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]

[Forward-Looking Statements](index=5&type=section&id=Forward-Looking%20Statements) This report contains forward-looking statements, qualified by identified risk factors, where actual results may materially differ from expectations - The report contains forward-looking statements involving **risks and uncertainties**, which could cause actual results to **differ materially** from expectations, qualified by factors identified in the report and 2018 Form 10-K[6](index=6&type=chunk)[7](index=7&type=chunk)[8](index=8&type=chunk) - Key factors impacting actual results include strategic objectives, economic conditions, regulatory changes, tax rates, legal proceedings, weather, capital markets, interest rates, project delays, operating expenses, commodity prices, personnel retention, emerging technology, geopolitical risks, acquisitions, population growth, power market conditions, regulatory actions, competition, climate change, renewable energy deployment, fuel pricing, customer expansion, real estate, and Energy Infrastructure business factors[7](index=7&type=chunk) [Part I. Financial Information](index=7&type=section&id=Part%20I.%20Financial%20Information) This section presents ALLETE, Inc.'s unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Consolidated Financial Statements - Unaudited](index=7&type=section&id=Item%201.%20Consolidated%20Financial%20Statements%20-%20Unaudited) This section presents ALLETE, Inc.'s unaudited consolidated financial statements, including balance sheets, income statements, cash flows, and equity, along with detailed notes on operations, accounting policies, and segment performance [Consolidated Balance Sheet](index=7&type=section&id=Consolidated%20Balance%20Sheet) This section presents ALLETE, Inc.'s consolidated balance sheet, detailing assets, liabilities, and equity as of September 30, 2019, and December 31, 2018 Consolidated Balance Sheet (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------|:-------------|:-------------| | **Assets** | | | | Total Current Assets | $296.1 | $334.3 | | Property, Plant & Equipment| $4,210.7 | $3,904.4 | | Regulatory Assets | $393.1 | $389.5 | | Equity Investments | $183.3 | $161.1 | | Goodwill & Intangible Assets| $1.0 | $223.3 | | Total Assets | $5,275.8 | $5,165.0 | | **Liabilities & Equity** | | | | Total Current Liabilities | $483.3 | $405.1 | | Long-Term Debt | $1,404.9 | $1,428.5 | | Total Liabilities | $3,068.0 | $3,009.2 | | Total Shareholders' Equity | $2,207.8 | $2,155.8 | | Total Liabilities & Equity | $5,275.8 | $5,165.0 | - Total assets increased by **$110.8 million** (**2.1%**) from December 31, 2018, to September 30, 2019, primarily driven by an increase in Property, Plant and Equipment, partially offset by a significant decrease in Goodwill and Intangible Assets due to the sale of U.S. Water Services[9](index=9&type=chunk)[50](index=50&type=chunk) - Goodwill and Intangible Assets decreased from **$223.3 million** to **$1.0 million**, primarily due to the sale of U.S. Water Services on March 26, 2019[9](index=9&type=chunk)[50](index=50&type=chunk) [Consolidated Statement of Income](index=8&type=section&id=Consolidated%20Statement%20of%20Income) This section presents ALLETE, Inc.'s consolidated statement of income, detailing revenues, expenses, and net income for the periods ended September 30, 2019, and 2018 Consolidated Statement of Income (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:----------------------------------|:--------|:--------|:--------|:--------| | Total Operating Revenue | $288.3 | $348.0 | $935.9 | $1,050.3| | Total Operating Expenses | $251.3 | $304.7 | $805.9 | $913.1 | | Operating Income | $37.0 | $43.3 | $130.0 | $137.2 | | Income Before Income Taxes | $28.8 | $31.1 | $131.6 | $104.3 | | Income Tax Expense (Benefit) | $(2.4) | $0.4 | $(4.3) | $(8.7) | | Net Income | $31.2 | $30.7 | $135.9 | $113.0 | | Basic EPS | $0.60 | $0.59 | $2.63 | $2.20 | | Diluted EPS | $0.60 | $0.59 | $2.63 | $2.19 | - Net income for the nine months ended September 30, 2019, increased to **$135.9 million** from **$113.0 million** in the prior year, primarily driven by a gain on the sale of U.S. Water Services and higher income tax benefits[10](index=10&type=chunk)[120](index=120&type=chunk)[124](index=124&type=chunk) - Total operating revenue for the nine months decreased by **$114.4 million** (**10.9%**) due to lower non-utility contracts, largely from the sale of U.S. Water Services[10](index=10&type=chunk)[111](index=111&type=chunk)[156](index=156&type=chunk) [Consolidated Statement of Comprehensive Income](index=9&type=section&id=Consolidated%20Statement%20of%20Comprehensive%20Income) This section presents ALLETE, Inc.'s consolidated statement of comprehensive income, detailing net income and other comprehensive income components for the periods ended September 30, 2019, and 2018 Consolidated Statement of Comprehensive Income (Millions) | Millions | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:---------------------------------------------|:--------|:--------|:--------|:--------| | Net Income | $31.2 | $30.7 | $135.9 | $113.0 | | Other Comprehensive Income (Loss) | | | | | | Unrealized Gain (Loss) on Securities | — | — | $0.2 | $(0.1) | | Defined Benefit Pension & Other Postretirement Benefit Plans | $0.1 | $0.3 | $0.3 | $1.0 | | Total Other Comprehensive Income | $0.1 | $0.3 | $0.5 | $0.9 | | Total Comprehensive Income | $31.3 | $31.0 | $136.4 | $113.9 | - Total comprehensive income for the nine months ended September 30, 2019, increased to **$136.4 million** from **$113.9 million** in the prior year, primarily reflecting the increase in net income[11](index=11&type=chunk) [Consolidated Statement of Cash Flows](index=10&type=section&id=Consolidated%20Statement%20of%20Cash%20Flows) This section presents ALLETE, Inc.'s consolidated statement of cash flows, detailing cash movements from operating, investing, and financing activities for the periods ended September 30, 2019, and 2018 Consolidated Statement of Cash Flows (Millions) | Millions | 9M 2019 | 9M 2018 | |:---------------------------------------------|:--------|:--------| | Cash from Operating Activities | $176.4 | $298.1 | | Cash for Investing Activities | $(160.0)| $(207.8)| | Cash from (for) Financing Activities | $39.8 | $(58.9) | | Change in Cash, Cash Equivalents & Restricted Cash | $56.2 | $31.4 | | Cash, Cash Equivalents & Restricted Cash at End of Period | $135.2 | $141.5 | - Cash from operating activities decreased to **$176.4 million** in 9M 2019 from **$298.1 million** in 9M 2018, primarily due to refunds of tax reform and interim rates to customers, fewer customer deposits, and lower cost recovery rider recoveries, partially offset by timing of accounts receivable collections[12](index=12&type=chunk)[212](index=212&type=chunk) - Cash used for investing activities decreased to **$160.0 million** in 9M 2019 from **$207.8 million** in 9M 2018, mainly due to proceeds from the sale of U.S. Water Services, partially offset by higher additions to property, plant