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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 March 31, 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 classTrading symbolName of each exchange on which registered
Common Stock, without par valueALENew 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,
52,188,909 shares outstanding
as of March 31, 2021




Index
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLETE, Inc. First 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 AcronymTerm
AFUDCAllowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods
ALLETEALLETE, Inc.
ALLETE Clean EnergyALLETE Clean Energy, Inc. and its subsidiaries
ALLETE PropertiesALLETE Properties, LLC and its subsidiaries
ALLETE South WindALLETE South Wind, LLC
ALLETE Transmission HoldingsALLETE Transmission Holdings, Inc.
ArcelorMittalArcelorMittal S.A.
ATCAmerican Transmission Company LLC
BisonBison Wind Energy Center
BNI EnergyBNI Energy, Inc. and its subsidiary
BoswellBoswell Energy Center
Camp RipleyCamp Ripley Solar Array
CliffsCleveland-Cliffs Inc.
CompanyALLETE, Inc. and its subsidiaries
COVID-192019 novel coronavirus
CSAPRCross-State Air Pollution Rule
DCDirect Current
EISEnvironmental Impact Statement
EPAUnited States Environmental Protection Agency
ESOPEmployee Stock Ownership Plan
FERCFederal Energy Regulatory Commission
Form 10-KALLETE Annual Report on Form 10-K
Form 10-QALLETE Quarterly Report on Form 10-Q
GAAPGenerally Accepted Accounting Principles in the United States of America
GHGGreenhouse Gases
GNTLGreat Northern Transmission Line
Hibbing TaconiteHibbing Taconite Co.
Husky EnergyHusky Energy Inc.
Invest DirectALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
IRPIntegrated Resource Plan
Item ___Item ___ of this Form 10-Q
kVKilovolt(s)
kW / kWh
Kilowatt(s) / Kilowatt-hour(s)
LaskinLaskin Energy Center
Lampert Capital MarketsLampert Capital Markets, Inc.
Manitoba HydroManitoba Hydro-Electric Board
Minnesota PowerAn operating division of ALLETE, Inc.
Minnkota PowerMinnkota Power Cooperative, Inc.
MISOMidcontinent Independent System Operator, Inc.
MMTPManitoba-Minnesota Transmission Project
Moody’sMoody’s Investors Service, Inc.
MPCAMinnesota Pollution Control Agency
ALLETE, Inc. First Quarter 2021 Form 10-Q
3



Abbreviation or AcronymTerm
MPUCMinnesota Public Utilities Commission
MW / MWhMegawatt(s) / Megawatt-hour(s)
NAAQSNational Ambient Air Quality Standards
NDPSCNorth Dakota Public Service Commission
Nobles 2Nobles 2 Power Partners, LLC
NOLNet Operating Loss
NOX
Nitrogen Oxides
Northshore MiningNorthshore Mining Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
Note ___Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDESNational Pollutant Discharge Elimination System
NTECNemadji Trail Energy Center
Oliver Wind IOliver Wind I Energy Center
Oliver Wind IIOliver Wind II Energy Center
PolyMetPolyMet Mining Corp.
PPA / PSAPower Purchase Agreement / Power Sales Agreement
PPACAPatient Protection and Affordable Care Act of 2010
PSCWPublic Service Commission of Wisconsin
SECSecurities and Exchange Commission
Silver Bay PowerSilver Bay Power Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
SO2
Sulfur Dioxide
Square ButteSquare Butte Electric Cooperative, a North Dakota cooperative corporation
SWL&PSuperior Water, Light and Power Company
Taconite HarborTaconite Harbor Energy Center
Town Center DistrictTown Center at Palm Coast Community Development District in Florida
U.S.United States of America
USS CorporationUnited States Steel Corporation
WTGWind Turbine Generator

ALLETE, Inc. First 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. First Quarter 2021 Form 10-Q
5



PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
March 31,
2021
December 31,
2020
Millions
Assets  
Current Assets  
Cash and Cash Equivalents$159.0 $44.3 
Accounts Receivable (Less Allowance of $2.6 and $2.5)113.5 111.9 
Inventories – Net74.0 74.2 
Prepayments and Other31.9 24.5 
Total Current Assets378.4 254.9 
Property, Plant and Equipment – Net4,930.6 4,840.8 
Regulatory Assets472.7 480.9 
Equity Investments301.5 301.2 
Other Non-Current Assets191.3 206.8 
Total Assets$6,274.5 $6,084.6 
Liabilities and Equity  
Liabilities  
Current Liabilities  
Accounts Payable$107.0 $110.0 
Accrued Taxes75.2 59.4 
Accrued Interest15.3 19.8 
Long-Term Debt Due Within One Year298.5 203.7 
Other78.9 66.7 
Total Current Liabilities574.9 459.6 
Long-Term Debt1,652.4 1,593.2 
Deferred Income Taxes190.2 195.7 
Regulatory Liabilities517.9 524.8 
Defined Benefit Pension and Other Postretirement Benefit Plans212.5 225.8 
Other Non-Current Liabilities280.2 285.3 
Total Liabilities3,428.1 3,284.4 
Commitments, Guarantees and Contingencies (Note 6)
Equity  
ALLETE Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 52.2 and 52.1 Shares Issued and Outstanding1,467.6 1,460.9 
Accumulated Other Comprehensive Loss(30.7)(31.1)
Retained Earnings883.8 864.8 
Total ALLETE Equity2,320.7 2,294.6 
Non-Controlling Interest in Subsidiaries525.7 505.6 
Total Equity2,846.4 2,800.2 
Total Liabilities and Equity$6,274.5 $6,084.6 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2021 Form 10-Q
6



ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
Three Months Ended
March 31,
 20212020
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility$293.0 $265.3 
Contracts with Customers – Non-utility43.4 43.5 
Other – Non-utility2.8 2.8 
Total Operating Revenue339.2 311.6 
Operating Expenses
Fuel, Purchased Power and Gas – Utility120.4 89.0 
Transmission Services – Utility17.7 18.5 
Cost of Sales – Non-utility16.8 16.9 
Operating and Maintenance66.3 61.0 
Depreciation and Amortization58.0 53.4 
Taxes Other than Income Taxes18.0 12.6 
Total Operating Expenses297.2 251.4 
Operating Income42.0 60.2 
Other Income (Expense)
Interest Expense(17.1)(15.7)
Equity Earnings4.8 5.2 
Other3.3 1.0 
Total Other Expense(9.0)(9.5)
Income Before Income Taxes33.0 50.7 
Income Tax Benefit(10.4)(13.8)
Net Income43.4 64.5 
Net Loss Attributable to Non-Controlling Interest(8.4)(1.8)
Net Income Attributable to ALLETE$51.8 $66.3 
Average Shares of Common Stock
Basic52.1 51.7 
Diluted52.2 51.8 
Basic Earnings Per Share of Common Stock$0.99 $1.28 
Diluted Earnings Per Share of Common Stock$0.99 $1.28 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2021 Form 10-Q
7



ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
Three Months Ended
March 31,
20212020
Millions  
Net Income$43.4 $64.5 
Other Comprehensive Income (Loss)  
Unrealized Loss on Securities
Net of Income Tax Benefit of $– and $(0.1) (0.4)
Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense of $0.1 and $0.10.4 0.2 
Total Other Comprehensive Income (Loss)0.4 (0.2)
Total Comprehensive Income43.8 64.3 
Net Loss Attributable to Non-Controlling Interest(8.4)(1.8)
Total Comprehensive Income Attributable to ALLETE$52.2 $66.1 
The accompanying notes are an integral part of these statements.

