<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>r10q102805.txt
<DESCRIPTION>ALLETE THIRD QUARTER 2005 FORM 10-Q
<TEXT>
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549



                                    FORM 10-Q


(Mark One)

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of  the Securities Exchange
    Act of 1934

For the quarterly period ended SEPTEMBER 30, 2005

                                       or

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                          Commission File Number 1-3548


                                  ALLETE, INC.
             (Exact name of registrant as specified in its charter)

                   MINNESOTA                             41-0418150
        (State or other jurisdiction of                (IRS Employer
         incorporation or organization)              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)


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 and (2) has been subject to such filing requirements for
the past 90 days.

                  Yes     X      No
                        -----       -----

Indicate by check  mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                  Yes     X      No
                        -----       -----

Indicate by  check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                  Yes            No   X
                        -----       -----


                           Common Stock, no par value,
                          30,080,481 shares outstanding
                            as of September 30, 2005


<PAGE>

                                   INDEX

                                                                            Page

Definitions                                                                   2

Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995                                                            3

Part I.  Financial Information

         Item 1.   Financial Statements

              Consolidated Balance Sheet -
                   September 30, 2005 and December 31, 2004                   4

              Consolidated Statement of Income -
                   Quarter and Nine Months Ended September 30, 2005 and 2004  5

              Consolidated Statement of Cash Flows -
                   Nine Months Ended September 30, 2005 and 2004              6

              Notes to Consolidated Financial Statements                      7

         Item 2.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       21

         Item 3.   Quantitative and Qualitative Disclosures about
                   Market Risk                                               36

         Item 4.   Controls and Procedures                                   37

Part II. Other Information

         Item 1.   Legal Proceedings                                         38

         Item 2.   Unregistered Sales of Equity Securities and Use of
                   Proceeds                                                  38

         Item 3.   Defaults Upon Senior Securities                           38

         Item 4.   Submission of Matters to a Vote of Security Holders       38

         Item 5.   Other Information                                         38

         Item 6.   Exhibits                                                  40

Signatures                                                                   41

1                     ALLETE Third Quarter 2005 Form 10-Q

<PAGE>

                                   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
--------------------------------------------------------------------------------

2004 Form 10-K                           ALLETE's Annual Report on Form 10-K for
                                             the Year Ended December 31, 2004
ADESA                                    ADESA, Inc.
AICPA                                    American Institute of Certified Public
                                             Accountants
ALLETE                                   ALLETE, Inc.
ALLETE Properties                        ALLETE Properties, Inc.
APB                                      Accounting Principles Board
Aqua America                             Aqua America, Inc.
AREA                                     Arrowhead Regional Emission Abatement
ATC                                      American Transmission Company
BNI Coal                                 BNI Coal, Ltd.
Boswell                                  Boswell Energy Center
Company                                  ALLETE, Inc. and its subsidiaries
Constellation Energy Commodities         Constellation Energy Commodities Group,
                                             Inc.
Enventis Telecom                         Enventis Telecom, Inc.
EPA                                      Environmental Protection Agency
ESOP                                     Employee Stock Ownership Plan
FASB                                     Financial Accounting Standards Board
FERC                                     Federal Energy Regulatory Commission
Florida Landmark                         Florida Landmark Communities, Inc.
Florida Water                            Florida Water Services Corporation
FPSC                                     Florida Public Service Commission
FSP                                      Financial Accounting Standards Board
                                             Staff Position
GAAP                                     Accounting Principles Generally
                                             Accepted in the United States
Hibbard                                  Hibbard Energy Center
Laskin                                   Laskin Energy Center
Minnesota Power                          An operating division of ALLETE, Inc.
Minnkota Power                           Minnkota Power Cooperative, Inc.
MISO                                     Midwest Independent Transmission System
                                             Operator, Inc.
MPUC                                     Minnesota Public Utilities Commission
MW                                       Megawatt(s)
Northwest Airlines                       Northwest Airlines, Inc.
Note ___                                 Note ___ to the consolidated financial
                                             statements in this Form 10-Q
NOx                                      Nitrogen oxide
PSCW                                     Public Service Commission of Wisconsin
Rainy River Energy                       Rainy River Energy Corporation
SEC                                      Securities and Exchange Commission
SFAS                                     Statement of Financial Accounting
                                             Standards No.
SO2                                      Sulfur Dioxide
Split Rock Energy                        Split Rock Energy LLC
Square Butte                             Square Butte Electric Cooperative
SWL&P                                    Superior Water, Light and Power Company
Taconite Harbor                          Taconite Harbor Energy Center
Tomoka Holdings                          Tomoka Holdings, LLC
Town Center                              Town Center at Palm Coast development
                                             project in Florida
WDNR                                     Wisconsin Department of Natural
                                             Resources

                      ALLETE Third Quarter 2005 Form 10-Q                      2
<PAGE>


                              SAFE HARBOR STATEMENT
           UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In  connection  with  the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform  Act of 1995,  we are  hereby  filing  cautionary  statements
identifying  important  factors  that could  cause our actual  results to differ
materially from those projected in  forward-looking  statements (as such term is
defined in the Private  Securities  Litigation Reform Act of 1995) made by or on
behalf of ALLETE in this  Quarterly  Report on Form 10-Q, in  presentations,  in
response to questions or otherwise.  Any  statements  that  express,  or involve
discussions  as to  expectations,  beliefs,  plans,  objectives,  assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "anticipates,"  "believes,"  "estimates,"  "expects," "intends,"
"plans,"  "projects,"  "will likely  result," "will  continue,"  "could," "may,"
"potential,"  "target," "outlook" or similar  expressions) are not statements of
historical facts and may be forward-looking.

Forward-looking   statements   involve   estimates,   assumptions,   risks   and
uncertainties  and 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,   which  are   difficult   to   predict,   contain
uncertainties,  are beyond our control and may cause actual  results or outcomes
to differ materially from those contained in forward-looking statements:

 - our ability to successfully implement our strategic objectives;
 - prevailing  governmental  policies and regulatory actions, including those of
   the United States Congress, state legislatures, the FERC, the MPUC, the FPSC,
   the PSCW, and various local and county regulators,  and city  administrators,
   about  allowed  rates of return,  financings,  industry  and rate  structure,
   acquisition and disposal of assets and facilities,  real estate  development,
   operation and construction of plant  facilities,  recovery of purchased power
   and  capital  investments,   present  or  prospective  wholesale  and  retail
   competition (including but not limited to transmission costs), and zoning and
   permitting of land held for resale;
 - effects of restructuring initiatives in the electric industry;
 - economic and geographic factors, including political and economic risks;
 - changes in and compliance with environmental and safety laws and policies;
 - weather conditions;
 - natural disasters;
 - war and acts of terrorism;
 - wholesale power market conditions;
 - population growth rates and demographic patterns;
 - the effects of  competition, including  competition for retail and  wholesale
   customers;
 - pricing and transportation of commodities;
 - changes in tax rates or policies or in rates of inflation;
 - unanticipated project delays or changes in project costs;
 - unanticipated changes in operating expenses and capital expenditures;
 - global and domestic economic conditions;
 - our ability to access capital markets;
 - changes in interest rates and the performance of the financial markets;
 - competition for economic expansion or development opportunities;
 - our ability to manage expansion and integrate acquisitions; and
 - the  outcome  of  legal  and  administrative  proceedings  (whether  civil or
   criminal)  and  settlements  that affect the  business and  profitability  of
   ALLETE.

Additional  disclosures  regarding  factors  that could  cause our  results  and
performance to differ from results or performance anticipated by this report are
discussed  under the heading  "Factors that May Affect Future Results" in Item 7
of our  2004  Form  10-K  and  Item 2 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 us in our 2004 Form 10-K and in our other reports filed with
the SEC that attempt to advise interested parties of the factors that may affect
our business.

3                     ALLETE Third Quarter 2005 Form 10-Q
<PAGE>


PART I.    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

<TABLE>

                                                         ALLETE
                                               CONSOLIDATED BALANCE SHEET
                                                  Millions - Unaudited
<CAPTION>

                                                                                    SEPTEMBER 30,      DECEMBER 31,
                                                                                       2005               2004
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>

ASSETS

Current Assets
     Cash and Cash Equivalents                                                      $   91.4           $   44.9
     Restricted Cash                                                                       -               30.3
     Short-Term Investments                                                             66.8              149.2
     Accounts Receivable (Less Allowance of $2.0 and $2.0)                              66.9               86.1
     Inventories                                                                        37.3               34.0
     Prepayments and Other                                                              22.3               21.6
     Deferred Income Taxes                                                              25.8                  -
     Discontinued Operations                                                             0.6                2.0
----------------------------------------------------------------------------------------------------------------------

        Total Current Assets                                                           311.1              368.1

Property, Plant and Equipment - Net                                                    886.6              883.1

Investments                                                                            126.8              124.5

Other Assets                                                                            46.9               52.8

Discontinued Operations                                                                  2.2                2.9
----------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                        $1,373.6           $1,431.4
----------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current Liabilities
     Accounts Payable                                                               $   33.4           $   40.0
     Accrued Taxes                                                                      24.7               23.3
     Accrued Interest                                                                    4.7                6.9
     Long-Term Debt Due Within One Year                                                  1.6                1.8
     Deferred Profit on Sales of Real Estate                                             9.4                1.1
     Other                                                                              20.7               24.7
     Discontinued Operations                                                             3.9               12.0
----------------------------------------------------------------------------------------------------------------------

        Total Current Liabilities                                                       98.4              109.8

Long-Term Debt                                                                         389.0              390.2

Deferred Income Taxes                                                                  134.0              143.9

Other Liabilities                                                                      156.8              151.4

Minority Interest                                                                        6.8                5.6
----------------------------------------------------------------------------------------------------------------------

        Total Liabilities                                                              785.0              800.9
----------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES
----------------------------------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Common Stock Without Par Value, 43.3 Shares Authorized
     30.1 and 29.7 Shares Outstanding                                                  417.1              400.1

Unearned ESOP Shares                                                                   (78.1)             (51.4)

Accumulated Other Comprehensive Loss                                                   (11.0)             (11.4)

Retained Earnings                                                                      260.6              293.2
----------------------------------------------------------------------------------------------------------------------

        Total Shareholders' Equity                                                     588.6              630.5
----------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          $1,373.6           $1,431.4
----------------------------------------------------------------------------------------------------------------------

                         The accompanying notes are an integral part of these statements.
</TABLE>
                      ALLETE Third Quarter 2005 Form 10-Q                      4

<PAGE>

<TABLE>

                                                         ALLETE
                                            CONSOLIDATED STATEMENT OF INCOME
                                     Millions Except Per Share Amounts - Unaudited
<CAPTION>

                                                                       QUARTER ENDED            NINE MONTHS ENDED
                                                                       SEPTEMBER 30,              SEPTEMBER 30,
                                                                     2005         2004         2005         2004
----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>          <C>          <C>

OPERATING REVENUE                                                  $187.0        $177.6       $580.7       $572.8
----------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES
     Fuel and Purchased Power                                        66.9          71.9        206.3        218.0
     Operating and Maintenance                                       74.5          70.1        239.2        230.9
     Kendall County Charge                                              -             -         77.9            -
     Depreciation                                                    12.7          12.3         38.0         37.2
----------------------------------------------------------------------------------------------------------------------

         Total Operating Expenses                                   154.1         154.3        561.4        486.1
----------------------------------------------------------------------------------------------------------------------

OPERATING INCOME FROM CONTINUING OPERATIONS                          32.9          23.3         19.3         86.7
----------------------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSE)
     Interest Expense                                                (6.7)         (7.5)       (20.2)       (25.7)
     Other                                                            0.4         (18.3)        (2.3)       (21.4)
----------------------------------------------------------------------------------------------------------------------

         Total Other Expense                                         (6.3)        (25.8)       (22.5)       (47.1)
----------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
     BEFORE MINORITY INTEREST AND INCOME TAXES                       26.6          (2.5)        (3.2)        39.6

MINORITY INTEREST                                                     1.0           0.1          2.4          2.0
----------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
     BEFORE INCOME TAXES                                             25.6          (2.6)        (5.6)        37.6

INCOME TAX EXPENSE (BENEFIT)                                          9.8          (2.0)         0.2         14.4
----------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
     BEFORE CHANGE IN ACCOUNTING PRINCIPLE                           15.8          (0.6)        (5.8)        23.2

INCOME (LOSS) FROM DISCONTINUED OPERATIONS - NET OF TAX              (0.6)         13.7         (1.9)        79.3

CHANGE IN ACCOUNTING PRINCIPLE - NET OF TAX                             -             -            -         (7.8)
----------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS)                                                  $ 15.2        $ 13.1        $(7.7)     $  94.7
----------------------------------------------------------------------------------------------------------------------

AVERAGE SHARES OF COMMON STOCK
     Basic                                                           27.4          28.5         27.3         28.3
     Diluted                                                         27.5          28.6         27.3         28.5
----------------------------------------------------------------------------------------------------------------------

BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
     Continuing Operations                                          $0.58        $(0.03)      $(0.21)       $0.82
     Discontinued Operations                                        (0.02)         0.48        (0.07)        2.80
     Change in Accounting Principle                                     -             -            -        (0.28)
----------------------------------------------------------------------------------------------------------------------

                                                                    $0.56        $ 0.45       $(0.28)       $3.34
----------------------------------------------------------------------------------------------------------------------

DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
     Continuing Operations                                          $0.58        $(0.02)      $(0.21)       $0.82
     Discontinued Operations                                        (0.02)         0.47        (0.07)        2.78
     Change in Accounting Principle                                     -             -            -        (0.27)
----------------------------------------------------------------------------------------------------------------------

                                                                    $0.56        $ 0.45       $(0.28)       $3.33
----------------------------------------------------------------------------------------------------------------------

DIVIDENDS PER SHARE OF COMMON STOCK                               $0.3150       $0.8475      $0.9300      $2.5425
----------------------------------------------------------------------------------------------------------------------

                         The accompanying notes are an integral part of these statements.
</TABLE>

5                     ALLETE Third Quarter 2005 Form 10-Q

<PAGE>

<TABLE>

                                                         ALLETE
                                          CONSOLIDATED STATEMENT OF CASH FLOWS
                                                 Millions - Unaudited
<CAPTION>

                                                                                           NINE MONTHS ENDED
                                                                                             SEPTEMBER 30,
                                                                                     2005                   2004
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                    <C>

OPERATING ACTIVITIES
       Income (Loss) from Continuing Operations
          Before Change in Accounting Principle                                    $ (5.8)                $  15.4
       Change in Accounting Principle                                                   -                     7.8
       Loss on Impairment of Investments                                              5.1                     5.5
       Depreciation                                                                  38.0                    37.2
       Deferred Income Taxes                                                        (37.3)                   (2.8)
       Minority Interest                                                              1.2                    (1.6)
       Changes in Operating Assets and Liabilities
          Accounts Receivable                                                        19.2                    (8.7)
          Inventories                                                                (3.3)                   (6.7)
          Prepayments and Other                                                      (0.7)                   (2.9)
          Accounts Payable                                                           (6.6)                   (1.1)
          Other Current Liabilities                                                   3.5                   (23.0)
       Other Assets                                                                   5.9                    (0.2)
       Other Liabilities                                                             10.7                     3.1
       Net Operating Activities from (for) Discontinued Operations                   (9.2)                  119.9
----------------------------------------------------------------------------------------------------------------------

              Cash from Operating Activities                                         20.7                   141.9
----------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
       Proceeds from Sale of Available-For-Sale Securities                          323.5                     1.6
       Payments for Purchase of Available-For-Sale Securities                      (241.0)                  (76.2)
       Changes to Investments                                                        (5.0)                   10.2
       Additions to Property, Plant and Equipment                                   (40.4)                  (48.8)
       Other                                                                         (3.1)                    5.1
       Net Investing Activities from Discontinued Operations                            -                    60.1
----------------------------------------------------------------------------------------------------------------------

              Cash from (for) Investing Activities                                   34.0                   (48.0)
----------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
       Issuance of Common Stock                                                      17.0                    38.5
       Issuance of Long-Term Debt                                                    35.0                   119.6
       Changes in Notes Payable - Net                                                   -                   (53.0)
       Reductions of Long-Term Debt                                                 (36.4)                 (240.9)
       Dividends on Common Stock                                                    (24.9)                  (71.3)
       Net Financing Activities for Discontinued Operations                          (0.1)                  (18.6)
----------------------------------------------------------------------------------------------------------------------

              Cash for Financing Activities                                          (9.4)                 (225.7)
----------------------------------------------------------------------------------------------------------------------

CHANGE IN CASH AND CASH EQUIVALENTS                                                  45.3                  (131.8)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD <F1>                                46.1                   229.5
----------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD <F1>                                    $ 91.4                 $  97.7
----------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION
       Cash Paid During the Period for
          Interest - Net of Amounts Capitalized                                     $28.5                   $42.8
          Income Taxes                                                              $23.9                   $61.8
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $0 of cash from Discontinued Operations  at  September 30, 2005 ($1.2 million at September 30, 2004) and
     $1.2 million at December 31, 2004 ($116.1 million at December 31, 2003).
</FN>

                         The accompanying notes are an integral part of these statements.
</TABLE>

                      ALLETE Third Quarter 2005 Form 10-Q                      6
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements and notes should be
read in  conjunction  with our 2004 Form 10-K. In our opinion,  all  adjustments
necessary for a fair statement of the results for the interim  periods have been
made.  The  results  of  operations  for an interim  period are not  necessarily
indicative of the results to be expected for the full year.


NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

REAL ESTATE REVENUE AND EXPENSE RECOGNITION. Full profit recognition is recorded
on sales upon closing,  provided cash collections are at least 20 percent of the
contract price and the other  requirements of SFAS 66,  "Accounting for Sales of
Real Estate," are met. In certain cases,  where there are obligations to perform
significant  development  activities after the date of sale, we recognize profit
on a percentage-of-completion basis in accordance with SFAS 66. Pursuant to this
method of accounting,  gross profit is recognized based upon the relationship of
development  costs  incurred  as of that  date to the total  estimated  costs to
develop the  parcels,  including  all related  amenities  or common costs of the
entire  project.  Revenue  and cost of real  estate sold in excess of the amount
recognized  based  on  the  percentage-of-completion   method  is  deferred  and
recognized  as revenue  and cost of real  estate sold during the period in which
the related development costs are incurred. Revenue and cost of real estate sold
are recorded net as Deferred Profit on Sales of Real Estate on our  consolidated
balance sheet.