and equipment[12](index=12&type=chunk)[213](index=213&type=chunk) - Cash from financing activities significantly improved to **$39.8 million** in 9M 2019 from a use of **$58.9 million** in 9M 2018, primarily due to higher proceeds from the issuance of long-term debt[12](index=12&type=chunk)[213](index=213&type=chunk) [Consolidated Statement of Shareholders' Equity](index=12&type=section&id=Consolidated%20Statement%20of%20Shareholders'%20Equity) This section presents ALLETE, Inc.'s consolidated statement of shareholders' equity, detailing changes in equity components for the periods ended September 30, 2019, and 2018 Consolidated Statement of Shareholders' Equity (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | Sep 30, 2019 | Sep 30, 2018 | |:----------------------------------|:-------------|:-------------| | Common Stock, End of Period | $1,435.1 | $1,421.1 | | Accumulated Other Comprehensive Loss, End of Period | $(26.8) | $(27.3) | | Retained Earnings, End of Period | $799.5 | $722.3 | | Total Shareholders' Equity | $2,207.8 | $2,116.1 | | Dividends Per Share of Common Stock | $1.7625 | $1.68 | - Total Shareholders' Equity increased to **$2,207.8 million** as of September 30, 2019, from **$2,116.1 million** as of September 30, 2018, driven by an increase in retained earnings and common stock issued[14](index=14&type=chunk) - Dividends per share of common stock increased to **$1.7625** for the nine months ended September 30, 2019, from **$1.68** for the same period in 2018[14](index=14&type=chunk) [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes to ALLETE, Inc.'s consolidated financial statements, explaining significant accounting policies, regulatory matters, and specific financial accounts [Note 1. Operations and Significant Accounting Policies](index=12&type=section&id=Note%201.%20Operations%20and%20Significant%20Accounting%20Policies) This note details ALLETE's significant accounting policies, including cash and restricted cash, inventory valuation, and the impact of new accounting pronouncements, particularly the adoption of new lease accounting guidance. It also covers the sale of U.S. Water Services and the acquisition of the Diamond Spring wind project Cash, Cash Equivalents and Restricted Cash (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------------------------|:-------------|:-------------| | Cash and Cash Equivalents | $100.3 | $69.1 | | Restricted Cash (Prepayments and Other) | $3.4 | $1.3 | | Restricted Cash (Other Non-Current Assets) | $31.5 | $8.6 | | Total Cash, Cash Equivalents and Restricted Cash | $135.2 | $79.0 | - ALLETE adopted new lease accounting guidance in Q1 2019, recognizing right-of-use assets and lease liabilities for leases over 12 months, with total operating lease right-of-use assets and liabilities at **$30.4 million** as of September 30, 2019[24](index=24&type=chunk)[29](index=29&type=chunk) - ALLETE completed the sale of U.S. Water Services on March 26, 2019, receiving approximately **$265 million** in cash and recognizing an after-tax gain of **$11.1 million**, resulting in the removal of related inventory, goodwill, and intangible assets from the balance sheet[18](index=18&type=chunk)[30](index=30&type=chunk)[50](index=50&type=chunk) - ALLETE Clean Energy acquired the Diamond Spring wind project (**300 MW**) in Oklahoma on May 3, 2019, with construction expected to begin in late 2019 and complete in late 2020, fully contracted under long-term power sales agreements[31](index=31&type=chunk) [Note 2. Regulatory Matters](index=17&type=section&id=Note%202.%20Regulatory%20Matters) This note outlines key regulatory developments affecting ALLETE's Regulated Operations segment, including electric rate cases, cost recovery riders, and the Integrated Resource Plan. It also details changes in regulatory assets and liabilities - Minnesota Power filed a retail rate increase request with the MPUC on November 1, 2019, seeking an average increase of approximately **10.6%** for retail customers, aiming for a **10.05%** return on equity and a **53.81%** equity ratio, with an annual interim rate increase of approximately **$48 million** expected within 60 days of filing acceptance[36](index=36&type=chunk) - The PSCW approved a rate increase for SWL&P effective January 1, 2019, including a **10.4%** return on equity and a **55.0%** equity ratio, expected to generate approximately **$1.3 million** in additional annualized revenue[37](index=37&type=chunk) - Minnesota Power's 2015 Integrated Resource Plan (IRP) was approved with modifications, including the retirement of Boswell Units 1 and 2 in Q4 2018 and plans to cease coal-fired operations at Taconite Harbor in 2020, with the next IRP filing due by October 1, 2020[41](index=41&type=chunk)[182](index=182&type=chunk) Regulatory Assets and Liabilities (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------------------------|:-------------|:-------------| | Total Non-Current Regulatory Assets | $393.1 | $389.5 | | Total Current Regulatory Liabilities | $2.7 | $55.1 | | Total Non-Current Regulatory Liabilities | $510.4 | $512.1 | | Total Regulatory Liabilities | $513.1 | $567.2 | - Current regulatory liabilities decreased significantly from **$55.1 million** to **$2.7 million**, primarily due to the refund of the provision for interim rate refund (**$40.0 million**) and tax reform refund (**$10.4 million**) to Minnesota Power's customers in Q1 and Q2 2019[20](index=20&type=chunk)[45](index=45&type=chunk)[212](index=212&type=chunk) [Note 3. Equity Investments](index=19&type=section&id=Note%203.%20Equity%20Investments) This note details ALLETE's equity investments in American Transmission Company LLC (ATC) and Nobles 2, outlining investment balances, earnings, and future investment plans Equity Investments (Millions) | Millions | Sep 30, 2019 | |:---------------------------------------------|:-------------| | ALLETE's Investment in ATC | $136.9 | | Equity Investment in Nobles 2 | $46.4 | - ALLETE's equity investment in ATC increased to **$136.9 million** as of September 30, 2019, from **$128.1 million** at December 31, 2018, with **$4.7 million** invested in 9M 2019 and an additional **$1.9 million** in October 2019[46](index=46&type=chunk)[47](index=47&type=chunk)[193](index=193&type=chunk) - The equity investment in Nobles 2 increased to **$46.4 million** as of September 30, 2019, from **$33.0 million** at December 31, 2018, with Nobles 2 returning **$8.3 million** in capital in Q1 2019, and ALLETE expecting to make approximately **$12 million** in additional investments in 2019[49](index=49&type=chunk)[207](index=207&type=chunk) [Note 4. Goodwill and Intangible Assets](index=19&type=section&id=Note%204.