticipates that future environmental expenditures may be material and require significant capital investments[77](index=77&type=chunk)[78](index=78&type=chunk) [Employees](index=20&type=section&id=Employees) As of December 31, 2019, ALLETE had **1,339 employees**, with a significant portion at Minnesota Power, SWL&P, and BNI Energy represented by IBEW labor agreements - As of year-end 2019, ALLETE had **1,339 employees**. **465 employees** at Minnesota Power and SWL&P are represented by IBEW Local 31, and **133 employees** at BNI Energy are represented by IBEW Local 1593[79](index=79&type=chunk)[80](index=80&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) ALLETE faces entity-wide, operational, and business-specific risks, including capital market access, economic downturns, extensive regulation, cybersecurity threats, industrial customer reliance, and renewable energy variability - A significant risk is the concentration of revenue from eight Large Power Customers, which accounted for **28%** of 2019 consolidated operating revenue. An economic downturn affecting these customers, particularly in the taconite industry, could negatively impact results[106](index=106&type=chunk)[107](index=107&type=chunk) - The company is subject to extensive federal and state regulation regarding rates, capital structure, and environmental compliance. Future laws limiting GHG emissions could require significant capital expenditures or the closure of coal-fired facilities[110](index=110&type=chunk)[119](index=119&type=chunk) - ALLETE Clean Energy's performance is highly dependent on suitable wind conditions, which are variable. Unfavorable weather could cause electricity generation and revenue to be substantially below expectations[137](index=137&type=chunk) - The company is vulnerable to cybersecurity attacks which could disrupt utility service, compromise sensitive data, and negatively impact its reputation and financial results[99](index=99&type=chunk)[101](index=101&type=chunk) [Unresolved Staff Comments](index=29&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[147](index=147&type=chunk) [Properties](index=29&type=section&id=Item%202.%20Properties) A discussion of the company's properties is included by reference in Item 1 of this report - The discussion of properties is incorporated by reference from Item 1. Business[148](index=148&type=chunk) [Legal Proceedings](index=29&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation, but does not expect material effects on its financial position, results of operations, or cash flows - The company does not expect the outcome of litigation arising in the normal course of business to have a material effect on its financial condition[150](index=150&type=chunk) [Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Mine safety disclosures required by the Dodd-Frank Act are included in Exhibit 95 to this Form 10-K - Mine safety disclosures required by the Dodd-Frank Act are included in Exhibit 95 of the Form 10-K[151](index=151&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) ALLETE's common stock is listed on the NYSE under ALE, has paid continuous dividends since 1948, and achieved a **74%** cumulative total shareholder return over five years - The company has paid uninterrupted dividends on its common stock since 1948. A quarterly dividend of **$0.6175 per share** was declared payable on March 1, 2020[152](index=152&type=chunk) Cumulative Total Shareholder Return (2014-2019) | Year | ALLETE | S&P 500 Index | Philadelphia Utility Index | | :--- | :--- | :--- | :--- | | 2014 | $100 | $100 | $100 | | 2015 | $96 | $101 | $94 | | 2016 | $126 | $113 | $110 | | 2017 | $150 | $138 | $124 | | 2018 | $158 | $132 | $129 | | 2019 | $174 | $174 | $163 | [Selected Financial Data](index=31&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five-year financial data, highlighting 2019 operating revenue of **$1,240.5 million**, net income of **$185.6 million**, and diluted EPS of **$3.59** Five-Year Selected Financial Data (Millions, Except Per Share Amounts) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Revenue | $1,240.5 | $1,498.6 | $1,419.3 | $1,339.7 | $1,486.4 | | Net Income Attributable to ALLETE | $185.6 | $174.1 | $172.2 | $155.3 | $141.1 | | Diluted Earnings Per Share | $3.59 | $3.38 | $3.38 | $3.14 | $2.92 | | Total Assets | $5,482.8 | $5,165.0 | $5,080.0 | $4,876.9 | $4,864.4 | | Long-Term Debt | $1,400.9 | $1,428.5 | $1,439.2 | $1,370.4 | $1,556.7 | | Total Capital Expenditures | $626.6 | $318.6 | $266.5 | $247.8 | $251.8 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) ALLETE's 2019 net income was **$185.6 million**, with 5-7% EPS growth and **$1.885 billion** in capital expenditures projected 2019 vs. 2018 Financial Highlights | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income