Land held for sale is recorded at the lower of cost or fair value  determined by
the evaluation of individual  land parcels and is included in Investments on our
consolidated balance sheet. Real estate costs include the cost of land acquired,
subsequent development costs and costs of improvements,  capitalized development
period  interest,  real  estate  taxes and  payroll  costs of certain  employees
devoted directly to the development effort. These real estate costs incurred are
capitalized  to the cost of real estate  parcels  based upon the relative  sales
value of parcels  within each  development  project in accordance  with SFAS 67,
"Accounting  for Costs and Initial Rental  Operations of Real Estate  Projects."
When real estate is sold,  the cost of sales  includes the actual costs incurred
and the estimate of future  completion  costs  allocated to the real estate sold
based upon the relative sales value method.

Whenever  events or  circumstances  indicate that the carrying value of the real
estate may not be  recoverable,  impairments  would be recorded  and the related
assets would be adjusted to their estimated fair value, less costs to sell.

REVISION IN THE  CLASSIFICATION  OF CERTAIN  SECURITIES.  In connection with the
preparation  of our Form 10-Q for the  quarterly  period ended June 30, 2005, we
concluded that it was appropriate to reclassify our auction rate municipal bonds
and variable rate municipal demand notes as short-term investments.  Previously,
such investments had been classified as cash and cash equivalents.  Accordingly,
we now report these securities as short-term investments in a separate line item
on our  Consolidated  Balance  Sheet as of December 31, 2004.  We have also made
corresponding  adjustments to our  Consolidated  Statement of Cash Flows for the
period ended  September  30, 2004,  to reflect the gross  purchases and sales of
these securities as investing  activities rather than as a component of cash and
cash equivalents.  This change in classification  does not affect our previously
reported Consolidated Statements of Income for any period.

For the year ended  December  31, 2004,  net cash used in  investing  activities
related to these  short-term  investments of $149.2 million was included in cash
and cash equivalents in our Consolidated Statement of Cash Flows.

SHORT-TERM  INVESTMENTS.  At September  30, 2005 and December 31, 2004,  we held
$66.8  million and $149.2  million,  respectively,  of  short-term  investments,
consisting of auction rate municipal  bonds and variable rate  municipal  demand
notes  classified as  available-for-sale  securities.  Our  investments in these
securities  are recorded at cost,  which  approximates  fair market value due to
their variable interest rates, which typically reset every 7 to 35 days. Despite
the long-term nature of their stated contractual maturities, we have the ability
to quickly liquidate these  securities.  As a result, we had no cumulative gross
unrealized  holding gains  (losses) or gross  realized  gains  (losses) from our
short-term  investments.  All income generated from these short-term investments
was recorded as interest income.

7                     ALLETE Third Quarter 2005 Form 10-Q

<PAGE>

NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES.  Inventories  are  stated at the lower of cost or  market.  Cost is
determined by the average cost method.

<TABLE>
<CAPTION>

                                                                            SEPTEMBER 30,           DECEMBER 31,

INVENTORIES                                                                      2005                   2004
----------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                         <C>                     <C>
Fuel                                                                             $13.2                  $11.4
Materials and Supplies                                                            22.4                   20.4
Other                                                                              1.7                    2.2
----------------------------------------------------------------------------------------------------------------------

                                                                                 $37.3                  $34.0
----------------------------------------------------------------------------------------------------------------------
</TABLE>

ACCOUNTING  FOR  STOCK-BASED  COMPENSATION.  We  have  elected  to  account  for
stock-based  compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees."  Accordingly,  we recognize  expense for performance
share awards  granted and do not  recognize  expense for employee  stock options
granted.  The after-tax  expense  recognized in net income for performance share
awards was  approximately  $1.1 million for the nine months ended  September 30,
2005 ($0.8 million for the nine months ended September 30, 2004).  The following
table  illustrates  the effect on net income  and  earnings  per share if we had
applied  the fair value  recognition  provisions  of SFAS 123,  "Accounting  for
Stock-Based Compensation."

<TABLE>
<CAPTION>

                                                                          QUARTER ENDED         NINE MONTHS ENDED
EFFECT OF SFAS 123                                                        SEPTEMBER 30,           SEPTEMBER 30,
ACCOUNTING FOR STOCK-BASED COMPENSATION                                2005         2004       2005         2004
----------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
<S>                                                                    <C>          <C>       <C>           <C>

Net Income (Loss)
       As Reported                                                     $15.2        $13.1      $(7.7)       $94.7
       Plus:  Employee Stock Compensation Expense
              Included in Net Income (Loss) - Net of Tax                 0.5            -        1.1          0.8
       Less:  Employee Stock Compensation Expense
              Determined Under SFAS 123 - Net of Tax                     0.5            -        1.2          1.0
----------------------------------------------------------------------------------------------------------------------

       Pro Forma Net Income (Loss)                                     $15.2        $13.1      $(7.8)       $94.5
----------------------------------------------------------------------------------------------------------------------

Basic Earnings (Loss) Per Share
       As Reported                                                     $0.56        $0.45     $(0.28)       $3.34
       Pro Forma                                                       $0.56        $0.45     $(0.29)       $3.34

Diluted Earnings (Loss) Per Share
       As Reported                                                     $0.56        $0.45     $(0.28)       $3.33
       Pro Forma                                                       $0.56        $0.45     $(0.29)       $3.32
----------------------------------------------------------------------------------------------------------------------
</TABLE>

In the previous table, the expense for employee stock options granted determined
under SFAS 123 was calculated using the  Black-Scholes option  pricing model and
the following assumptions:

<TABLE>
<CAPTION>

                                                                                            2005            2004
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>             <C>

Risk-Free Interest Rate                                                                      3.7%            3.3%
Expected Life - Years                                                                           5               5
Expected Volatility                                                                         20.0%           28.1%
Dividend Growth Rate                                                                           5%              2%
----------------------------------------------------------------------------------------------------------------------
</TABLE>

                      ALLETE Third Quarter 2005 Form 10-Q                      8
<PAGE>


NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING  STANDARDS.  SFAS 123(R).  In December 2004, the FASB issued SFAS
123(R), "Share-Based Payment," which will be effective for enterprises beginning
with the first  interim or annual  reporting  period of the  registrants'  first
fiscal year beginning on or after June 15, 2005.  SFAS 123(R) replaces SFAS 123,
"Accounting  for Stock-Based  Compensation,"  and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees."  The new standard  requires that the
compensation  cost  relating to  share-based  payment be recognized in financial
statements at fair value.  As such,  reporting  employee stock options under the
intrinsic  value-based method prescribed by APB Opinion No. 25 will no longer be
allowed.  Historically,  we have elected to use the  intrinsic  value method and
have not  recognized  expense for employee stock options  granted.  We expect to
implement SFAS 123(R) beginning January 1, 2006, and do not believe it will have
a material  impact on our  financial  position,  results of  operations  or cash
flows.

The FASB has  clarified  the  adoption  of SFAS  123(R)  with FSP SFAS  123(R)-1
"Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee  Services  under FASB  Statement No. 123(R)" and
FSP SFAS 123(R)-2  "Practical  Accommodation to the Application of Grant Date as
Defined in FASB  Statement  No.  123(R)."  These  staff  positions  clarify  the
implementation  of SFAS  123(R).  We do not  believe  they will have a  material
impact on the Company.

The  FASB has  proposed  FSP  SFAS  123(R)-c  "Transition  Election  Related  to
Accounting  for the Tax Effects of  Share-Based  Payment  Awards." This proposed
staff position  provides for an alternate method for the  implementation of SFAS
123(R). We do not believe it will have a material impact on the Company.

INTERPRETATION  NO. 47. In March 2005,  the FASB issued  Interpretation  No. 47,
"Accounting for Conditional Asset Retirement Obligations." Interpretation No. 47
clarifies that the term  "conditional  asset  retirement  obligation" as used in
SFAS 143,  "Accounting  for  Asset  Retirement  Obligations,"  refers to a legal
obligation  to perform an asset  retirement  activity in which the timing and/or
method of settlement  are  conditional  on a future event that may or may not be
within the control of the entity.  However,  the obligation to perform the asset
retirement  activity is unconditional  even though  uncertainty exists about the
timing  and/or  method of  settlement.  Interpretation  No. 47 requires that the
uncertainty  about the timing and/or method of settlement of a conditional asset
retirement  obligation be factored into the  measurement  of the liability  when
sufficient  information  exists.  Interpretation  No. 47 also  clarifies when an
entity would have sufficient  information to reasonably  estimate the fair value
of an asset retirement obligation. Interpretation No. 47 is effective for fiscal
years  ending  after  December  15,  2005.  Retroactive  application  of interim
financial  information  is permitted,  but not required.  We are  evaluating the
impact of this Interpretation, but do not expect it to have a material impact on
our financial position, results of operations or cash flows.

SFAS 109. In July 2005, the FASB issued an exposure  draft of an  Interpretation
of SFAS  109,  "Accounting  for  Income  Taxes."  This  proposed  Interpretation
clarifies the  accounting for uncertain tax  positions.  An enterprise  would be
required to  recognize,  in its financial  statements,  the best estimate of the
impact of a tax position only if that  position is probable of being  sustained,
if audited by the taxing  authorities,  based solely on the technical  merits of
the position.  In evaluating whether the probable recognition threshold has been
met, this proposed  Interpretation  would require the  presumption  that the tax
position  will be  evaluated  during  an audit by taxing  authorities.  The term
probable is used in this proposed Interpretation consistent with its use in SFAS
5,  "Accounting  for  Contingencies,"  to mean "the  future  event or events are
likely to occur."

Individual  tax positions that fail to meet the probable  recognition  threshold
will generally result in the inability to recognize the benefit of such position
in the financial statements. This proposed Interpretation also provides guidance
on disclosure, accrual of interest and penalties, accounting in interim periods,
and transition.  If adopted as proposed,  this Interpretation would be effective
as of the end of the first fiscal year ending after December 15, 2005. We do not
anticipate  this  Interpretation,  if adopted as proposed,  will have a material
impact on the Company.

9                     ALLETE Third Quarter 2005 Form 10-Q
<PAGE>

NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SFAS 154. In May 2005, the FASB issued SFAS 154,  "Accounting  Changes and Error
Corrections"  (SFAS 154) which replaces APB Opinion No. 20 "Accounting  Changes"
and SFAS 3, "Reporting  Accounting  Changes in Interim  Financial  Statements-An
Amendment of APB Opinion No. 28." SFAS 154 provides  guidance on the  accounting
for and reporting of accounting  changes and error  corrections.  It establishes
retrospective  application,  or the latest  practicable  date,  as the  required
method for  reporting a change in  accounting  principle  and the reporting of a
correction  of an  error.  SFAS 154 is  effective  for  accounting  changes  and
corrections of errors made in fiscal years beginning after December 15, 2005. We
are currently  evaluating  the effect that the adoption of SFAS 154 will have on
our consolidated results of operations and financial condition but do not expect
that adoption will have a material impact.


NOTE 2.    BUSINESS SEGMENTS

In 2005,  we began  allocating  corporate  charges and  interest  expense to our
business segments.  For comparative  purposes,  segment information for 2004 has
been  restated to reflect the new  allocation  method used in 2005 for corporate
charges and interest expense. This restatement had no impact on consolidated net
income or earnings per share.

<TABLE>
<CAPTION>

                                                                            NONREGULATED
                                                              REGULATED        ENERGY         REAL
                                             CONSOLIDATED      UTILITY       OPERATIONS      ESTATE        OTHER
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                          <C>              <C>           <C>              <C>          <C>
FOR THE QUARTER ENDED SEPTEMBER 30, 2005

Operating Revenue                                $187.0        $137.4           $28.7        $11.2         $ 9.7
Fuel and Purchased Power                           66.9          60.4             6.5            -             -
Operating and Maintenance                          74.5          45.5            16.6          2.8           9.6
Depreciation Expense                               12.7           9.9             1.9          0.1           0.8
----------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing
  Operations                                       32.9          21.6             3.7          8.3          (0.7)
Interest Expense                                   (6.7)         (4.3)           (1.8)        (0.1)         (0.5)
Other Income                                        0.4             -             0.1            -           0.3
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Minority Interest and Income
    Taxes                                          26.6          17.3             2.0          8.2          (0.9)
Minority Interest                                   1.0             -               -          1.0             -
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Income Taxes                            25.6          17.3             2.0          7.2          (0.9)
Income Tax Expense (Benefit)                        9.8           6.7             0.4          3.2          (0.5)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations           15.8        $ 10.6           $ 1.6        $ 4.0         $(0.4)
                                                              --------------------------------------------------------

Loss from Discontinued Operations -
    Net of Tax                                     (0.6)
----------------------------------------------------------

Net Income                                       $ 15.2
----------------------------------------------------------


FOR THE QUARTER ENDED SEPTEMBER 30, 2004

Operating Revenue                                $177.6        $136.1            $25.5        $5.2        $ 10.8
Fuel and Purchased Power                           71.9          63.4              8.5           -             -
Operating and Maintenance                          70.1          44.1             13.1         2.5          10.4
Depreciation Expense                               12.3           9.7              1.9           -           0.7
----------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing
  Operations                                       23.3          18.9              2.0         2.7          (0.3)
Interest Expense                                   (7.5)         (5.0)            (1.4)       (0.1)         (1.0)
Other Income (Expense)                            (18.3)            -              0.3           -         (18.6)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Minority Interest and Income
    Taxes                                          (2.5)         13.9              0.9         2.6         (19.9)
Minority Interest                                   0.1             -                -         0.1             -
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Income Taxes                            (2.6)         13.9              0.9         2.5         (19.9)
Income Tax Expense (Benefit)                       (2.0)          5.7              0.2         1.0          (8.9)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations           (0.6)       $  8.2            $ 0.7        $1.5        $(11.0)
                                                              --------------------------------------------------------

Income from Discontinued Operations -
    Net of Tax                                     13.7
----------------------------------------------------------

Net Income                                       $ 13.1
----------------------------------------------------------
</TABLE>

                      ALLETE Third Quarter 2005 Form 10-Q                     10
<PAGE>

NOTE 2.    BUSINESS SEGMENTS (CONTINUED)

<TABLE>
<CAPTION>

                                                                            NONREGULATED
                                                              REGULATED        ENERGY         REAL
                                             CONSOLIDATED      UTILITY       OPERATIONS      ESTATE        OTHER
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                          <C>              <C>           <C>              <C>          <C>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

Operating Revenue                                $580.7        $422.8           $83.1        $38.9         $35.9
Fuel and Purchased Power                          206.3         186.5            19.8            -             -
Operating and Maintenance                         239.2         143.1            49.3         12.3          34.5
Kendall County Charge                              77.9             -            77.9            -             -
Depreciation Expense                               38.0          29.5             6.0          0.1           2.4
----------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing
  Operations                                       19.3          63.7           (69.9)        26.5          (1.0)
Interest Expense                                  (20.2)        (13.0)           (4.7)        (0.3)         (2.2)
Other Income (Expense)                             (2.3)          0.4             0.3            -          (3.0)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Minority Interest and Income
    Taxes                                          (3.2)         51.1           (74.3)        26.2          (6.2)
Minority Interest                                   2.4             -               -          2.4             -
----------------------------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations
    Before Income Taxes                            (5.6)         51.1           (74.3)        23.8          (6.2)
Income Tax Expense (Benefit)                        0.2          19.8           (27.0)        10.1          (2.7)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations           (5.8)       $ 31.3          $(47.3)       $13.7         $(3.5)
                                                              --------------------------------------------------------

Loss from Discontinued Operations -
    Net of Tax                                     (1.9)
----------------------------------------------------------

Net Loss                                         $ (7.7)
----------------------------------------------------------

Total Assets                                   $1,373.6 <F1>   $899.6          $183.4        $77.1        $210.7
Property, Plant and Equipment - Net              $886.6        $729.5          $117.6            -         $39.5
Accumulated Depreciation                         $800.6        $742.7           $45.0            -         $12.9
Capital Expenditures                              $40.4 <F1>    $31.1            $6.0            -          $3.3

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

Operating Revenue                                $572.8        $414.3           $81.1        $39.6        $ 37.8
Fuel and Purchased Power                          218.0         186.4            31.6            -             -
Operating and Maintenance                         230.9         138.7            41.4         12.7          38.1
Depreciation Expense                               37.2          29.5             5.6            -           2.1
----------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing
  Operations                                       86.7          59.7             2.5         26.9          (2.4)
Interest Expense                                  (25.7)        (14.3)           (3.8)        (0.2)         (7.4)
Other Income (Expense)                            (21.4)          0.1             1.2            -         (22.7)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Minority Interest and Income
    Taxes                                          39.6          45.5            (0.1)        26.7         (32.5)
Minority Interest                                   2.0             -               -          2.0             -
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Income Taxes                            37.6          45.5            (0.1)        24.7         (32.5)
Income Tax Expense (Benefit)                       14.4          17.4            (0.7)        10.2         (12.5)
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations           23.2        $ 28.1           $ 0.6        $14.5        $(20.0)
                                                              --------------------------------------------------------

Income from Discontinued Operations -
    Net of Tax                                     79.3

Change in Accounting Principle                     (7.8)
----------------------------------------------------------

Net Income                                       $ 94.7
----------------------------------------------------------

Total Assets                                   $1,449.3 <F1>   $919.6          $161.3        $74.8        $285.6
Property, Plant and Equipment - Net              $885.0        $729.6          $117.1            -         $38.3
Accumulated Depreciation                         $766.6        $717.6           $40.1            -          $8.9
Capital Expenditures                              $65.0 <F1>    $32.8           $11.5            -          $4.5

----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Discontinued Operations represented $2.8 million of total assets in 2005 ($8.0 million in 2004) and $0 of capital
     expenditures in 2005 ($16.2 million in 2004).
</FN>
</TABLE>

11                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


NOTE 3.    INVESTMENTS

At September  30, 2005,  Investments  included the real estate  assets of ALLETE
Properties,  debt and equity securities  consisting primarily of securities held
to fund employee benefits, and our emerging technology investments.

<TABLE>
<CAPTION>

                                                                          SEPTEMBER 30,              DECEMBER 31,
INVESTMENTS                                                                   2005                       2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                       <C>                        <C>

Real Estate Assets                                                          $  77.1                    $  75.1
Debt and Equity Securities                                                     40.5                       35.8
Emerging Technology Investments                                                 9.2                       13.6
----------------------------------------------------------------------------------------------------------------------

                                                                            $ 126.8                    $ 124.5
----------------------------------------------------------------------------------------------------------------------
</TABLE>

REAL ESTATE.  At September 30, 2005,  real estate assets  included land of $45.8
million ($47.2 million at December 31, 2004),  long-term finance  receivables of
$13.3  million  ($9.7  million at December  31, 2004) and $18.0  million  ($18.2
million at December 31, 2004) of other assets,  which  consisted  primarily of a
shopping center.  Finance  receivables have maturities  ranging up to ten years,
accrue interest at  market-based  rates and are net of an allowance for doubtful
accounts of $0.6  million at  September  30, 2005 ($0.7  million at December 31,
2004).

