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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, 2021
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File Number 1-3548
ALLETE, Inc.
(Exact name of registrant as specified in its charter)
Minnesota   41-0418150
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)
30 West Superior Street
Duluth, Minnesota 55802-2093
(Address of principal executive offices)
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol Name of each exchange on which registered
Common Stock, without par value ALE New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
         Large Accelerated Filer                 Accelerated Filer    
         Non-Accelerated Filer             Smaller Reporting Company    
                             Emerging Growth Company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Common Stock, without par value,
52,572,466 shares outstanding
as of September 30, 2021




Index
     
3
5
 
 
6
 
6
 
7
8
 
9
 
 
 
 
 
 
 
 
 
 
 
 
ALLETE, Inc. Third Quarter 2021 Form 10-Q
2



Definitions

The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.
Abbreviation or Acronym Term
AFUDC Allowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods
ALLETE ALLETE, Inc.
ALLETE Clean Energy ALLETE Clean Energy, Inc. and its subsidiaries
ALLETE Properties ALLETE Properties, LLC and its subsidiaries
ALLETE South Wind ALLETE South Wind, LLC
ALLETE Transmission Holdings ALLETE Transmission Holdings, Inc.
ArcelorMittal ArcelorMittal S.A.
ATC American Transmission Company LLC
Basin Basin Electric Power Cooperative, a North Dakota cooperative corporation
Bison Bison Wind Energy Center
BNI Energy BNI Energy, Inc. and its subsidiary
Boswell Boswell Energy Center
Camp Ripley Camp Ripley Solar Array
Cliffs Cleveland-Cliffs Inc.
Company ALLETE, Inc. and its subsidiaries
COVID-19 2019 novel coronavirus
CSAPR Cross-State Air Pollution Rule
DC Direct Current
EIS Environmental Impact Statement
EPA United States Environmental Protection Agency
ESOP Employee Stock Ownership Plan
FERC Federal Energy Regulatory Commission
Form 10-K ALLETE Annual Report on Form 10-K
Form 10-Q ALLETE Quarterly Report on Form 10-Q
GAAP Generally Accepted Accounting Principles in the United States of America
GHG Greenhouse Gases
GNTL Great Northern Transmission Line
Hibbing Taconite Hibbing Taconite Co.
Husky Energy Husky Energy Inc.
Invest Direct ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
IRP Integrated Resource Plan
Item ___ Item ___ of this Form 10-Q
kV Kilovolt(s)
kW / kWh
Kilowatt(s) / Kilowatt-hour(s)
Laskin Laskin Energy Center
Lampert Capital Markets Lampert Capital Markets, Inc.
Manitoba Hydro Manitoba Hydro-Electric Board
Minnesota Power An operating division of ALLETE, Inc.
Minnkota Power Minnkota Power Cooperative, Inc.
MISO Midcontinent Independent System Operator, Inc.
MMTP Manitoba-Minnesota Transmission Project
Moody’s Moody’s Investors Service, Inc.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
3



Abbreviation or Acronym Term
MPCA Minnesota Pollution Control Agency
MPUC Minnesota Public Utilities Commission
MW / MWh Megawatt(s) / Megawatt-hour(s)
NAAQS National Ambient Air Quality Standards
NDPSC North Dakota Public Service Commission
Nobles 2 Nobles 2 Power Partners, LLC
NOL Net Operating Loss
NOX
Nitrogen Oxides
Northshore Mining Northshore Mining Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
Note ___ Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDES National Pollutant Discharge Elimination System
NTEC Nemadji Trail Energy Center
Oliver Wind I Oliver Wind I Energy Center
Oliver Wind II Oliver Wind II Energy Center
PolyMet PolyMet Mining Corp.
PPA / PSA Power Purchase Agreement / Power Sales Agreement
PPACA Patient Protection and Affordable Care Act of 2010
PSCW Public Service Commission of Wisconsin
SEC Securities and Exchange Commission
Silver Bay Power Silver Bay Power Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
SO2
Sulfur Dioxide
Square Butte Square Butte Electric Cooperative, a North Dakota cooperative corporation
South Shore Energy South Shore Energy, LLC
SWL&P Superior Water, Light and Power Company
Taconite Harbor Taconite Harbor Energy Center
Town Center District Town Center at Palm Coast Community Development District in Florida
U.S. United States of America
USS Corporation United States Steel Corporation
WTG Wind Turbine Generator

ALLETE, Inc. Third Quarter 2021 Form 10-Q
4



Forward-Looking Statements

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

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

our ability to successfully implement our strategic objectives;
global and domestic economic conditions affecting us or our customers;
changes in and compliance with laws and regulations;
changes in tax rates or policies or in rates of inflation;
the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;
weather conditions, natural disasters and pandemic diseases, including the ongoing COVID-19 pandemic;
our ability to access capital markets, bank financing and other financing sources;
changes in interest rates and the performance of the financial markets;
project delays or changes in project costs;
changes in operating expenses and capital expenditures and our ability to raise revenues from our customers;
the impacts of commodity prices on ALLETE and our customers;
our ability to attract and retain qualified, skilled and experienced personnel;
effects of emerging technology;
war, acts of terrorism and cybersecurity attacks;
our ability to manage expansion and integrate acquisitions;
population growth rates and demographic patterns;
wholesale power market conditions;
federal and state regulatory and legislative actions that impact regulated utility economics, including our allowed rates of return, capital structure, ability to secure financing, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities and utility infrastructure, recovery of purchased power, capital investments and other expenses, including present or prospective environmental matters;
effects of competition, including competition for retail and wholesale customers;
effects of restructuring initiatives in the electric industry;
the impacts on our businesses of climate change and future regulation to restrict the emissions of GHG;
effects of increased deployment of distributed low-carbon electricity generation resources;
the impacts of laws and regulations related to renewable and distributed generation;
pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;
our current and potential industrial and municipal customers’ ability to execute announced expansion plans;
real estate market conditions where our legacy Florida real estate investment is located may not improve; and
the success of efforts to realize value from, invest in, and develop new opportunities.

Additional disclosures regarding factors that could cause our results or performance to differ from those anticipated by this report are discussed in Part I, Item 1A. Risk Factors of our 2020 Form 10-K and Part II, Item 1A. Risk Factors of this Form 10-Q. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can it assess the impact of each of these factors on the businesses of ALLETE or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by ALLETE in this Form 10-Q and in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
5



PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
September 30,
2021
December 31,
2020
Millions
Assets    
Current Assets    
Cash and Cash Equivalents $59.0  $44.3 
Accounts Receivable (Less Allowance of $2.1 and $2.5) 110.2  111.9 
Inventories – Net 89.6  74.2 
Prepayments and Other 19.9  24.5 
Total Current Assets 278.7  254.9 
Property, Plant and Equipment – Net 5,053.1  4,840.8 
Regulatory Assets 502.9  480.9 
Equity Investments 317.8  301.2 
Other Non-Current Assets 179.7  206.8 
Total Assets $6,332.2  $6,084.6 
Liabilities and Equity    
Liabilities    
Current Liabilities    
Accounts Payable $101.9  $110.0 
Accrued Taxes 67.4  59.4 
Accrued Interest 15.3  19.8 
Long-Term Debt Due Within One Year 377.4  203.7 
Other 84.0  66.7 
Total Current Liabilities 646.0  459.6 
Long-Term Debt 1,649.4  1,593.2 
Deferred Income Taxes 187.1  195.7 
Regulatory Liabilities 509.5  524.8 
Defined Benefit Pension and Other Postretirement Benefit Plans 207.6  225.8 
Other Non-Current Liabilities 278.1  285.3 
Total Liabilities 3,477.7  3,284.4 
Commitments, Guarantees and Contingencies (Note 6)
Equity    
ALLETE Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 52.6 and 52.1 Shares Issued and Outstanding 1,496.5  1,460.9 
Accumulated Other Comprehensive Loss (29.9) (31.1)
Retained Earnings 873.4  864.8 
Total ALLETE Equity 2,340.0  2,294.6 
Non-Controlling Interest in Subsidiaries 514.5  505.6 
Total Equity 2,854.5  2,800.2 
Total Liabilities and Equity $6,332.2  $6,084.6 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
6



ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
Quarter Ended Nine Months Ended
September 30, September 30,
  2021 2020 2021 2020
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility $304.8  $255.1  $888.2  $721.2 
Contracts with Customers – Non-utility 37.7  35.9  123.4  119.0 
Other – Non-utility 2.9  2.9  8.6  8.5 
Total Operating Revenue 345.4  293.9  1,020.2  848.7 
Operating Expenses    
Fuel, Purchased Power and Gas – Utility 140.1  93.4  389.4  251.7 
Transmission Services – Utility 19.2  14.9  56.1  49.8 
Cost of Sales – Non-utility 15.2  15.4  47.8  48.6 
Operating and Maintenance 66.7  61.9  200.1  181.9 
Depreciation and Amortization 57.5  53.4  173.4  161.3 
Taxes Other than Income Taxes 15.6  13.3  52.1  40.9 
Total Operating Expenses 314.3  252.3  918.9  734.2 
Operating Income 31.1  41.6  101.3  114.5 
Other Income (Expense)    
Interest Expense (17.3) (16.3) (51.8) (47.9)
Equity Earnings 4.4  5.1  14.3  16.7 
Other 1.0  2.9  6.1  9.1 
Total Other Expense (11.9) (8.3) (31.4) (22.1)
Income Before Income Taxes 19.2  33.3  69.9  92.4 
Income Tax Benefit (4.9) (5.5) (19.3) (27.8)
Net Income 24.1  38.8  89.2  120.2 
Net Loss Attributable to Non-Controlling Interest (3.5) (1.9) (18.1) (6.9)
Net Income Attributable to ALLETE $27.6  $40.7  $107.3  $127.1 
Average Shares of Common Stock    
Basic 52.4  51.9  52.3  51.8 
Diluted 52.5  52.0  52.3  51.9 
Basic Earnings Per Share of Common Stock $0.53  $0.78  $2.05  $2.45 
Diluted Earnings Per Share of Common Stock $0.53  $0.78  $2.05  $2.45 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
7



ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
Quarter Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Millions        
Net Income $24.1  $38.8  $89.2  $120.2 
Other Comprehensive Income        
Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense of $0.1, $0.1, $0.4 and $0.2 0.4  0.2  1.2  0.5 
Total Other Comprehensive Income 0.4  0.2  1.2  0.5 
Total Comprehensive Income 24.5  39.0  90.4  120.7 
Net Loss Attributable to Non-Controlling Interest (3.5) (1.9) (18.1) (6.9)
Total Comprehensive Income Attributable to ALLETE $28.0  $40.9  $108.5  $127.6 
The accompanying notes are an integral part of these statements.

