<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>r10q72806.txt
<DESCRIPTION>ALLETE 10-Q FOR THE QUARTER ENDED JUNE 30, 2006
<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 JUNE 30, 2006

                                       or

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

     For the transition period from ______________ to ______________


                          Commission File Number 1-3548


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

                 MINNESOTA                              41-0418150
      (State or other jurisdiction of                 (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. /X/ Yes / / No

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

Large Accelerated Filer /X/   Accelerated Filer / /    Non-Accelerated Filer / /

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


                           Common Stock, no par value,
                          30,321,240 shares outstanding
                               as of June 30, 2006

<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 -
                   June 30, 2006 and December 31, 2005                        4

              Consolidated Statement of Income -
                   Quarter and Six Months Ended June 30, 2006 and 2005        5

              Consolidated Statement of Cash Flows -
                   Six Months Ended June 30, 2006 and 2005                    6

              Notes to Consolidated Financial Statements                      7

         Item 2.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       23

         Item 3.   Quantitative and Qualitative Disclosures about Market
                   Risk                                                      38

         Item 4.   Controls and Procedures                                   39

Part II. Other Information

         Item 1.   Legal Proceedings                                         40

         Item 1A.  Risk Factors                                              40

         Item 2.   Unregistered Sales of Equity Securities and Use of
                   Proceeds                                                  40

         Item 3.   Defaults Upon Senior Securities                           40

         Item 4.   Submission of Matters to a Vote of Security Holders       40

         Item 5.   Other Information                                         41

         Item 6.   Exhibits                                                  42

Signatures                                                                   43


1                     ALLETE Second Quarter 2006 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
--------------------------------------------------------------------------------

2005 Form 10-K                           ALLETE's Annual Report on Form 10-K for
                                             the Year Ended December 31, 2005
ALLETE                                   ALLETE, Inc.
ALLETE Properties                        ALLETE Properties, Inc.
AREA                                     Arrowhead Regional Emission Abatement
                                             Plan
ATC                                      American Transmission Company LLC
BNI Coal                                 BNI Coal, Ltd.
Boswell                                  Boswell Energy Center
Company                                  ALLETE, Inc. and its subsidiaries
Constellation Energy Commodities         Constellation Energy Commodities Group,
                                             Inc.
DOC                                      Minnesota Department of Commerce
Enventis Telecom                         Enventis Telecom, Inc.
EITF                                     Emerging Issues Task Force Issue No.
EPA                                      Environmental Protection Agency
ESOP                                     Employee Stock Ownership Plan
FASB                                     Financial Accounting Standards Board
FERC                                     Federal Energy Regulatory Commission
Florida Water                            Florida Water Services Corporation
FSP                                      Financial Accounting Standards Board
                                             Staff Position
GAAP                                     Accounting Principles Generally
                                             Accepted in the United States of
                                             America
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.
MPCA                                     Minnesota Pollution Control Agency
MPUC                                     Minnesota Public Utilities Commission
MW                                       Megawatt(s)
Note ___                                 Note ___ to the consolidated  financial
                                             statements in this Form 10-Q
NOx                                      Nitrogen Oxide
Palm Coast District                      Palm Coast Park Community Development
                                             District
Palm Coast Park                          Palm Coast Park development project in
                                             Florida
PSCW                                     Public Service Commission of Wisconsin
Rainy River Energy                       Rainy River Energy Corporation
Resource Plan                            Integrated Resource Plan
SEC                                      Securities and Exchange Commission
SFAS                                     Statement of Financial Accounting
                                             Standards No.
SO2                                      Sulfur Dioxide
Square Butte                             Square Butte Electric Cooperative
SWL&P                                    Superior Water, Light and Power Company
Taconite Harbor                          Taconite Harbor Energy Center
Town Center                              Town Center at Palm Coast development
                                             project in Florida
Town Center District                     Town Center at Palm Coast Community
                                             Development District
WDNR                                     Wisconsin Department of Natural
                                             Resources

                      ALLETE Second Quarter 2006 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;
    -    our ability to manage expansion and integrate acquisitions;
    -    prevailing  governmental  policies  and  regulatory  actions, including
         those of the United States Congress, state legislatures,  the FERC, the
         MPUC,  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 and pandemic diseases;
    -    war and acts of terrorism;
    -    wholesale power market conditions;
    -    our ability to obtain viable real estate for development purposes;
    -    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  replace  a  mature  workforce,  and  retain  qualified,
         skilled and experienced personnel; 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 "Risk  Factors" in Part I, Item 1A of our 2005 Form
10-K and Part II, Item 1A of our  Quarterly  Reports on Form 10-Q for 2006.  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 this Form 10-Q 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 Second Quarter 2006 Form 10-Q