EMERGING TECHNOLOGY  INVESTMENTS.  In March 2005, we recorded $5.1 million ($3.3
million  after  tax)  of   impairments   related  to  certain   investments   in
privately-held,   start-up   companies  whose  future  business  prospects  have
diminished significantly.  Recent developments at these companies indicated that
future  commercial  viability  is  unlikely,  as is new  financing  necessary to
continue  development.  The total  carrying  value of our direct  investments in
privately-held,  start-up  companies  at  September  30,  2005,  was  zero.  Our
remaining emerging  technology  investments  consist of our interests in certain
venture capital funds. We account for these investments under the equity method.


NOTE 4.    SHORT-TERM AND LONG-TERM DEBT

On March  16,  2005,  Florida  Landmark,  a  wholly-owned  subsidiary  of Lehigh
Acquisition  Corporation,  which is an 80 percent  owned  subsidiary  of ALLETE,
entered  into an $8.5 million  revolving  development  loan with  CypressCoquina
Bank.  The  revolving  development  loan has an interest rate equal to the prime
rate, with an initial term of 36 months. The term of the loan may be extended 24
months,  if  certain  conditions  are met.  The  loan is  guaranteed  by  Lehigh
Acquisition  Corporation.  No funds were  drawn  under  this loan  agreement  at
September 30, 2005.

On August 1, 2005, ALLETE issued $35 million of its first mortgage bonds,  which
carry an interest rate of 5.28% and have a term of 15 years.  On August 2, 2005,
we used  proceeds  from  these  newly  issued  bonds to redeem  $35  million  in
principal amount of First Mortgage Bonds, 7 1/2% Series due 2007.

On October 6, 2005, ALLETE accepted an offer from certain  institutional  buyers
in the  private  placement  market to purchase  $50  million of  ALLETE's  first
mortgage bonds.  When issued, on or about March 1, 2006, the bonds will carry an
interest rate of 5.69% and will have a term of 30 years.  ALLETE  intends to use
the proceeds from the bonds to redeem a portion of ALLETE's outstanding debt.


                      ALLETE Third Quarter 2005 Form 10-Q                     12
<PAGE>


NOTE 5.     KENDALL COUNTY CHARGE

On April 1, 2005,  Rainy River  Energy,  a  wholly-owned  subsidiary  of ALLETE,
completed  the  assignment  of its power  purchase  agreement  with  LSP-Kendall
Energy,  LLC,  the owner of an energy  generation  facility  located  in Kendall
County,  Illinois, to Constellation Energy Commodities.  Rainy River Energy paid
Constellation  Energy  Commodities  $73  million  in cash to  assume  the  power
purchase agreement,  which is in effect through  mid-September 2017. The payment
resulted in a charge to our operating  income in the second quarter of 2005. The
tax  benefits of the payment will be realized  through a capital loss  carryback
for federal  income tax  purposes  and have been  recorded  as current  deferred
income tax assets.  The tax  benefits  are  expected to be realized in the first
half of 2006. In addition,  consent,  advisory and closing costs of $4.9 million
were  incurred to complete  the  transaction.  As a result of this  transaction,
ALLETE  incurred a charge to operating  expenses  totaling  $77.9 million ($50.4
million after tax, or $1.84 per diluted share) in the second quarter of 2005.


NOTE 6.    OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>

                                                                          QUARTER ENDED         NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                       2005         2004       2005         2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                   <C>         <C>         <C>         <C>
Debt Prepayment Premium and Unamortized
    Debt Issuance Costs                                                   -       $(18.5)         -       $(18.5)
Loss on Emerging Technology Investments                               $(0.1)        (1.0)     $(5.9)        (6.9)
Investment and Other Income                                             0.5          1.2        3.6          4.0
----------------------------------------------------------------------------------------------------------------------

                                                                      $ 0.4       $(18.3)     $(2.3)      $(21.4)
----------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 7.    INCOME TAX EXPENSE
<TABLE>
<CAPTION>

                                                                          QUARTER ENDED         NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                       2005         2004       2005         2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                  <C>           <C>        <C>          <C>
Current Tax Expense
    Federal                                                          $ 10.7         $0.4      $30.6 <F1>   $11.7
    State                                                               2.4          1.1        6.9 <F1>     5.5
----------------------------------------------------------------------------------------------------------------------

                                                                       13.1          1.5       37.5         17.2
----------------------------------------------------------------------------------------------------------------------

Deferred Tax Benefit
    Federal                                                            (2.5)        (2.2)     (35.1) <F1>   (0.5)
    State                                                              (0.5)        (1.1)      (1.2)        (1.3)
----------------------------------------------------------------------------------------------------------------------

                                                                       (3.0)        (3.3)     (36.3)        (1.8)
----------------------------------------------------------------------------------------------------------------------

Deferred Tax Credits                                                   (0.3)        (0.2)      (1.0)        (1.0)
----------------------------------------------------------------------------------------------------------------------

Income Tax Expense (Benefit) on Continuing Operations                   9.8         (2.0)       0.2         14.4
Income Tax Expense (Benefit) on Discontinued Operations                (0.3)        11.0       (0.8)        60.3
Income Tax Benefit on Change in Accounting Principle                      -            -          -         (5.5)
----------------------------------------------------------------------------------------------------------------------

Total Income Tax Expense (Benefit)                                   $  9.5         $9.0      $(0.6)       $69.2
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included a current  federal  tax  benefit of $1.3 million; current state tax benefit of $0.4 million and deferred
     federal tax benefit of $25.8 million related to the Kendall County Charge. (See Note 5.)
</FN>
</TABLE>

For the nine months ended  September  30, 2005,  the  effective  rate for income
taxes  deviated from the statutory  rate,  primarily as a result of the emerging
technology investment  impairments recorded in March 2005 and the Kendall County
capital  loss  recorded in April 2005.  The current  benefit for these items was
limited to a federal benefit for income tax purposes. The state tax benefit from
these items is not expected to be realized  currently or in future  periods and,
accordingly,  are fully  offset by a  valuation  allowance.  Current  taxes also
increased  in  2005,  due to the  expiration  of  the  accelerated  depreciation
deduction  allowed by the Jobs and Growth Tax Relief Act of 2003,  which expired
December 31, 2004. The effective rate for income taxes for the nine months ended
September  30,  2004,  deviated  from the  statutory  rate due to  nondeductible
transaction costs related to the spin-off of Automotive Services.

13                    ALLETE Third Quarter 2005 Form 10-Q
<PAGE>

NOTE 8.    DISCONTINUED OPERATIONS

AUTOMOTIVE  SERVICES.  On  September  20, 2004,  the spin-off of our  Automotive
Services business (ADESA),  was completed by distributing to ALLETE shareholders
all of ALLETE's  shares of ADESA common  stock.  One share of ADESA common stock
was  distributed for each  outstanding  share of ALLETE common stock held at the
close of business on the September 13, 2004, record date.

WATER SERVICES.  In June 2004, we essentially concluded our strategy to exit our
Water Services businesses when we completed the sale of our North Carolina water
assets and the sale of the remaining 72 water and wastewater systems in Florida.
Aqua  America  purchased  our North  Carolina  water  assets for $48 million and
assumed  approximately  $28 million in debt,  and also purchased 63 of our water
and wastewater systems in Florida for $14 million. Seminole County purchased the
remaining 9 Florida  systems for a total of $4 million.  The FPSC  approved  the
Seminole County  transaction in September 2004. The transaction  relating to the
sale of 63 water and  wastewater  systems  in Florida  to Aqua  America  remains
subject to regulatory  approval by the FPSC. The approval  process may result in
an adjustment to the final purchase price, based on the FPSC's  determination of
plant  investment  for the  systems.  We  anticipate  a decision  in mid to late
December 2005.  Gains in 2004 from the sale of our North Carolina assets and the
remaining  systems in Florida were offset by an adjustment to gains  reported in
2003,  resulting in an aggregate  net loss of $0.5 million in 2004 ($0.4 million
loss first quarter;  $5.8 million gain second  quarter;  $0.2 million loss third
quarter; $5.7 million loss fourth quarter).

In February  2005,  we sold our  wastewater  assets in Georgia for an immaterial
gain.  Florida Water  continues to incur  administrative  and other  expenses to
support transfer proceedings with the FPSC.

<TABLE>
<CAPTION>

                                                                          QUARTER ENDED         NINE MONTHS ENDED
DISCONTINUED OPERATIONS                                                   SEPTEMBER 30,           SEPTEMBER 30,
SUMMARY INCOME STATEMENT                                               2005         2004       2005         2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                   <C>          <C>         <C>         <C>

Operating Revenue
    Automotive Services                                                   -        $201.9          -       $681.7
    Water Services                                                        -           1.2          -         16.3
----------------------------------------------------------------------------------------------------------------------

                                                                          -        $203.1          -       $698.0
----------------------------------------------------------------------------------------------------------------------

Pre-Tax Income (Loss) from Operations
    Automotive Services                                                   -         $25.8          -       $132.8
    Water Services                                                        -          (0.7)         -         (0.9)
----------------------------------------------------------------------------------------------------------------------

                                                                          -          25.1          -        131.9
----------------------------------------------------------------------------------------------------------------------

Income Tax Expense (Benefit)
    Automotive Services                                                   -          11.4          -         54.0
    Water Services                                                        -          (0.3)         -         (0.3)
----------------------------------------------------------------------------------------------------------------------

                                                                          -          11.1          -         53.7
----------------------------------------------------------------------------------------------------------------------

         Total Net Income from Operations                                 -          14.0          -         78.2
----------------------------------------------------------------------------------------------------------------------

Gain (Loss) on Disposal
    Automotive Services                                                   -          (0.1)         -         (6.7)
    Water Services                                                    $(0.9)         (0.3)     $(2.7)        14.4
----------------------------------------------------------------------------------------------------------------------

                                                                       (0.9)         (0.4)      (2.7)         7.7
----------------------------------------------------------------------------------------------------------------------

Income Tax Expense (Benefit)
    Automotive Services                                                   -             -          -         (2.6)
    Water Services                                                     (0.3)         (0.1)      (0.8)         9.2
----------------------------------------------------------------------------------------------------------------------

                                                                       (0.3)         (0.1)      (0.8)         6.6
----------------------------------------------------------------------------------------------------------------------

         Net Gain (Loss) on Disposal                                   (0.6)         (0.3)      (1.9)         1.1
----------------------------------------------------------------------------------------------------------------------

Income (Loss) from Discontinued Operations                            $(0.6)        $13.7      $(1.9)      $ 79.3
----------------------------------------------------------------------------------------------------------------------
</TABLE>

                      ALLETE Third Quarter 2005 Form 10-Q                     14
<PAGE>


NOTE 8.    DISCONTINUED OPERATIONS (CONTINUED)

<TABLE>
<CAPTION>

DISCONTINUED OPERATIONS                                                   SEPTEMBER 30,              DECEMBER 31,
SUMMARY BALANCE SHEET INFORMATION                                             2005                       2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                       <C>                        <C>

Assets of Discontinued Operations
     Cash and Cash Equivalents                                                   -                       $1.2
     Other Current Assets                                                     $0.6                       $0.8
     Property, Plant and Equipment                                            $2.2                       $2.9

Liabilities of Discontinued Operations
     Current Liabilities                                                      $3.9                      $12.0
----------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 9.    COMPREHENSIVE INCOME (LOSS)

For the quarter ended September 30, 2005, total comprehensive income (loss), net
of tax, was comprehensive income of $15.6 million (a $3.7 million  comprehensive
loss, net of tax, for the quarter ended September 30, 2004). For the nine months
ended September 30, 2005, total  comprehensive  income (loss), net of tax, was a
$7.3 million loss ($71.8 million of  comprehensive  income,  net of tax, for the
nine months  ended  September  30,  2004).  Total  comprehensive  income  (loss)
includes net income (loss), unrealized gains and losses on securities classified
as available-for-sale, and additional pension liability.

<TABLE>
<CAPTION>

ACCUMULATED OTHER COMPREHENSIVE                                                        SEPTEMBER 30,
INCOME (LOSS) - NET OF TAX                                                    2005                       2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                         <C>                         <C>

Unrealized Gain on Securities                                               $  1.9                      $ 1.4
Additional Pension Liability                                                 (12.9)                      (9.8)
----------------------------------------------------------------------------------------------------------------------
                                                                            $(11.0)                     $(8.4)
----------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 10.     EARNINGS PER SHARE

The  difference  between  basic  and  diluted  earnings  per share  arises  from
outstanding  stock  options  and  performance  share  awards  granted  under our
Executive and Director  Long-Term  Incentive  Compensation  Plans. In accordance
with SFAS 128,  "Earnings  Per Share," for the nine months ended  September  30,
2005,  0.1 million  dilutive  securities  were  excluded in the  computation  of
diluted earnings per share because a loss from continuing operations existed for
the nine months ended  September 30, 2005.  At September  30, 2004,  0.1 million
options to purchase shares of common stock were excluded from the computation of
diluted  earnings per share  because they were  anti-dilutive  due to the option
exercise prices being greater than the average market price of the common stock.

<TABLE>
<CAPTION>

                                                            2005                                2004
                                              ------------------------------------------------------------------------
RECONCILIATION OF BASIC AND DILUTED                       DILUTIVE                            DILUTIVE
EARNINGS PER SHARE                               BASIC   SECURITIES    DILUTED       BASIC   SECURITIES    DILUTED
----------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
<S>                                              <C>     <C>           <C>          <C>      <C>           <C>

FOR THE QUARTER ENDED SEPTEMBER 30,

Income (Loss) from Continuing Operations
     Before Change in Accounting Principle       $15.8         -        $15.8        $(0.6)        -        $(0.6)
Common Shares                                     27.4       0.1         27.5         28.5       0.1         28.6
Per Share from Continuing Operations             $0.58         -        $0.58       $(0.03)        -       $(0.02)
----------------------------------------------------------------------------------------------------------------------

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

Income (Loss) from Continuing Operations
     Before Change in Accounting Principle       $(5.8)        -        $(5.8)       $23.2         -        $23.2
Common Shares                                     27.3         -         27.3         28.3       0.2         28.5
Per Share from Continuing Operations            $(0.21)        -       $(0.21)       $0.82         -        $0.82
----------------------------------------------------------------------------------------------------------------------
</TABLE>

15                    ALLETE Third Quarter 2005 Form 10-Q
<PAGE>


NOTE 11.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

<TABLE>
<CAPTION>

                                                                                               POSTRETIREMENT
                                                                  PENSION                      HEALTH AND LIFE
                                              ------------------------------------------------------------------------
COMPONENTS OF PERIODIC BENEFIT EXPENSE                     2005            2004             2005            2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                       <C>             <C>               <C>             <C>

FOR THE QUARTER ENDED SEPTEMBER 30,

Service Cost                                               $2.1             $2.1            $1.1             $0.9
Interest Cost                                               5.4              5.2             1.6              1.6
Expected Return on Plan Assets                             (7.0)            (6.9)           (1.2)            (1.2)
Amortization of Prior Service Costs                         0.2              0.2               -                -
Amortization of Net Loss                                    0.7              0.4             0.2              0.1
Amortization of Transition Obligation                        -               0.1             0.6              0.6
----------------------------------------------------------------------------------------------------------------------

Periodic Benefit Expense                                   $1.4             $1.1            $2.3             $2.0
----------------------------------------------------------------------------------------------------------------------

FOR THE NINE MONTHS ENDED SEPTEMBER 30,

Service Cost                                              $ 6.5           $  6.3            $3.1             $3.0
Interest Cost                                              16.0             15.6             4.9              5.0
Expected Return on Plan Assets                            (21.2)           (20.7)           (3.6)            (3.4)
Amortization of Prior Service Costs                         0.6              0.6               -                -
Amortization of Net Loss                                    2.3              1.2             0.6              0.4
Amortization of Transition Obligation                       0.1              0.2             1.9              1.8
----------------------------------------------------------------------------------------------------------------------

Periodic Benefit Expense                                  $ 4.3           $  3.2            $6.9             $6.8
----------------------------------------------------------------------------------------------------------------------
</TABLE>

In May 2004, the FASB issued FSP 106-2,  "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug,  Improvement and Modernization Act of
2003," (Act) which provides  accounting  and  disclosure  guidance for employers
that sponsor  postretirement  health care plans that provide  prescription  drug
benefits.  FSP  106-2  requires  that  the  accumulated  postretirement  benefit
obligation  and  postretirement  benefit cost reflect the impact of the Act upon
adoption.  We provide  postretirement  health benefits that include prescription
drug  benefits and have  concluded  that our  prescription  drug  benefits  will
qualify us for the federal  subsidy to be provided under the Act. We adopted FSP
106-2 in the third  quarter  of 2004.  The  adoption  of FSP 106-2  reduced  our
after-tax  postretirement  medical  expense  by  $0.5  million  for  each of the
quarters ended September 30, 2005 and 2004, and $1.5 million for the nine months
ended  September 30, 2005 ($1.0 million for the nine months ended  September 30,
2004).

In 2005,  we  determined  that our  postretirement  health  care  plans meet the
requirements   of  the  Centers  for  Medicare  and  Medicaid   Services'  (CMS)
regulations,  and  are in  the  process  of  enrolling  with  the  CMS to  begin
recovering the subsidy in 2006.

                      ALLETE Third Quarter 2005 Form 10-Q                     16
<PAGE>


NOTE 12.     EMPLOYEE STOCK AND INCENTIVE PLANS

We  sponsor  a  leveraged  ESOP as  part of our  Retirement  Savings  and  Stock
Ownership Plan (RSOP).  As a result of the September 2004 spin-off of Automotive
Services,  the ESOP received 3.3 million shares of ADESA common stock related to
unearned ESOP shares that have not been allocated to participants.  The ESOP was
required to sell the ADESA common stock and use the proceeds to purchase  ALLETE
common stock on the open market.  At December 31, 2004, the ESOP had sold all of
these  ADESA  shares.  The 3.3  million  ADESA  shares  sold by the ESOP in 2004
resulted in total  proceeds  of $65.9  million  and an  after-tax  gain of $11.5
million,  which we recognized in the fourth quarter of 2004. Under the direction
of an independent  trustee, the ESOP began using the proceeds to purchase shares
of ALLETE common stock in October  2004. As of February 15, 2005,  the remaining
proceeds ($30.3 million  classified as Restricted Cash at December 31, 2004) had
been used to  purchase  ALLETE  common  stock,  which  were  recorded  using the
treasury method as Unearned ESOP Shares within Shareholders' Equity as presented
on our consolidated balance sheet.