ALLETE, Inc. Third Quarter 2021 Form 10-Q
8



ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Nine Months Ended
September 30,
  2021 2020
Millions
Operating Activities    
Net Income $89.2  $120.2 
AFUDC – Equity (1.7) (1.8)
Income from Equity Investments – Net of Dividends 1.8  (2.3)
Gain on Investments and Property, Plant and Equipment (0.7) — 
Depreciation Expense 173.4  161.3 
Amortization of PSAs (8.6) (8.5)
Amortization of Other Intangible Assets and Other Assets 7.4  7.5 
Deferred Income Tax Benefit (19.4) (27.9)
Share-Based and ESOP Compensation Expense 4.6  4.7 
Defined Benefit Pension and Postretirement Benefit Expense 3.3  0.1 
Provision for Interim Rate Refund —  5.2 
Payments for Tax Reform Refund —  (0.1)
Bad Debt Expense 0.9  1.6 
Changes in Operating Assets and Liabilities    
Accounts Receivable 0.8  2.8 
Inventories (15.4) (2.0)
Prepayments and Other 7.9  8.8 
Accounts Payable 4.0  2.2 
Other Current Liabilities 20.7  12.5 
Cash Contributions to Defined Benefit Pension Plans (10.3) (10.7)
Changes in Regulatory and Other Non-Current Assets (41.3) (23.5)
Changes in Regulatory and Other Non-Current Liabilities (7.4) (8.2)
Cash from Operating Activities 209.2  241.9 
Investing Activities    
Proceeds from Sale of Available-for-sale Securities 3.3  6.8 
Payments for Purchase of Available-for-sale Securities (3.0) (7.2)
Payments for Equity Method Investments (17.4) (91.0)
Additions to Property, Plant and Equipment (384.3) (540.8)
Other Investing Activities 4.3  1.0 
Cash for Investing Activities (397.1) (631.2)
Financing Activities    
Proceeds from Issuance of Common Stock 31.0  12.8 
Proceeds from Issuance of Short-Term and Long-Term Debt 510.6  607.4 
Repayments of Short-Term and Long-Term Debt (280.9) (207.4)
Proceeds from Non-Controlling Interest in Subsidiaries 28.9  67.8 
Dividends on Common Stock (98.7) (96.0)
Other Financing Activities (2.8) (2.7)
Cash from Financing Activities 188.1  381.9 
Change in Cash, Cash Equivalents and Restricted Cash 0.2  (7.4)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period 65.2  92.5 
Cash, Cash Equivalents and Restricted Cash at End of Period $65.4  $85.1 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
9



ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
Quarter Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period $1,474.1  $1,447.7  $1,460.9  $1,436.7 
Common Stock Issued 22.4  6.5  35.6  17.5 
Balance, End of Period 1,496.5  1,454.2  1,496.5  1,454.2 
Accumulated Other Comprehensive Loss
Balance, Beginning of Period (30.3) (23.3) (31.1) (23.6)
Other Comprehensive Income - Net of Income Taxes
Defined Benefit Pension and Other Postretirement Plans 0.4  0.2  1.2  0.5 
Balance, End of Period (29.9) (23.1) (29.9) (23.1)
Retained Earnings
Balance, Beginning of Period 878.8  841.3  864.8  818.8 
Net Income Attributable to ALLETE 27.6  40.7  107.3  127.1 
Common Stock Dividends (33.0) (32.1) (98.7) (96.0)
Balance, End of Period 873.4  849.9  873.4  849.9 
Non-Controlling Interest in Subsidiaries
Balance, Beginning of Period 519.3  166.5  505.6  103.7 
Proceeds from Non-Controlling Interest in Subsidiaries —  —  28.9  67.8 
Net Loss Attributable to Non-Controlling Interest (3.5) (1.9) (18.1) (6.9)
Distributions to Non-Controlling Interest (1.3) —  (1.9) — 
Balance, End of Period 514.5  164.6  514.5  164.6 
Total Equity $2,854.5  $2,445.6  $2,854.5  $2,445.6 
Dividends Per Share of Common Stock $0.63  $0.6175  $1.89  $1.8525 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
10



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2020, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the nine months ended September 30, 2021, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2021. For further information, refer to the Consolidated Financial Statements and notes included in our 2020 Form 10-K.


NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of September 30, 2021, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under ALLETE Clean Energy loan and tax equity financing agreements as well as PSAs. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.
Cash, Cash Equivalents and Restricted Cash September 30,
2021
December 31,
2020
September 30,
2020
December 31,
2019
Millions    
Cash and Cash Equivalents $59.0  $44.3  $79.0  $69.3 
Restricted Cash included in Prepayments and Other 4.1  0.8  3.2  2.8 
Restricted Cash included in Other Non-Current Assets 2.3  20.1  2.9  20.4 
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows $65.4  $65.2  $85.1  $92.5 

Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations segment are carried at an average cost or first-in, first-out basis. Inventories in our ALLETE Clean Energy segment and Corporate and Other businesses are carried at an average cost, first-in, first-out or specific identification basis.
Inventories – Net September 30,
2021
December 31,
2020
Millions    
Fuel (a)
$12.4  $23.1 
Materials and Supplies 55.2  51.1 
Construction of Wind Energy Facilities (b)
22.0  — 
Total Inventories – Net $89.6  $74.2 
(a)    Fuel consists primarily of coal inventory at Minnesota Power.
(b) Project costs related to ALLETE Clean Energy’s Northern Wind and Red Barn wind projects which are expected be sold in late 2022. (See Other Current Liabilities.)
ALLETE, Inc. Third Quarter 2021 Form 10-Q
11



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Non-Current Assets September 30,
2021
December 31,
2020
Millions
Contract Assets (a)
$23.4  $25.5 
Operating Lease Right-of-use Assets 17.7  22.4 
ALLETE Properties 17.6  18.2 
Restricted Cash 2.3  20.1 
Other Postretirement Benefit Plans 35.8  34.2 
Other 82.9  86.4 
Total Other Non-Current Assets $179.7  $206.8 
(a)    Contract Assets consist of payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.     

Other Current Liabilities September 30,
2021
December 31,
2020
Millions    
Customer Deposits (a)
$27.5  $7.4 
PSAs 12.6  12.5 
Fuel Adjustment Clause 2.6  3.7 
Operating Lease Liabilities 5.0  5.9 
Other 36.3  37.2 
Total Other Current Liabilities $84.0  $66.7 
(a) Primarily related to deposits received by ALLETE Clean Energy for the Northern Wind and Red Barn wind projects which are expected be sold in late 2022. (See Inventories – Net.)

Other Non-Current Liabilities September 30,
2021
December 31,
2020
Millions    
Asset Retirement Obligation (a)
$170.9  $166.6 
PSAs 42.6  52.1 
Operating Lease Liabilities 12.7  16.5 
Other 51.9  50.1 
Total Other Non-Current Liabilities $278.1  $285.3 
(a)The asset retirement obligation is primarily related to our Regulated Operations and is funded through customer rates over the life of the related assets. Additionally, BNI Energy funds its obligation through its cost-plus coal supply agreements for which BNI Energy has recorded a receivable of $25.0 million in Other Non-Current Assets on the Consolidated Balance Sheet as of September 30, 2021, and December 31, 2020.
Other Income
Nine Months Ended September 30, 2021 2020
Millions
Pension and Other Postretirement Benefit Plan Non-Service Credits (a)
$4.4  $6.5 
Interest and Investment Income 1.7  0.4 
AFUDC - Equity 1.7  1.8 
Other (1.7) 0.4 
Total Other Income $6.1  $9.1 
(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 9. Pension and Other Postretirement Benefit Plans.)


ALLETE, Inc. Third Quarter 2021 Form 10-Q
12



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.
Nine Months Ended September 30, 2021 2020
Millions    
Cash Paid for Interest – Net of Amounts Capitalized $54.9 $48.8
Noncash Investing and Financing Activities    
Increase in Accounts Payable for Capital Additions to Property, Plant and Equipment $(12.1) $(88.4)
Capitalized Asset Retirement Costs $3.5 $2.1
AFUDC–Equity $1.7 $1.8

Non-Controlling Interest in Subsidiaries. Non-controlling interest in subsidiaries on the Consolidated Balance Sheet and net loss attributable to non-controlling interest on the Consolidated Statement of Income represent the portion of equity ownership and earnings, respectively, of subsidiaries that are not attributable to equity holders of ALLETE. These amounts are primarily related to the tax equity financing structures for ALLETE Clean Energy’s 106 MW Glen Ullin, 80 MW South Peak and 303 MW Diamond Spring wind energy facilities as well as ALLETE’s equity investment in the 250 MW Nobles 2 wind energy facility.

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

On September 22, 2021, South Shore Energy, ALLETE’s non-rate regulated, Wisconsin subsidiary, entered into an agreement with a wholly-owned subsidiary of Basin pursuant to which South Shore Energy agreed to sell to Basin a portion of its interest in NTEC for approximately $20 million representing reimbursement of current costs plus a fee for prior development costs and risks incurred. Pursuant to this transaction, which closed on October 1, 2021, South Shore Energy sold a portion of its undivided ownership interest in NTEC to Basin, such that, South Shore Energy now owns a 20 percent undivided ownership interest in NTEC, Basin owns a 30 percent undivided ownership interest in NTEC and Dairyland Power Cooperative continues to own a 50 percent undivided ownership interest in NTEC. The closing of the transaction resulted in the recognition of an approximately $8.5 million after-tax gain recorded in Corporate and Other in the fourth quarter of 2021, related to prior development costs and risks incurred. NTEC is an approximately 600 MW proposed combined-cycle natural gas-fired generating facility to be built in Superior, Wisconsin. Construction of NTEC is subject to obtaining additional permits from local, state and federal authorities. The total project cost is estimated to be approximately $700 million, of which South Shore Energy’s portion is expected to be approximately $140 million. South Shore Energy’s portion of NTEC project costs incurred through September 30, 2021, is approximately $15 million of which approximately $8 million related to development costs sold to Basin.


NOTE 2. REGULATORY MATTERS

Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2020 Form 10-K, with additional disclosure provided in the following paragraphs.

Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable, and environmental investments and expenditures. Revenue from cost recovery riders was $29.2 million for the nine months ended September 30, 2021 ($22.6 million for the nine months ended September 30, 2020).

2020 Minnesota General Rate Case. In November 2019, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 10.6 percent for retail customers. The rate filing sought a return on equity of 10.05 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would have generated approximately $66 million in additional revenue. In December 2019 orders, the MPUC accepted the filing as complete and authorized an annual interim rate increase of $36.1 million beginning January 1, 2020.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
13



NOTE 2. REGULATORY MATTERS (Continued)
Electric Rates (Continued)

In April 2020, Minnesota Power filed a request with the MPUC that proposed a resolution of Minnesota Power’s 2020 general rate case. Key components of our proposal included removing the power marketing margin credit in base rates and reflecting actual power marketing margins in the fuel adjustment clause effective May 1, 2020; refunding to customers interim rates collected through April 2020; increasing customer rates 4.1 percent compared to the 5.8 percent increase reflected in interim rates; and a provision that Minnesota Power would not file another rate case until at least November 1, 2021, unless certain events occur. In a June 2020 order, the MPUC approved Minnesota Power’s petition and proposal to resolve and withdraw the general rate case. Effective May 1, 2020, customer rates were set at an increase of 4.1 percent with the removal of the power marketing margin credit from base rates. Actual power marketing margins will be reflected in the fuel adjustment clause. Reserves for interim rates of $11.7 million were recorded in the second quarter of 2020 and refunded in the third and fourth quarters of 2020.

2022 Minnesota General Rate Case. On November 1, 2021, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 18 percent for retail customers. The rate filing seeks a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $108 million in additional revenue. Once the filing is accepted as complete, an annual interim rate increase of approximately $87 million, subject to refund, which would be an average increase of approximately 14 percent for retail customers, is expected to be implemented within 60 days, subject to MPUC adjustment and authorization. We cannot predict the level of interim or final rates that may be authorized by the MPUC.

Minnesota Power Land Sales. In August 2020, Minnesota Power filed a petition with the MPUC for approval to sell land that surrounds several reservoirs on its hydroelectric system and is no longer required to maintain its operations. The land has an estimated value of approximately $100 million, and Minnesota Power proposed to credit ratepayers the net proceeds from the sales in a future rate case or through its renewable resources rider to mitigate future rate increases. At a hearing on October 14, 2021, the MPUC decided to allow the land sales to occur and the proceeds refunded to ratepayers subject to certain conditions and required compliance filings.

Environmental Improvement Rider. Minnesota Power has an approved environmental improvement rider for investments and expenditures related to the implementation of the Boswell Unit 4 mercury emissions reduction plan completed in 2015. Updated customer billing rates for the environmental improvement rider were approved by the MPUC in a November 2018 order. On January 19, 2021, Minnesota Power filed a petition seeking MPUC approval to end the environmental improvement rider, which was approved in an order dated April 20, 2021.

Solar Cost Recovery Rider. In June 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard, which was approved by the MPUC in an order dated April 20, 2021. New customer billing rates for the solar cost recovery rider were implemented on June 1, 2021. On October 21, 2021, Minnesota Power submitted its 2022 solar factor filing. Upon approval of the filing, Minnesota Power will be authorized to include updated billing rates on customer bills.

Electric Vehicle Charging Infrastructure Petition. On April 8, 2021, Minnesota Power filed a petition seeking approval to install and own DC fast charger stations for electric vehicles across its service territory, implement accompanying rates for those stations, and track and recover investments and expenses for the project. In an order dated October 22, 2021, the MPUC approved Minnesota Power’s petition.

COVID-19 Related Deferred Accounting. In an order dated March 24, 2020, the PSCW authorized public utilities, including SWL&P, to defer expenditures incurred by the utility resulting from its compliance with state government or regulator orders during Wisconsin’s declared public health emergency for COVID-19. On April 20, 2020, Minnesota Power along with other regulated electric and natural gas service providers in Minnesota filed a joint petition to request MPUC authorization to track incremental costs and expenses incurred as a result of the COVID-19 pandemic, and to defer and record such costs as a regulatory asset, subject to recovery in a future proceeding. In an order dated May 22, 2020, the MPUC approved the joint petition requiring the joint petitioners to track cost and revenue impacts resulting from the COVID-19 pandemic with review for recovery in a future rate proceeding. As of September 30, 2021, Minnesota Power has not deferred any costs or lost revenue, and SWL&P has deferred an immaterial amount of costs.



ALLETE, Inc. Third Quarter 2021 Form 10-Q
14



NOTE 2. REGULATORY MATTERS (Continued)
Electric Rates (Continued)

Minnesota Power submitted a petition in November 2020 to the MPUC requesting authority to track and record as a regulatory asset lost large industrial customer revenue resulting from the idling of USS Corporation’s Keetac plant and Verso Corporation’s paper mill in Duluth, Minnesota. Keetac and Verso Corporation represent revenue of approximately $30 million annually, net of associated expense savings such as fuel costs. Minnesota Power proposed in this petition to defer any lost revenue related to the idling of the Keetac facility and the Verso Corporation paper mill to its next general rate case or other proceeding for review for recovery by the MPUC. In an order dated May 13, 2021, the MPUC denied Minnesota Power’s request.

Fuel Adjustment Clause. In March 2020, Minnesota Power filed its fuel adjustment clause report covering the period July 2018 through December 2019. In a September 2020 order, the MPUC referred the review of Minnesota Power’s forced outage costs during the period of the report, which totaled approximately $8 million, to an administrative law judge (ALJ) for a contested case hearing to recommend to the MPUC if any of those costs should be returned to customers. On August 11, 2021, the ALJ recommended that Minnesota Power refund approximately $5 million to ratepayers; the ALJ’s recommendation is not binding on the MPUC. Minnesota Power submitted exceptions to the ALJ’s report to the MPUC stating that it disagreed with the ALJ’s recommendation and that no refund should be made as the Company operated its facilities in accordance with good utility practice. A decision from the MPUC is expected in the fourth quarter of 2021.

Conservation Improvement Program. On April 1, 2021, Minnesota Power submitted its 2020 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $2.4 million based upon MPUC procedures, which was recognized in the third quarter of 2021 upon approval by the MPUC in an order dated September 7, 2021. In 2020, a CIP financial incentive of $2.4 million was recognized in the third quarter upon approval by the MPUC of Minnesota Power’s 2019 CIP consolidated filing. CIP financial incentives are recognized in the period in which the MPUC approves the filing.

2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in mid-2022.

Nemadji Trail Energy Center. In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of a natural gas capacity dedication and other affiliated-interest agreements for NTEC, an approximately 600 MW proposed combined-cycle natural gas-fired generating facility to be built in Superior, Wisconsin, which will be jointly owned by Dairyland Power Cooperative, Basin and South Shore Energy, ALLETE’s non-rate regulated, Wisconsin subsidiary. Minnesota Power is expected to purchase approximately 20 percent of the facility's output starting in 2025 pursuant to the capacity dedication agreement. (See Note 1. Operations and Significant Accounting Policies – Subsequent Events.) In a January 2019 order, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication and other affiliated-interest agreements. In 2019, the Minnesota Court of Appeals reversed and remanded the MPUC’s decision to approve certain affiliated-interest agreements. On April 21, 2021, the Minnesota Supreme Court reversed the Minnesota Court of Appeal’s decision by ruling that the MPUC is not required to conduct a review under the Minnesota Environmental Policy Act before approving affiliated-interest agreements that govern construction and operation of a Wisconsin power plant by a Minnesota utility, and remanded the case back to the Minnesota Court of Appeals for review of remaining issues on appeal. On August 23, 2021, the Minnesota Court of Appeals affirmed the decision by the MPUC to approve certain affiliated-interest agreements.




ALLETE, Inc. Third Quarter 2021 Form 10-Q
15



NOTE 2. REGULATORY MATTERS (Continued)

Verso Corporation Electric Service Agreement. On August 2, 2021, Minnesota Power filed a petition with the MPUC requesting the MPUC to interpret the electric service agreement (ESA) between Minnesota Power and Verso Corporation finding that Verso Corporation has tariff obligations and owes minimum firm demand payments during the term of the ESA. Minnesota Power filed this petition in response to Verso Corporation ceasing to make its minimum firm demand payments under the ESA. At a hearing on October 14, 2021, the MPUC agreed with Minnesota Power’s petition and concluded that the MPUC has jurisdiction to interpret the relevant provisions of the ESA, and the ESA requires Verso Corporation to continue full minimum firm demand payments for a period of two years from the January 29, 2021, notice of termination, regardless of Minnesota Power’s electricity sales to a new customer at the former Verso Corporation facility. Minnesota Power has a receivable related to the ESA of approximately $1.2 million as of September 30, 2021. In addition, Verso Corporation owes Minnesota Power payments under a steam agreement, which is proceeding through arbitration. Minnesota Power has a receivable under the steam agreement of approximately $2.4 million as of September 30, 2021. Minnesota Power expects to fully collect these outstanding account receivable balances as well as Verso Corporation’s remaining obligations under the ESA.

Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidance for the effect of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. With the exception of the regulatory asset for Boswell Units 1 and 2 net plant and equipment, no other regulatory assets are currently earning a return. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.