%20Goodwill%20and%20Intangible%20Assets) This note details the changes in goodwill and intangible assets, primarily driven by the sale of U.S. Water Services, which resulted in the removal of associated goodwill and a significant portion of intangible assets - Goodwill was eliminated as of September 30, 2019, due to the sale of U.S. Water Services, compared to **$148.5 million** at December 31, 2018[50](index=50&type=chunk) Intangible Assets (Millions) | Millions | Dec 31, 2018 | Amortization | Other (b) | Sep 30, 2019 | |:-----------------------------|:-------------|:-------------|:----------|:-------------| | Total Definite-Lived Intangible Assets | $58.2 | $(1.5) | $(55.7) | $1.0 | | Total Indefinite-Lived Intangible Assets | $16.6 | — | $(16.6) | — | | Total Intangible Assets | $74.8 | $(1.5) | $(72.3) | $1.0 | - The sale of U.S. Water Services resulted in the removal of **$72.3 million** in intangible assets, including customer relationships and trademarks/trade names, with amortization expense for intangible assets at **$1.5 million** for the nine months ended September 30, 2019[50](index=50&type=chunk)[51](index=51&type=chunk) [Note 5. Fair Value](index=20&type=section&id=Note%205.%20Fair%20Value) This note describes ALLETE's fair value measurements for assets and liabilities, categorizing them into a three-level hierarchy based on input observability. It also provides fair value information for financial instruments and non-recurring measurements Fair Value of Assets and Liabilities (Millions) | Millions | Level 1 | Level 2 | Level 3 | Total | |:---------------------------------------------|:--------|:--------|:--------|:------| | **Assets (Sep 30, 2019)** | | | | | | Available-for-sale – Equity Securities | $10.6 | — | — | $10.6 | | Available-for-sale – Corporate and Governmental Debt Securities | — | $9.6 | — | $9.6 | | Cash Equivalents | $1.2 | — | — | $1.2 | | Total Fair Value of Assets | $11.8 | $9.6 | — | $21.4 | | **Liabilities (Sep 30, 2019)** | | | | | | Deferred Compensation | — | $21.6 | — | $21.6 | | Total Fair Value of Liabilities | — | $21.6 | — | $21.6 | - The Level 3 contingent consideration liability related to the U.S. Water Services acquisition was fully paid out in the first quarter of 2019, amounting to **$3.8 million**[55](index=55&type=chunk)[56](index=56&type=chunk) Long-Term Debt Fair Value (Millions) | Millions | Carrying Amount | Fair Value | |:---------------------------------------------|:----------------|:-----------| | Long-Term Debt (Sep 30, 2019) | $1,626.7 | $1,814.1 | | Long-Term Debt (Dec 31, 2018) | $1,495.2 | $1,534.6 | [Note 6. Short-Term and Long-Term Debt](index=25&type=section&id=Note%206.%20Short-Term%20and%20Long-Term%20Debt) This note provides a breakdown of ALLETE's short-term and long-term debt, details recent financing activities including a new credit agreement and bond issuance, and confirms compliance with financial covenants Short-Term and Long-Term Debt (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:-----------------------|:-------------|:-------------| | Short-Term Debt | $212.7 | $57.5 | | Long-Term Debt | $1,404.9 | $1,428.5 | | Total Debt | $1,617.6 | $1,486.0 | - ALLETE entered into an amended **$400 million** unsecured credit agreement in January 2019, expiring in January 2024, for general corporate purposes, commercial paper support, and letters of credit[60](index=60&type=chunk)[216](index=216&type=chunk) - In March 2019, ALLETE issued **$100 million** in First Mortgage Bonds (**$70 million** at **4.08%** due 2029, **$30 million** at **4.47%** due 2049) to fund utility capital investment and general corporate purposes[61](index=61&type=chunk)[62](index=62&type=chunk) - As of September 30, 2019, ALLETE's ratio of indebtedness to total capitalization was approximately **0.43 to 1.00**, well within the covenant limit of **0.65 to 1.00**, indicating compliance with financial covenants[64](index=64&type=chunk) [Note 7. Commitments, Guarantees and Contingencies](index=27&type=section&id=Note%207.%20Commitments,%20Guarantees%20and%20Contingencies) This note details ALLETE's various commitments, guarantees, and contingencies, including power purchase agreements (PPAs), transmission projects like the Great Northern Transmission Line (GNTL), and environmental matters such as air, water, and solid waste regulations. It also covers legal proceedings and other business-specific obligations - Minnesota Power's cost of power purchased from Square Butte for the nine months ended September 30, 2019, was **$61.3 million**, an increase from **$57.9 million** in the same period of 2018[67](index=67&type=chunk) - The Great Northern Transmission Line (GNTL) project, with an estimated total cost of **$700 million** (ALLETE's portion **$325 million**), has incurred **$581.6 million** in costs through September 30, 2019, with **$310.4 million** recovered from a Manitoba Hydro subsidiary, and completion expected by mid-2020[72](index=72&type=chunk)[193](index=193&type=chunk) - ALLETE's businesses are subject to extensive environmental regulations (Clean Air Act, Clean Water Act, waste management), with potential material expenditures for future environmental matters, particularly related to coal ash management and water discharge, for which the company would seek recovery through rate proceedings[76](index=76&type=chunk)[77](index=77&type=chunk)[91](index=91&type=chunk)[95](index=95&type=chunk) - As of September 30, 2019, BNI Energy had **$67.7 million** in surety bonds for reclamation liability, and ALLETE Properties had **$4.8 million** in surety bonds and letters of credit for development obligations[98](index=98&type=chunk)[99](index=99&type=chunk) [Note 8. Earnings Per Share and Common Stock](index=27&type=section&id=Note%208.%20Earnings%20Per%20Share%20and%20Common%20Stock) This note provides a reconciliation of basic and diluted earnings per share, highlighting the impact of non-vested restricted stock units and performance share awards Earnings Per Share (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | Q3 2019 Basic | Q3 2019 Diluted | Q3 2018 Basic | Q3 2018 Diluted | |:----------------------------------|:--------------|:----------------|:--------------|:----------------| | Net Income | $31.2 | $31.2 | $30.7 | $30.7 | | Average Common Shares | 51.7 | 51.8 | 51.4 | 51.6 | | Earnings Per Share | $0.60 | $0.60 | $0.59 | $0.59 | | | 9M 2019 Basic | 9M 2019 Diluted | 9M 2018 Basic | 9M 2018 Diluted | | Net Income | $135.9 | $135.9 | $113.0 | $113.0 | | Average Common Shares | 51.6 | 51.7 | 51.3 | 51.5 | | Earnings Per Share | $2.63 | $2.63 | $2.20 | $2.19 | - Diluted earnings per share for the nine months ended September 30, 2019, increased to **$2.63** from **$2.19** in the prior year, reflecting higher net income[103](index=103&type=chunk) [Note 9. Income Tax Expense](index=27&type=section&id=Note%209.