<PAGE>

PART I.    FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS

<TABLE>
                                                            ALLETE
                                                  CONSOLIDATED BALANCE SHEET
                                                     MILLIONS - UNAUDITED
<CAPTION>
                                                                                    JUNE 30,         DECEMBER 31,
                                                                                      2006               2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>              <C>
ASSETS

Current Assets
     Cash and Cash Equivalents                                                      $   62.8           $   89.6
     Short-Term Investments                                                            120.4              116.9
     Accounts Receivable (Less Allowance of $1.0 for 2006 and 2005)                     61.0               79.1
     Inventories                                                                        42.1               33.1
     Prepayments and Other                                                              21.6               23.8
     Deferred Income Taxes                                                              33.1               31.0
     Discontinued Operations                                                               -                0.4
-----------------------------------------------------------------------------------------------------------------------------

        Total Current Assets                                                           341.0              373.9

Property, Plant and Equipment - Net                                                    871.6              860.4

Investments                                                                            127.8              117.7

Other Assets                                                                            45.7               44.6

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

TOTAL ASSETS                                                                        $1,386.1           $1,398.8
-----------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current Liabilities
     Accounts Payable                                                               $   30.4           $   44.7
     Accrued Taxes                                                                      15.8               19.1
     Accrued Interest                                                                    7.2                7.4
     Long-Term Debt Due Within One Year                                                 61.6                2.7
     Deferred Profit on Sales of Real Estate                                             8.1                8.6
     Other                                                                              18.0               24.2
     Discontinued Operations                                                               -               13.0
-----------------------------------------------------------------------------------------------------------------------------

        Total Current Liabilities                                                      141.1              119.7

Long-Term Debt                                                                         326.9              387.8

Deferred Income Taxes                                                                  135.4              138.4

Other Liabilities                                                                      149.2              144.1

Minority Interest                                                                        5.7                6.0
-----------------------------------------------------------------------------------------------------------------------------

        Total Liabilities                                                              758.3              796.0
-----------------------------------------------------------------------------------------------------------------------------

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

SHAREHOLDERS' EQUITY

Common Stock Without Par Value, 43.3 Shares Authorized,
     30.3 and 30.1 Shares Outstanding                                                  430.8              421.1

Unearned ESOP Shares                                                                   (75.6)             (77.6)

Accumulated Other Comprehensive Loss                                                   (12.5)             (12.8)

Retained Earnings                                                                      285.1              272.1
-----------------------------------------------------------------------------------------------------------------------------

        Total Shareholders' Equity                                                     627.8              602.8
-----------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          $1,386.1           $1,398.8
-----------------------------------------------------------------------------------------------------------------------------

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


                      ALLETE Second Quarter 2006 Form 10-Q                     4

<PAGE>

<TABLE>
                                                            ALLETE
                                               CONSOLIDATED STATEMENT OF INCOME
                                         MILLIONS EXCEPT PER SHARE AMOUNTS - UNAUDITED
<CAPTION>
                                                                   QUARTER ENDED                  SIX MONTHS ENDED
                                                                     JUNE 30,                         JUNE 30,
                                                               2006            2005             2006           2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>             <C>              <C>            <C>
OPERATING REVENUE                                             $178.3          $174.4           $370.8         $367.7
-----------------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES
     Fuel and Purchased Power                                   63.0            68.9            132.4          136.5
     Operating and Maintenance                                  76.8            71.7            151.3          144.4
     Kendall County Charge                                         -            77.9                -           77.9
     Depreciation                                               12.2            11.9             24.4           23.8
-----------------------------------------------------------------------------------------------------------------------------

         Total Operating Expenses                              152.0           230.4            308.1          382.6
-----------------------------------------------------------------------------------------------------------------------------

OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS              26.3           (56.0)            62.7          (14.9)
-----------------------------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSE)
     Interest Expense                                           (6.4)           (6.7)           (12.8)         (13.5)
     Other                                                       3.4             1.5              5.1           (2.7)
-----------------------------------------------------------------------------------------------------------------------------

         Total Other Expense                                    (3.0)           (5.2)            (7.7)         (16.2)
-----------------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
     BEFORE MINORITY INTEREST AND INCOME TAXES                  23.3           (61.2)            55.0          (31.1)