Regulatory Assets and Liabilities September 30,
2021
December 31,
2020
Millions  
Non-Current Regulatory Assets    
Defined Benefit Pension and Other Postretirement Benefit Plans $247.6  $259.7 
Income Taxes 107.2  113.7 
Cost Recovery Riders 61.8  54.0 
Asset Retirement Obligations 31.4  31.6 
Fuel Adjustment Clause 30.1  — 
Manufactured Gas Plant
11.9  8.8 
PPACA Income Tax Deferral 4.4  4.5 
Boswell Units 1 and 2 Net Plant and Equipment 3.2  5.0 
Other 5.3  3.6 
Total Non-Current Regulatory Assets $502.9  $480.9 
Current Regulatory Liabilities (a)
   
Fuel Adjustment Clause $2.6  $3.7 
Transmission Formula Rates Refund 3.1  2.9 
Other 3.3  1.0 
Total Current Regulatory Liabilities 9.0  7.6 
Non-Current Regulatory Liabilities    
Income Taxes 359.3  375.3 
Wholesale and Retail Contra AFUDC 84.4  86.6 
Plant Removal Obligations 47.4  41.2 
North Dakota Investment Tax Credits 12.3  12.0 
Defined Benefit Pension and Other Postretirement Benefit Plans 1.4  4.4 
Conservation Improvement Program —  1.5 
Other 4.7  3.8 
Total Non-Current Regulatory Liabilities 509.5  524.8 
Total Regulatory Liabilities $518.5  $532.4 
(a)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
16



NOTE 3. EQUITY INVESTMENTS

Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting.
ALLETE’s Investment in ATC  
Millions  
Equity Investment Balance as of December 31, 2020 $149.0 
Equity in ATC Earnings 15.8 
Distributed ATC Earnings (12.8)
Amortization of the Remeasurement of Deferred Income Taxes 1.0 
Equity Investment Balance as of September 30, 2021 $153.0 

ATC’s authorized return on equity is 10.02 percent, or 10.52 percent including an incentive adder for participation in a regional transmission organization, based on a May 2020 FERC order that granted rehearing of a 2019 FERC order. These FERC orders are subject to various outstanding legal challenges related to the refund period ordered by the FERC. If these legal challenges are successful, ATC may be required to provide refunds to its customers of up to approximately $66 million of which our share would be approximately $5 million pre-tax.

Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that owns and operates the 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. We account for our investment in Nobles 2 under the equity method of accounting.

ALLETE’s Investment in Nobles 2
Millions
Equity Investment Balance as of December 31, 2020 $152.2 
Cash Investments 17.4 
Equity in Nobles 2 Earnings (a)
(1.5)
Distributed Nobles 2 Earnings (3.3)
Equity Investment Balance as of September 30, 2021 $164.8 
(a)The Company also recorded net loss attributable to non-controlling interest of $4.4 million related to its investment in Nobles 2.


NOTE 4. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 6. Fair Value to the Consolidated Financial Statements in our 2020 Form 10-K.

The following tables set forth, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2021, and December 31, 2020. Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.

ALLETE, Inc. Third Quarter 2021 Form 10-Q
17



NOTE 4. FAIR VALUE (Continued)
  Fair Value as of September 30, 2021
Recurring Fair Value Measures Level 1 Level 2 Level 3 Total
Millions        
Assets        
Investments (a)
Available-for-sale – Equity Securities $9.2  —  —  $9.2 
Available-for-sale – Corporate and Governmental Debt Securities (b)
—  $8.4  —  8.4 
Cash Equivalents 2.8  —  —  2.8 
Total Fair Value of Assets $12.0  $8.4  —  $20.4 
Liabilities        
Deferred Compensation (c)
—  $21.5  —  $21.5 
Total Fair Value of Liabilities —  $21.5  —  $21.5 
Total Net Fair Value of Assets (Liabilities) $12.0  $(13.1) —  $(1.1)
  Fair Value as of December 31, 2020
Recurring Fair Value Measures Level 1 Level 2 Level 3 Total
Millions
Assets
Investments (a)
Available-for-sale – Equity Securities $7.2  —  —  $7.2 
Available-for-sale – Corporate and Governmental Debt Securities —  $10.4  —  10.4 
Cash Equivalents 5.5  —  —  5.5 
Total Fair Value of Assets $12.7  $10.4  —  $23.1 
Liabilities
Deferred Compensation (c)
—  $21.0  —  $21.0 
Total Fair Value of Liabilities —  $21.0  —  $21.0 
Total Net Fair Value of Assets (Liabilities) $12.7  $(10.6) —  $2.1 
(a)Included in Other Non-Current Assets on the Consolidated Balance Sheet.
(b)As of September 30, 2021, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $1.5 million, in one year to less than three years was $3.4 million, in three years to less than five years was $3.0 million and in five or more years was $0.5 million.
(c)Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.

Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instruments approximates the carrying amount. The fair value of the item listed in the following table was based on quoted market prices for the same or similar instruments (Level 2).
Financial Instruments Carrying Amount Fair Value
Millions    
Short-Term and Long-Term Debt (a)
   
September 30, 2021 $2,036.1 $2,262.2
December 31, 2020 $1,806.4 $2,122.0
(a)Excludes unamortized debt issuance costs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, land inventory, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the quarter and nine months ended September 30, 2021, and the year ended December 31, 2020, there were no indicators of impairment for these non-financial assets.

We continue to monitor changes in the broader energy markets along with wind resources that could indicate impairment at ALLETE Clean Energy wind energy facilities upon contract expirations. A continued decline in energy prices or lower wind resources could result in a future impairment.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
18



NOTE 5. SHORT-TERM AND LONG-TERM DEBT

The following tables present the Company’s short-term and long-term debt as of September 30, 2021, and December 31, 2020:
September 30, 2021 Principal Unamortized Debt Issuance Costs Total
Millions    
Short-Term Debt $377.6  $(0.2) $377.4 
Long-Term Debt 1,658.5  (9.1) 1,649.4 
Total Debt $2,036.1  $(9.3) $2,026.8 
December 31, 2020 Principal Unamortized Debt Issuance Costs Total
Millions    
Short-Term Debt $204.0  $(0.3) $203.7 
Long-Term Debt 1,602.4  (9.2) 1,593.2 
Total Debt $1,806.4  $(9.5) $1,796.9 

We had $26.2 million outstanding in standby letters of credit and $25.2 million outstanding draws under our lines of credit as of September 30, 2021 ($22.3 million in standby letters of credit and no outstanding draws as of December 31, 2020).

On March 25, 2021, ALLETE entered into a $150 million unsecured term loan agreement (Term Loan). An additional draw of $35 million through the exercise of an accordion feature was made during the second quarter of 2021. As of September 30, 2021, we have borrowed the full amount of $185 million. The Term Loan is due March 24, 2022, and may be repaid at any time. Interest is payable monthly at a rate per annum equal to LIBOR plus 0.75 percent. Proceeds from the Term Loan were used for general corporate purposes.

On September 1, 2021, ALLETE issued $100 million of its First Mortgage Bonds (Bonds) to certain institutional buyers in the private placement market. The Bonds, which bear interest at 2.79 percent, will mature in September 2031 and pay interest semi-annually in March and September of each year, commencing on March 1, 2022. ALLETE has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. Proceeds from the sale of the Bonds were used to fund utility capital investment and for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.

Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00, measured quarterly. As of September 30, 2021, our ratio was approximately 0.43 to 1.00. Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. ALLETE has no significant restrictions on its ability to pay dividends from retained earnings or net income. As of September 30, 2021, ALLETE was in compliance with its financial covenants.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
19



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Power Purchase and Sale Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined that either we have no variable interest in the PPAs or, where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required. These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses or receive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.

Our PPAs are summarized in Note 8. Commitments, Guarantees and Contingencies to the Consolidated Financial Statements in our 2020 Form 10-K, with additional disclosure provided in the following paragraphs.

Square Butte PPA. As of September 30, 2021, Square Butte had total debt outstanding of $256.9 million. Fuel expenses are recoverable through Minnesota Power’s fuel adjustment clause and include the cost of coal purchased from BNI Energy under a long-term contract. Minnesota Power’s cost of power purchased from Square Butte during the nine months ended September 30, 2021, was $60.3 million ($59.9 million for the same period in 2020). This reflects Minnesota Power’s pro rata share of total Square Butte costs based on the 50 percent output entitlement. Included in this amount was Minnesota Power’s pro rata share of interest expense of $4.3 million ($5.4 million for the same period in 2020). Minnesota Power’s payments to Square Butte are approved as a purchased power expense for ratemaking purposes by both the MPUC and the FERC.

Minnkota Power PSA. Minnesota Power has a PSA with Minnkota Power, which commenced in 2014. Under the PSA, Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power, resulting in Minnkota Power’s net entitlement increasing and Minnesota Power’s net entitlement decreasing until Minnesota Power’s share is eliminated at the end of 2025. Of Minnesota Power’s 50 percent output entitlement, Minnesota Power sold to Minnkota Power approximately 28 percent in 2021 and in 2020.

Coal, Rail and Shipping Contracts. Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirements through December 2021. Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2021. The costs of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s retail and municipal utility customers through the fuel adjustment clause.

Environmental Matters.

Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have been promulgated by both the EPA and state authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation.

We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have been obtained. We anticipate that with many state and federal environmental regulations and requirements finalized, or to be finalized in the near future, potential expenditures for future environmental matters may be material and require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.

We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers.

Air. The electric utility industry is regulated both at the federal and state level to address air emissions. Minnesota Power’s thermal generating facilities mainly burn low-sulfur western sub-bituminous coal. All of Minnesota Power’s coal-fired generating facilities are equipped with pollution control equipment such as scrubbers, baghouses and low NOX technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with emission requirements.

ALLETE, Inc. Third Quarter 2021 Form 10-Q
20



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

Cross-State Air Pollution Rule (CSAPR). The CSAPR requires certain states in the eastern half of the U.S., including Minnesota, to reduce power plant emissions that contribute to ozone or fine particulate pollution in other states. The CSAPR does not require installation of controls but does require facilities have sufficient allowances to cover their emissions on an annual basis. These allowances are allocated to facilities from each state’s annual budget, and can be bought and sold. Based on our review of the NOX and SO2 allowances issued and pending issuance, we currently expect generation levels and emission rates will result in continued compliance with the CSAPR. The EPA’s CSAPR Update Rule issued on March 15, 2021, to revise the 2016 CSAPR Update does not apply to the state of Minnesota and is therefore not currently projected to affect Minnesota Power’s CSAPR compliance. The State of Minnesota has not been identified in litigation as a culpable upwind emission source to downwind states, and previous EPA air quality modeling has demonstrated that Minnesota is not a significant contributor to downwind air quality attainment challenges. Minnesota Power will continue to monitor ongoing CSAPR rulemakings and compliance implementation.

National Ambient Air Quality Standards (NAAQS). The EPA is required to review the NAAQS every five years. If the EPA determines that a state’s air quality is not in compliance with the NAAQS, the state is required to adopt plans describing how it will reduce emissions to attain the NAAQS. Minnesota Power actively monitors NAAQS developments and compliance costs for existing standards or proposed NAAQS revisions are not currently expected to be material. The EPA is currently reviewing the secondary NAAQS for NOx and SO2, as well as particulate matter. On June 10, 2021, the EPA announced it will reconsider the December 2020 final rule retaining the 2012 particulate matter NAAQS, with a proposed rulemaking anticipated in mid-2022. The EPA has not stated its intent with regard to the 2020 Ozone NAAQS rule finalized in December 2020.