<TABLE>
<CAPTION>

SUMMARY OF ALLETE COMMON STOCK PURCHASES                                     SHARES                    AMOUNT
----------------------------------------------------------------------------------------------------------------------
Millions Except Shares
<S>                                                                       <C>                          <C>

2004    October                                                              80,600                    $ 2.7
        November                                                            669,578                     23.5
        December                                                            262,600                      9.4
2005    January                                                             544,797                     21.4
        February                                                            214,928                      8.9
----------------------------------------------------------------------------------------------------------------------

                                                                          1,772,503                    $65.9
----------------------------------------------------------------------------------------------------------------------
</TABLE>

UNALLOCATED  SHARES. As of September 30, 2005, there were 2,614,140  unallocated
shares of ALLETE  common  stock in the ESOP  (2,001,505  shares at December  31,
2004),  which reflected 759,725 shares purchased and 147,090 shares allocated or
used for plan expenses  during the first nine months of 2005.  Pursuant to AICPA
Statement of Position 93-6,  "Employers' Accounting for Employee Stock Ownership
Plans," unallocated ALLETE common stock currently held by the ESOP is treated as
unearned  ESOP shares and not  considered  outstanding  for  earnings  per share
computations.  ESOP shares are included in earnings per share  computations only
after they are allocated to participants.

ALLOCATED SHARES. In September 2005, the RSOP's independent trustee directed the
sale of the approximately 1.4 million shares of ADESA common stock that remained
invested in the RSOP  participants'  ADESA  common  stock funds at  September 1,
2005.  Proceeds from the sale of the ADESA common stock were $30.4  million,  of
which the majority was used to purchase  ALLETE  common stock as required by the
terms of the RSOP.  The process was  completed  on October  26,  2005.  Proceeds
totaling $28.5 million were used to purchase a total of 644,450 shares of ALLETE
common stock (289,900 shares in September 2005; 354,550 shares in October 2005).

17                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


NOTE 13.     COMMITMENTS, GUARANTEES AND CONTINGENCIES

SQUARE BUTTE POWER  PURCHASE  AGREEMENT.  Minnesota  Power has a power  purchase
agreement with Square Butte that extends through 2026 (Agreement). It provides a
long-term  supply  of  low-cost  energy to  customers  in our  electric  service
territory and enables  Minnesota Power to meet power pool reserve  requirements.
Square Butte, a North Dakota cooperative  corporation,  owns a 455-MW coal-fired
generating  unit (Unit) near  Center,  North  Dakota.  The Unit is adjacent to a
generating unit owned by Minnkota Power, a North Dakota cooperative  corporation
whose Class A members are also members of Square Butte. Minnkota Power serves as
the operator of the Unit and also purchases power from Square Butte.

Minnesota  Power is entitled to  approximately  71 percent of the Unit's  output
under the Agreement.  After 2005, and upon  compliance  with a two-year  advance
notice  requirement,  Minnkota Power has the option to reduce Minnesota  Power's
entitlement by approximately 5 percent annually,  to a minimum of 50 percent. In
December 2004 and 2003, we received  notices from Minnkota  Power that they will
reduce our output  entitlement by approximately 5 percent  beginning  January 1,
2006 and 2007, to 66 percent and 60 percent,  respectively.  Minnesota  Power is
obligated to pay its pro rata share of Square  Butte's  costs based on Minnesota
Power's entitlement to Unit output. Minnesota Power's payment obligation will be
suspended  if Square  Butte  fails to deliver  any power,  whether  produced  or
purchased,  for a  period  of one  year.  Square  Butte's  fixed  costs  consist
primarily of debt service.  At September  30, 2005,  Square Butte had total debt
outstanding  of $310.9  million.  Total  annual debt service for Square Butte is
expected to be approximately $25 million in each of the years 2005 through 2009.
Variable  operating costs include the price of coal purchased from BNI Coal, our
subsidiary,  under a long-term  contract.  Minnesota  Power's payments to Square
Butte are approved as a purchased power expense for ratemaking  purposes by both
the MPUC and the FERC.

LEASING AGREEMENTS.  In September 2004, BNI Coal entered into an operating lease
agreement  for a new  dragline  that was placed in service at BNI Coal's mine on
September 30, 2004. BNI Coal is obligated to make lease  payments  totaling $2.8
million  annually  for the lease  term which  expires in 2027.  BNI Coal has the
option at the end of the lease term to renew the lease at a fair market  rental,
to purchase the dragline at fair market value,  or to surrender the dragline and
pay a $3.0 million termination fee.

We lease other  properties and equipment under  operating lease  agreements with
terms expiring  through 2013. The aggregate amount of minimum lease payments for
all of these other  operating  leases is $3.5  million in 2005,  $3.3 million in
2006,  $2.8 million in 2007, $2.1 million in 2008, $1.7 million in 2009 and $2.4
million thereafter.

COAL,  RAIL AND SHIPPING  CONTRACTS.  We have three coal supply  agreements with
various  expiration  dates ranging from December 2006 to December  2009. We also
have rail and shipping  agreements for  transportation  of all of our coal, with
various  expiration  dates  ranging from  December  2005 to December  2011.  Our
minimum  annual  payment   obligations  under  these  coal,  rail  and  shipping
agreements  are  currently  $40.5 million in 2005,  $13.0 million in 2006,  $9.7
million  in  2007,  $10.1  million  in 2008 and  $10.2  million  in  2009.  Upon
finalization of our  nominations  for coal  deliveries  during 2006, our minimum
annual payment  obligations will increase;  and once annual nominations are made
for coal  deliveries  during 2007,  2008 and 2009,  our minimum  annual  payment
obligations during each of those years are also expected to increase.

EMERGING  TECHNOLOGY  PORTFOLIO.  We have  investments in emerging  technologies
through  minority  investments  in venture  capital funds  structured as limited
liability  companies,   and  direct  investments  in  privately-held,   start-up
companies.  The  carrying  value of our direct  investments  in  privately-held,
start-up  companies was zero at September 30, 2005 ($4.5 million at December 31,
2004).  We have committed to make  additional  investments  in certain  emerging
technology  venture capital funds. The total future  commitment was $3.2 million
at September 30, 2005 ($4.5 million at December 31, 2004), and is expected to be
invested  at  various  times  through  2007.  We do not  have  plans to make any
additional investments beyond this commitment.

                    ALLETE Third Quarter 2005 Form 10-Q                       18

<PAGE>


NOTE 13.     COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

ENVIRONMENTAL  MATTERS.  Our  businesses  are subject to  regulation  by various
federal,  state and  local  authorities  concerning  environmental  matters.  We
anticipate  that  potential  expenditures  for  environmental  matters  will  be
material  in the  future,  due to stricter  environmental  requirements  through
legislation and/or rulemakings that are expected to require  significant capital
investments.   We  are  unable  to  predict  if  and  when  any  such   stricter
environmental  requirements will be imposed and the impact they will have on the
Company.  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.  These accruals are adjusted periodically
as assessment and  remediation  efforts  progress or as additional  technical or
legal information becomes available.  Accruals for environmental liabilities are
included in the 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 charged to expense unless recoverable in
rates from customers.

SWL&P  MANUFACTURED  GAS PLANT. In May 2001, SWL&P received notice from the WDNR
that the City of Superior had found soil  contamination on property  adjoining a
former  Manufactured  Gas  Plant  (MGP)  site  owned  and  operated  by  SWL&P's
predecessors  from  1889 to  1904.  The WDNR  requested  SWL&P  to  initiate  an
environmental  investigation.  The WDNR also issued  SWL&P a  Responsible  Party
letter in  February  2002.  The  environmental  investigation  is under way.  In
February  2003,  SWL&P  submitted a Phase II  environmental  site  investigation
report to the WDNR.  This report  identified  some MGP-like  chemicals that were
found in the soil near the former plant site. During 2003, sediment samples were
taken from nearby  Superior  Bay. The report on the results of this sampling was
completed and sent to the WDNR during the first quarter of 2004.  The next phase
of the investigation was to determine any impact to soil or ground water between
the  former  MGP site and  Superior  Bay.  The site  work for this  phase of the
investigation  was performed  during October 2004, and the final report was sent
to the WDNR in March 2005.  Additional  investigation was performed in September
and October of 2005 to further delineate the extent of the contamination.  It is
anticipated that the final report for this portion of the investigation  will be
completed  in mid-2006.  Although it is not  possible to quantify the  potential
cleanup cost until the investigation is completed,  a $0.5 million liability was
recorded in December 2003 to address the known areas of  contamination.  We have
recorded a  corresponding  dollar  amount as a  regulatory  asset to offset this
liability.  The PSCW has approved  SWL&P's  deferral of these MGP  environmental
investigation and potential cleanup costs for future recovery in rates,  subject
to a regulatory  prudency review.  In May 2005, the PSCW approved the collection
through rates of $150,000 of site investigation  costs that had been incurred by
the time SWL&P filed their most recent rate request.  ALLETE maintains pollution
liability  insurance coverage that includes coverage for SWL&P. A claim has been
filed  with  respect  to  this  matter.  The  insurance  carrier  has  issued  a
reservation  of  rights  letter  and we  continue  to work with the  insurer  to
determine the availability of insurance coverage.

SQUARE BUTTE GENERATING FACILITY.  In June 2002, Minnkota Power, the operator of
Square Butte,  received a Notice of Violation from the EPA regarding alleged New
Source Review  violations at the M.R. Young  Station,  which includes the Square
Butte  generating  unit. The EPA claims certain  capital  projects  completed by
Minnkota  Power  should have been  reviewed  pursuant  to the New Source  Review
regulations,  potentially  resulting  in new air  permit  operating  conditions.
Minnkota  Power has held  several  meetings  with the EPA to discuss the alleged
violations.  Discussions  between  Minnkota Power and the EPA are ongoing and we
are unable to predict the outcome or cost  impacts.  If Square Butte is required
to make significant  capital  expenditures to comply with EPA  requirements,  we
expect  such  capital  expenditures  to be debt  financed.  Our  future  cost of
purchased  power  would  include  our pro  rata  share of this  additional  debt
service.

CLEAN  WATER ACT - FISH  IMPINGEMENT/ENTRAINMENT  REDUCTION  STANDARDS.  In July
2004,  the EPA issued  Section  316(b)  Phase II Rule of the Clean  Water Act to
ensure that the  location,  design,  construction  and capacity of cooling water
intake structures at electric generating  facilities reflect the best technology
available to reduce by specific  percentages  fish  mortality due to impingement
(being  pinned  against  screens  or  other  parts  of a  cooling  water  intake
structure) or entrainment  (being drawn into cooling water systems and subjected
to thermal,  physical  or chemical  stresses).  The fish  impingement  reduction
requirements apply to the Boswell,  Laskin,  Hibbard and Square Butte generating
facilities.  Both  impingement  and  entrainment  reduction  standards  apply to
Taconite  Harbor  because  it is  located on Lake  Superior.  The rule  requires
biological  studies and engineering  analyses to be performed within the 2005 to
2008 timeframe. The estimated total cost of these studies for our facilities  is
expected  to be in the range of $0.5  million  to $1.0  million.  We cannot  yet
estimate the capital expenditures that may be required to comply with the rule.

19                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>

NOTE 13.     COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

EPA CLEAN AIR INTERSTATE RULE AND CLEAN AIR MERCURY RULE. In March 2005, the EPA
announced  the  final  Clean  Air  Interstate   Rule  (CAIR)  that  reduces  and
permanently  caps emissions of SO2, NOX and  particulates  in the eastern United
States.  The CAIR  includes  Minnesota  as one of the 28 states it  considers as
"eastern" states. The EPA also announced the final Clean Air Mercury Rule (CAMR)
that  reduces  and  permanently  caps  emissions  of  electric  utility  mercury
emissions in the continental United States.  Together,  the two rules address at
least some of the  emission  reductions  that were  targeted  by the Clear Skies
legislation  that was not  enacted  in 2004.  The  CAIR and the CAMR  have  been
challenged  in the  court  system,  which  may  delay  implementation  or modify
provisions of the rules.  Minnesota Power is  participating in a legal challenge
to the CAIR but is not challenging the CAMR.  However,  if the CAMR and the CAIR
do go into effect,  Minnesota Power expects to be required to (1) make emissions
reductions,  (2)  purchase  mercury,  SO2 and NOX  allowances  through the EPA's
cap-and-trade  system,  and/or (3) use a  combination  of both.  The Clear Skies
legislation  is  being   revisited  and,  if  enacted,   will  likely   displace
implementation of these rules.

We believe that CAIR contains flaws in its  methodology and  application,  which
will cause  Minnesota  Power to incur  significantly  higher  compliance  costs.
Consequently, in July 2005, Minnesota Power filed a Petition for Review with the
U.S. Court of Appeals for the District of Columbia Circuit. We also have filed a
Petition for Reconsideration with the EPA. If the litigation and/or the Petition
for Reconsideration  are successful,  we expect to incur lower compliance costs,
consistent  with the rules  applicable  to those states  considered as "western"
states under the CAIR.

GUARANTEE.   ALLETE  guarantees  $1.0  million  of  Northwest  Airlines,  Inc.'s
(Northwest  Airlines)  payments of principal  and  interest on $24.7  million of
"Duluth  Airport  Lease  Revenue  Bonds" (to be paid out of lease  revenue  from
Northwest Airlines to the Duluth Economic Development  Authority).  If Northwest
Airlines is delinquent in their rent payments,  the bond trustee may draw on the
collateral of ALLETE to make the payment.  ALLETE's collateral, in lieu of cash,
is a letter of credit in favor of the State of Minnesota.  Although ALLETE would
have a claim to  reimbursement  for any draws on its  letter of  credit,  we are
uncertain  about  the  sufficiency  of the  security  supporting  our  right  to
reimbursement.  ALLETE shares its security interest with the State of Minnesota,
St. Louis County and the City of Duluth. In September 2005,  following Northwest
Airlines' bankruptcy filing and its default on other obligations,  we recorded a
$1.0 million ($0.6  million after tax) charge to recognize the probable  payment
of this guarantee.

OTHER.  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, compliance with regulations,  rate
base and cost of service  issues,  among other things.  While the  resolution of
such matters could have a material effect on earnings and cash flows in the year
of  resolution,  none of these  matters are  expected to change  materially  our
present liquidity position,  nor have a material adverse effect on our financial
condition.

                     ALLETE Third Quarter 2005 Form 10-Q                      20

<PAGE>

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

The following  discussion  should be read in conjunction  with our  consolidated
financial  statements  and notes to those  statements  and the  other  financial
information  appearing  elsewhere  in this  report.  In addition  to  historical
information,  the following  discussion  and other parts of this report  contain
forward-looking information that involves risks and uncertainties.


EXECUTIVE SUMMARY

ALLETE's  operations are comprised of four business segments.  REGULATED UTILITY
includes retail and wholesale rate-regulated electric, water and gas services in
northeastern  Minnesota and  northwestern  Wisconsin  under the  jurisdiction of
state  and  federal  regulatory  authorities.   NONREGULATED  ENERGY  OPERATIONS
includes nonregulated  generation (non-rate base generation sold at market-based
rates to the  wholesale  market)  primarily  from  Taconite  Harbor in  northern
Minnesota and our coal mining  activities in North Dakota.  Nonregulated  Energy
Operations  also included  generation  secured  through the Kendall County power
purchase  agreement,  which was assigned to Constellation  Energy Commodities in
April  2005.  (See  Note  5.) REAL  ESTATE  includes  our  Florida  real  estate
operations.  OTHER includes our  telecommunications  activities,  investments in
emerging  technologies  and earnings on cash,  cash  equivalents  and short-term
investments.  DISCONTINUED OPERATIONS includes our Automotive Services business,
spin-off costs incurred by ALLETE and our Water Services businesses.

We provide financial statements that are prepared in accordance with GAAP. Along
with this  information,  we  disclose  and discuss  certain pro forma  financial
information in our quarterly earnings releases, on investor conference calls and
during investor  conferences and related  events.  Management  believes that pro
forma  financial data  supplements  our GAAP  financial  statements by providing
investors with  additional  information  which  enhances the investors'  overall
understanding  of  our  financial  performance  and  the  comparability  of  our
operating  results from period to period.  The  presentation  of this additional
information  is not meant to be considered  in isolation or as a substitute  for
results prepared in accordance with GAAP.

Financial results for the periods discussed in this Form 10-Q were significantly
impacted by the following two transactions:
 - KENDALL COUNTY  CHARGE.  In the second  quarter  of 2005,  we  completed  the
   assignment of our Kendall  County power purchase  agreement to  Constellation
   Energy Commodities,  which was a key strategic accomplishment for the Company
   because  it  eliminated  recurring  operating  losses.  As a  result  of this
   assignment,  we incurred a charge to our operating  expenses  totaling  $77.9
   million ($50.4 million after tax, or $1.84 per diluted share) (Kendall County
   Charge).
 - DEBT  PREPAYMENT  COST.  In the third  quarter of 2004, we  incurred an $18.5
   million ($10.9 million after tax, or $0.38 per diluted share) debt prepayment
   cost as part of  ALLETE's  financial  restructuring  in  preparation  for the
   spin-off of Automotive Services.

Since the April 2005  Kendall  County  Charge and the July 2004 debt  prepayment
cost significantly impacted the financial results from continuing operations for
the  periods  discussed  in this Form  10-Q,  we  believe  that for  comparative
purposes,  it is useful to present earnings for each applicable period excluding
the impact of these two  transactions.  The table below reflects  actual results
adjusted for the  exclusion of the 2005 Kendall  County Charge and the 2004 debt
prepayment cost.