Attributable to ALLETE | $185.6M | $174.1M | | Diluted EPS | $3.59 | $3.38 | - The increase in 2019 net income was primarily driven by a **$13.2 million** after-tax gain from the sale of the U.S. Water Services segment[164](index=164&type=chunk)[168](index=168&type=chunk) - The company has a long-term objective of achieving average annual earnings per share growth of **5% to 7%**[218](index=218&type=chunk) - Projected capital expenditures for 2020-2024 total approximately **$1.885 billion**, with significant investments in Regulated Operations (**$1.415 billion**) and ALLETE Clean Energy (**$370 million**)[278](index=278&type=chunk) [2019 Compared to 2018](index=33&type=section&id=2019%20Compared%20to%202018) Net income increased to **$185.6 million** in 2019, driven by higher Regulated Operations income and the U.S. Water Services sale gain, despite a decline in ALLETE Clean Energy's net income Net Income Attributable to ALLETE by Segment (Millions) | Segment | 2019 | 2018 | | :--- | :--- | :--- | | Regulated Operations | $154.4 | $131.0 | | ALLETE Clean Energy | $12.4 | $33.7 | | U.S. Water Services | $(1.1) | $3.2 | | Corporate and Other | $19.9 | $6.2 | - Regulated Operations revenue decreased by **$17.1 million** primarily due to lower kWh sales, but operating income increased by **$20.7 million** due to lower operating & maintenance and property tax expenses[169](index=169&type=chunk)[177](index=177&type=chunk) - ALLETE Clean Energy's revenue dropped by **$100.3 million**, largely because 2018 revenue included the sale of a wind energy facility. 2019 results were also impacted by lower wind resources and availability[180](index=180&type=chunk) [2018 Compared to 2017](index=37&type=section&id=2018%20Compared%20to%202017) Net income slightly increased in 2018 to **$174.1 million**, with Regulated Operations benefiting from tax reform, while ALLETE Clean Energy and U.S. Water Services saw declines due to the absence of prior year's one-time tax benefits Net Income Attributable to ALLETE by Segment (Millions) | Segment | 2018 | 2017 | | :--- | :--- | :--- | | Regulated Operations | $131.0 | $128.4 | | ALLETE Clean Energy | $33.7 | $41.5 | | U.S. Water Services | $3.2 | $10.7 | | Corporate and Other | $6.2 | $(8.4) | - The 2017 results for ALLETE Clean Energy, U.S. Water Services, and Corporate and Other included significant one-time impacts from the remeasurement of deferred tax assets and liabilities due to the Tax Cuts and Jobs Act (TCJA)[204](index=204&type=chunk)[206](index=206&type=chunk)[208](index=208&type=chunk) - Regulated Operations depreciation expense increased by **$25.4 million** in 2018, primarily due to modifications of the depreciable lives for the Boswell energy center[197](index=197&type=chunk) [Critical Accounting Policies](index=42&type=section&id=Critical%20Accounting%20Policies) Critical accounting policies involve significant management judgment in Regulatory Accounting, Pension and Postretirement Benefit Assumptions, Impairment of Long-Lived Assets, and Taxation - Key critical accounting policies involve significant management judgment and include: Regulatory Accounting, Pension and Postretirement Benefit Assumptions, Impairment of Long-Lived Assets, and Taxation[211](index=211&type=chunk) [Outlook](index=43&type=section&id=Outlook) ALLETE targets **5-7%** average annual EPS growth, with Regulated Operations expected to contribute **80%** of 2020 net income, and significant investments planned for renewable energy expansion - The company's long-term objective is to achieve average annual earnings per share growth of **5% to 7%**[218](index=218&type=chunk) - Minnesota Power's 'EnergyForward' strategy is targeting approximately **50%** of its energy to be supplied by renewable sources by 2021[237](index=237&type=chunk) - ALLETE Clean Energy is developing new projects, including the **~300 MW** Diamond Spring wind project in Oklahoma, expected to be completed in late 2020[249](index=249&type=chunk)[360](index=360&type=chunk) - The company expects its effective tax rate for 2020 to be a benefit of approximately **15% to 20%**, primarily due to federal production tax credits from wind energy generation[254](index=254&type=chunk) [Liquidity and Capital Resources](index=49&type=section&id=Liquidity%20and%20Capital%20Resources) ALLETE maintains strong liquidity with **$69.3 million** cash and **$345.0 million** available credit, projecting **$1.885 billion** in capital expenditures for 2020-2024, funded by internal funds, debt, and equity Capital Structure (as of Dec 31) | Component | 2019 | 2018 | | :--- | :--- | :--- | | ALLETE Equity | 56% | 59% | | Non-Controlling Interest | 3% | 0% | | Long-Term Debt | 41% | 41% | Projected Capital Expenditures (2020-2024, Millions) | Segment | 2020-2024 Total | | :--- | :--- | | Regulated Operations | $1,415 | | ALLETE Clean Energy | $370 | | Corporate and Other | $100 | | **Total** | **$1,885** | - Cash from operating activities decreased from **$433.1 million** in 2018 to **$249.5 million** in 2019, primarily due to the refund of provisions for tax reform and interim rates to customers[257](index=257&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=55&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section refers to Item 7 for market risk disclosures, covering interest rate and commodity price risks managed through debt mix and regulatory recovery mechanisms - Information related to market risk is provided in Item 7 of the report[286](index=286&type=chunk) [Financial Statements and Supplementary Data](index=55&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item refers to the Consolidated Financial Statements and supplementary data, indexed in Item 15(a) of this report - Refers to the Consolidated Financial Statements indexed under Item 15(a)[287](index=287&type=chunk) [Controls and Procedures](index=55&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, confirmed by PricewaterhouseCoopers LLP - Management concluded that disclosure controls and procedures, as well as internal control over financial reporting, were effective as of December 31, 2019[288](index=288&type=chunk)[289](index=289&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=56&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement and Part I of this Form 10-K - Most information required by this item is incorporated by reference from the 2020 Proxy Statement[292](index=292&type=chunk) [Executive Compensation](index=57&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive compensation is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[296](index=296&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=57&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference from the 2020 Proxy Statement, with **857,656** securities available for future issuance under approved equity plans Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Approved by Security Holders | 150,181 | 857,656 | | Not Approved by Security Holders | — | — | [Certain Relationships and Related Transactions, and Director Independence](index=57&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[299](index=299&type=chunk) [Principal Accounting Fees and Services](index=58&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[301](index=301&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=58&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all documents filed as part of the Form 10-K, including Consolidated Financial Statements, auditor reports, and various exhibits - Lists all financial statements, schedules, and exhibits filed with the Form 10-K[302](index=302&type=chunk) [Form 10-K Summary](index=66&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company reports that there is no Form 10-K summary - None[310](index=310&type=chunk) Consolidated Financial Statements [Report of Independent Registered Public Accounting Firm](index=69&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued an unqualified opinion on ALLETE's financial statements and internal controls, identifying regulatory accounting as a critical audit matter due to judgment in cost recoverability - The independent auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting[315](index=315&type=chunk) - A critical audit matter was identified related to the accounting for regulatory matters, specifically the significant judgment required by management to determine the recoverability of deferred costs (regulatory assets)[324](index=324&type=chunk)[325](index=325&type=chunk) [Consolidated Financial Statements - Audited](index=71&type=section&id=Consolidated%20Financial%20Statements%20-%20Audited) Audited financial statements show **$5.48 billion** total assets, **$3.15 billion** total liabilities, and **$185.6 million** net income Consolidated Balance Sheet Highlights (Millions) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Current Assets | $269.5 | $334.3 | | Property, Plant and Equipment – Net | $4,377.0 | $3,904.4 | | Total Assets | $5,482.8 | $5,165.0 | | Total Current Liabilities | $507.4 | $405.1 | | Long-Term Debt | $1,400.9 | $1,428.5 | | Total Liabilities | $3,147.2 | $3,009.2 | | Total ALLETE Equity | $2,231.9 | $2,155.8 | Consolidated Statement of Income Highlights (Millions) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Operating Revenue | $1,240.5 | $1,498.6 | $1,419.3 | | Operating Income | $179.8 | $201.2 | $225.9 | | Net Income Attributable to ALLETE | $185.6 | $174.1 | $172.2 | | Diluted EPS | $3.59 | $3.38 | $3.38 | [Notes to Consolidated Financial Statements](index=76&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on