Climate Change. The scientific community generally accepts that emissions of GHG are linked to global climate change which creates physical and financial risks. Physical risks could include, but are not limited to: increased or decreased precipitation and water levels in lakes and rivers; increased or other changes in temperatures; and changes in the intensity and frequency of extreme weather events. These all have the potential to affect the Company’s business and operations. We are addressing climate change by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customers’ requirements:

Expanding renewable power supply for both our operations and the operations of others;
Providing energy conservation initiatives for our customers and engaging in other demand side management efforts;
Improving efficiency of our generating facilities;
Supporting research of technologies to reduce carbon emissions from generating facilities and carbon sequestration efforts;
Evaluating and developing less carbon intensive future generating assets such as efficient and flexible natural gas-fired generating facilities;
Managing vegetation on right-of-way corridors to reduce potential wildfire or storm damage risks; and
Practicing sound forestry management in our service territories to create landscapes more resilient to disruption from climate-related changes, including planting and managing long-lived conifer species.

EPA Regulation of GHG Emissions. In 2019, the EPA finalized several separate rulemakings regarding regulating carbon emissions from electric utility generating units. These rulemakings included repealing the Clean Power Plan (CPP) and adopting the Affordable Clean Energy Rule under Section 111(d) of the Clean Air Act (CAA) to regulate CO2 emissions at existing coal-fired power plants. The CPP was first announced as a proposed rule under Section 111(d) of the CAA for existing power plants entitled “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Generating Units”. The Affordable Clean Energy Rule established emissions guidelines for states to use when developing plans to limit CO2 coal-fired power plants. The EPA also published regulations for the state implementation of the Affordable Clean Energy Rule and other Section 111(d) rules. Affected facilities for Minnesota Power included Boswell Units 3 and 4, and Taconite Harbor Units 1 and 2, which are currently economically idled.

On January 19, 2021, the D.C. Circuit issued an opinion vacating the Affordable Clean Energy Rule and remanded the Affordable Clean Energy Rule back to the EPA for further consideration, consistent with the D.C. Circuit’s finding that the EPA erred in interpreting the CAA, pending rehearing or appeal. The EPA has indicated that it is working on a new set of emission guidelines to establish a Best System of Emissions Reduction for existing fossil fuel-fired electric generating units to direct states in regulating GHGs within their borders; however, no timeline has been disclosed. Minnesota Power will continue to monitor any related guidelines and rulemakings issued by the EPA or state regulatory authorities.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
21



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

On April 22, 2021, the Biden Administration announced a goal to reach 100 percent carbon pollution-free electricity by 2035 as part of the Nationally Determined Contributions pledge, which is part of an international effort to limit global warming. At this time, no specific regulatory pathway to achieve these reductions has been proposed. Minnesota Power will continue to monitor these developments.

Minnesota had already initiated several measures consistent with those called for under the now repealed CPP and vacated Affordable Clean Energy Rule. Minnesota Power continues implementing its EnergyForward strategic plan that provides for significant emission reductions and diversifying its electricity generation mix to include more renewable and natural gas energy. We are unable to predict the GHG emission compliance costs we might incur as a result of a replacement for the Affordable Clean Energy Rule or other future laws, regulations or administrative policies; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Additionally on January 13, 2021, the EPA issued a rulemaking to apply CO2 emission New Source Performance Standards (NSPS) to new, modified and reconstructed fossil fuel-fired electric generating units under Section 111(b) of the CAA. Minnesota Power is monitoring the NSPS final rule and any further Section 111(b) developments including their potential impact to the Company. The Company’s proposed combined-cycle natural gas-fired generating facility, NTEC, is expected to meet these NSPS requirements.

Water. The Clean Water Act requires NPDES permits be obtained from the EPA (or, when delegated, from individual state pollution control agencies) for any wastewater discharged into navigable waters. We have obtained all necessary NPDES permits, including NPDES storm water permits for applicable facilities, to conduct our operations.

Steam Electric Power Generating Effluent Limitations Guidelines. In 2015, the EPA issued revised federal effluent limitation guidelines (ELG) for steam electric power generating stations under the Clean Water Act. It set effluent limits and prescribed BACT for several wastewater streams, including flue gas desulphurization (FGD) water, bottom ash transport water and coal combustion landfill leachate. In 2017, the EPA announced a two-year postponement of the ELG compliance date of November 1, 2018, to November 1, 2020, while the agency reconsidered the bottom ash transport water and FGD wastewater provisions. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded back to the EPA portions of the ELG that allowed for continued discharge of legacy wastewater and leachate. On October 13, 2020, the EPA published a final ELG Rule allowing re-use of bottom ash transport water in FGD scrubber systems with limited discharges related to maintaining system water balance. The rule sets technology standards and numerical pollutant limits for discharges of bottom ash transport water and FGD wastewater. Compliance deadlines depend on subcategory, with compliance generally required as soon as possible, beginning after October 13, 2021, but no later than December 31, 2025, or December 31, 2028, in some specific cases. The rule also established new subcategories for retiring high-flow and low-utilization units, and established a voluntary incentives program for FGD wastewater. In accordance with the January 2021 Executive Order 13990, the EPA was mandated to conduct a review of actions and polices taken during the prior administration, including the 2020 ELG Rule. On September 14, 2021, the EPA published a notice of availability for preliminary effluent guidelines program plan. In the plan, the EPA confirmed the agency is initiating a rulemaking process to strengthen wastewater pollution limitations from FGD and bottom ash transport water discharges while the 2020 ELG Rule remains in effect. The EPA is expected to publish a proposed rule in the fall of 2022.

The ELG's potential impact on Minnesota Power operations is primarily at Boswell. Boswell currently discharges bottom ash contact water through its NPDES permit, and also has a closed-loop FGD system that does not discharge to surface waters, but may do so in the future. With Boswell’s planned conversion to dry FGD handling and storage, ongoing FGD water generation will be reduced, and the majority of FGD waters will be legacy waters to be dewatered from existing impoundments. Re-use and onsite consumption for the majority of FGD waters is planned at Boswell.

Under the new ELG rule, most bottom ash transport water discharge to surface waters must cease no later than December 31, 2025, except for small discharges needed to retain water balance. The majority of bottom ash transport water will either need to be re-used in a closed-loop process or routed to a FGD scrubber. At Boswell, the bottom ash handling systems are planned to be converted to a dry process, which will eliminate the discharge of bottom ash transport water.

The EPA’s additional reconsideration of legacy wastewater discharge requirements has the potential to reduce timelines for dewatering Boswell’s existing ponds. The timing of a draft rule addressing legacy wastewater and leachate is currently unknown.

ALLETE, Inc. Third Quarter 2021 Form 10-Q
22



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

At this time, we estimate that the planned dry conversion of bottom ash handling and storage at Boswell in response to the CCR revisions requiring closure of clay-lined impoundments, as well as other water re-use practices, will reduce or eliminate the need for additional significant compliance costs for ELG bottom ash water and FGD requirements. Compliance costs we might incur related to other ELG waste streams (e.g., legacy leachate) or other potential future water discharge regulations cannot be estimated; however, the costs could be material, including costs associated with wastewater treatment and re-use. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Permitted Water Discharges – Sulfate. In 2017, the MPCA released a draft water quality standard in an attempt to update Minnesota’s existing 10 mg/L sulfate limit for waters used for the production of wild rice with the proposed rulemaking heard before an administrative law judge (ALJ). In 2018, the ALJ rejected significant portions of the proposed rulemaking and the MPCA subsequently withdrew the rulemaking. The existing 10 mg/L limit remains in place, but the MPCA is currently prohibited under state law from listing wild rice waters as impaired or requiring sulfate reduction technology.

In April 2021, the MPCA’s proposed list of impaired waters submitted pursuant to the Clean Water Act was partially rejected by the EPA due to the absence of wild rice waters listed for sulfate impairment. The EPA subsequently proposed a list of 30 wild rice waters in a separate listing process on April 29, 2021, followed by a list of three additional wild rice waters proposed separately on September 1, 2021. A final impaired waters listing is expected to follow, which could subsequently be used to set sulfate limits in discharge permits for power generation facilities and municipal and industrial customers, including paper and pulp facilities, and mining operations. At this time we are unable to determine the specific impacts these developments may have on Minnesota Power operations, if any. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Solid and Hazardous Waste. The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We are required to notify the EPA of hazardous waste activity and, consequently, routinely submit reports to the EPA.

Coal Ash Management Facilities. Minnesota Power produces the majority of its coal ash at Boswell, with small amounts of ash generated at Hibbard Renewable Energy Center. Ash storage and disposal methods include storing ash in clay-lined onsite impoundments (ash ponds), disposing of dry ash in a lined dry ash landfill, applying ash to land as an approved beneficial use, and trucking ash to state permitted landfills.

Coal Combustion Residuals from Electric Utilities (CCR). In 2015, the EPA published the final rule regulating CCR as nonhazardous waste under Subtitle D of the Resource Conservation and Recovery Act (RCRA) in the Federal Register. The rule includes additional requirements for new landfill and impoundment construction as well as closure activities related to certain existing impoundments. Costs of compliance for Boswell and Laskin are expected to be incurred primarily over the next 15 years and be between approximately $65 million and $120 million. Compliance costs for CCR at Taconite Harbor are not expected to be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
23



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

Minnesota Power continues to work on minimizing costs through evaluation of beneficial re-use and recycling of CCR and CCR-related waters. In 2017, the EPA announced its intention to formally reconsider the CCR rule under Subtitle D of the RCRA. In March 2018, the EPA published the first phase of the proposed rule revisions in the Federal Register. In 2018, the EPA finalized revisions to elements of the CCR rule, including extending certain deadlines by two years, the establishment of alternative groundwater protection standards for certain constituents and the potential for risk-based management options at facilities based on site characteristics. In 2018, a U.S. District Court for the District of Columbia decision vacated specific provisions of the CCR rule. The court decision resulted in a change to the status of three existing clay-lined impoundments at Boswell that must now be considered unlined. The EPA proposed additional rule revisions in 2019 to address outstanding issues from litigation and closure timelines for unlined impoundments, respectively. The first of these rules, CCR Part A Rule, was finalized in September 2020. The Part A Rule revision requires unlined impoundments to cease disposal of waste as soon as technically feasible but no later than April 11, 2021. This deadline has tolled forward as the EPA did not make any variance application determinations by that date. Minnesota Power sought EPA approval to extend the closure date for the two active Boswell impoundments in November 2020 through a variance application, and continues to operate the impoundments pending a final determination by the EPA. Additionally, the EPA released a proposed Part B rulemaking in February 2020 that addressed options for beneficial reuse of CCR materials, alternative liner demonstrations, and other CCR regulatory revisions. Portions of the Part B Rule addressing alternative liner equivalency standards were finalized in November 2020. According to the EPA’s regulatory agenda, finalization of the remainder of the proposed Part B Rule was expected in mid-2021, but has not yet been published. Expected compliance costs at Boswell due to the court decision and subsequent rule revisions are reflected in our estimate of compliance costs for the CCR rule noted previously. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Other Environmental Matters

Manufactured Gas Plant Site. We are reviewing and addressing environmental conditions at a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P. SWL&P has been working with the Wisconsin Department of Natural Resources (WDNR) in determining the extent and location of contamination at the site and surrounding properties. As of September 30, 2021, we have recorded a liability of approximately $13 million for remediation costs at this site after incorporating detailed design components specific to the site (approximately $7 million as of December 31, 2020); however, SWL&P continues to work with the WDNR on the extent of contamination which may result in additional remediation costs being identified. SWL&P has also recorded an associated regulatory asset as we expect recovery of these remediation costs to be allowed by the PSCW. Remediation costs are expected to be incurred through 2023.