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



ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Three Months Ended
March 31,
 20212020
Millions
Operating Activities  
Net Income$43.4 $64.5 
AFUDC – Equity(0.5)(0.5)
Income from Equity Investments – Net of Dividends1.0  
Realized and Unrealized Gain (Loss) on Investments and Property, Plant and Equipment(0.5)3.1 
Depreciation Expense58.0 53.4 
Amortization of PSAs(2.8)(2.8)
Amortization of Other Intangible Assets and Other Assets2.5 2.3 
Deferred Income Tax Benefit(10.4)(13.8)
Share-Based and ESOP Compensation Expense1.7 1.7 
Defined Benefit Pension and Postretirement Benefit Expense1.1  
Bad Debt Expense0.4 0.4 
Changes in Operating Assets and Liabilities  
Accounts Receivable(2.2)(3.4)
Inventories0.2 (6.2)
Prepayments and Other(1.3)4.0 
Accounts Payable(8.6)(5.5)
Other Current Liabilities23.5 7.1 
Cash Contributions to Defined Benefit Pension Plans(10.3)(10.7)
Changes in Regulatory and Other Non-Current Assets(0.6)(11.4)
Changes in Regulatory and Other Non-Current Liabilities(6.1)6.0 
Cash from Operating Activities88.5 88.2 
Investing Activities  
Proceeds from Sale of Available-for-sale Securities1.2 0.9 
Payments for Purchase of Available-for-sale Securities(0.6)(1.1)
Payments for Equity Investments(1.0)(27.8)
Additions to Property, Plant and Equipment(134.4)(154.3)
Other Investing Activities3.9 0.4 
Cash for Investing Activities(130.9)(181.9)
Financing Activities  
Proceeds from Issuance of Common Stock5.0 3.3 
Proceeds from Issuance of Short-Term and Long-Term Debt194.9 110.0 
Repayments of Long-Term Debt(41.4)(1.4)
Proceeds from Non-Controlling Interest in Subsidiaries28.9  
Dividends on Common Stock(32.8)(31.9)
Other Financing Activities(0.4)0.1 
Cash from Financing Activities154.2 80.1 
Change in Cash, Cash Equivalents and Restricted Cash111.8 (13.6)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period65.2 92.5 
Cash, Cash Equivalents and Restricted Cash at End of Period$177.0 $78.9 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2021 Form 10-Q
9



ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
Three Months Ended
March 31,
20212020
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period$1,460.9 $1,436.7 
Common Stock Issued6.7 5.0 
Balance, End of Period1,467.6 1,441.7 
Accumulated Other Comprehensive Loss
Balance, Beginning of Period(31.1)(23.6)
Other Comprehensive Income - Net of Income Taxes
Unrealized Loss on Debt Securities (0.4)
Defined Benefit Pension and Other Postretirement Plans0.4 0.2 
Balance, End of Period(30.7)(23.8)
Retained Earnings
Balance, Beginning of Period864.8 818.8 
Net Income Attributable to ALLETE51.8 66.3 
Common Stock Dividends (32.8)(31.9)
Balance, End of Period883.8 853.2 
Non-Controlling Interest in Subsidiaries
Balance, Beginning of Period505.6 103.7 
Proceeds from Non-Controlling Interest in Subsidiaries28.9  
Net Loss Attributable to Non-Controlling Interest(8.4)(1.8)
Distributions to Non-Controlling Interest(0.4) 
Balance, End of Period525.7 101.9 
Total Equity$2,846.4 $2,373.0 
Dividends Per Share of Common Stock$0.63 $0.6175 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First 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 three months ended March 31, 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 March 31, 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 CashMarch 31,
2021
December 31,
2020
March 31,
2020
December 31,
2019
Millions  
Cash and Cash Equivalents$159.0 $44.3 $67.0 $69.3 
Restricted Cash included in Prepayments and Other 7.1 0.8 6.1 2.8 
Restricted Cash included in Other Non-Current Assets10.9 20.1 5.8 20.4 
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows$177.0 $65.2 $78.9 $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 – NetMarch 31,
2021
December 31,
2020
Millions  
Fuel (a)
$20.4 $23.1 
Materials and Supplies53.6 51.1 
Total Inventories – Net$74.0 $74.2 
(a)    Fuel consists primarily of coal inventory at Minnesota Power.
Other Non-Current AssetsMarch 31,
2021
December 31,
2020
Millions
Contract Assets (a)
$24.8 $25.5 
Operating Lease Right-of-use Assets20.2 22.4 
ALLETE Properties18.2 18.2 
Restricted Cash10.9 20.1 
Other Postretirement Benefit Plans34.7 34.2 
Other82.5 86.4 
Total Other Non-Current Assets$191.3 $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.     
ALLETE, Inc. First Quarter 2021 Form 10-Q
11