<TABLE>
<CAPTION>

                                                                          QUARTER ENDED         NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                       2005         2004       2005         2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                    <C>         <C>        <C>         <C>

Income (Loss) from Continuing Operations Before
   Change in Accounting Principle                                      $15.8       $(0.6)     $(5.8)      $ 23.2
      Add Back:  Kendall County Charge                                     -           -       50.4            -
                 Debt Prepayment Cost                                      -        10.9          -         10.9
----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
   Change in Accounting Principle Excluding
   Kendall County Charge and Debt Prepayment Cost                       15.8        10.3       44.6         34.1
Income (Loss) from Discontinued Operations                              (0.6)       13.7       (1.9)        79.3
Change in Accounting Principle                                             -           -          -         (7.8)
----------------------------------------------------------------------------------------------------------------------
                                                                       $15.2       $24.0      $42.7       $105.6
----------------------------------------------------------------------------------------------------------------------
</TABLE>

21                    ALLETE Third Quarter 2005 Form 10-Q
<PAGE>


EXECUTIVE SUMMARY (CONTINUED)
<TABLE>
<CAPTION>

                                                                          QUARTER ENDED         NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                       2005         2004       2005         2004
----------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>         <C>        <C>           <C>
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
   Continuing Operations Before Change in Accounting Principle        $0.58       $(0.02)    $(0.21)       $0.82
      Add Back:  Kendall County Charge                                    -            -       1.84            -
                 Debt Prepayment Cost                                     -         0.38          -         0.38
----------------------------------------------------------------------------------------------------------------------
   Continuing Operations Before Change in Accounting Principle
      Excluding Kendall County Charge and Debt Prepayment Cost         0.58         0.36       1.63         1.20
   Discontinued Operations                                            (0.02)        0.47      (0.07)        2.78
   Change in Accounting Principle                                         -            -          -        (0.27)
----------------------------------------------------------------------------------------------------------------------
                                                                      $0.56        $0.83      $1.56        $3.71
----------------------------------------------------------------------------------------------------------------------
</TABLE>

Cash flow from continuing  operations was significantly  impacted by the Kendall
County Charge in 2005, and the debt prepayment cost and discontinued  operations
in 2004.  Therefore,  we believe that for comparative  purposes, it is useful to
present cash flow activity  excluding the impact of these items. The table below
reflects actual results  adjusted for the exclusion of the Kendall County Charge
in 2005, and the debt prepayment cost and discontinued operations in 2004.

<TABLE>
<CAPTION>

CONSOLIDATED CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30,                                           2005                            2004
----------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                                      <C>                            <C>
Cash from Operating Activities                                           $ 20.7                         $ 141.9
     Add Back:  Kendall County Charge                                      77.9                               -
                Debt Prepayment Cost                                          -                            10.9
     Less: Discontinued Operations                                         (9.2)                          119.9
----------------------------------------------------------------------------------------------------------------------

                                                                         $107.8                         $  32.9
----------------------------------------------------------------------------------------------------------------------

Cash from (for) Investing Activities                                      $34.0                         $ (48.0)
     Less: Discontinued Operations                                            -                            60.1
----------------------------------------------------------------------------------------------------------------------

                                                                          $34.0                         $(108.1)
----------------------------------------------------------------------------------------------------------------------

Cash for Financing Activities                                             $(9.4)                        $(225.7)
     Add Back: Long-Term Debt Prepaid                                         -                           125.0
     Less: Discontinued Operations                                         (0.1)                          (18.6)
----------------------------------------------------------------------------------------------------------------------
                                                                          $(9.3)                        $ (82.1)
----------------------------------------------------------------------------------------------------------------------
</TABLE>

Excluding the 2004 debt prepayment cost,  income from continuing  operations and
diluted  earnings per share for the quarter ended September 30, 2005,  increased
53 percent  and 61 percent,  respectively,  from the same  period  2004.  Strong
electric sales and continued strong demand for real estate contributed to higher
earnings during the third quarter of 2005.

Excluding  the 2005 Kendall  County  Charge and the 2004 debt  prepayment  cost,
income from  continuing  operations and diluted  earnings per share for the nine
months  ended  September  30,  2005,   increased  31  percent  and  36  percent,
respectively,  from the same  period in 2004.  The  increase  in 2005  reflected
continued  strong electric sales,  the benefits of lower interest expense due to
reduced  debt  balances,  and  expense  reductions  following  the  spin-off  of
Automotive Services and exit from the Water Services businesses in 2004.

Earnings  per share for 2005 were  favorably  impacted  by ALLETE  common  stock
purchased pursuant to the Company's Retirement Savings and Stock Ownership Plan.
(See Note 12.)

Excluding the 2005 Kendall County Charge and the 2004 debt  prepayment  cost, in
total, net income and diluted earnings per share for the quarter ended September
30, 2005, were down 37 percent and 33 percent, respectively, from the comparable
period in 2004, and for the nine months ended  September 30, 2005,  were down 60
percent and 58 percent,  respectively,  from the comparable  period in 2004. The
decrease in net income in total  reflected  reduced  earnings from  discontinued
operations  following the spin-off of Automotive  Services and the exit from the
Water Services businesses.

                      ALLETE Third Quarter 2005 Form 10-Q                     22
<PAGE>


EXECUTIVE SUMMARY (CONTINUED)
<TABLE>
<CAPTION>

                                                                   QUARTER ENDED             NINE MONTHS ENDED
                                                                   SEPTEMBER 30,               SEPTEMBER 30,
                                                                2005          2004           2005         2004
----------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts
<S>                                                            <C>           <C>            <C>          <C>

Operating Revenue
     Regulated Utility                                         $137.4        $136.1         $422.8       $414.3
     Nonregulated Energy Operations                              28.7          25.5           83.1         81.1
     Real Estate                                                 11.2           5.2           38.9         39.6
     Other                                                        9.7          10.8           35.9         37.8
----------------------------------------------------------------------------------------------------------------------

                                                               $187.0        $177.6         $580.7       $572.8
----------------------------------------------------------------------------------------------------------------------

Operating Expenses
     Regulated Utility                                         $115.8        $117.2         $359.1       $354.6
     Nonregulated Energy Operations                              25.0          23.5          153.0 <F1>    78.6
     Real Estate                                                  2.9           2.5           12.4         12.7
     Other                                                       10.4          11.1           36.9         40.2
----------------------------------------------------------------------------------------------------------------------

                                                               $154.1        $154.3         $561.4       $486.1
----------------------------------------------------------------------------------------------------------------------

Interest Expense
     Regulated Utility                                           $4.3          $5.0          $13.0        $14.3
     Nonregulated Energy Operations                               1.8           1.4            4.7          3.8
     Real Estate                                                  0.1           0.1            0.3          0.2
     Other                                                        0.5           1.0            2.2          7.4
----------------------------------------------------------------------------------------------------------------------

                                                                 $6.7          $7.5          $20.2        $25.7
----------------------------------------------------------------------------------------------------------------------

Other Income (Expense)
     Regulated Utility                                              -             -          $ 0.4       $  0.1
     Nonregulated Energy Operations                              $0.1        $  0.3            0.3          1.2
     Other                                                        0.3         (18.6) <F2>     (3.0)       (22.7) <F2>
----------------------------------------------------------------------------------------------------------------------

                                                                 $0.4        $(18.3)         $(2.3)      $(21.4)
----------------------------------------------------------------------------------------------------------------------

Net Income (Loss)
     Regulated Utility                                          $10.6         $ 8.2          $31.3       $ 28.1
     Nonregulated Energy Operations                               1.6           0.7          (47.3) <F1>    0.6
     Real Estate                                                  4.0           1.5           13.7         14.5
     Other                                                       (0.4)        (11.0) <F2>     (3.5)       (20.0) <F2>
----------------------------------------------------------------------------------------------------------------------

     Income (Loss) from Continuing Operations                    15.8          (0.6)          (5.8)        23.2
     Income (Loss) from Discontinued Operations                  (0.6)         13.7           (1.9)        79.3
     Change in Accounting Principle                                 -             -              -         (7.8)
----------------------------------------------------------------------------------------------------------------------

     Net Income (Loss)                                          $15.2        $ 13.1          $(7.7)      $ 94.7
----------------------------------------------------------------------------------------------------------------------

Diluted Average Shares of Common Stock                           27.5          28.6           27.3         28.5
----------------------------------------------------------------------------------------------------------------------

Diluted Earnings (Loss) Per Share of Common Stock
     Continuing Operations                                      $0.58        $(0.02) <F2>   $(0.21) <F1> $ 0.82 <F2>
     Discontinued Operations                                    (0.02)         0.47          (0.07)        2.78
     Change in Accounting Principle                                 -             -              -        (0.27)
----------------------------------------------------------------------------------------------------------------------

                                                                $0.56         $0.45         $(0.28)      $ 3.33
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included  operating  expenses  totaling  $77.9  million  ($50.4 million  after  tax, or $1.84  per diluted share)
     related  to  the assignment of the Kendall County power purchase agreement in April 2005. (See Note 5.)

<F2> Included  an $18.5  million  ($10.9 million  after  tax, or $0.38 per  share) debt  prepayment  cost incurred  in
     July 2004 as part of ALLETE's financial restructuring in preparation for the spin-off of Automotive Services.
</FN>
</TABLE>

In 2005,  we began  allocating  corporate  charges and  interest  expense to our
business segments.  For comparative  purposes,  segment information for 2004 has
been  restated to reflect the new  allocation  method used in 2005 for corporate
charges and interest expense. This restatement had no impact on consolidated net
income or earnings per share.

23                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


EXECUTIVE SUMMARY (CONTINUED)
<TABLE>
<CAPTION>

                                                                       QUARTER ENDED            NINE MONTHS ENDED
                                                                       SEPTEMBER 30,              SEPTEMBER 30,
                                                                     2005         2004         2005         2004
----------------------------------------------------------------------------------------------------------------------
KILOWATTHOURS SOLD
Millions
<S>                                                                <C>          <C>          <C>          <C>

     Regulated Utility
         Retail and Municipals
              Residential                                            254.5        233.7        804.2         772.8
              Commercial                                             346.6        334.7        986.9         960.9
              Industrial                                           1,782.8      1,736.9      5,306.8       5,273.7
              Municipals                                             236.0        211.1        657.3         613.9
              Other                                                   20.7         19.9         59.2          57.9
----------------------------------------------------------------------------------------------------------------------

                                                                   2,640.6      2,536.3      7,814.4       7,679.2
         Other Power Suppliers                                       261.3        260.2        864.9         645.8
----------------------------------------------------------------------------------------------------------------------

                                                                   2,901.9      2,796.5      8,679.3       8,325.0
     Nonregulated Energy Operations                                  405.8        349.4      1,159.6       1,198.0
----------------------------------------------------------------------------------------------------------------------

                                                                   3,307.7      3,145.9      9,838.9       9,523.0
----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                               QUARTER ENDED                           NINE MONTHS ENDED
                                               SEPTEMBER 30,                             SEPTEMBER 30,
                                         2005                2004                  2005                2004
                                  ------------------------------------------------------------------------------------
REAL ESTATE ACTIVITY
CLOSED LAND TRANSACTIONS              QTY     AMOUNT      QTY   AMOUNT          QTY    AMOUNT       QTY    AMOUNT
----------------------------------------------------------------------------------------------------------------------
Dollars in Millions
<S>                                <C>        <C>         <C>   <C>           <C>      <C>         <C>     <C>

Town Center Sales <F1>
   Commercial Sq. Ft.              246,000     $ 5.0        -       -         643,000     $15.1        -        -
   Residential Units                     -         -        -       -               -        -         -        -

Other Land Sales
   Acres                               521       7.6       18    $3.7           1,058      32.2    1,445    $30.4
   Lots                                  -         -        -       -               7       0.4      211      4.6
----------------------------------------------------------------------------------------------------------------------

Contract Sales Price <F2>                -      12.6        -     3.7               -      47.7        -     35.0

Deferred Revenue                         -      (2.5)       -       -               -     (11.0)       -        -

Adjustments <F3>                         -      (0.7)       -       -               -      (1.6)       -        -
----------------------------------------------------------------------------------------------------------------------

Revenue from Land Sales                        $ 9.4             $3.7                     $35.1             $35.0
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> For the quarter  ended September 30, 2005, 27 acres were  sold (70 acres for the  nine months ended September 30,
     2005).
<F2> Reflected  total  contract  sales  price. Land  sales are recorded using a percentage-of-completion  method. (See
     Note 1.)
<F3> Primarily contributed development dollars, which are credited to cost of sales.
</FN>
</TABLE>


NET INCOME

The following net income  discussion  summarizes a comparison of the nine months
ended September 30, 2005, to the nine months ended September 30, 2004.

REGULATED UTILITY contributed net income of $31.3 million in 2005 ($28.1 million
in 2004). In 2005, a 34 percent  increase in  kilowatthour  sales to other power
suppliers,  higher  off-peak  prices and continued  strong retail electric sales
offset  $2.2  million  of  additional  planned  maintenance  expense  at Company
generating facilities.

NONREGULATED  ENERGY  OPERATIONS  reported  a net loss of $47.3  million in 2005
($0.6 million of income in 2004).  In April 2005, we completed the assignment of
our Kendall County power purchase agreement to Constellation Energy Commodities.
As a result of this  transaction,  we  incurred a charge to  operating  expenses
totaling  $50.4  million after tax in the second  quarter of 2005.  Nonregulated
Energy  Operations in 2005 also  reflected the absence of operating  losses from
Kendall County and increased net income from coal operations.


                    ALLETE Third Quarter 2005 Form 10-Q                       24
<PAGE>


NET INCOME (CONTINUED)

REAL ESTATE  contributed  net income of $13.7 million in 2005 ($14.5  million in
2004).  Lower net income in 2005 was  primarily  attributed  to the  deferral of
profit on certain real estate sales.  In addition,  the timing of the closing of
real estate  transactions  varies from period to period and impacts  comparisons
between periods.

In the second  quarter of 2005, we began  selling  property from our Town Center
development  project in northeast Florida.  Since the project is currently under
construction, revenue and expenses are recorded using a percentage-of-completion
method. (See Note 1.) As of September 30, 2005, we have $9.4 million of deferred
profit on sales of real  estate,  before  taxes and  minority  interest,  on our
balance  sheet.  We expect most of this  deferred  profit will be  reflected  in
income during the next 15 months.

At  September  30, 2005,  total  pending  land sales under  contract  were $94.2
million,  of which $64.6 million were for properties in Town Center.  Pricing on
these contracts range from $20 to $50 per commercial  square foot and $15,000 to
$40,000 per  residential  unit for Town Center,  and $8,000 to $524,000 per acre
for all other  properties.  Prices per acre are stated on a gross  acreage basis
and are dependent on the type and location of the properties  sold. The majority
of the other properties under contract are zoned commercial or mixed use.

<TABLE>
<CAPTION>

REAL ESTATE
PENDING CONTRACTS                                                                                      CONTRACT
AT SEPTEMBER 30, 2005                                           QUANTITY                              SALES PRICE
----------------------------------------------------------------------------------------------------------------------
Dollars in Millions
<S>                                                             <C>                                   <C>

Town Center
     Commercial Sq. Ft.                                         1,272,500                                $37.8
     Residential Units                                              1,294                                 26.8

Other Land
     Acres                                                          1,155                                 29.6
----------------------------------------------------------------------------------------------------------------------
                                                                                                         $94.2
----------------------------------------------------------------------------------------------------------------------
</TABLE>

OTHER  reflected a net loss of $3.5 million in 2005 (a $20.0 million net loss in
2004).  In 2004,  a $10.9  million  debt  prepayment  cost  associated  with the
retirement  of  long-term   debt  was  incurred  as  a  part  of  our  financial
restructuring in preparation for the spin-off of Automotive  Services.  In 2005,
the Company  benefited from the positive impact of lower interest expense due to
reduced  debt  balances  and  expense  reductions   following  the  spin-off  of
Automotive  Services and exit from the Water  Services  businesses in 2004 and a
$1.5  million  increase in earnings on cash,  cash  equivalents  and  short-term
investments.  Equity losses from our emerging  technology  investments were $0.3
million  lower than 2004. In 2005,  we  recognized  $3.3 million of  impairments
related to our emerging technology  investments ($3.2 million in 2004). In 2005,
we also  recognized a $0.6 million charge due to the probable  payment under our
guarantee of Northwest Airlines debt. (See Note 13.)

DISCONTINUED  OPERATIONS  reflected  a net loss of $1.9  million in 2005  ($79.3
million  of net  income in 2004).  The  absence of  operations  from  Automotive
Services,  spun off in  September  2004,  accounted  for  $74.7  million  of the
decrease in income from discontinued operations.  Income from Water Services was
down $6.5 million, primarily due to gains recognized in June 2004 on the sale of
Heater  Utilities,  Inc.  and the  remaining  72 Florida  Water  systems.  Water
Services'  loss in 2005  reflected  $1.9  million  of  administrative  and other
expenses  incurred  by Florida  Water in  connection  with the  FPSC's  transfer
proceedings.

25                    ALLETE Third Quarter 2005 Form 10-Q
<PAGE>


COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004

REGULATED UTILITY

     OPERATING  REVENUE was up $1.3 million,  or 1 percent,  from 2004.  Revenue
     from other power  suppliers was up $1.9 million from 2004, due to increased
     capacity  sales.  Transmission  revenue  was up  $0.8  million  from  2004,
     reflecting  increased   MISO-related  revenue.  The  Company  is  currently
     recovering  other MISO expenses,  subject to refund with interest,  through
     the fuel clause.  (See Outlook.) Revenue from sales to retail and municipal
     customers  was  down  $1.9  million,  primarily  due to lower  fuel  clause
     recoveries in 2005. (See operating  expenses below.)  Kilowatthour sales to
     retail and municipal  customers were up 4 percent from last year reflecting
     increased usage. Residential and municipal customer usage was higher due to
     warmer  weather  in 2005  compared  to  unusually  cool  weather  in  2004.
     Commercial  usage was higher due to  stronger  economic  conditions  in our
     electric  service  territory in 2005. As in 2004, the Company's  industrial
     customers are operating at high production levels,  with taconite and paper
     production at or near capacity.  Kilowatthour sales to industrial customers
     were up 3 percent from last year. Overall,  regulated utility  kilowatthour
     sales were up 4 percent from 2004.

     Revenue from electric sales to taconite customers  accounted for 22 percent
     of  consolidated  operating  revenue in 2005 (24 percent in 2004).  Revenue
     from  electric  sales to paper and pulp  mills  accounted  for 9 percent of
     consolidated operating revenue in 2005 (10 percent in 2004).

     OPERATING  EXPENSES were down $1.4 million,  or 1 percent,  from 2004. Fuel
     and  purchased  power  expense was down $3.0 million from 2004,  reflecting
     decreased  purchased  power  expense  partially  offset  by a $1.3  million
     increase in MISO  transmission  expense.  In 2004,  an  extended  outage at
     Boswell Unit 4 required us to purchase  additional  power.  Other operating
     expenses were higher in 2005,  primarily due to a $1.4 million  increase in
     maintenance expense.

     INTEREST  EXPENSE was down $0.7 million from 2004,  due to lower  effective
     interest rates (5.98 percent in 2005; 7.13 percent in 2004).