Other Matters.

Letters of Credit and Surety Bonds.

We have multiple credit facility agreements in place that provide the ability to issue standby letters of credit to satisfy contractual security requirements across our businesses. As of September 30, 2021, we had $123.9 million of outstanding letters of credit issued, including those issued under our revolving credit facility.

Regulated Operations. As of September 30, 2021, we had $4.9 million outstanding in standby letters of credit at our Regulated Operations which are pledged as security to MISO and a state agency.

ALLETE Clean Energy. ALLETE Clean Energy’s wind energy facilities have PSAs in place for their entire output and expire in various years between 2022 and 2039. As of September 30, 2021, ALLETE Clean Energy has $81.9 million outstanding in standby letters of credit, the majority of which are pledged as security under these PSAs and PSAs for wind energy facilities under development. ALLETE Clean Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.

Corporate and Other.

South Shore Energy. As of September 30, 2021, South Shore Energy had $23.9 million outstanding in standby letters of credit pledged as security in connection with the development of NTEC. South Shore Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
24



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Other Matters (Continued)

Investment in Nobles 2. The Nobles 2 wind energy facility requires standby letters of credit as security for certain contractual obligations. As of September 30, 2021, ALLETE South Wind has $13.2 million outstanding in standby letters of credit, related to its portion of the security requirements relative to its ownership in Nobles 2. We do not believe it is likely that any of these outstanding letters of credit will be drawn upon.

BNI Energy. As of September 30, 2021, BNI Energy had surety bonds outstanding of $71.2 million related to the reclamation liability for closing costs associated with its mine and mine facilities. Although its coal supply agreements obligate the customers to provide for the closing costs, additional assurance is required by federal and state regulations. BNI Energy’s total reclamation liability is currently estimated at $70.7 million. BNI Energy does not believe it is likely that any of these outstanding surety bonds will be drawn upon.

ALLETE Properties. As of September 30, 2021, ALLETE Properties had surety bonds outstanding and letters of credit to governmental entities totaling $2.0 million primarily related to development and maintenance obligations for various projects. The estimated cost of the remaining development work is $1.0 million. ALLETE Properties does not believe it is likely that any of these outstanding surety bonds or letters of credit will be drawn upon.

Community Development District Obligations. As of September 30, 2021, we owned 48 percent of the assessable land in the Town Center District (48 percent as of December 31, 2020). As of September 30, 2021, ownership levels, our annual assessments related to capital improvement and special assessment bonds for the ALLETE Properties project within the district is approximately $1.8 million. As we sell property at this project, the obligation to pay special assessments will pass to the new landowners. In accordance with accounting guidance, these bonds are not reflected as debt on our Consolidated Balance Sheet.

Legal Proceedings.

We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base and cost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations or cash flows.


NOTE 7. EARNINGS PER SHARE AND COMMON STOCK

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from non-vested restricted stock units and performance share awards granted under our Executive Long-Term Incentive Compensation Plan.
    2021     2020  
Reconciliation of Basic and Diluted   Dilutive     Dilutive  
Earnings Per Share Basic Securities Diluted Basic Securities Diluted
Millions Except Per Share Amounts            
Quarter ended September 30,            
Net Income Attributable to ALLETE $27.6  $27.6  $40.7  $40.7 
Average Common Shares 52.4  0.1  52.5  51.9  0.1  52.0 
Earnings Per Share $0.53  $0.53  $0.78  $0.78 
Nine Months Ended September 30,      
Net Income Attributable to ALLETE $107.3  $107.3  $127.1  $127.1 
Average Common Shares 52.3  —  52.3  51.8  0.1  51.9 
Earnings Per Share $2.05  $2.05  $2.45  $2.45 


ALLETE, Inc. Third Quarter 2021 Form 10-Q
25




NOTE 8. INCOME TAX EXPENSE
Quarter Ended Nine Months Ended
September 30, September 30,
  2021 2020 2021 2020
Millions        
Current Income Tax Expense (a)
       
Federal —  —  —  — 
State $0.1  $0.1  $0.1  $0.1 
Total Current Income Tax Expense $0.1  $0.1  $0.1  $0.1 
Deferred Income Tax Expense (Benefit)        
Federal (b)
$(5.8) $(8.3) $(26.3) $(34.5)
State 0.9 2.9 7.3 7.1
Investment Tax Credit Amortization (0.1) (0.2) (0.4) (0.5)
Total Deferred Income Tax Benefit $(5.0) $(5.6) $(19.4) $(27.9)
Total Income Tax Benefit $(4.9) $(5.5) $(19.3) $(27.8)
(a)For each of the three and nine months ended September 30, 2021 and 2020, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of certain tax legislation. Federal and state NOLs are being carried forward to offset current and future taxable income.
(b)For each of the three and nine months ended September 30, 2021 and 2020, the federal income tax benefit is primarily due to production tax credits.

The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.

Quarter Ended Nine Months Ended
Reconciliation of Taxes from Federal Statutory September 30, September 30,
Rate to Total Income Tax Expense 2021 2020 2021 2020
Millions    
Income Before Income Taxes $19.2  $33.3  $69.9  $92.4 
Statutory Federal Income Tax Rate 21  % 21  % 21  % 21  %
Income Taxes Computed at Statutory Federal Rate $4.0  $7.0  $14.7  $19.4 
Increase (Decrease) in Income Tax Due to:
State Income Taxes (Credit) – Net of Federal Income Tax Benefit 0.7  2.4  5.8  5.7 
Production Tax Credits (9.5) (12.5) (36.6) (45.9)
Regulatory Differences – Excess Deferred Tax (2.1) (3.2) (6.7) (8.5)
Non-Controlling Interest in Subsidiaries 0.8  0.4  3.9  1.5 
Share-Based Compensation —  —  0.5  (0.1)
Other 1.2  0.4  (0.9) 0.1 
Total Income Tax Benefit $(4.9) $(5.5) $(19.3) $(27.8)

For the nine months ended September 30, 2021, the effective tax rate was a benefit of 27.6 percent (benefit of 30.1 percent for the nine months ended September 30, 2020). The effective tax rate for 2021 and 2020 was primarily impacted by production tax credits.

Uncertain Tax Positions. As of September 30, 2021, we had gross unrecognized tax benefits of $1.5 million ($1.4 million as of December 31, 2020). Of the total gross unrecognized tax benefits, $0.6 million represents the amount of unrecognized tax benefits included on the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.

ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2017, or state examination for years before 2016.
ALLETE, Inc. Third Quarter 2021 Form 10-Q
26



NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
  Pension Other
Postretirement
Components of Net Periodic Benefit Cost (Credit) 2021 2020 2021 2020
Millions        
Quarter Ended September 30,        
Service Cost $2.7  $2.7  $0.9  $0.8 
Non-Service Cost Components (a)
Interest Cost 6.1  6.9  1.1  1.2 
Expected Return on Plan Assets (10.8) (10.6) (2.4) (2.4)
Amortization of Prior Service Credits —  —  (1.9) (2.0)
Amortization of Net Loss 4.7  3.2  0.7  0.3 
Net Periodic Benefit Cost (Credit) $2.7  $2.2  $(1.6) $(2.1)
Nine Months Ended September 30,
Service Cost $8.2  $8.0  $2.7  $2.5 
Non-Service Cost Components (a)
Interest Cost 18.4  20.9  3.3  3.7 
Expected Return on Plan Assets (32.5) (32.0) (7.3) (7.3)
Amortization of Prior Service Credits (0.1) (0.1) (5.7) (6.0)
Amortization of Net Loss 14.1  9.6  2.2  0.8 
Net Periodic Benefit Cost (Credit) $8.1  $6.4  $(4.8) $(6.3)
(a)These components of net periodic benefit cost (credit) are included in the line item “Other” under Other Income (Expense) on the Consolidated Statement of Income.

Employer Contributions. For the nine months ended September 30, 2021, we contributed $10.3 million in cash to the defined benefit pension plans ($10.7 million for the nine months ended September 30, 2020); we do not expect to make additional contributions to our defined benefit pension plans in 2021. For the nine months ended September 30, 2021 and 2020, we made no contributions to our other postretirement benefit plans; we do not expect to make any contributions to our other postretirement benefit plans in 2021.


NOTE 10. BUSINESS SEGMENTS

We present two reportable segments: Regulated Operations and ALLETE Clean Energy. We measure performance of our operations through budgeting and monitoring of contributions to consolidated net income by each business segment.