accounting policies, segment information, regulatory matters, debt, commitments, and employee benefit plans, including the U.S. Water Services sale and rate case specifics - **Note 1:** Details the sale of U.S. Water Services on March 26, 2019, for approximately **$270 million** in cash[345](index=345&type=chunk) - **Note 4:** Outlines the 2020 Minnesota General Rate Case, seeking a **10.6%** retail rate increase, and details various cost recovery riders for transmission, renewable, and environmental investments[417](index=417&type=chunk)[422](index=422&type=chunk)[423](index=423&type=chunk) - **Note 9:** Describes major commitments, including the Square Butte PPA through 2026 and multiple PPAs with Manitoba Hydro. It also estimates coal ash (CCR) compliance costs at the Boswell facility to be between **$65 million** and **$120 million** over the next 15 years[469](index=469&type=chunk)[498](index=498&type=chunk) - **Note 12:** Reports the funded status of benefit plans as of year-end 2019, with the pension plan being underfunded by **$154.4 million** and the postretirement health and life plan being overfunded by **$23.9 million**[527](index=527&type=chunk)[534](index=534&type=chunk)

Financial Data and Key Metrics Changes - ALLETE reported Q3 2019 earnings of $0.60 per share, with a net income of $31.2 million, compared to $0.59 per share and $30.7 million in Q3 2018 [6][19] - The regulated operations segment recorded net income of $32.4 million, an increase of $2.6 million from the previous year, primarily due to higher transmission revenue and lower operating expenses [19] - ALLETE Clean Energy's earnings decreased by $2.2 million from 2018, attributed to lower revenue from expiring power sales agreements [20] Business Line Data and Key Metrics Changes - Minnesota Power currently provides 30% renewable energy and aims for 50% by 2021, maintaining the lowest residential rates in Minnesota [9] - ALLETE Clean Energy is adding nearly 500 megawatts of new wind generation, with a total investment of over $700 million by the end of 2020 [15][16] - The corporate segment, including BI Energy and ALLETE properties, recorded higher earnings of $1.8 million due to lower expenses [20] Market Data and Key Metrics Changes - Minnesota Power filed a request for a retail rate increase of approximately $66 million to address lower customer demand and increasing operating expenses [21] - The demand for enhanced pellet products in steelmaking is high, with significant capital investments from mining customers in northeastern Minnesota [11] Company Strategy and Development Direction - ALLETE's strategy focuses on sustainability and clean energy transformation, with significant investments in renewable energy infrastructure [8][30] - The company plans a $190 million investment in the Nobles 2 project, delivering 250 megawatts of renewable wind energy [12] - ALLETE aims to own and operate at least 1500 megawatts of clean energy by 2022, with a goal to add two to three projects per year [17][26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving growth from non-regulated activities, particularly from ALLETE Clean Energy [24] - The company anticipates significant investment opportunities in transmission and distribution to support the transition to renewable energy [14] - Management remains optimistic about the future, citing a strong balance sheet and substantial free cash flow expected to increase in the coming years [28] Other Important Information - ALLETE's five-year capital investment plan exceeds $2 billion, aimed at meeting the demand for clean energy infrastructure [30] - The company is actively engaging with stakeholders to ensure reliability and affordability while meeting clean energy objectives [9] Q&A Session Summary Question: Can you quantify some of the items in the rate case request? - Management preferred not to provide detailed quantifications at this time, indicating more information would be available later [34] Question: How do you view buying projects versus developing them? - The company is currently balanced between new projects and acquisitions, focusing on smaller projects that meet their underwriting criteria [38] Question: What does the two to three projects guidance imply for 2020? - The guidance indicates that while Diamond Springs will come online in late 2020, the focus for 2020 will be on South Peak and Glen Ullin projects [43][45] Question: Can you provide insight into the loss at ALLETE Clean Energy in Q3? - The loss was expected due to it being a low resource quarter, with a significant pickup anticipated in Q4 [51] Question: What is the status of the Mousavi Metallics opportunity? - The project is still in limbo, with ongoing monitoring of its status in Minnesota [56][58]