NONREGULATED ENERGY OPERATIONS

     OPERATING REVENUE was up $3.2 million,  or 13 percent,  from 2004.  Revenue
     from  nonregulated  generation was up $2.0 million from 2004,  reflecting a
     $6.0 million increase in revenue from Taconite Harbor partially offset by a
     $4.7 million decrease in revenue from Kendall County. Revenue from Taconite
     Harbor  was higher in 2005 due to two  5-year  contracts  (175 MW in total)
     that began in May 2005,  while revenue from Kendall County was down in 2005
     due to the absence of operations  following  the  assignment of the Kendall
     County power purchase agreement.  Overall,  nonregulated kilowatthour sales
     were up 16 percent  from 2004.  Coal  revenue,  realized  under a cost-plus
     contract,  was up $1.0 million from 2004,  reflecting a 19 percent increase
     in tons of coal sold and higher coal  production  expenses  (see  operating
     expenses below).

     OPERATING EXPENSES were up $1.5 million, or 6 percent,  from 2004. Fuel and
     purchased  power  expense was down $2.0 million from 2004,  reflecting  the
     absence of operations at Kendall County, partially offset by increased fuel
     and purchased power expense at Taconite  Harbor.  Other operating  expenses
     were  $3.5  million  higher  in  2005  and  reflected  increased  corporate
     allocations,  a $0.5 million increase in SO2 emission  allowance expense at
     Taconite Harbor and a $0.4 million increase in expenses related to our coal
     operations.  In 2005,  expenses  related to our coal  operations  reflected
     increased fuel costs and a $0.7 million  increase in lease expense  related
     to the new dragline,  partially offset by lower maintenance  expense.  Coal
     operations  maintenance  expenses  were  higher  in 2004  due to  scheduled
     maintenance performed during a planned outage at Square Butte.

     INTEREST EXPENSE was up $0.4 million from 2004, reflecting higher corporate
     allocations.

                      ALLETE Third Quarter 2005 Form 10-Q                     26

<PAGE>


COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 2005 AND 2004 (CONTINUED)

REAL ESTATE

     OPERATING REVENUE was up $6.0 million from 2004, or 115 percent,  primarily
     due to a $5.7 million  increase in revenue  from land sales  because of the
     type and location of real estate sold. Town Center land sales accounted for
     $1.8 million of the increase in revenue from land sales.  In 2005,  revenue
     of $2.5  million,  related to Town  Center land sales, was  deferred  until
     completion of development  obligations are performed ($0 in 2004). In 2005,
     548 acres were sold,  of which 27 acres are  located in Town  Center.  Town
     Center sales  included  assignments of rights to build up to 246,000 square
     feet of commercial space. In 2004, 18 acres were sold.

     OPERATING  EXPENSES were up $0.4 million from 2004 due to increased cost of
     sales ($1.4 million in 2005;  $0.9 million in 2004). In 2005, cost of sales
     totaling $0.6 million and selling  expense of $0.1 million  related to Town
     Center land sales were deferred until completion of development obligations
     are performed. In 2004, no expenses were deferred.

OTHER

     OPERATING REVENUE was down $1.1 million,  or 10 percent,  from 2004, due to
     less  revenue  from  our  telecommunications   business  because  of  fewer
     equipment sales.

     OPERATING  EXPENSES  were down  $0.7  million,  or 6  percent,  from  2004,
     reflecting  a  decrease  in  expenses  at our  telecommunication  business,
     primarily due to lower cost of goods sold  associated  with fewer equipment
     sales.

     INTEREST  EXPENSE was down $0.5 million from 2004,  primarily  due to lower
     debt  balances.  The Company  repaid $125  million of 7.80% Senior Notes in
     July 2004. A combination of  internally-generated  funds, proceeds from the
     sale of our Water  Services  assets and proceeds  received  from ADESA were
     used to repay this debt.

     OTHER INCOME (EXPENSE) reflected $18.9 million less expense in 2005 because
     in 2004 we incurred an $18.5  million debt  prepayment  cost related to the
     early  redemption  of $125 million in senior notes.  In 2005,  other income
     (expense)  reflected a $0.6  million  increase  in  earnings on cash,  cash
     equivalents and short-term  investments,  a $0.9 million decrease in equity
     losses related to our emerging  technology  investments  and a $1.0 million
     charge to record the  probable  payment  under our  guarantee  of Northwest
     Airlines debt.

INCOME TAXES

The effective  rate for income taxes in 2005  deviated from the statutory  rate,
primarily as a result of the Kendall County capital loss recorded in April 2005.
The current benefit for the loss was limited to a federal benefit for income tax
purposes.  The state tax  benefit  for this item is not  expected to be realized
currently or in future  periods.  The benefit related to this state capital loss
carryforward is fully offset by a valuation allowance. Current taxes were higher
in 2005, due to the expiration of the accelerated depreciation deduction allowed
by the Jobs and Growth Tax Relief Act of 2003,  which expired December 31, 2004.
The  effective  rate  for  income  taxes  in 2004  increased,  primarily  due to
nondeductible transaction costs related to the spin-off of Automotive Services.

27                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004

REGULATED UTILITY

     OPERATING  REVENUE was up $8.5 million,  or 2 percent,  from 2004.  Revenue
     from other power  suppliers  was up $12.0  million  from 2004,  due to a 34
     percent  increase in kilowatthour  sales and higher off-peak market prices.
     Transmission  revenue was up $3.7 million from 2004,  reflecting  increased
     MISO-related  revenue.  The  Company  is  currently  recovering  other MISO
     expenses,  subject to refund with interest,  through the fuel clause.  (See
     Outlook.)  Revenue from sales to retail and  municipal  customers  was down
     $8.3 million,  primarily due to lower fuel clause  recoveries in 2005. (See
     operating  expenses  below.)  Kilowatthour  sales to retail  and  municipal
     customers  remained  strong--up  2 percent from 2004  reflecting  increased
     usage.  Residential and municipal  customer usage was higher in 2005 due to
     cooler  winter  weather  and  warmer  summer  weather in 2005 than in 2004.
     Commercial  usage was higher due to  stronger  economic  conditions  in our
     electric  service  territory in 2005.  Sales to industrial  customers  were
     similar  to last year (up 1 percent)  because,  as in 2004,  the  Company's
     industrial customers are operating at high production levels, with taconite
     and  paper  production  at or near  capacity.  Overall,  regulated  utility
     kilowatthour sales were up 4 percent from 2004.

     Revenue from electric sales to taconite customers  accounted for 22 percent
     of  consolidated  operating  revenue in 2005 (23 percent in 2004).  Revenue
     from  electric  sales to paper and pulp  mills  accounted  for 8 percent of
     consolidated operating revenue in 2005 (9 percent in 2004).

     OPERATING EXPENSES were up $4.5 million, or 1 percent,  from 2004. Fuel and
     purchased power expense was up $0.1 million from 2004 reflecting  increased
     fuel expense due to a 20 percent increase in Company  generation and a $3.7
     million  increase in MISO  transmission  expenses,  mostly  offset by lower
     purchased  power  expense in 2005.  In 2004,  an outage at  Boswell  Unit 4
     required us to purchase additional power. Maintenance expenses were up $3.8
     million from 2004, primarily due to more planned maintenance in 2005. Other
     operating  expenses  were $0.6 million  higher in 2005 and reflected a $1.0
     million  increase for  vegetation  management,  a $1.0 million  increase in
     conservation  improvement  program  expenses which are recovered  through a
     billing adjustment clause, and a variety of minor items partially offset by
     a $2.0 million  decrease in expenses  related to Split Rock  Energy.  Split
     Rock Energy was a joint venture, which we exited in March 2004.

     INTEREST  EXPENSE was down $1.3 million from 2004,  due to lower  effective
     interest rates (6.06 percent in 2005; 6.93 percent in 2004).

NONREGULATED ENERGY OPERATIONS

     OPERATING  REVENUE was up $2.0 million,  or 2 percent,  from 2004.  Revenue
     from nonregulated generation was down $2.3 million from 2004, reflecting an
     $11.0 million  decrease  from Kendall  County  partially  offset by an $8.0
     million  increase in revenue  from  Taconite  Harbor.  Revenue from Kendall
     County  decreased due to the absence of Kendall  County  operations,  while
     revenue from Taconite  Harbor  increased due to a 76-MW  one-year  capacity
     contract that began in May 2004 and two 5-year  contracts (175 MW in total)
     that began in May 2005. Overall,  nonregulated kilowatthour sales were down
     3 percent from 2004. Coal revenue, realized under a cost-plus contract, was
     up $4.6 million from 2004 reflecting a 16 percent  increase in the delivery
     price  per  ton due to  higher  coal  production  expenses  (see  operating
     expenses below).

     OPERATING  EXPENSES were up $74.4  million from 2004,  primarily due to the
     $77.9 million  charge related to the assignment of the Kendall County power
     purchase  agreement to Constellation  Energy  Commodities on April 1, 2005.
     Nonregulated  generation  fuel and  purchased  power expense was down $11.8
     million from 2004,  reflecting  the absence of Kendall  County  operations.
     Operating  expenses at Taconite  Harbor were higher in  2005--SO2  emission
     allowance  expenses  were up $2.0 million and  depreciation  expense was up
     $0.5 million as a result of capitalized projects being completed and placed
     into  operation.  Expenses  related  to our  coal  operations  were up $3.8
     million,  in part due to higher expenses associated with equipment repairs,
     increased fuel costs and a $2.1 million  increase in lease expense  related
     to the new dragline.  In 2004,  fewer equipment  repairs  resulted in lower
     operating expenses.

     INTEREST EXPENSE was up $0.9 million from 2004, reflecting higher corporate
     allocations.

     OTHER  INCOME  (EXPENSE)  reflected  $0.9  million  less  income  in  2005,
     primarily due to fewer  Minnesota  land sales.  Minnesota land is primarily
     land acquired when we purchased Taconite Harbor in 2001.

                      ALLETE Third Quarter 2005 Form 10-Q                     28
<PAGE>


COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (CONTINUED)

REAL ESTATE

     OPERATING  REVENUE  was  down  $0.7  million,  or  2  percent,  from  2004,
     reflecting  strong land sales offset by the deferral of revenue  associated
     with certain real estate sales.  Revenue from  land sales was $35.1 million
     in 2005 ($35.0 million in 2004).  Town Center land sales accounted for $3.5
     million of land sale revenue in 2005.  In 2005,  revenue of $11.0  million,
     related  primarily to Town Center land sales, was deferred until completion
     of  development  obligations  are performed ($0 in 2004).  Revenue from lot
     sales was also lower in 2005 because in January 2004 we sold the  remaining
     184 lots at Sugarmill Woods for $3.9 million,  essentially  exiting the lot
     sales  business.  In 2005,  1,128  acres and 7 lots were sold,  of which 70
     acres are located in Town Center. Town Center sales included assignments of
     rights to build up to 643,000  square feet of  commercial  space.  In 2004,
     1,445 acres and 211 lots were sold.  Revenue from our  brokerage  business,
     Cape  Properties,  Inc., was down $1.3 million  reflecting  extraordinarily
     strong sales in 2004.

     OPERATING  EXPENSES  were down  $0.3  million,  or 2  percent,  from  2004.
     Expenses  for  our  brokerage  business  were  down  $0.4  million  due  to
     extraordinarily  strong  sales in 2004.  Selling  expenses  were  down $0.6
     million  from  2004 due to lower  transaction  costs  and  fewer  brokerage
     commissions  on 2005 sales.  Cost of sales were $0.8 million higher in 2005
     ($7.2  million in 2005;  $6.4 million in 2004) due to more sales.  In 2005,
     cost of sales  totaling  $2.4  million and selling  expense of $0.3 million
     related  primarily to Town Center land sales were deferred until completion
     of  development  obligations  are  performed.  In 2004,  no  expenses  were
     deferred.

OTHER

     OPERATING  REVENUE was down $1.9 million,  or 5 percent,  from 2004, due to
     decreased  revenue from our  telecommunications  business  because of fewer
     equipment sales.

     OPERATING  EXPENSES  were down  $3.3  million,  or 8  percent,  from  2004,
     reflecting  a $2.3  million  decrease in expenses at our  telecommunication
     business,  primarily due to lower cost of goods sold  associated with fewer
     equipment sales,  and a reduction in other expenses  following the spin-off
     of Automotive Services and exit from the Water Services businesses in 2004.

     INTEREST  EXPENSE was down $5.2 million from 2004,  primarily  due to lower
     debt  balances.  The  Company  repaid  a $53  million  balance  on a credit
     agreement  in April  2004 and $125  million of 7.80%  Senior  Notes in July
     2004. A combination of  internally-generated  funds, proceeds from the sale
     of our Water Services assets and proceeds  received from ADESA were used to
     repay this debt.

     OTHER  INCOME  (EXPENSE)  reflected  $19.7  million  less  expense in 2005,
     because in 2004 we incurred an $18.5 million debt  prepayment  cost related
     to the early  redemption  of $125 million in senior notes.  In 2005,  other
     income  also  reflected  a $2.4  million  increase  in earnings on cash and
     short-term investments. In 2005, equity losses from our emerging technology
     investments  decreased  $0.6 million from 2004.  In 2005,  we also recorded
     $5.1 million of impairments  related to certain direct emerging  technology
     investments  ($5.5 million in 2004), and a $1.0 million charge to recognize
     the probable  payment  under our guarantee of Northwest  Airlines  debt. In
     2004, we recognized $1.4 million of income from a rabbi trust,  established
     to secure certain deferred executive compensation.

INCOME TAXES

The effective  rate for income taxes in 2005  deviated from the statutory  rate,
primarily as a result of the emerging technology investment impairments recorded
in March 2005 and the Kendall  County  capital loss recorded in April 2005.  The
current  benefit for these items was limited to a federal benefit for income tax
purposes.  The state tax benefit from these items is not expected to be realized
currently or in future  periods.  The benefit related to these state net capital
loss carryforwards is fully offset by a valuation allowance.  Current taxes also
increased  in  2005,  due to the  expiration  of  the  accelerated  depreciation
deduction  allowed by the Jobs and Growth Tax Relief Act of 2003,  which expired
December 31, 2004. The effective rate for income taxes for 2004  increased,  due
to  nondeductible  transaction  costs  related  to the  spin-off  of  Automotive
Services.

29                    ALLETE Third Quarter 2005 Form 10-Q
<PAGE>


CRITICAL ACCOUNTING POLICIES

Certain  accounting  measurements  under  applicable  GAAP involve  management's
judgment  about  subjective  factors  and  estimates,  the  effects of which are
inherently uncertain.  Accounting measurements that we believe are most critical
to  our  reported  results  of  operations  and  financial   condition  include:
impairment  of long-lived  assets,  pension and  postretirement  health and life
actuarial assumptions, valuation of investments and provisions for environmental
remediation.  These policies are reviewed with the Audit  Committee of our Board
of Directors on a regular basis and summarized in our 2004 Form 10-K.


OUTLOOK

Our financial performance through the first nine months of 2005 has exceeded our
original expectations and, as a result, we now expect ALLETE's 2005 earnings per
share from  continuing  operations  to be 60 percent  over 2004,  excluding  the
Kendall  County  Charge.  The growth is expected to come from  continued  strong
energy and real estate  sales,  lower  interest  expense and the transfer of the
Kendall  County  power  purchase  agreement.  The April 2005  assignment  of the
Kendall County power purchase agreement to Constellation  Energy Commodities was
a key strategic  accomplishment for the Company. As a result of this assignment,
we recorded  expenses  totaling  $50.4  million  after tax, or $1.84 per diluted
share, in the second quarter of 2005, and eliminated  anticipated  annual losses
of approximately $8 million after tax.

In 2005,  we have fewer shares  outstanding  for earnings per share  calculation
purposes than the  comparable  periods in 2004.  The ESOP used proceeds from the
sale of ADESA stock to purchase  ALLETE  common stock on the open  market.  (See
Note 12.) Pursuant to AICPA Statement of Position 93-6,  "Employers'  Accounting
for Employee Stock Ownership Plans,"  unallocated  ALLETE common stock currently
held by the  ESOP  is  treated  as  unearned  ESOP  shares  and  not  considered
outstanding  for  earnings per share  computations.  ESOP shares are included in
earnings per share computations only after they are allocated to participants.

REGULATED UTILITY AND NONREGULATED ENERGY OPERATIONS

MISO.  As a  result  of MISO Day 2  implementation  on  April  1,  2005,  energy
transactions  to serve retail  customers  are sourced by wholesale  transactions
with MISO as the counterparty. Minnesota Power filed a petition with the MPUC in
February 2005 to amend the fuel clause to accommodate  costs and revenue related
to MISO Day 2 market  implementation.  In March 2005, the MPUC approved  interim
accounting  treatment  of MISO costs to be  recovered  through the fuel  clause,
subject to refund  with  interest.  This  interim  treatment  of MISO costs will
continue until the MPUC  addresses the cost recovery  petitions from Xcel Energy
Inc., Otter Tail Power Company,  Alliant Energy Corporation and Minnesota Power.
The MPUC action  regarding  MISO costs will  include an analysis of how the fuel
clause is affected, and whether it should be modified as a result of MISO Day 2.
We are  unable to  predict  the  extent  of MISO  related  charges  that will be
approved for recovery through the fuel clause.

LARGE  POWER  CUSTOMERS.  In  recent  months  we  reached  new  long-term,   all
requirements  agreements with our largest energy  customer,  United States Steel
Corporation  (USS),  and our fifth  largest  energy  customer,  Mittal Steel USA
(Mittal  Steel),  a subsidiary of Mittal Steel Company N.V. Our  long-term,  all
requirements  agreement  with USS was approved by the MPUC in September 2005 and
provides for electric service through October 2013 to USS's Minntac and Keewatin
Taconite production  facilities located on the Mesabi Iron Range in northeastern
Minnesota. Our long-term, all requirements agreement with Mittal Steel, which is
subject to MPUC approval,  provides for electric  service through  December 2012
for Mittal Steel's Minorca Mine production facility near Virginia, Minnesota.

The extension of our electric supply  contracts is an important  achievement for
both our large power  customers and  Minnesota  Power.  Electric  power is a key
component in the production of taconite and paper, and these industries  consume
a sizable  portion of the  electricity  we  produce.  These  agreements  help to
provide  planning  certainty  for both our customers  and us.  Negotiations  are
ongoing  with other large power  customers  to enter into  amended and  restated
contracts  anticipating  three- to  seven-year  extensions  beyond the notice of
cancellation  period.  We expect to be  successful  with  additional  industrial
customer contract extensions going forward.