Regulated Operations includes three operating segments which consist of our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC. ALLETE Clean Energy is our business focused on developing, acquiring and operating clean and renewable energy projects. We also present Corporate and Other which includes two operating segments, BNI Energy, our coal mining operations in North Dakota, and ALLETE Properties, our legacy Florida real estate investment, along with our investment in Nobles 2, South Shore Energy, our non-rate regulated, Wisconsin subsidiary developing NTEC, other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 4,000 acres of land in Minnesota, and earnings on cash and investments.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
27



NOTE 10. BUSINESS SEGMENTS (Continued)
Quarter Ended Nine Months Ended
September 30, September 30,
  2021 2020 2021 2020
Millions
Operating Revenue
Regulated Operations
Residential $37.0  $34.2  $118.0  $102.5 
Commercial 44.3  37.1  124.7  103.2 
Municipal 14.4  11.2  38.5  30.5 
Industrial 139.7  109.6  407.8  316.4 
Other Power Suppliers 41.2  30.9  116.9  96.6 
CIP Financial Incentive (a)
2.4  2.4  2.4  2.4 
Other 25.8  29.7  79.9  69.6 
Total Regulated Operations 304.8  255.1  888.2  721.2 
ALLETE Clean Energy
Long-term PSA 14.0  11.9  50.8  44.0 
Other 2.9  2.9  8.6  8.5 
Total ALLETE Clean Energy 16.9  14.8  59.4  52.5 
Corporate and Other
Long-term Contract 20.3  20.7  63.4  65.6 
Other 3.4  3.3  9.2  9.4 
Total Corporate and Other 23.7  24.0  72.6  75.0 
Total Operating Revenue $345.4  $293.9  $1,020.2  $848.7 
Net Income (Loss) Attributable to ALLETE    
Regulated Operations $32.9  $42.4  $99.4  $111.0 
ALLETE Clean Energy (0.8) 1.1  11.7  16.8 
Corporate and Other (4.5) (2.8) (3.8) (0.7)
Total Net Income Attributable to ALLETE $27.6  $40.7  $107.3  $127.1 
(a)See Note 2. Regulatory Matters.

September 30,
2021
December 31,
2020
Millions
Assets
Regulated Operations $4,207.4  $4,196.8 
ALLETE Clean Energy 1,691.4  1,483.3 
Corporate and Other 433.4  404.5 
Total Assets $6,332.2  $6,084.6 
ALLETE, Inc. Third Quarter 2021 Form 10-Q
28



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The following discussion should be read in conjunction with our Consolidated Financial Statements and notes to those statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations from our 2020 Form 10-K, and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. Readers are cautioned that forward-looking statements should be read in conjunction with our disclosures in this Form 10-Q, including Part II, Item 1A Risk Factors, and our 2020 Form 10-K under the headings: “Forward-Looking Statements” located on page 6 and “Risk Factors” located in Part I, Item 1A, beginning on page 23 of our 2020 Form 10-K. The risks and uncertainties described in this Form 10-Q and our 2020 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the risks are realized.

The COVID-19 pandemic has had widespread impacts on the global economy and on our employees, customers, contractors, and suppliers. Additional disclosures regarding the impacts of the COVID-19 pandemic are located in our 2020 Form 10-K located in Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load, Liquidity and Capital Resources – Liquidity Position and Part I, Item 1A. Risk Factors.

Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 15 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service in northwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities. (See Note 2. Regulatory Matters.)

ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in seven states, more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has an approximately 300 MW wind energy facility under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.

Corporate and Other is comprised of BNI Energy, our coal mining operations in North Dakota; our investment in Nobles 2, an entity that owns and operates a 250 MW wind energy facility in southwestern Minnesota; South Shore Energy, our non-rate regulated, Wisconsin subsidiary developing NTEC, an approximately 600 MW proposed combined-cycle natural gas-fired generating facility; ALLETE Properties, our legacy Florida real estate investment; other business development and corporate expenditures; unallocated interest expense; a small amount of non-rate base generation; approximately 4,000 acres of land in Minnesota, and earnings on cash and investments.

ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of September 30, 2021, unless otherwise indicated. All subsidiaries are wholly-owned unless otherwise specifically indicated. References in this report to “we,” “us” and “our” are to ALLETE and its subsidiaries, collectively.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
29



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)

Financial Overview

The following net income discussion summarizes a comparison of the nine months ended September 30, 2021, to the nine months ended September 30, 2020.

Net income attributable to ALLETE for the nine months ended September 30, 2021, was $107.3 million, or $2.05 per diluted share, compared to $127.1 million, or $2.45 per diluted share, for the same period in 2020. Net income in 2021 included an approximately $5 million after-tax, or $0.10 per share, negative impact related to ALLETE Clean Energy’s Diamond Spring wind energy facility due to an extreme winter storm event in the southwest United States in February 2021. This winter storm event caused volatility in power prices in the regional power market resulting in losses being incurred under one of the facility’s power sales agreements during portions of the winter storm event. Net income in 2020 included margins of $10.2 million after-tax, or $0.20 per share, in Regulated Operations for sales under a 100 MW PSA which expired in April 2020. Net income in 2020 also included reserves for interim rates of $8.3 million after-tax, or $0.16 per share, for the refund of interim rates collected between January 1, 2020, and April 30, 2020.

Regulated Operations net income attributable to ALLETE was $99.4 million for the nine months ended September 30, 2021, compared to $111.0 million for the same period in 2020. Net income at Minnesota Power was lower than 2020 primarily due to: lower margins from Other Power Suppliers resulting from the expiration of a PSA; and higher operating and maintenance, property tax and depreciation expenses. These negative impacts were partially offset by increased earnings related to the GNTL; and higher kWh sales to residential, commercial and municipal customers. Net income in 2020 also included reserves for interim rates of $8.3 million after-tax for the refund of interim rates collected between January 1, 2020, and April 30, 2020. Net income at SWL&P was lower than 2020 primarily due to higher operating expenses. Our after-tax equity earnings in ATC were lower compared to 2020 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints in 2020.
ALLETE Clean Energy net income attributable to ALLETE was $11.7 million for the nine months ended September 30, 2021, compared to $16.8 million for the same period in 2020. Net income in 2021 included an approximately $5 million after-tax negative impact related to ALLETE Clean Energy’s Diamond Spring wind energy facility due to an extreme winter storm event in the southwest United States in February 2021 as well as a lower wind resources at other wind energy facilities. These negative impacts were partially offset by expense management efforts.

Corporate and Other net loss attributable to ALLETE was $3.8 million for the nine months ended September 30, 2021, compared to a net loss of $0.7 million for the same period in 2020. The net loss in 2021 included higher expenses and additional income tax expense recorded in 2021 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate. These negative impacts were partially offset by earnings from our investment in Nobles 2 which commenced operations in December 2020.



ALLETE, Inc. Third Quarter 2021 Form 10-Q
30



COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2021 AND 2020

(See Note 10. Business Segments for financial results by segment.)

Regulated Operations
Quarter Ended September 30, 2021 2020
Millions    
Operating Revenue – Utility $304.8  $255.1 
Fuel, Purchased Power and Gas – Utility 140.1  93.4 
Transmission Services – Utility 19.2  14.9 
Operating and Maintenance 53.2  48.1 
Depreciation and Amortization 42.6  41.3 
Taxes Other than Income Taxes 13.5  11.9 
Operating Income 36.2  45.5 
Interest Expense (14.5) (14.4)
Equity Earnings 5.3  5.1 
Other Income 1.4  1.6 
Income Before Income Taxes 28.4  37.8 
Income Tax Benefit (4.5) (4.6)
Net Income Attributable to ALLETE $32.9  $42.4 

Operating Revenue Utility increased $49.7 million from 2020 primarily due to higher fuel adjustment clause recoveries and higher kWh sales.

Fuel adjustment clause revenue increased $27.4 million due to higher fuel and purchased power costs attributable to retail and municipal customers. (See Fuel, Purchased Power and Gas – Utility.)

Revenue from kWh sales increased $23.6 million from 2020 reflecting higher sales to commercial and industrial customers as well as other power suppliers. Sales to commercial and industrial customers increased primarily due to improving business conditions related to the COVID-19 pandemic and its impact on customer operations. Many commercial and industrial customers operated at reduced levels or were temporarily closed or idled during the third quarter of 2020 as a result of the COVID-19 pandemic and related governmental responses while business conditions have improved in 2021. These higher sales to commercial and industrial customers were partially offset by lower sales to Verso Corporation which indefinitely idled its paper mill in Duluth, Minnesota in 2020. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) Sales to other power suppliers, which are sold at market-based prices into the MISO market on a daily basis or through PSAs of various durations, increased primarily due to additional kWh sales made to mitigate the uncertainty of customers’ energy needs and potential load loss due to the COVID-19 pandemic.

Kilowatt-hours Sold   Variance
Quarter Ended September 30, 2021 2020 Quantity %
Millions        
Regulated Utility        
Retail and Municipal        
Residential 268  268  —  — 
Commercial 360  345  15  4.3  %
Industrial 1,778  1,410  368  26.1  %
Municipal 147  147  —  — 
Total Retail and Municipal 2,553  2,170  383  17.6  %
Other Power Suppliers 1,253  967  286  29.6  %
Total Regulated Utility Kilowatt-hours Sold 3,806  3,137  669  21.3  %


ALLETE, Inc. Third Quarter 2021 Form 10-Q
31



COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2021 AND 2020 (Continued)
Regulated Operations (Continued)

Revenue from electric sales to taconite customers accounted for 32 percent of regulated operating revenue in 2021 (29 percent in 2020). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of regulated operating revenue in 2021 (6 percent in 2020). Revenue from electric sales to pipelines and other industrial customers accounted for 8 percent of regulated operating revenue in 2021 (8 percent in 2020).

Operating Expenses increased $59.0 million, or 28 percent, from 2020.

Fuel, Purchased Power and Gas – Utility expense increased $46.7 million, or 50 percent, from 2020 primarily due to higher purchased power prices, kWh sales and fuel costs. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause.

Transmission Services – Utility expense increased $4.3 million, or 29 percent, from 2020 primarily due to higher MISO-related expense.

Operating and Maintenance expense increased $5.1 million, or 11 percent, from 2020 primarily due to an increase in contract and professional services and materials purchased for generation facilities and higher vegetation management expenses. In addition, 2021 included higher labor and benefit expenses as compared to 2020.

Depreciation and Amortization expense increased $1.3 million, or 3 percent, from 2020 primarily due to additional property, plant and equipment in service.

Taxes Other than Income Taxes increased $1.6 million, or 13 percent, from 2020 primarily due to higher property tax expense resulting from higher estimated taxable market values.

Income Tax Benefit was similar to 2020 reflecting lower production tax credits and the timing of income taxes in 2021 compared to 2020, mostly offset by lower pre-tax income. The income tax benefit in 2021 included less income tax benefit recorded in 2021 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.

We expect our annual effective tax rate in 2021 to be a lower income tax benefit than in 2020 primarily due to lower production tax credits.