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Other Current LiabilitiesMarch 31,
2021
December 31,
2020
Millions  
PSAs$12.5 $12.5 
Fuel Adjustment Clause1.8 3.7 
Operating Lease Liabilities5.7 5.9 
Other58.9 44.6 
Total Other Current Liabilities$78.9 $66.7 
Other Non-Current LiabilitiesMarch 31,
2021
December 31,
2020
Millions  
Asset Retirement Obligation (a)
$170.8 $166.6 
PSAs48.9 52.1 
Operating Lease Liabilities14.5 16.5 
Other46.0 50.1 
Total Other Non-Current Liabilities$280.2 $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 March 31, 2021 and December 31, 2020.
Other Income
Three Months Ended March 31, 20212020
Millions
Pension and Other Postretirement Benefit Plan Non-Service Credits (a)
$1.9 $2.6 
Interest and Investment Income (Loss)1.1 (2.6)
AFUDC - Equity0.5 0.5 
Gain on Land Sales 0.1 
Other(0.2)0.4 
Total Other Income$3.3 $1.0 
(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.)

Supplemental Statement of Cash Flows Information.
Three Months Ended March 31, 20212020
Millions  
Cash Paid for Interest – Net of Amounts Capitalized$21.2 $18.3 
Noncash Investing and Financing Activities  
Increase in Accounts Payable for Capital Additions to Property, Plant and Equipment$5.6 $4.7 
Capitalized Asset Retirement Costs$3.5 $1.6 
AFUDC–Equity$0.5 $0.5 

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 as of and during the quarter ended March 31, 2021, are primarily related to the tax equity financing structure 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.

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



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

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


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 $9.6 million for the three months ended March 31, 2021 and 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.

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.

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.

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.

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 March 31, 2021, Minnesota Power has not deferred any costs or lost revenue, and SWL&P has deferred an immaterial amount of costs.


ALLETE, Inc. First Quarter 2021 Form 10-Q
13



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 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 paper mill to its next general rate case or other proceeding for review for recovery by the MPUC. At a hearing on April 1, 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 for a contested case hearing to recommend to the MPUC if any of those costs should be returned to customers. A recommendation by the administrative law judge is expected in the third quarter of 2021. We cannot predict the outcome of this proceeding.

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. 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 late 2021.

Nemadji Trail Energy Center. In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of a 250 MW natural gas capacity dedication and other affiliated-interest agreements for NTEC, a proposed 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. 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. The MPUC was ordered to determine whether NTEC may have the potential for significant environmental effects and, if so, to prepare an environmental assessment before reassessing the agreements. On January 22, 2020, Minnesota Power filed a petition for further review with the Minnesota Supreme Court requesting that it review and overturn the Minnesota Court of Appeals decision. 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 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. In January 2019, an application for a certificate of public convenience and necessity for NTEC was submitted to the PSCW, which was approved by the PSCW at a hearing in January 2020. 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 ALLETE’s portion is expected to be approximately $350 million. ALLETE’s portion of NTEC project costs incurred through March 31, 2021, is approximately $15 million.

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.

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



NOTE 2. REGULATORY MATTERS (Continued)
Regulatory Assets and Liabilities (Continued)
Regulatory Assets and LiabilitiesMarch 31,
2021
December 31,
2020
Millions 
Non-Current Regulatory Assets  
Defined Benefit Pension and Other Postretirement Benefit Plans$255.3 $259.7 
Income Taxes110.7 113.7 
Cost Recovery Riders57.5 54.0 
Asset Retirement Obligations 31.5 31.6 
Manufactured Gas Plant
5.8 8.8 
Boswell Units 1 and 2 Net Plant and Equipment3.6 5.0 
PPACA Income Tax Deferral4.5 4.5 
Other3.8 3.6 
Total Non-Current Regulatory Assets$472.7 $480.9 
Current Regulatory Liabilities (a)
  