%20Income%20Tax%20Expense) This note details ALLETE's income tax expense, including current and deferred components, and reconciles the federal statutory rate to the effective tax rate. It also discusses the impact of production tax credits and the sale of U.S. Water Services on the effective tax rate Income Tax Expense (Benefit) (Millions) | Millions | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | |:---------------------------------------------|:--------|:--------|:--------|:--------| | Total Current Income Tax Expense | — | — | $0.2 | $0.4 | | Total Deferred Income Tax Expense (Benefit) | $(2.4) | $0.4 | $(4.5) | $(9.1) | | Total Income Tax Expense (Benefit) | $(2.4) | $0.4 | $(4.3) | $(8.7) | - For the nine months ended September 30, 2019, ALLETE reported an income tax benefit of **$4.3 million**, compared to a benefit of **$8.7 million** in the prior year, with the effective tax rate being a benefit of **3.3%** in 9M 2019 (**8.3%** in 9M 2018), primarily due to a higher tax rate on the gain from the sale of U.S. Water Services[104](index=104&type=chunk)[105](index=105&type=chunk)[159](index=159&type=chunk) - Production tax credits significantly reduced the effective tax rate, contributing a **$35.7 million** decrease in income tax for the nine months ended September 30, 2019[105](index=105&type=chunk) - As of September 30, 2019, gross unrecognized tax benefits were **$1.3 million**, with **$0.6 million** potentially favorably impacting the effective income tax rate if recognized[106](index=106&type=chunk) [Note 10. Pension and Other Postretirement Benefit Plans](index=29&type=section&id=Note%2010.%20Pension%20and%20Other%20Postretirement%20Benefit%20Plans) This note provides details on ALLETE's defined benefit pension and other postretirement benefit plans, including service and non-service cost components, and employer contributions Pension and Postretirement Benefit Costs (Millions) | Millions | 9M 2019 Pension | 9M 2018 Pension | 9M 2019 Postretirement | 9M 2018 Postretirement | |:---------------------------------------------|:----------------|:----------------|:-----------------------|:-----------------------| | Service Cost | $7.0 | $8.2 | $2.8 | $3.7 | | Net Periodic Benefit Cost (Credit) | $2.5 | $6.2 | $(0.7) | $0.2 | - ALLETE contributed **$10.4 million** in cash to defined benefit pension plans for the nine months ended September 30, 2019, a decrease from **$15.0 million** in the same period of 2018, with no contributions made to other postretirement benefit plans in either period[108](index=108&type=chunk) [Note 11. Business Segments](index=29&type=section&id=Note%2011.%20Business%20Segments) This note provides a detailed breakdown of ALLETE's financial performance by its three reportable segments: Regulated Operations, ALLETE Clean Energy, and U.S. Water Services (until its sale), along with Corporate and Other. It presents operating revenue, net income (loss), and assets for each segment - ALLETE's reportable segments are Regulated Operations (Minnesota Power, SWL&P, ATC), ALLETE Clean Energy (clean and renewable energy projects), and U.S. Water Services (integrated water management, sold March 26, 2019), with Corporate and Other including BNI Energy, ALLETE Properties, Nobles 2, and other corporate activities[109](index=109&type=chunk)[110](index=110&type=chunk) Segment Operating Revenue (Millions) | Millions | 9M 2019 Operating Revenue | 9M 2018 Operating Revenue | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $786.1 | $789.3 | | ALLETE Clean Energy | $43.3 | $57.9 | | U.S. Water Services | $33.4 | $124.7 | | Corporate and Other | $73.1 | $78.4 | | Total Operating Revenue | $935.9 | $1,050.3 | Segment Net Income (Loss) (Millions) | Millions | 9M 2019 Net Income (Loss) | 9M 2018 Net Income (Loss) | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $114.2 | $99.7 | | ALLETE Clean Energy | $6.5 | $15.9 | | U.S. Water Services | $(1.1) | $0.5 | | Corporate and Other | $16.3 | $(3.1) | | Total Net Income | $135.9 | $113.0 | Segment Assets (Millions) | Millions | Sep 30, 2019 Assets | Dec 31, 2018 Assets | |:---------------------------------------------|:--------------------|:--------------------| | Regulated Operations | $4,045.2 | $3,952.5 | | ALLETE Clean Energy | $839.8 | $606.6 | | U.S. Water Services | — | $295.8 | | Corporate and Other | $390.8 | $310.1 | | Total Assets | $5,275.8 | $5,165.0 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on ALLETE's financial condition and results of operations, offering a detailed comparison of performance for the quarter and nine months ended September 30, 2019, versus 2018. It also includes an overview of critical accounting policies, the company's outlook, and an analysis of liquidity and capital resources [Overview](index=37&type=section&id=Overview) This section provides an overview of ALLETE's core business segments, including Regulated Operations, ALLETE Clean Energy, and Corporate and Other activities, highlighting their primary functions and recent developments - ALLETE's core business is Regulated Operations, including Minnesota Power and SWL&P, and an investment in ATC, with Minnesota Power serving approximately **145,000** retail customers and **15** municipal customers in northeastern Minnesota, and SWL&P serving about **15,000** electric, **13,000** natural gas, and **10,000** water customers in northwestern Wisconsin[114](index=114&type=chunk) - ALLETE Clean Energy develops, acquires, and operates clean and renewable energy projects, currently owning and operating approximately **555 MW** of wind energy generation, with an additional **480 MW** under construction[114](index=114&type=chunk) - U.S. Water Services, an integrated water management company, was sold on March 26, 2019, for approximately **$265 million** in cash[115](index=115&type=chunk) - Corporate and Other segment includes BNI Energy (coal mining), ALLETE Properties (Florida real estate), investment in Nobles 2, and other corporate activities[116](index=116&type=chunk) [Financial Overview](index=39&type=section&id=Financial%20Overview) This section provides a high-level summary of ALLETE's financial performance, focusing on net income and diluted earnings per share for the nine months ended September 30, 2019, compared to the prior year, and segment contributions Net Income and Diluted EPS (Millions Except Per Share Amounts) | Millions Except Per Share Amounts | 9M 2019 | 9M 2018 | |:----------------------------------|:--------|:--------| | Net Income | $135.9 | $113.0 | | Diluted EPS | $2.63 | $2.19 | - Net income for the nine months ended September 30, 2019, increased by **$22.9 million** (**20.3%**) to **$135.9 million**, or **$2.63** per diluted share, compared to **$113.0 million**, or **$2.19** per diluted share, in 2018, including an **$11.1 million** after-tax gain (**$0.22** per share) from the sale of U.S. Water Services[120](index=120&type=chunk) - Regulated Operations net income increased to **$114.2 million** (9M 2019) from **$99.7 million** (9M 2018), driven by lower operating and maintenance expenses, increased cost recovery rider revenue, and timing of fuel adjustment clause recoveries at Minnesota Power, and higher rates at SWL&P[121](index=121&type=chunk) - ALLETE Clean Energy net income decreased to **$6.5 million** (9M 2019) from **$15.9 million** (9M 2018), primarily due to lower revenue from wind resources and availability, and higher depreciation, partially offset by increased production tax credits[122](index=122&type=chunk) - Corporate and Other net income was **$16.3 million** (9M 2019) compared to a net loss of **$3.1 million** (9M 2018), benefiting from the U.S. Water Services