MINORITY INTEREST                                                0.8             0.2              2.1            1.4
-----------------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS
     BEFORE INCOME TAXES                                        22.5           (61.4)            52.9          (32.5)

INCOME TAX EXPENSE (BENEFIT)                                     8.9           (21.6)            20.5          (10.1)
-----------------------------------------------------------------------------------------------------------------------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                        13.6           (39.8)            32.4          (22.4)

LOSS FROM DISCONTINUED OPERATIONS - NET OF TAX                  (0.4)           (0.5)            (0.4)          (0.5)
-----------------------------------------------------------------------------------------------------------------------------

NET INCOME (LOSS)                                             $ 13.2          $(40.3)          $ 32.0         $(22.9)
-----------------------------------------------------------------------------------------------------------------------------

AVERAGE SHARES OF COMMON STOCK
     Basic                                                      27.7            27.2             27.6           27.2
     Diluted                                                    27.9            27.2             27.8           27.2
-----------------------------------------------------------------------------------------------------------------------------

BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK
     Continuing Operations                                     $0.50          $(1.46)           $1.18         $(0.82)
     Discontinued Operations                                   (0.02)          (0.02)           (0.02)         (0.02)
-----------------------------------------------------------------------------------------------------------------------------

                                                               $0.48          $(1.48)           $1.16         $(0.84)
-----------------------------------------------------------------------------------------------------------------------------

DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
     Continuing Operations                                     $0.49          $(1.46)           $1.17         $(0.82)
     Discontinued Operations                                   (0.02)          (0.02)           (0.02)         (0.02)
-----------------------------------------------------------------------------------------------------------------------------

                                                               $0.47          $(1.48)           $1.15         $(0.84)
-----------------------------------------------------------------------------------------------------------------------------

DIVIDENDS PER SHARE OF COMMON STOCK                          $0.3625         $0.3150          $0.7250        $0.6150
-----------------------------------------------------------------------------------------------------------------------------

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

5                     ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

<TABLE>

                                                            ALLETE
                                             CONSOLIDATED STATEMENT OF CASH FLOWS
                                                     MILLIONS - UNAUDITED

<CAPTION>
                                                                                           SIX MONTHS ENDED
                                                                                               JUNE 30,
                                                                                     2006                    2005
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                     <C>
OPERATING ACTIVITIES
     Net Income (Loss)                                                              $ 32.0                  $(22.9)
     Loss from Discontinued Operations                                                 0.4                     0.5
     Loss on Impairment of Investments                                                   -                     5.1
     Depreciation                                                                     24.4                    23.8
     Deferred Income Taxes                                                            (4.7)                  (34.1)
     Minority Interest                                                                 2.1                     1.4
     Stock Compensation Expense                                                        0.9                     0.6
     Bad Debt Expense                                                                  0.4                     0.4
     Changes in Operating Assets and Liabilities
       Accounts Receivable                                                            17.7                    15.7
       Inventories                                                                    (9.0)                   (3.6)
       Prepayments and Other                                                           2.2                     1.8
       Accounts Payable                                                              (10.9)                   (9.5)
       Other Current Liabilities                                                     (10.1)                   (0.9)
     Other Assets                                                                     (1.1)                    4.7
     Other Liabilities                                                                 5.1                     3.0
     Net Operating Activities for Discontinued Operations                            (13.0)                   (6.0)
-----------------------------------------------------------------------------------------------------------------------------

         Cash from (for) Operating Activities                                         36.4                   (20.0)
-----------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
     Proceeds from Sale of Available-For-Sale Securities                             410.6                   271.1
     Payments for Purchase of Available-For-Sale Securities                         (414.1)                 (183.5)
     Changes to Investments                                                          (11.2)                   (3.4)
     Additions to Property, Plant and Equipment                                      (35.3)                  (22.6)
     Other                                                                             2.5                    (1.8)
     Net Investing Activities from (for) Discontinued Operations                       2.2                    (1.4)
-----------------------------------------------------------------------------------------------------------------------------

         Cash from (for) Investing Activities                                        (45.3)                   58.4
-----------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
     Issuance of Common Stock                                                          8.8                    12.8
     Issuance of Long-Term Debt                                                       50.0                       -
     Payments of Long-Term Debt                                                      (52.0)                   (1.0)
     Dividends on Common Stock and Distributions to Minority Shareholders            (21.3)                  (16.0)
     Net Decrease in Book Overdrafts                                                  (3.4)                      -
     Net Financing Activities for Discontinued Operations                                -                    (0.1)
-----------------------------------------------------------------------------------------------------------------------------