Fuel Adjustment Clause$1.8 $3.7 
Transmission Formula Rates Refund2.4 2.9 
Other0.4 1.0 
Total Current Regulatory Liabilities 4.6 7.6 
Non-Current Regulatory Liabilities  
Income Taxes 367.8 375.3 
Wholesale and Retail Contra AFUDC 85.9 86.6 
Plant Removal Obligations43.0 41.2 
Defined Benefit Pension and Other Postretirement Benefit Plans3.4 4.4 
North Dakota Investment Tax Credits 12.4 12.0 
Conservation Improvement Program 1.7 1.5 
Other3.7 3.8 
Total Non-Current Regulatory Liabilities517.9 524.8 
Total Regulatory Liabilities$522.5 $532.4 
(a)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
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. We expect to make cash investments of approximately $2.0 million in 2021.
ALLETE’s Investment in ATC 
Millions 
Equity Investment Balance as of December 31, 2020$149.0 
Equity in ATC Earnings5.3 
Distributed ATC Earnings(4.3)
Amortization of the Remeasurement of Deferred Income Taxes0.3 
Equity Investment Balance as of March 31, 2021$150.3 

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.


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



NOTE 3. EQUITY INVESTMENTS (Continued)

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 Investments1.0 
Equity in Nobles 2 Earnings (a)
(0.5)
Distributed Nobles 2 Earnings(1.5)
Equity Investment Balance as of March 31, 2021$151.2 
(a)The Company also recorded net loss attributable to non-controlling interest of $1.4 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 March 31, 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. First Quarter 2021 Form 10-Q
16



NOTE 4. FAIR VALUE (Continued)
 Fair Value as of March 31, 2021
Recurring Fair Value MeasuresLevel 1Level 2Level 3Total
Millions    
Assets    
Investments (a)
Available-for-sale – Equity Securities$7.8   $7.8 
Available-for-sale – Corporate and Governmental Debt Securities (b)
 $9.3  9.3 
Cash Equivalents1.7   1.7 
Total Fair Value of Assets$9.5 $9.3  $18.8 
Liabilities    
Deferred Compensation (c)
 $21.0 $21.0 
Total Fair Value of Liabilities $21.0 $21.0 
Total Net Fair Value of Assets (Liabilities)$9.5 $(11.7) $(2.2)
 Fair Value as of December 31, 2020
Recurring Fair Value MeasuresLevel 1Level 2Level 3Total
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 Equivalents5.5   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 March 31, 2021, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $2.5 million, in one year to less than three years was $2.8 million, in three years to less than five years was $3.7 million and in five or more years was $0.3 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 InstrumentsCarrying AmountFair Value
Millions  
Short-Term and Long-Term Debt (a)
  
March 31, 2021$1,960.1$2,150.7
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 three months ended March 31, 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 that could indicate impairment at ALLETE Clean Energy wind energy facilities upon contract expirations. A continued decline in energy prices could result in a future impairment.
ALLETE, Inc. First Quarter 2021 Form 10-Q
17



NOTE 5. SHORT-TERM AND LONG-TERM DEBT

The following tables present the Company’s short-term and long-term debt as of March 31, 2021, and December 31, 2020:
March 31, 2021PrincipalUnamortized Debt Issuance CostsTotal
Millions  
Short-Term Debt$298.8 $(0.3)$298.5 
Long-Term Debt1,661.3 (8.9)1,652.4 
Total Debt$1,960.1 $(9.2)$1,950.9 
December 31, 2020PrincipalUnamortized Debt Issuance CostsTotal
Millions  
Short-Term Debt $204.0 $(0.3)$203.7 
Long-Term Debt1,602.4 (9.2)1,593.2 
Total Debt$1,806.4 $(9.5)$1,796.9 

We had $24.3 million outstanding in standby letters of credit and $60.0 million outstanding draws under our lines of credit as of March 31, 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) and borrowed $100 million upon execution. The Term Loan provides for an additional draw of $50 million on or before May 29, 2021. 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 April 21, 2021, ALLETE agreed to sell $100 million of its First Mortgage Bonds (Bonds) to certain institutional buyers in the private placement market. The Bonds, which will be issued on or before September 1, 2021, will bear interest at 2.79 percent. The Bonds 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. ALLETE intends to use the proceeds from the sale of the Bonds 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 March 31, 2021, our ratio was approximately 0.42 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 March 31, 2021, ALLETE was in compliance with its financial covenants.