sale gain and higher earnings on cash and short-term investments[124](index=124&type=chunk) [Comparison of the Quarters Ended September 30, 2019 and 2018](index=39&type=section&id=Comparison%20of%20the%20Quarters%20Ended) This section provides a detailed comparison of ALLETE's financial performance for the third quarter of 2019 versus 2018, broken down by segment, highlighting changes in operating revenue, expenses, and net income, along with the underlying drivers for these changes Segment Operating Revenue (Millions) | Millions | Q3 2019 Operating Revenue | Q3 2018 Operating Revenue | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $254.1 | $261.3 | | ALLETE Clean Energy | $10.4 | $15.0 | | U.S. Water Services | — | $45.0 | | Corporate and Other | $23.8 | $26.7 | | Total Operating Revenue | $288.3 | $348.0 | Segment Net Income (Loss) (Millions) | Millions | Q3 2019 Net Income (Loss) | Q3 2018 Net Income (Loss) | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $32.4 | $29.8 | | ALLETE Clean Energy | $(1.2) | $1.0 | | U.S. Water Services | — | $1.7 | | Corporate and Other | — | $(1.8) | | Total Net Income | $31.2 | $30.7 | - Regulated Operations' operating revenue decreased by **$7.2 million** (**3%**) in Q3 2019, primarily due to lower kWh sales to residential, commercial, municipal, and other power suppliers, partially offset by higher transmission revenue[126](index=126&type=chunk)[127](index=127&type=chunk) - ALLETE Clean Energy's operating revenue decreased by **$4.6 million** (**31%**) in Q3 2019, mainly due to lower non-cash amortization from expired power sales agreements and reduced kWh sales from lower wind resources and availability[134](index=134&type=chunk) - U.S. Water Services reported no operating revenue or net income in Q3 2019 due to its sale in Q1 2019, compared to **$45.0 million** revenue and **$1.7 million** net income in Q3 2018[136](index=136&type=chunk) [Comparison of the Nine Months Ended September 30, 2019 and 2018](index=35&type=section&id=Comparison%20of%20the%20Nine%20Months%20Ended) This section provides a detailed comparison of ALLETE's financial performance for the nine months ended September 30, 2019, versus 2018, broken down by segment. It highlights significant changes in operating revenue, expenses, and net income, along with the factors influencing these changes Segment Operating Revenue (Millions) | Millions | 9M 2019 Operating Revenue | 9M 2018 Operating Revenue | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $786.1 | $789.3 | | ALLETE Clean Energy | $43.3 | $57.9 | | U.S. Water Services | $33.4 | $124.7 | | Corporate and Other | $73.1 | $78.4 | | Total Operating Revenue | $935.9 | $1,050.3 | Segment Net Income (Loss) (Millions) | Millions | 9M 2019 Net Income (Loss) | 9M 2018 Net Income (Loss) | |:---------------------------------------------|:--------------------------|:--------------------------| | Regulated Operations | $114.2 | $99.7 | | ALLETE Clean Energy | $6.5 | $15.9 | | U.S. Water Services | $(1.1) | $0.5 | | Corporate and Other | $16.3 | $(3.1) | | Total Net Income | $135.9 | $113.0 | - Regulated Operations' operating revenue decreased by **$3.2 million** in 9M 2019, primarily due to lower kWh sales, largely offset by higher fuel adjustment clause recoveries, increased cost recovery rider revenue, and higher FERC formula-based rates[141](index=141&type=chunk) - ALLETE Clean Energy's operating revenue decreased by **$14.6 million** (**25%**) in 9M 2019, mainly due to lower non-cash amortization from expired power sales agreements (**$9.2 million**) and reduced kWh sales from lower wind resources and availability[152](index=152&type=chunk) - Corporate and Other net income increased to **$16.3 million** in 9M 2019 from a net loss of **$3.1 million** in 9M 2018, primarily due to the **$11.1 million** after-tax gain on the sale of U.S. Water Services and additional income tax benefits[158](index=158&type=chunk) [Critical Accounting Policies](index=38&type=section&id=Critical%20Accounting%20Policies) This section outlines ALLETE's critical accounting policies, which involve significant management judgment and estimates, including regulatory accounting, pensions, asset impairment, and taxation - ALLETE's critical accounting policies, which involve significant management judgment and estimates, include regulatory accounting, pension and postretirement health and life actuarial assumptions, impairment of long-lived assets, and taxation, and are reviewed regularly with the Audit Committee[160](index=160&type=chunk) [Outlook](index=39&type=section&id=Outlook) This section provides ALLETE's strategic outlook, including earnings per share growth targets, segment contributions, and planned capital investments in clean energy and infrastructure - ALLETE aims for average annual earnings per share growth of **5% to 7%** and a competitive dividend payout, with Regulated Operations projected for **4% to 5%** annual earnings growth and Energy Infrastructure and Related Services targeting at least **15%** annual growth[162](index=162&type=chunk) - Regulated Operations are expected to contribute approximately **80%** of total consolidated net income in 2019, with the contribution from Energy Infrastructure and Related Services and other businesses expected to increase in future years[163](index=163&type=chunk) - Minnesota Power is executing its EnergyForward strategic plan, including investments in wind, solar, natural gas, and hydroelectric power, transmission capacity, and emissions control technology, aiming for approximately **50%** renewable energy supply by 2021[180](index=180&type=chunk)[182](index=182&type=chunk) - ALLETE Clean Energy is targeting acquisitions and development of new wind or solar facilities up to **200 MW** each, with long-term PSAs or for sale, and plans to invest approximately **$80 million** through 2020 for production tax credit requalification of up to **468 WTGs**, anticipating annual production tax credits of **$12 million** in 2019 and **$17 million to $22 million** annually from 2020-2027[198](index=198&type=chunk)[199](index=199&type=chunk) - ALLETE expects its effective tax rate to be a benefit of approximately **5%** for 2019, primarily due to federal production tax credits from wind energy generation, and anticipates a lower effective tax rate than the combined statutory rate over the next 10 years due to these credits[210](index=210&type=chunk) [Liquidity and Capital Resources](index=45&type=section&id=Liquidity%20and%20Capital%20Resources) This section analyzes ALLETE's liquidity and capital resources, including cash position, credit availability, debt structure, capital expenditures, and credit ratings - As of September 30, 2019, ALLETE had **$100.3 million** in cash and cash equivalents, **$346.9 million** in available consolidated lines of credit, and a debt-to-capital ratio of **42%**[211](index=211&type=chunk) Total Capitalization and Debt-to-Capital Ratio (Millions) | Millions | Sep 30, 2019 | Dec 31, 2018 | |:---------------------------------------------|:-------------|:-------------| | Shareholders' Equity | $2,207.8 | $2,155.8 | | Long-Term Debt (incl. current portion) | $1,626.7 | $1,495.2 | | Total Capitalization | $3,834.5 | $3,651.0 | | Debt-to-Capital Ratio | 42% | 41% | - Cash from operating activities decreased in 2019 compared to 2018, primarily due to customer refunds for tax reform and interim rates, and lower cost recovery rider recoveries, while cash used for investing activities decreased due to proceeds from the U.S. Water Services sale, and cash from financing activities increased due to higher long-term debt issuance[212](index=212&type=chunk)[213](index=213&type=chunk) - ALLETE's capital expenditures for 2019 and 2020 are projected at approximately **$695 million** and **$495 million**, respectively, an increase from prior projections mainly due to the Diamond Spring wind energy facility acquisition[221](index=221&type=chunk) - Moody's downgraded ALLETE's long-term issuer rating to **Baa1** from **A3** on March 26, 2019, with a stable outlook, citing the adverse 2018 Minnesota Power general rate case outcome and future debt coverage ratios[219](index=219&type=chunk) [Other](index=47&type=section&id=Other) This section provides additional information regarding ALLETE's employee count and labor agreement expiration dates - ALLETE had **1,349** employees as of September 30, 2019, with labor agreements for IBEW Local 31 (Minnesota Power and SWL&P) expiring April 30, 2020, and February 1, 2021, respectively, and for IBEW Local 1593 (BNI Energy) expiring March 31, 2023[223](index=223&type=chunk)[224](index=224&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=48&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section discusses ALLETE's exposure to various market risks, including securities investment risk, commodity price risk, and interest rate risk, and outlines the strategies employed to manage these risks - ALLETE's available-for-sale securities portfolio primarily consists of securities held in postretirement plans, and the company's regulated utility operations mitigate commodity price risk (power, fuel, natural gas) through ratemaking processes that allow for cost recovery or savings distribution to ratepayers[226](index=226&type=chunk)[227](index=227&type=chunk) - Minnesota Power's power marketing activities involve purchasing and selling energy in the wholesale market, exposing it to credit risk, which is managed through credit policies and monitoring counterparty limits[228](index=228&type=chunk)[229](index=229&type=chunk) - ALLETE is exposed to interest rate risk from variable rate debt, where a hypothetical **100 basis point** increase in interest rates would impact pre-tax interest expense by **$1.5 million** based on variable rate debt outstanding as of September 30, 2019[230](index=230&type=chunk) [Item 4. Controls and Procedures](index=49&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of ALLETE's disclosure controls and procedures as of September 30, 2019, and states that there have been no material changes in internal control over financial reporting during the most recent fiscal quarter - ALLETE's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2019, ensuring timely and accurate reporting of information required under the Exchange Act[231](index=231&type=chunk) - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[232](index=232&type=chunk) [Part II. Other Information](index=49&type=section&id=Part%20II.%20Other%20Information) This section provides additional information not covered in Part I, including legal proceedings, risk factors, sales of equity securities, defaults, mine safety disclosures, and a list of exhibits [Item 1. Legal Proceedings](index=49&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to disclosures in the 2018 Form 10-K and current report regarding legal and regulatory proceedings, stating that the outcome of these matters is not expected to have a material effect on the company's financial position, results of operations, or cash flows - ALLETE is involved in litigation, tax, regulatory, and other governmental audits in the normal course of business, but does not expect these matters to materially affect its financial position, results of operations, or cash flows[101](index=101&type=chunk)[233](index=233&type=chunk) [Item 1A. Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) This section states that there have been no material changes to the risk factors previously disclosed in Part I, Item 1A of ALLETE's 2018 Form 10-K - No material changes have occurred from the risk factors disclosed in ALLETE's 2018 Form 10-K[234](index=234&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were no unregistered sales of equity securities and no use of proceeds to report - There were no unregistered sales of equity securities and no use of proceeds to report[234](index=234&type=chunk) [Item 3. Defaults Upon Senior Securities](index=49&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities to report - There were no defaults upon senior securities to report[234](index=234&type=chunk) [Item 4. Mine Safety Disclosures](index=49&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section notes that information regarding mine safety violations, as required by the Dodd-Frank Act, is included in Exhibit 95 to this Form 10-Q - Mine safety disclosures, as required by the Dodd-Frank Act, are provided in Exhibit 95 of this Form 10-Q[235](index=235&type=chunk) [Item 5. Other Information](index=49&type=section&id=Item%205.%20Other%20Information) This section states that there is no other information to report - There is no other information to report[236](index=236&type=chunk) [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including legal agreements, certifications, mine safety disclosures, news releases, and XBRL interactive data files - Exhibits include an Amended and Restated Term Loan Agreement, Rule 13a-14(a)/15d-14(a) Certifications by CEO and CFO, Section 1350 Certification, Mine Safety disclosures, ALLETE News Release dated November 6, 2019, and various XBRL interactive data files[236](index=236&type=chunk) [Signatures](index=51&type=section&id=Signatures) This section contains the official signatures of ALLETE's executive officers, certifying the accuracy and compliance of the report - The report is signed by Robert J. Adams, Senior Vice President and Chief Financial Officer, and Steven W. Morris, Vice President, Controller and Chief Accounting Officer, on November 6, 2019, certifying compliance with Securities Exchange Act of 1934 requirements[237](index=237&type=chunk)

ALLETE, Inc. (NYSE:ALE) Q2 2019 Earnings Conference Call August 1, 2019 10:00 AM ET Company Participants Alan Hodnik - President and Chief Executive Officer Bethany Owen - President Robert Adams - Senior Vice President and Chief Financial Officer Steven Morris - Vice President, Controller and Chief Accounting Officer Conference Call Participants David Emami - Verition Fund Management LLC Vedula Murti - Avon Capital Christopher Ellinghaus - The Williams Capital Group, LP Operator Good day, and welcome to the ...