                      ALLETE Third Quarter 2005 Form 10-Q                     30
<PAGE>


OUTLOOK (CONTINUED)

REGULATED UTILITY AND NONREGULATED ENERGY OPERATIONS (CONTINUED)

RESOURCE  PLAN. In 2004, we filed an integrated  resource plan  (Resource  Plan)
with the MPUC,  detailing our retail energy  demand  projections  and our energy
sourcing options to meet the projected demand over the next 15 years. We project
a load growth of  approximately  200 megawatts by the 2009-2010  timeframe  with
another 200 megawatts of growth  anticipated  by 2015. We have been working with
regulators  and  other  stakeholders  to  determine  the  best  way to meet  our
projected customer needs for more electricity reliably,  cost-effectively and in
an  environmentally  responsible  way. We anticipate that the MPUC will formally
consider the Resource Plan by the end of 2005 or early 2006.

On October 24, 2005,  we proposed to the MPUC a  comprehensive  solution to meet
our generation needs through the 2009-2010 timeframe that includes the following
key components:

 - Transitioning  our  Taconite Harbor generating  facility from wholesale sales
   to  retail  sales to help meet the  utility's  forecasted  base  load  energy
   requirements.  While we propose  that  Taconite  Harbor  would become part of
   Minnesota  Power's  rate-based  assets as of January 2006,  current wholesale
   contracts  sourced from Taconite  Harbor will be honored through their terms.
   Utilizing  Taconite  Harbor  would meet the  near-term  increased  demand for
   electricity without requiring the construction of new assets.

 - Taconite  Harbor   generation  is  proposed   to   be   supplemented  with  a
   50-megawatt  long-term  power  purchase  agreement to meet  near-term  energy
   needs.

 - Our various  resource  additions  are proposed  to help  meet forecasted base
   load, support the expansion of our renewable  generating assets and help meet
   Minnesota's  Renewable  Energy  Objective  that seeks a 10 percent  supply of
   renewable  energy in the state by 2015.  We have  applied  for  approval of a
   power  purchase  agreement for 50 megawatts of wind energy  purchased  from a
   plant in North  Dakota.  We are also  actively  pursuing an agreement  for an
   additional   50  megawatts  of  wind  energy  from   facilities   located  in
   northeastern Minnesota, (see Wind Power below) and are proposing to obtain 10
   megawatts of additional hydro  generation  through an expansion of one of our
   hydro electric stations.

Our proposal is supported by the Minnesota Department of Commerce and a group of
our large power customers.  We are also discussing the agreement with the Office
of Attorney General-Residential Utilities Division.

AREA PLAN. In October 2005, we announced a $60 million environmental  initiative
which is expected to  significantly  reduce  emissions  from two of our electric
generating facilities in northeastern Minnesota. Our Arrowhead Regional Emission
Abatement (AREA) plan is designed to further reduce emissions while  maintaining
a  reliable  and  reasonably-priced  energy  supply  to meet  the  needs  of our
customers.  We believe that control and  abatement  technologies  applicable  to
these plants have matured to the point where  further  significant  air emission
reductions can be attained through AREA in a relatively cost-effective manner.

At Taconite Harbor, we plan to employ multi-emission reduction technology, while
at Laskin we plan to install a retrofit to lower NOx  emissions.  Upon projected
completion  of the  retrofits,  we  estimate an  emission  reduction  of over 60
percent for NOx at both facilities and a 65 percent reduction in SO2 at Taconite
Harbor. Laskin already has relatively low emission levels of SO2 due to existing
emission reduction technology.  Additionally, with the emerging technology being
proposed for Taconite Harbor, there is the potential for as much as a 90 percent
reduction in mercury emissions.

On  October  13,  2005,  we filed the AREA plan with the MPUC.  A second  filing
detailing  current cost recovery outside of a rate case for the plan is expected
to be made to the MPUC before the end of December 2005. If approved by the MPUC,
the rate impact on residential and general  service  customers is expected to be
about 2 percent and for large power customers the impact is expected to be about
3.3 percent when the plan is fully  implemented at the end of 2008.  Approval is
sought before June 30, 2006, when the statutory  authorization  for current cost
recovery on utility emission reduction  investments  sunsets. The filing process
will provide for written comments,  public hearings and regional meetings on the
proposal.  The Minnesota  Pollution  Control  Agency has stated its intention to
issue a letter of support to the MPUC encouraging  Minnesota Power's anticipated
efforts to reduce emissions.

31                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


OUTLOOK (CONTINUED)

REGULATED UTILITY AND NONREGULATED ENERGY OPERATIONS (CONTINUED)

WIND  POWER.  In May 2005,  we added a  significant  resource  to our  Regulated
Utility  generation  portfolio  when we  entered  into a  25-year  agreement  to
purchase  approximately  50 megawatts  of wind power from a new wind  generation
project to be built in North  Dakota by an  affiliate  of FPL Energy,  LLC.  FPL
Energy  expects the facility to be operational by the end of 2006. The wind farm
will  include  approximately  33 new wind  turbines  linked to the Square  Butte
substation  in  Center,   North  Dakota.  The  project  is  subject  to  certain
conditions,  including regulatory approvals as discussed above. In addition,  we
are actively  pursuing an  agreement  for another new wind farm to be located in
northeastern Minnesota.

ENERGY POLICY ACT. In August 2005, the Energy Policy Act of 2005 was signed into
law.  Key  provisions  in  the  law  include:   mandatory  electric  reliability
standards; FERC backstop siting authority for transmission corridors of national
interest,  as well as,  giving the  Department  of Energy  (DOE)  "lead  agency"
authority to coordinate federal agencies involved in siting  transmission lines;
and the repeal of the Public Utility  Holding Company Act of 1935 (PUHCA) giving
the FERC  additional  authority  over  merger  reviews and  allowing  the states
expanded books and records  authority.  The law also reforms the hydro licensing
process and  supports  the DOE's clean  coal/FutureGen  program.  We believe the
overall  impact  on the  electric  utility  industry  will be  positive  and are
evaluating the effects on our business as this legislation is being implemented.

ATC. ATC is a for-profit  transmission-only  company  created by the transfer of
transmission  assets previously owned by several electric  utilities serving the
upper  Midwest.  In April 2003, the PSCW approved a transfer of interests in the
Wausau-to-Duluth electric transmission line project to ATC. As a result, ATC has
assumed  primary  responsibility  for the overall  management of the project and
will own and operate the completed Wausau-to-Duluth line.

We have a  contractual  opportunity  related to ATC  that,  if  exercised, would
ultimately  result in our having an equity  investment  in ATC.  We  intend,  if
approved by other parties, to invest $60 million in ATC by the end of 2006.

REAL ESTATE

In March 2005,  Florida  Landmark  signed an agreement  with  Developers  Realty
Corporation  (DRC) to develop the first phase of the urban core area of our Town
Center.  The agreement  also includes the  development  of a 51-acre  commercial
retail site.  Revenue  associated with this agreement is anticipated to be $21.8
million over the life of the contract, which extends to September 2012. DRC is a
regional  commercial  developer  with strong ties to national  retailers and has
experience developing "lifestyle center" projects.

In August 2005, Tomoka Holdings, which is owned by ALLETE Properties,  submitted
a Development of Regional Impact (DRI)  Application for Development  Approval to
the East Central Florida  Regional  Planning  Council for its nearly  6,000-acre
Ormond Crossings project.  Development uses and intensities  proposed in the DRI
include 5 million square feet of commercial, office and industrial opportunities
along with up to 4,400  residential  units.  We anticipate that the DRI approval
process will be concluded within  approximately 16 months at which time we would
receive a Development  Order from the City of Ormond Beach. The Ormond Crossings
DRI application represents the launch of our third major real estate development
in Florida and the largest in terms of acreage.

Ground  was  broken  on  the  Town  Center  development   earlier  in  2005  and
construction is slated to begin on the Palm Coast Park property in 2006. Florida
recently granted the Palm Coast Park Community Development District authority to
issue special assessment revenue bonds to finance its property development.

                      ALLETE Third Quarter 2005 Form 10-Q                     32

<PAGE>


OUTLOOK (CONTINUED)

REAL ESTATE (CONTINUED)

ALLETE  Properties  occasionally  provides  seller  financing,  and  outstanding
finance  receivables  were $13.3 million at September 30, 2005,  with maturities
ranging up to seven years.  Outstanding  finance  receivables accrue interest at
market-based rates. These finance receivables are collateralized by the financed
properties.

<TABLE>
<CAPTION>

SUMMARY OF DEVELOPMENT PROJECTS                              TOTAL             RESIDENTIAL           COMMERCIAL
AT SEPTEMBER 30, 2005                   OWNERSHIP           ACRES <F1>           UNITS <F2>          SQ. FT. <F2><F3>
----------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                <C>                   <C>
Town Center at Palm Coast                  80%
     At December 31, 2004                                    1,550                2,950              3,525,000
     Property Sold                                             (70)                   -               (643,000)
----------------------------------------------------------------------------------------------------------------------

                                                             1,480                2,950              2,882,000
----------------------------------------------------------------------------------------------------------------------

Palm Coast Park                           100%               4,705                3,600              3,200,000
----------------------------------------------------------------------------------------------------------------------

Ormond Crossings                          100%
     At December 31, 2004                                    5,850                 <F4>                   <F4>
     Change in Estimate <F1>                                   110
----------------------------------------------------------------------------------------------------------------------

                                                             5,960
----------------------------------------------------------------------------------------------------------------------

                                                            12,145                6,550              6,082,000
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Acreage amounts  are approximate  and shown on a gross  basis, including  wetlands and minority interest. Acreage
     amounts  may vary  due to  platting or  surveying  activity. Wetland  amounts vary by  property and are often not
     formally determined prior to sale.
<F2> Estimated and includes minority interest. The actual property breakdown at full build-out  may be different  than
     these estimates.
<F3> Includes industrial, office and retail square footage.
<F4> The DRI filed in August 2005 proposed 4,400 residential units and 5 million  square feet of commercial space, and
     is subject to approval by regulating governmental entities.
</FN>
</TABLE>

<TABLE>
<CAPTION>

SUMMARY OF OTHER LAND INVENTORIES
AT SEPTEMBER 30, 2005                   OWNERSHIP     TOTAL     MIXED USE    RESIDENTIAL   COMMERCIAL   AGRICULTURAL
----------------------------------------------------------------------------------------------------------------------
ACRES <F1>
<S>                                     <C>          <C>        <C>          <C>           <C>          <C>

Palm Coast Holdings                        80%
     At December 31, 2004                            3,099       2,040          513           291          255
     Property Sold                                    (518)       (333)        (167)          (10)          (8)
----------------------------------------------------------------------------------------------------------------------

                                                     2,581       1,707          346           281          247
----------------------------------------------------------------------------------------------------------------------

Lehigh                                     80%
     At December 31, 2004                            1,082         840          140            93            9
     Property Sold                                    (469)       (450)           -           (19)           -
----------------------------------------------------------------------------------------------------------------------

                                                       613         390          140            74            9
----------------------------------------------------------------------------------------------------------------------

Cape Coral                                100%
     At December 31, 2004                              104           -            1           103            -
     Property Sold                                     (34)          -            -           (34)           -
----------------------------------------------------------------------------------------------------------------------

                                                        70           -            1            69            -
----------------------------------------------------------------------------------------------------------------------

Other                                     100%
     At December 31, 2004                              908           -            -             -          908
     Property Sold                                     (37)          -            -             -          (37)
     Contributed Land                                  (30)          -            -             -          (30)
     Change in Estimate <F1>                           103           -            -             -          103
----------------------------------------------------------------------------------------------------------------------

                                                       944           -            -             -          944
----------------------------------------------------------------------------------------------------------------------

                                                     4,208       2,097          487           424        1,200
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Acreage amounts are  approximate and  shown on a gross  basis, including wetlands and  minority interest. Acreage
     amounts may  vary due  to platting or surveying  activity. Wetland  amounts  vary by  property and  are often not
     formally  determined prior to sale. The actual  property breakdown at full  build-out may be different than these
     estimates.
</FN>
</TABLE>

33                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW ACTIVITIES

A primary goal of our  strategic  plan is to improve cash flow from  operations.
Our  strategy  includes  growing our  businesses  both  internally  by expanding
facilities,  services and operations (see Capital Requirements),  and externally
through acquisitions.

We believe our  financial  condition  is strong,  as  evidenced by cash and cash
equivalents of $91.4 million, $66.8 million of short-term investments and a debt
to total capital ratio of 40 percent at September 30, 2005.

Cash  from  operating  activities  was  lower  in 2005  due to the  spin-off  of
Automotive  Services and sale of our Water Service  businesses in 2004,  and the
Kendall  County Charge in 2005.  Cash flow from  operating  activities was $20.7
million  for the first nine  months of 2005  ($141.9  million for the first nine
months of 2004).  Excluding  the  Kendall  County  Charge in 2005,  and the debt
prepayment  cost and  discontinued  operations in 2004, we continued to generate
strong cash flow from operating activities, which amounted to $107.8 million for
the first nine months of 2005 ($32.9 million for the first nine months of 2004).
Cash  from  operating  activities,  excluding  the  Kendall  County  Charge  and
discontinued  operations,  was  higher in 2005,  due to  increased  income  from
continuing  operations,  the collection of an outstanding receivable at December
31, 2004, from ATC for work on the Duluth-to-Wausau  transmission line and other
receivables, and additional deferred profit on real estate activities.

Cash from  investing  activities  was higher in 2005,  primarily due to a $157.1
million  increase  in  net  proceeds   received  from  the  sale  of  short-term
investments.  Gross proceeds from the sale of available-for-sale securities were
$323.5  million in 2005 ($1.6 million in 2004) and purchases were $241.0 million
($76.2  million in 2004).  The increase was offset by proceeds  received in 2004
from the sale of our remaining  Water Services  businesses.  Cash from investing
activities, excluding discontinued operations, was higher in 2005, primarily due
to the  $157.1  million  increase  in net  proceeds  received  from  the sale of
short-term  investments mentioned above. Cash from investing activities was also
higher due to lower  additions to property,  plant and equipment in 2005,  which
vary from period to period depending on projects. These increases were partially
offset by $12 million  received from Split Rock Energy in 2004 upon  termination
of the joint venture.

Cash for financing activities was lower in 2005, primarily due to the redemption
of $125  million  in senior  notes and the  repayment  of a $53.0  million  note
payable in 2004. In addition,  dividends paid on common stock were $46.4 million
lower in 2005,  primarily due to the change in dividends  following the spin-off
of Automotive Services.

Our  Town  Center  development  project  in  Florida  is being  financed  with a
revolving development loan and tax-exempt bonds. In March 2005, Florida Landmark
entered into an $8.5 million revolving development loan with CypressCoquina Bank
to fund approximately $26 million of Town Center development costs. The loan has
an interest rate equal to the prime rate with an initial term of 36 months.  The
term of the loan may be extended 24 months, if certain  conditions are met. Also
in March 2005,  the Town  Center at Palm Coast  Community  Development  District
(Town Center CDD) issued $26.4  million of  tax-exempt,  6% Capital  Improvement
Revenue Bonds,  Series 2005, due May 1, 2036 (Bonds).  Approximately $21 million
of  the  Bond  proceeds  will  be  used  for   construction  of   infrastructure
improvements at Town Center, with the remaining funds to be used for capitalized
interest,  a debt  service  reserve  fund and costs of  issuance.  The Bonds are
payable from and secured by the revenue derived from  assessments to be imposed,
levied and  collected  by the Town  Center CDD.  The  assessments  represent  an
allocation of the costs of the improvements,  including bond financing costs, to
the lands  within the Town  Center CDD  benefiting  from the  improvements.  The
assessments  will be included in the annual property tax bills of land owners in
the  development  project  beginning  in  November  2006.  Town Center CDD is an
independent unit of local government, created and established in accordance with
Florida's  Uniform  Community  Development  District Act of 1980 (Act).  The Act
provides  legal  authority for a community  development  district to finance the
construction  of major  infrastructure  for community  development  with general
obligation, revenue and special assessment revenue debt obligations.

WORKING CAPITAL.  Additional working capital,  if and when needed,  generally is
provided by the sale of commercial paper. Approximately 1 million original issue
shares of our common stock are available for issuance through INVEST DIRECT, our
direct stock purchase and dividend reinvestment plan.

                      ALLETE Third Quarter 2005 Form 10-Q                     34

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

SECURITIES

In March 2001, ALLETE, ALLETE Capital II and ALLETE Capital III, jointly filed a
registration  statement with the SEC,  pursuant to Rule 415 under the Securities
Act of 1933. The registration  statement,  which has been declared  effective by
the SEC,  relates to the possible  issuance of a remaining  aggregate  amount of
$387  million of  securities,  which may  include  ALLETE  common  stock,  first
mortgage  bonds and other  debt  securities,  and  ALLETE  Capital II and ALLETE
Capital  III  preferred  trust  securities.   ALLETE  also  previously  filed  a
registration  statement,  which has been declared effective by the SEC, relating
to the possible  issuance of $25 million of first  mortgage bonds and other debt
securities.  We may sell all or a portion of the remaining registered securities
if warranted by market  conditions and our capital  requirements.  Any offer and
sale  of the  above-mentioned  securities  will  be  made  only  by  means  of a
prospectus  meeting the requirements of the Securities Act of 1933 and the rules
and regulations thereunder.

On August 1, 2005, ALLETE issued $35 million of its first mortgage bonds,  which
carry an interest rate of 5.28% and have a term of 15 years.  On August 2, 2005,
we used  proceeds  from  these  newly  issued  bonds to redeem  $35  million  in
principal amount of First Mortgage Bonds, 7 1/2% Series due 2007.

On October 6, 2005, ALLETE accepted an offer from certain  institutional  buyers
in the  private  placement  market to purchase  $50  million of  ALLETE's  first
mortgage bonds.  When issued, on or about March 1, 2006, the bonds will carry an
interest rate of 5.69% and will have a term of 30 years.  ALLETE  intends to use
the proceeds from the bonds to redeem a portion of ALLETE's outstanding debt.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance  sheet  arrangements  are  summarized  in our 2004 Form  10-K,  with
additional disclosure discussed in Note 13 of this Form 10-Q.

CAPITAL REQUIREMENTS

For  the  nine  months  ended  September  30,  2005,  capital  expenditures  for
continuing   operations   totaled  $40.4  million   ($48.8   million  in  2004).
Expenditures  for the nine months  ended  September  30,  2005,  included  $31.1
million for Regulated Utility,  $6.0 million for Nonregulated  Energy Operations
and $3.3 million for Other,  which related to our  telecommunications  business.
Internally-generated funds were the source of funding for these expenditures.