         Cash for Financing Activities                                               (17.9)                   (4.3)
-----------------------------------------------------------------------------------------------------------------------------

CHANGE IN CASH AND CASH EQUIVALENTS                                                  (26.8)                   34.1

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD <F1>                                 89.6                    46.1
-----------------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD <F1>                                     $ 62.8                  $ 80.2
-----------------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION
     Cash Paid During the Period for
       Interest - Net of Amounts Capitalized                                         $19.4                   $16.4
       Income Taxes                                                                  $31.1                   $13.6
-----------------------------------------------------------------------------------------------------------------------------

<FN>
<F1> Included $1.1 million of cash from Discontinued Operations at June 30, 2005 and $1.2 million at December 31, 2004.

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

                      ALLETE Second Quarter 2006 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 2005 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

Certain  reclassifications  have been made to prior years' amounts to conform to
current  year  classifications.  We revised our  Consolidated  Statement of Cash
Flows for the quarter  ended June 30, 2005, to reconcile Net Income to Cash from
Operating   Activities.   Previously,   we  reconciled  Income  from  Continuing
Operations to Cash from Operating Activities.  In addition, we have reclassified
certain  amounts in our balance  sheet,  statement of income,  statement of cash
flows and segment information to reflect  discontinued  operations treatment for
our  telecommunications   business,  which  we  sold  in  December  2005.  These
reclassifications  had no effect on previously reported consolidated net income,
shareholders' equity, comprehensive income or cash flows.

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

<TABLE>
<CAPTION>
                                          JUNE 30,             DECEMBER 31,
INVENTORIES                                2006                   2005
--------------------------------------------------------------------------------
MILLIONS
<S>                                       <C>                  <C>
Fuel                                        $20.0                  $11.0
Materials and Supplies                       22.1                   22.1
--------------------------------------------------------------------------------

Total Inventories                           $42.1                  $33.1
--------------------------------------------------------------------------------
</TABLE>

STOCK-BASED COMPENSATION EXPENSE. Effective January 1, 2006, we adopted the fair
value  recognition  provisions of SFAS 123R,  "Share-Based  Payment,"  using the
modified  prospective   transition  method.  Under  this  method,  we  recognize
compensation expense for all share-based payments granted after January 1, 2006,
and those granted  prior to but not yet vested as of January 1, 2006.  Under the
fair  value  recognition  provisions  of SFAS  123R,  we  recognize  stock-based
compensation net of an estimated forfeiture rate and only recognize compensation
expense for those shares  expected to vest over the required  service  period of
the award.  Prior to our  adoption of SFAS 123R,  we accounted  for  share-based
payments under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations.

STOCK INCENTIVE PLAN. Under our Executive Long-Term Incentive Compensation Plan,
share-based  awards may be issued to  employees  via a broad  range of  methods,
including  non-qualified  and  incentive  stock  options,   performance  shares,
performance units, restricted stock, stock appreciation rights and other awards.
There are 3.2 million  shares of common stock  reserved  for issuance  under the
plan,  with 1.6 million of these  shares  available  for issuance as of June 30,
2006. We currently have the following types of share-based awards outstanding:

     NON-QUALIFIED  STOCK OPTIONS.  The options allow for the purchase of shares
     of common stock at a price equal to the common  stock's market value at the
     date of grant.  Options  become  exercisable  beginning  one year after the
     grant date, with one-third vesting each year over three years.  Options may
     be exercised up to ten years  following  the date of grant.  In the case of
     qualified retirement, death or disability, options vest immediately and the
     period over which the options can be exercised is shortened. Employees have
     up to three months to exercise vested options upon voluntary termination or
     involuntary  termination  without  cause.  All options are  cancelled  upon
     termination  for  cause.  All  options  vest  immediately  upon a change of
     control, as defined in the award agreement.  We determine the fair value of
     options using the  Black-Scholes  option pricing model.  The estimated fair
     value of  options,  including  the  effect  of  estimated  forfeitures,  is
     recognized as expense on the straight-line  basis over the options' vesting
     periods.