[Part I. Financial Information](index=7&type=section&id=Part%20I.%20Financial%20Information) [Item 1. Consolidated Financial Statements](index=7&type=section&id=Item%201.%20Consolidated%20Financial%20Statements) The unaudited consolidated financial statements for the period ended June 30, 2019, show a net income of $104.7 million for the six-month period, a significant increase from $82.3 million in the prior year, largely driven by a gain on the sale of U.S. Water Services, with total assets remaining stable at $5.18 billion and cash from operating activities decreasing to $95.2 million from $194.4 million year-over-year due to customer refunds [Consolidated Balance Sheet](index=7&type=section&id=Consolidated%20Balance%20Sheet) As of June 30, 2019, total assets were $5.177 billion, a slight increase from $5.165 billion at year-end 2018, with notable changes including a significant increase in Cash and Cash Equivalents to $203.1 million from $69.1 million, a decrease in Goodwill and Intangible Assets to $1.1 million from $223.3 million primarily due to the sale of U.S. Water Services, and Total Shareholders' Equity increasing to $2.205 billion Balance Sheet Highlights (Millions) | Balance Sheet Highlights (Millions) | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Assets** | | | | Cash and Cash Equivalents | $203.1 | $69.1 | | Total Current Assets | $397.3 | $334.3 | | Property, Plant and Equipment – Net | $4,062.9 | $3,904.4 | | Goodwill and Intangible Assets – Net | $1.1 | $223.3 | | **Total Assets** | **$5,176.5** | **$5,165.0** | | **Liabilities & Equity** | | | | Total Current Liabilities | $296.6 | $405.1 | | Long-Term Debt | $1,505.9 | $1,428.5 | | **Total Liabilities** | **$2,971.5** | **$3,009.2** | | **Total Shareholders' Equity** | **$2,205.0** | **$2,155.8** | [Consolidated Statement of Income](index=8&type=section&id=Consolidated%20Statement%20of%20Income) For the six months ended June 30, 2019, ALLETE reported a net income of $104.7 million, up from $82.3 million in the prior-year period, primarily driven by a $20.6 million pre-tax gain on the sale of U.S. Water Services, despite total operating revenue decreasing to $647.6 million from $702.3 million due to the divestiture, resulting in diluted earnings per share rising to $2.02 from $1.60 Income Statement (Millions, except EPS) | Income Statement (Millions, except EPS) | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Total Operating Revenue | $290.4 | $344.1 | $647.6 | $702.3 | | Operating Income | $36.2 | $36.5 | $93.0 | $93.9 | | Gain on Sale of U.S. Water Services | $0.5 | — | $20.6 | — | | **Net Income** | **$34.2** | **$31.3** | **$104.7** | **$82.3** | | **Diluted EPS** | **$0.66** | **$0.61** | **$2.02** | **$1.60** | [Consolidated Statement of Cash Flows](index=10&type=section&id=Consolidated%20Statement%20of%20Cash%20Flows) For the six months ended June 30, 2019, cash from operating activities significantly decreased to $95.2 million from $194.4 million in the prior year, primarily due to refunds for interim rates and tax reform, while investing activities provided $46.0 million in cash, a sharp reversal from a $138.5 million use of cash in 2018, driven by the $264.2 million net proceeds from the sale of U.S. Water Services, which offset increased capital expenditures Cash Flow Summary (Millions) | Cash Flow Summary (Millions) | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | | Cash from Operating Activities | $95.2 | $194.4 | | Cash from (for) Investing Activities | $46.0 | $(138.5) | | Cash for Financing Activities | $(13.6) | $(33.2) | | **Change in Cash** | **$127.6** | **$22.7** | - The primary driver for the positive cash flow from investing activities was the **$264.2 million** in net proceeds from the sale of U.S. Water Services[12](index=12&type=chunk) [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail significant accounting policies, including the adoption of a new lease standard in Q1 2019, and provide further information on the sale of U.S. Water Services for $270 million, which resulted in an after-tax gain of $11.1 million, also covering regulatory matters, debt, commitments, and segment performance, highlighting the removal of goodwill and intangible assets associated with the divested business - On March 26, 2019, ALLETE completed the sale of U.S. Water Services for a cash purchase price of **$270 million**, recognizing an after-tax gain of **$11.1 million**[30](index=30&type=chunk) - The company adopted a new lease accounting standard in the first quarter of 2019, resulting in the recognition of right-of-use assets and lease liabilities of **$31.2 million** on the balance sheet[22](index=22&type=chunk)[24](index=24&type=chunk) - As a result of the sale of U.S. Water Services, goodwill of **$148.5 million** and significant intangible assets were removed from the balance sheet[47](index=47&type=chunk) Net Income (Loss) by Segment (Millions) | Net Income (Loss) by Segment (Millions) | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | | Regulated Operations | $81.8 | $69.9 | | ALLETE Clean Energy | $7.7 | $14.9 | | U.S. Water Services | $(1.1) | $(1.2) | | Corporate and Other | $16.3 | $(1.3) | | **Total Net Income** | **$104.7** | **$82.3** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=36&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the year-over-year increase in net income for the first six months of 2019 primarily to the $11.1 million after-tax gain from the sale of U.S. Water Services, with Regulated Operations seeing higher net income due to lower operating expenses and favorable rate adjustments, while ALLETE Clean Energy's net income declined due to lower wind resources and the absence of prior-year retrospective production tax credits, as the company reiterates its long-term objective of 5% to 7% average annual EPS growth and outlines significant capital expenditure plans, primarily for the Regulated Operations and ALLETE Clean Energy segments [Comparison of Financial Results](index=37&type=section&id=Comparison%20of%20Financial%20Results) For the six months ended June 30, 2019, Regulated Operations net income rose to $81.8 million from $69.9 million YoY, driven by lower operating expenses and higher cost recovery rider revenue, while ALLETE Clean Energy's net income fell to $7.7 million from $14.9 million, impacted by lower wind resources and the non-recurrence of a $2.6 million tax credit benefit from 2018, and Corporate and Other net income was $16.3 million, compared to a loss of $1.3 million, boosted by the gain on the sale of U.S. Water Services - Regulated Operations' net income increased due to lower operating and maintenance expenses, higher cost recovery rider revenue, and favorable timing of fuel adjustment clause recoveries[117](index=117&type=chunk) - ALLETE Clean Energy's