Capital  expenditures  are  expected  to be $63  million  in total for 2005 ($48
million for system component  replacement and upgrades within Regulated Utility;
$11 million for system  component  replacement  and upgrades,  and coal handling
equipment   within   Nonregulated   Energy   Operations;   and  $4  million  for
telecommunication  fiber within  Other).  We expect to use  internally-generated
funds to fund all capital expenditures.

Due  primarily  to the  passage  of two new EPA  rules in 2005 that  reduce  and
permanently  cap  emissions  of  mercury,  SO2,  NOx and  particulates  from the
electric utility industry, capital expenditures are expected to total about $560
million for 2006 through 2009, of which  approximately  $300 million is expected
to be for environmental  compliance.  The new estimate is down $115 million from
the previously  anticipated $675 million and reflects a plan that incorporates a
combination  of solutions that include both  technology  and emission  allowance
purchases,  and timing and  scheduling  of  environmental  retrofit  during this
period.


ENVIRONMENTAL MATTERS AND OTHER

As  previously  mentioned  in our  Critical  Accounting  Policies  section,  our
businesses  are  subject  to  regulation  by  various  federal,  state and local
authorities  concerning  environmental  matters.  We anticipate  that  potential
expenditures for  environmental  matters will be material in the future,  due to
stricter environmental  requirements through legislation and/or rulemakings that
are  expected  to  require  significant  capital  investments.  We are unable to
predict the outcome of the issues discussed in Note 13.

35                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


NEW ACCOUNTING STANDARDS

New accounting standards are discussed in Note 1.

                              ---------------------


FACTORS THAT MAY AFFECT FUTURE RESULTS

READERS ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS, INCLUDING THOSE CONTAINED
IN THIS FORM 10-Q,  SHOULD BE READ IN CONJUNCTION WITH OUR DISCLOSURES UNDER THE
HEADING:  "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES  LITIGATION REFORM
ACT OF  1995"  LOCATED  ON  PAGE 2 OF THIS  FORM  10-Q,  AS WELL AS THE  FACTORS
DESCRIBED IN OUR 2004 FORM 10-K AND ANY UPDATES  MENTIONED  BELOW. THE RISKS AND
UNCERTAINTIES  DESCRIBED  IN THIS  FORM 10-Q ARE NOT THE ONLY  ONES  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 CONCERNS SET FORTH BELOW ARE REALIZED.

THE  OCCURRENCE  OF NATURAL  DISASTERS  IN FLORIDA  COULD  ADVERSELY  AFFECT OUR
BUSINESS.

The  occurrence of natural  disasters in Florida,  such as  hurricanes,  floods,
fires,  unusually  heavy or prolonged  rain or  droughts,  could have a material
adverse  effect on our ability to develop and sell  properties or realize income
from our  projects.  The  occurrence  of  natural  disasters  could  also  cause
increases in property  insurance rates and deductibles which could reduce demand
or selling price for our properties.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SECURITIES INVESTMENTS

AVAILABLE-FOR-SALE   SECURITIES.  Our  securities  investments  include  certain
securities,   which  are   accounted  for  as   available-for-sale   securities.
Available-for-sale  securities are recorded at fair value with unrealized  gains
and losses included in accumulated  other  comprehensive  income (loss),  net of
tax. Unrealized losses that are other than temporary are recognized in earnings.
At September 30, 2005, our available-for-sale  securities portfolio consisted of
securities  in a grantor trust  established  to fund certain  employee  benefits
included in Investments  and various  auction rate municipal  bonds and variable
rate   municipal   demand  notes   included  as  Short-Term   Investments.   Our
available-for-sale  securities  portfolio  had a fair value of $97.1  million at
September 30, 2005 ($179.4 million at December 31, 2004) and a total  unrealized
after-tax  gain of $1.9 million at September  30, 2005 ($1.5 million at December
31,  2004).  We  use  the  specific  identification  method  as  the  basis  for
determining the cost of securities  sold. Our policy is to review on a quarterly
basis  available-for-sale  securities  for other than  temporary  impairment  by
assessing  such factors as the  continued  viability of products  offered,  cash
flow,  share  price  trends and the impact of overall  market  conditions.  As a
result  of our  periodic  assessments,  we did  not  record  any  impairment  of
available-for-sale securities for the nine months ended September 30, 2005.

EMERGING TECHNOLOGY PORTFOLIO.  As part of our emerging technology portfolio, we
have  several   minority   investments  in  venture  capital  funds  and  direct
investments in privately-held, start-up companies. We account for our investment
in venture  capital  funds  under the equity  method and  account for our direct
investment in privately-held companies under the cost method. The total carrying
value of our emerging  technology  portfolio  was $9.2 million at September  30,
2005,  down $4.4 million from December 31, 2004. In March 2005, we recorded $5.1
million ($3.3 million after tax) of  impairments,  which  included a reserve for
future   commitments,   that   related   to  direct   investments   in   certain
privately-held,   start-up   companies  whose  future  business  prospects  have
diminished significantly.  Recent developments at these companies indicated that
future  commercial  viability  is  unlikely,  as is new  financing  necessary to
continue  development.  Our basis in cost  method  investments  included  in the
emerging  technology  portfolio  was zero at September 30, 2005 ($4.5 million at
December 31,  2004).  Our policy is to review these  investments  quarterly  for
impairment  by  assessing  such  factors as  continued  commercial  viability of
products, cash flow and earnings. Any impairment would reduce the carrying value
of the investment.

                      ALLETE Third Quarter 2005 Form 10-Q                     36

<PAGE>


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)

COMMODITY PRICE RISK

Our regulated utility operations in Minnesota and Wisconsin incur costs for fuel
(primarily  coal),  power and natural gas  purchased for resale in our regulated
service  territories,  and  related  transportation.  Our  regulated  utilities'
exposure to price risk for these  commodities is significantly  mitigated by the
current ratemaking  process and regulatory  environment which generally allows a
fuel clause  surcharge  if costs are in excess of those in our last rate filing.
Conversely,  costs below those in our last rate filing  result in a rate credit.
We seek to prudently  manage our  customers'  exposure to price risk by entering
into contracts of various durations and terms for the purchase of coal and power
(in Minnesota), power and natural gas (in Wisconsin), and related transportation
costs.

POWER MARKETING

Our power marketing activities consist of (1) purchasing energy in the wholesale
market  for resale in our  regulated  service  territories  when  retail  energy
requirements   exceed  generation  output,  and  (2)  selling  excess  available
regulated   utility   generation  and  purchased   power,  as  well  as  selling
nonregulated generation.

From time to time, our regulated  utility  operations may have excess generation
that is  temporarily  not  required  by retail and  municipal  customers  in our
regulated service  territory.  We actively sell this generation to the wholesale
market to optimize the value of our generating  facilities.  This  generation is
generally sold in the MISO market at market prices.

We have  approximately 200 MW of nonregulated  generation  available for sale to
the wholesale  markets at our Taconite  Harbor  facility in northern  Minnesota,
which has been sold through various short-term and long-term capacity and energy
contracts.  Approximately 116 MW of existing capacity and energy sales contracts
expired on April 30,  2005.  Long-term,  we have  entered  into two capacity and
energy sales contracts  totaling 175 MW (201 MW including a 15 percent reserve),
which were effective May 1, 2005,  and expire on April 30, 2010.  Both contracts
contain fixed monthly  capacity  charges and fixed minimum energy  charges.  One
contract  provides  for an  annual  escalator  to the  energy  charge  based  on
increases in our cost of coal, subject to a small minimum annual escalation. The
other  contract  provides  that the energy charge will be the greater of a fixed
minimum  charge  or an  amount  based  on  the  variable  production  cost  of a
combined-cycle, natural gas unit. Our exposure in the event of a full or partial
outage at our  Taconite  Harbor  facility is  significantly  limited  under both
contracts.  When the buyer is notified  at least two months  prior to an outage,
there is no exposure.  Outages with less than two months'  notice are subject to
an annual duration  limitation typical of this type of contract.  We also have a
50 MW capacity and energy sales  contract that extends  through April 2008 and a
15 MW energy sales  contract that extends  through May 2007.  The 50 MW capacity
and  energy  sales  contract  has  fixed  pricing   through   January  2006  and
market-based pricing thereafter.

In  addition  to  generation,  Taconite  Harbor  will  meet its  sales  contract
obligations  with two contracts that began in May 2005. We have a 50 MW capacity
and energy  purchase  contract  that  extends  through  April  2006,  with fixed
capacity payments and the right to purchase energy at market price. We also have
a 25 MW fixed-priced energy purchase contract that extends through January 2006.


ITEM 4.    CONTROLS AND PROCEDURES

We maintain a system of controls and procedures  designed to provide  reasonable
assurance  as  to  the  reliability  of  the  financial   statements  and  other
disclosures  included  in  this  report,  as well as to  safeguard  assets  from
unauthorized  use or disposition.  We evaluated the  effectiveness of the design
and operation of our disclosure  controls and procedures  under the  supervision
and with the participation of management,  including our chief executive officer
and chief  financial  officer,  as of the end of the period covered by this Form
10-Q.  Based  upon  that  evaluation,  our  chief  executive  officer  and chief
financial  officer  concluded  that our  disclosure  controls and procedures are
effective.  While we continue to enhance our  internal  control  over  financial
reporting,  there has been no  change in our  internal  control  over  financial
reporting  that  occurred  during  our  most  recent  fiscal  quarter  that  has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

37                    ALLETE Third Quarter 2005 Form 10-Q

<PAGE>


PART II.   OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS

Material  legal and  regulatory  proceedings  are included in the  discussion of
Other  Information  in Part II, Item 5 and/or Note 13, and are  incorporated  by
reference herein.


ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


ITEM 5.    OTHER INFORMATION

Reference  is made to our 2004  Form  10-K  for  background  information  on the
following updates. Unless otherwise indicated,  cited references are to our 2004
Form 10-K.

Ref. Page 7 - Minimum Revenue and Demand Under Contract Table
Ref. Page 28 - Form 10-Q for the Quarter Ended March 31, 2005 - Minimum Revenue
and Demand Under Contract Table

<TABLE>
<CAPTION>

MINIMUM REVENUE AND DEMAND UNDER CONTRACT                                MINIMUM                       MONTHLY
AS OF OCTOBER 1, 2005                                              ANNUAL REVENUE <F1>                MEGAWATTS
----------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                                <C>

     2005                                                                $109.0                          697
     2006                                                                 $63.3                          377
     2007                                                                 $35.9                          192
     2008                                                                 $26.0                          148
     2009                                                                 $21.5                          124
----------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Based on past experience, we believe  revenue from our large power  customers will be substantially  in excess of
     the minimum contract amounts.
</FN>
</TABLE>


Ref. Page 8 - Footnotes  to  Contract  Status  for  Minnesota Power  Large Power
              Customers Table
Ref. Page 36 - Form 10-Q for  the Quarter Ended June 30, 2005 - Second Paragraph

In August 2005,  we reached a new  long-term,  all-requirements  agreement  with
Mittal Steel USA (Mittal) to provide all electric service needs through December
2012 for  Mittal's  Minorca Mine  production  facility.  On September  21, 2005,
Minnesota  Power filed with the MPUC a petition for approval of its new electric
service agreement with Mittal.

In  September  2005,  the MPUC  approved  our new  long-term,  all  requirements
agreement with United States Steel Corporation (USS) to provide electric service
through  October  2013  to  USS's  Minntac  and  Keewatin  Taconite   production
facilities.

                      ALLETE Third Quarter 2005 Form 10-Q                     38


<PAGE>


ITEM 5.    OTHER INFORMATION (CONTINUED)

Ref. Page 10 - Eighth Paragraph and Page 16 - First and Second Full Paragraphs

In  October  2005,  Minnesota  Power  announced  a  $60  million   environmental
initiative which is expected to  significantly  reduce emissions from two of its
electric  generating  facilities in northeastern  Minnesota.  Minnesota  Power's
Arrowhead  Regional Emission Abatement (AREA) plan is designed to further reduce
emissions while  maintaining a reliable and  reasonably-priced  energy supply to
meet  the  needs  of its  customers.  We  believe  that  control  and  abatement
technologies  applicable to these plants have matured to the point where further
significant air emission reductions can be attained through AREA in a relatively
cost-effective manner.

At Taconite  Harbor,  Minnesota Power plans to employ  multi-emission  reduction
technology,  while  at  Laskin  we plan to  install  a  retrofit  to  lower  NOx
emissions. Upon projected completion of the retrofits, Minnesota Power estimates
an emission  reduction  of over 60 percent for NOx at both  facilities  and a 65
percent  reduction in SO2 at Taconite Harbor.  Laskin already has relatively low
emission  levels  of  SO2  due  to  existing  emission   reduction   technology.
Additionally,  with the emerging  technology being proposed for Taconite Harbor,
there  is the  potential  for as  much  as a 90  percent  reduction  in  mercury
emissions.

On October 13, 2005, Minnesota Power filed the AREA plan with the MPUC. A second
filing  detailing  current cost recovery  outside of a rate case for the plan is
expected to be made to the MPUC before the end of December  2005. If approved by
the MPUC,  the rate impact on  residential  and  general  service  customers  is
expected  to be about 2 percent  and for large  power  customers  the  impact is
expected to be about 3.3 percent when the plan is fully  implemented  at the end
of  2008.   Approval  is  sought  before  June  30,  2006,  when  the  statutory
authorization   for  current  cost  recovery  on  utility   emission   reduction
investments  sunsets.  The filing  process  will  provide for written  comments,
public hearings and regional meetings on the proposal.  The Minnesota  Pollution
Control Agency has stated its intention to issue a letter of support to the MPUC
encouraging Minnesota Power's anticipated efforts to reduce emissions.


Ref. Page 10 - Last Paragraph
Ref. Page 11 - First Paragraph

On October 24, 2005,  we proposed to the MPUC a  comprehensive  solution to meet
our generation needs through the 2009-2010 timeframe that includes the following
key components:  (1) Transitioning our Taconite Harbor generating  facility from
wholesale sales to retail sales to help meet the utility's  forecasted base load
energy requirements.  While we propose that Taconite Harbor would become part of
Minnesota  Power's  rate-based  assets as of  January  2006,  current  wholesale
contracts  sourced from  Taconite  Harbor will be honored  through  their terms.
Utilizing  Taconite  Harbor  would  meet  the  near-term  increased  demand  for
electricity  without  requiring  the  construction  of new assets.  (2) Taconite
Harbor  generation is proposed to be supplemented  with a 50-megawatt  long-term
power  purchase  agreement  to meet  near-term  energy  needs.  (3) Our  various
resource  additions are proposed to help meet forecasted base load,  support the
expansion of our renewable generating assets and help meet Minnesota's Renewable
Energy  Objective that seeks a 10 percent supply of renewable energy by 2015. We
have applied for approval of a power purchase agreement for 50 megawatts of wind
energy purchased from a plant in North Dakota.  We are also actively pursuing an
agreement for an additional 50 megawatts of wind energy from facilities  located
in  northeastern  Minnesota,  and  are  proposing  to  obtain  10  megawatts  of
additional  hydro  generation  through an expansion of one of our hydro electric
stations.

Our proposal is supported by the Minnesota Department of Commerce and a group of
our large power customers.  We are also discussing the agreement with the Office
of Attorney General-Residential Utilities Division.

39                    ALLETE Third Quarter 2005 Form 10-Q


<PAGE>


ITEM 5.    OTHER INFORMATION (CONTINUED)

Ref. Page 11 - Fourth Paragraph

ATC  is a  for-profit  transmission-only  company  created  by the  transfer  of
transmission  assets previously owned by several electric  utilities serving the
upper  Midwest.  In April 2003, the PSCW approved a transfer of interests in the
Wausau-to-Duluth electric transmission line project to ATC. As a result, ATC has
assumed  primary  responsibility  for the overall  management of the project and
will own and operate the completed Wausau-to-Duluth line.

We have a  contractual  opportunity  related to ATC  that,  if  exercised, would
ultimately  result in our having an equity  investment  in ATC.  We  intend,  if
approved by other parties, to invest $60 million in ATC by the end of 2006.


ITEM 6.    EXHIBITS

EXHIBIT
NUMBER

    31(a)    Rule  13a-14(a)/15d-14(a)  Certification  by  the  Chief  Executive
             Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.

    31(b)    Rule  13a-14(a)/15d-14(a)  Certification  by  the  Chief  Financial
             Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.

       32    Section  1350  Certification  of   Periodic  Report  by  the  Chief
             Executive Officer  and Chief Financial Officer  Pursuant to Section
             906 of the Sarbanes-Oxley Act of 2002.

       99    ALLETE News Release  dated  October 28, 2005, announcing 2005 third
             quarter earnings. [THIS EXHIBIT HAS BEEN FURNISHED AND SHALL NOT BE
             DEEMED "FILED" FOR PURPOSES  OF SECTION 18 OF THE SECURITIES ACT OF
             1934, NOR  SHALL IT  BE  DEEMED  INCORPORATED  BY  REFERENCE IN ANY
             FILING  UNDER  THE  SECURITIES  ACT  OF  1933,  EXCEPT  AS SHALL BE
             EXPRESSLY SET FORTH BY SPECIFIC REFERENCE IN SUCH FILING.]

                      ALLETE Third Quarter 2005 Form 10-Q                     40

<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                                 ALLETE, INC.





October 28, 2005                               James K. Vizanko
                             ---------------------------------------------------
                                               James K. Vizanko
                              Senior Vice President and Chief Financial Officer




October 28, 2005                               Mark A. Schober
                             ---------------------------------------------------
                                               Mark A. Schober
                                    Senior Vice President and Controller


41                    ALLETE Third Quarter 2005 Form 10-Q


<PAGE>


                                    EXHIBIT INDEX


EXHIBIT
NUMBER
--------------------------------------------------------------------------------
  31(a)    Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer
           Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

  31(b)    Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer
           Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     32    Section 1350  Certification of Periodic Report by the Chief Executive
           Officer  and Chief Financial Officer Pursuant  to Section 906  of the
           Sarbanes-Oxley Act of 2002.

     99    ALLETE  News  Release dated  October 28, 2005, announcing  2005 third
           quarter  earnings.  [THIS EXHIBIT HAS BEEN FURNISHED AND SHALL NOT BE
           DEEMED "FILED"  FOR PURPOSES OF  SECTION 18 OF THE  SECURITIES ACT OF
           1934, NOR SHALL IT BE DEEMED INCORPORATED BY  REFERENCE IN ANY FILING
           UNDER THE  SECURITIES  ACT OF 1933, EXCEPT  AS SHALL BE EXPRESSLY SET
           FORTH BY SPECIFIC REFERENCE IN SUCH FILING.]


                      ALLETE Third Quarter 2005 Form 10-Q
</TEXT>
</DOCUMENT>