ALLETE, Inc. First Quarter 2021 Form 10-Q
18



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 March 31, 2021, Square Butte had total debt outstanding of $265.4 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 three months ended March 31, 2021, was $19.6 million ($20.1 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 $1.5 million ($1.9 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, it 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. First Quarter 2021 Form 10-Q
19



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 ongoing CSAPR “good neighbor” provision and interstate transport litigation is also not currently projected to affect Minnesota Power’s CSAPR compliance. The State of Minnesota has not been identified by the downwind litigant states as a culpable upwind source, and previous EPA air quality modeling has demonstrated that Minnesota is not a significant contributor to downwind air quality attainment challenges. Minnesota Power also does not currently anticipate being materially affected by the EPA’s recent rulemaking to address the remand of certain CSAPR aspects. 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 expected to be material. Minnesota is not among the states expected to be impacted by the EPA’s March 15, 2021 final rule to revise the 2016 CSAPR Update for the 2008 ozone NAAQS in response to the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) remand of the CSAPR Update Rule.

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.

On April 22, 2021, the Biden Administration announced a goal to reach 100 percent carbon pollution-free electricity by 2035 as part of the U.S.’s 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.
ALLETE, Inc. First Quarter 2021 Form 10-Q
20



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

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, 2023, or December 31, 2028, in some specific cases. The rule also establishes new subcategories for retiring high-flow and low-utilization units, and establishes a voluntary incentives program for FGD wastewater.

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 bottom ash transport water.

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

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.

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



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

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 remaining 10 mg/L standard 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 was partially rejected by EPA due to the absence of wild rice waters listed for sulfate impairment. The EPA subsequently proposed a list of 30 wild rice waters for public comment in a separate listing process on April 29, 2021, with public comment through May 31, 2021. A final impaired waters listing is expected to follow the public comment period, 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 occur 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.

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 Rule Part A, 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, which tolls forward if the EPA does not make a determination on a variance application by that date. Minnesota Power sought EPA approval to extend the closure date for the two active Boswell impoundments in November 2020, 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 current regulatory agenda, the remainder of the proposed Part B Rule is expected to be finalized in mid-2021. 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.


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



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)

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. In January 2021, SWL&P submitted a final remedial actions options report to the WDNR with remedial site design expected to be completed in 2021. As of March 31, 2021, we have recorded a liability of approximately $7 million for remediation costs at this 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 our contractual security requirements across our businesses. As of March 31, 2021, we had $119.0 million of outstanding letters of credit issued, including those issued under our revolving credit facility.

Regulated Operations. As of March 31, 2021, we had $30.8 million outstanding in standby letters of credit at our Regulated Operations which are pledged as security for MISO and state agency agreements as well as energy facilities under development.

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 March 31, 2021, ALLETE Clean Energy has $74.4 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.

Investment in Nobles 2. Construction of the Nobles 2 wind energy facility requires standby letters of credit as security for certain contractual obligations. As of March 31, 2021, ALLETE South Wind has $13.8 million outstanding in standby letters of credit, related to its portion of the security requirements relative to its ownership in Nobles 2.

BNI Energy. As of March 31, 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 March 31, 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 March 31, 2021, we owned 48 percent of the assessable land in the Town Center District (48 percent as of December 31, 2020). As of March 31, 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.


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



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

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 ShareBasicSecuritiesDilutedBasicSecuritiesDiluted
Millions Except Per Share Amounts      
Three Months Ended March 31,    
Net Income Attributable to ALLETE$51.8 $51.8 $66.3 $66.3 
Average Common Shares52.1 0.1 52.2 51.7 0.1 51.8 
Earnings Per Share$0.99 $0.99 $1.28 $1.28 


NOTE 8. INCOME TAX EXPENSE
Three Months Ended
March 31,
 20212020
Millions