net income decreased due to lower wind resources, lower non-cash amortization, and the absence of **$2.6 million** in retrospective production tax credits recognized in 2018[118](index=118&type=chunk) - Corporate and Other net income was significantly higher due to the **$11.1 million** after-tax gain on the sale of U.S. Water Services[120](index=120&type=chunk) Regulated Utility kWh Sold (Millions) | Regulated Utility kWh Sold (Millions) | Six Months 2019 | Six Months 2018 | % Variance | | :--- | :--- | :--- | :--- | | Retail and Municipal | 5,224 | 5,322 | (1.8)% | | Other Power Suppliers | 1,536 | 2,008 | (23.5)% | | **Total** | **6,760** | **7,330** | **(7.8)%** | [Outlook](index=46&type=section&id=Outlook) ALLETE maintains its long-term annual EPS growth target of 5% to 7%, planning to remain predominantly a regulated utility, with Regulated Operations expected to contribute approximately 80% of consolidated net income in 2019, and significant investments are planned, including the Great Northern Transmission Line (GNTL) and multiple wind energy projects through ALLETE Clean Energy, such as the newly acquired 300 MW Diamond Spring project, while Minnesota Power anticipates filing a new rate case in late 2019 - The company has a long-term objective of achieving **5% to 7%** average annual earnings per share growth[157](index=157&type=chunk) - Regulated Operations are expected to comprise approximately **80%** of total consolidated net income in 2019[158](index=158&type=chunk) - Minnesota Power plans to file a new rate case in the fourth quarter of 2019[159](index=159&type=chunk) - ALLETE Clean Energy acquired the **~300 MW** Diamond Spring wind project and expects construction to be completed in the second half of 2020[31](index=31&type=chunk)[196](index=196&type=chunk) - The company's effective tax rate for 2019 is expected to be a benefit in the range of **5% to 10%**, primarily due to federal production tax credits from wind energy generation[204](index=204&type=chunk) [Liquidity and Capital Resources](index=52&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 30, 2019, ALLETE had a strong liquidity position with $203.1 million in cash and $350.7 million in available credit lines, with the debt-to-capital ratio stable at 41%, and capital expenditures are projected to be approximately $695 million in 2019 and $495 million in 2020, an increase from previous forecasts, mainly to fund the Diamond Spring wind project, with proceeds from the U.S. Water Services sale to be reinvested into growth initiatives Capital Structure (Millions) | Capital Structure (Millions) | June 30, 2019 | % of Total | | :--- | :--- | :--- | | Shareholders' Equity | $2,205.0 | 59% | | Long-Term Debt | $1,543.0 | 41% | | **Total Capitalization** | **$3,748.0** | **100%** | - Projected capital expenditures have increased to approximately **$695 million** for 2019 and **$495 million** for 2020, primarily due to the Diamond Spring wind energy facility[215](index=215&type=chunk) - On March 26, 2019, Moody's downgraded ALLETE's issuer rating to Baa1 from A3, citing the 2018 rate case outcome and debt coverage ratios[213](index=213&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=54&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risks include commodity price risk, power marketing credit risk, and interest rate risk, with commodity price risk for its regulated utilities significantly mitigated through regulatory recovery mechanisms like fuel adjustment clauses, and interest rate risk managed by limiting variable rate debt, where a hypothetical 100 basis point increase in rates would impact pre-tax interest expense by approximately $0.5 million annually - Commodity price risk for regulated operations is largely mitigated by the ratemaking process, which allows for the recovery of fuel and purchased power costs[220](index=220&type=chunk) - A hypothetical **100 basis point (1%)** increase in interest rates would impact annual pre-tax interest expense by approximately **$0.5 million**, based on variable rate debt outstanding at June 30, 2019[223](index=223&type=chunk) [Item 4. Controls and Procedures](index=55&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2019, with no material changes to internal control over financial reporting identified during the most recent fiscal quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of the end of the period[224](index=224&type=chunk) - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[225](index=225&type=chunk) [Part II. Other Information](index=56&type=section&id=Part%20II.%20Other%20Information) [Item 1. Legal Proceedings](index=56&type=section&id=Item%201.%20Legal%20Proceedings) The company refers to disclosures in Notes 2 and 7 of the financial statements for information regarding material legal and regulatory proceedings, incorporating them by reference - Information regarding material legal and regulatory proceedings is incorporated by reference from Note 2 (Regulatory Matters) and Note 7 (Commitments, Guarantees and Contingencies)[226](index=226&type=chunk) [Item 1A. Risk Factors](index=56&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes from the risk factors previously disclosed in the company's 2018 Form 10-K - No material changes to the risk factors disclosed in the 2018 Form 10-K were reported[227](index=227&type=chunk) [Item 4. Mine Safety Disclosures](index=56&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) Information related to mine safety violations and other regulatory matters as required by the Dodd-Frank Act is included in Exhibit 95 of this Form 10-Q - Mine safety disclosures required by the Dodd-Frank Act are provided in Exhibit 95 to the Form 10-Q[228](index=228&type=chunk)

ALLETE, Inc. (NYSE:ALE) Q1 2019 Results Conference Call May 2, 2019 10:00 AM ET Company Participants Alan Hodnik - President and Chief Executive Officer Bethany Owen - President Bob Adams - Senior Vice President and Chief Financial Officer Steve Morris - Vice President, Controller and Chief Accounting Officer Conference Call Participants Chris Ellinghaus - Williams Capital Vedula Murti - Avon Capital Operator Good day, and welcome to the ALLETE First Quarter 2019 Financial Results Call. Today's call is bein ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2019 or ¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File Number 1-3548 ALLETE, Inc. (Exact name of registrant as specified in its charter) Minnesota 41-0418150 (State ...

United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-K (Mark One) T Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the year ended December 31, 2018 £ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File Number 1-3548 ALLETE, Inc. (Exact name of registrant as specified in its charter) Minnesota 41-0418150 (State or other juris ...