ALLETE Clean Energy
Quarter Ended September 30, 2021 2020
Millions    
Operating Revenue
Contracts with Customers – Non-utility $14.0  $11.9 
Other – Non-utility (a)
2.9  2.9 
Operating and Maintenance 10.2  10.8 
Depreciation and Amortization 12.2  9.3 
Taxes Other than Income Taxes 1.8  0.8 
Operating Income (Loss) (7.3) (6.1)
Interest Expense (0.3) (0.4)
Loss Before Income Taxes (7.6) (6.5)
Income Tax Benefit (4.2) (5.7)
Net Loss (3.4) (0.8)
Net Loss Attributable to Non-Controlling Interest (2.6) (1.9)
Net Income (Loss) Attributable to ALLETE $(0.8) $1.1 
(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
32



COMPARISON OF THE QUARTER ENDED SEPTEMBER 30, 2021 AND 2020 (Continued)
ALLETE Clean Energy (Continued)

Operating Revenue increased $2.1 million, or 14 percent, from 2020 primarily due to revenue from the Diamond Spring wind energy facility which commenced operations in December 2020.
Quarter Ended September 30,
2021 2020
Production and Operating Revenue kWh Revenue kWh Revenue
Millions
Wind Energy Regions
East 39.8  $3.6  41.6  $3.7 
Midwest 148.7  6.5  182.5  7.0 
South 152.6  2.4  —  — 
West 180.0  4.4  166.3  4.1 
Total Production and Operating Revenue 521.1  $16.9  390.4  $14.8 

Operating and Maintenance expense decreased $0.6 million, or 6 percent, from 2020 primarily due to expense management efforts, partially offset by operating and maintenance expenses related to the Diamond Spring wind energy facility.

Depreciation and Amortization expense increased $2.9 million, or 31 percent, from 2020 primarily due to additional property, plant and equipment in service related to the Diamond Spring wind energy facility.

Taxes Other than Income Taxes increased $1.0 million from 2020 primarily due to higher property tax expense related to the Diamond Spring wind energy facility.

Income Tax Benefit decreased $1.5 million from 2020 primarily due to lower production tax credits.

Net Loss Attributable to Non-Controlling Interest increased $0.7 million from 2020 reflecting net losses attributable to non-controlling interest for the Diamond Spring wind energy facility and higher net losses attributable to non-controlling interest for the Glen Ullin and South Peak wind energy facilities.

Corporate and Other

Operating Revenue in 2021 was similar to the same period in 2020.

Net Loss Attributable to ALLETE of $4.5 million in 2021 compared to a net loss of $2.8 million in 2020. The net loss in 2021 included higher expenses. Net income at BNI Energy was $1.8 million in 2021 compared to $2.1 million in 2020. The net loss at ALLETE Properties was $0.5 million in 2021 compared to a net loss of $0.7 million in 2020.

Income Taxes – Consolidated

For the quarter ended September 30, 2021, the effective tax rate was a benefit of 25.5 percent (benefit of 16.5 percent for the quarter ended September 30, 2020). The effective tax rate for 2021 was a higher benefit primarily due to lower pre-tax income, partially offset by lower production tax credits.

We expect our annual effective tax rate in 2021 to be a lower income tax benefit than in 2020 primarily due to lower production tax credits. The estimated annual effective tax rate can differ from what a quarterly effective tax rate would otherwise be on a standalone basis, and this may cause quarter to quarter differences in the timing of income taxes.


ALLETE, Inc. Third Quarter 2021 Form 10-Q
33



COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(See Note 10. Business Segments for financial results by segment.)

Regulated Operations
Nine Months Ended September 30, 2021 2020
Millions    
Operating Revenue – Utility $888.2  $721.2 
Fuel, Purchased Power and Gas – Utility 389.4  251.7 
Transmission Services – Utility 56.1  49.8 
Operating and Maintenance 158.9  145.4 
Depreciation and Amortization 128.2  124.9 
Taxes Other than Income Taxes 45.1  36.5 
Operating Income 110.5  112.9 
Interest Expense (43.1) (43.7)
Equity Earnings 15.8  16.7 
Other Income 4.5  8.3 
Income Before Income Taxes 87.7  94.2 
Income Tax Benefit (11.7) (16.8)
Net Income Attributable to ALLETE $99.4  $111.0 

Operating Revenue Utility increased $167.0 million from 2020 primarily due to higher fuel adjustment clause recoveries, higher kWh sales, increased transmission revenue related to the GNTL, higher cost recovery rider revenue and higher FERC formula-based rates. Revenue in 2020 also included reserves for the refund of interim rates collected between January 1, 2020, and April 30, 2020.

Fuel adjustment clause revenue increased $83.6 million due to higher fuel and purchased power costs attributable to retail and municipal customers. (See Fuel, Purchased Power and Gas – Utility.)

Revenue from kWh sales increased $42.6 million from 2020 reflecting higher sales to residential, commercial, industrial and municipal customers as well as other power suppliers. These increases were partially offset by lower revenue related to the expiration of a 100 MW PSA in April 2020. Sales to commercial and industrial customers increased primarily due to improving business conditions related to the COVID-19 pandemic and its impact on customer operations. Many commercial and industrial customers operated at reduced levels or were temporarily closed or idled during 2020 as a result of the COVID-19 pandemic and related governmental responses while business conditions have improved in 2021. These higher sales to commercial and industrial customers were partially offset by lower sales to and demand revenue from Verso Corporation which indefinitely idled its paper mill in Duluth, Minnesota in 2020. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) Sales to residential and municipal customers increased from 2020 primarily due to more favorable weather conditions in 2021 compared to 2020. Sales to other power suppliers, which are sold at market-based prices into the MISO market on a daily basis or through PSAs of various durations, increased primarily due to additional kWh sales made to mitigate the uncertainty of customers’ energy needs and potential load loss due to the COVID-19 pandemic.

Kilowatt-hours Sold   Variance
Nine Months Ended September 30, 2021 2020 Quantity %
Millions        
Regulated Utility        
Retail and Municipal        
Residential 846  835  11  1.3  %
Commercial 1,018  983  35  3.6  %
Industrial 5,351  4,547  804  17.7  %
Municipal 445  434  11  2.5  %
Total Retail and Municipal 7,660  6,799  861  12.7  %
Other Power Suppliers 3,695  2,495  1,200  48.1  %
Total Regulated Utility Kilowatt-hours Sold 11,355  9,294  2,061  22.2  %


ALLETE, Inc. Third Quarter 2021 Form 10-Q
34



COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (Continued)
Regulated Operations (Continued)

Revenue from electric sales to taconite customers accounted for 32 percent of regulated operating revenue in 2021 (29 percent in 2020). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of regulated operating revenue in 2021 (6 percent in 2020). Revenue from electric sales to pipelines and other industrial customers accounted for 9 percent of regulated operating revenue in 2021 (9 percent in 2020).

Revenue in 2020 included reserves of $11.7 million for the refund of interim rates collected between January 1, 2020, and April 30, 2020. (See Note 2. Regulatory Matters.)

Transmission revenue related to GNTL increased $13.5 million primarily due to recovery of related expenses resulting from the GNTL being placed into service in June 2020.

Cost recovery rider revenue increased $6.6 million primarily due to fewer production tax credits recognized by Minnesota Power. If production tax credits are recognized at a level below those assumed in Minnesota Power’s base rates, an increase in cost recovery rider revenue is recognized to offset the impact of lower production tax credits on income tax expense.

Revenue from wholesale customers under FERC formula-based rates increased $4.5 million primarily due to higher rates.

Operating Expenses increased $169.4 million, or 28 percent, from 2020.

Fuel, Purchased Power and Gas – Utility expense increased $137.7 million, or 55 percent, from 2020 primarily due to higher purchased power prices, kWh sales and fuel costs. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause.

Transmission Services – Utility expense increased $6.3 million, or 13 percent, from 2020 primarily due to higher MISO-related expense.

Operating and Maintenance expense increased $13.5 million, or 9 percent, from 2020 primarily due to an increase in contract and professional services and materials purchased for generation facilities and higher vegetation management expenses. In addition, 2021 included higher labor and benefit expenses as compared to 2020.

Depreciation and Amortization expense increased $3.3 million, or 3 percent, from 2020 primarily due to additional property, plant and equipment in service resulting from the GNTL being placed into service in June 2020.

Taxes Other than Income Taxes increased $8.6 million, or 24 percent, from 2020 primarily due to higher property tax expense resulting from the GNTL being placed into service in June 2020 as well as higher estimated taxable market values.

Equity Earnings decreased $0.9 million, or 5 percent, from 2020 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints in 2020.

Other Income decreased $3.8 million, or 46 percent, from 2020 primarily due to lower pension and other postretirement plan non-service credits. (See Note 1. Operations and Significant Accounting Policies.)

Income Tax Benefit decreased $5.1 million from 2020 primarily due to lower production tax credits, partially offset by lower pre-tax income.

We expect the annual effective tax rate for Regulated Operations in 2021 to be a lower income tax benefit than in 2020 primarily due to lower production tax credits.

ALLETE, Inc. Third Quarter 2021 Form 10-Q
35



COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (Continued)

ALLETE Clean Energy
Nine Months Ended September 30, 2021 2020
Millions    
Operating Revenue
Contracts with Customers – Non-utility $50.8 $44.0
Other – Non-utility (a)
8.6  8.5 
Operating and Maintenance 31.6  26.8 
Depreciation and Amortization 36.5  26.4 
Taxes Other than Income Taxes 5.3  2.4 
Operating Income (Loss) (14.0) (3.1)
Interest Expense (1.1) (1.4)
Other Income 0.3  0.2 
Loss Before Income Taxes (14.8) (4.3)
Income Tax Benefit (12.7) (14.2)
Net Income (Loss) (2.1) 9.9 
Net Loss Attributable to Non-Controlling Interest (13.8) (6.9)
Net Income Attributable to ALLETE $11.7  $16.8 
(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs.

Operating Revenue increased $6.9 million, or 13 percent, from 2020 primarily due to revenue from the South Peak and Diamond Spring wind energy facilities which commenced operations in April 2020 and December 2020, respectively, partially offset by the negative impact related to ALLETE Clean Energy’s Diamond Spring wind energy facility due to an extreme winter storm event in the southwest United States in February 2021.

Nine Months Ended September 30,
2021 2020
Production and Operating Revenue kWh Revenue kWh Revenue
Millions
Wind Energy Regions
East 167.1  $15.1