7                     ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     The following  assumptions were used in determining the fair value of stock
     options   granted   during  the  first  six  months  of  2006,   under  the
     Black-Scholes option-pricing model:

<TABLE>
<CAPTION>
                                                     2006
--------------------------------------------------------------------------------
<S>                                                <C>
     Risk-Free Interest Rate                          4.5%
     Expected Life                                 5 Years
     Expected Volatility                               20%
     Dividend Growth Rate                               5%
--------------------------------------------------------------------------------
</TABLE>

     The risk-free  interest rate for periods within the contractual life of the
     option  is based on the U.S.  Treasury  yield  curve in effect at the grant
     date.  Expected volatility is based on the historic volatility of our stock
     and the stock of our peer group  companies.  We utilize  historical  option
     exercise  and  employee  termination  data to  estimate  the  option  life.
     Dividend  growth rate is based upon historic  growth rates in our dividends
     and the dividends of our peer group companies.

     PERFORMANCE  SHARES.  Under these  awards,  the number of shares  earned is
     contingent upon attaining  specific  performance  targets over a three-year
     performance  period.  In  the  case  of  qualified  retirement,   death  or
     disability  during a performance  period,  a pro-rata  portion of the award
     will be earned at the  conclusion  of the  performance  period based on the
     performance  goals  achieved.  In the case of termination of employment for
     any reason other than qualified retirement,  death or disability,  no award
     will be earned. If there is a change in control,  a pro-rata portion of the
     award will be paid based on the  greater  of actual  performance  up to the
     date of the  change in  control  or target  performance.  The fair value of
     these awards is equal to the grant date fair value which is estimated based
     upon the assumed  share-based  payment  three years from the date of grant.
     Compensation  cost is recognized  over the  three-year  performance  period
     based on our  estimate of the number of shares  which will be earned by the
     award recipients.

EMPLOYEE  STOCK  PURCHASE PLAN (ESPP).  Under our ESPP,  eligible  employees may
purchase  ALLETE  common stock at a 5 percent  discount  from the market  price.
Because the discount is not greater than 5 percent,  we are not required by SFAS
123R to apply fair value accounting to these awards.

RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN (RSOP).  Shares held in our RSOP are
excluded from SFAS 123R and are  accounted  for in accordance  with the American
Institute  of  Certified  Public  Accountants'  Statement  of Position No. 93-6,
"Employers' Accounting for Employee Stock Ownership Plans."

The following  share-based  compensation  expense amounts were recognized in our
consolidated statement of income for the periods presented since our adoption of
FAS 123R.

<TABLE>
<CAPTION>
                                            QUARTER ENDED     SIX MONTHS ENDED
                                              JUNE 30,            JUNE 30,
SHARE-BASED COMPENSATION EXPENSE                2006                2006
--------------------------------------------------------------------------------
MILLIONS

<S>                                         <C>               <C>
Stock Options                                    $0.2               $0.4
Performance Shares                                0.3                0.5
--------------------------------------------------------------------------------

Total Share-Based Compensation Expense           $0.5               $0.9
--------------------------------------------------------------------------------

Income Tax Benefit                               $0.2               $0.4
--------------------------------------------------------------------------------
</TABLE>

There were no significant capitalized stock-based compensation costs at June 30,
2006.

As of June 30, 2006, the total  compensation  cost for nonvested  awards not yet
recognized in our statements of income was $2.2 million. This amount is expected
to be recognized over a weighted-average period of 1.3 years.

                      ALLETE Second Quarter 2006 Form 10-Q                     8

<PAGE>

NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following  table presents the pro forma effect of stock-based  compensation,
had we applied the  provisions  of SFAS 123 for the quarter and six months ended
June 30, 2005.

<TABLE>
<CAPTION>
                                                                     QUARTER ENDED              SIX MONTHS ENDED
PRO FORMA EFFECT OF SFAS 123                                           JUNE 30,                     JUNE 30,
ACCOUNTING FOR STOCK-BASED COMPENSATION                                  2005                         2005
-----------------------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS

<S>                                                                  <C>                        <C>
Net Loss
   As Reported                                                          $(40.3)                      $(22.9)
   Plus: Employee Stock Compensation Expense
         Included in Net Loss - Net of Tax                                 0.3                          0.6
   Less: Employee Stock Compensation Expense
         Determined Under SFAS 123 - Net of Tax                            0.3                          0.7
-----------------------------------------------------------------------------------------------------------------------------

   Pro Forma Net Loss                                                   $(40.3)                      $(23.0)
-----------------------------------------------------------------------------------------------------------------------------

Basic Loss Per Share
     As Reported                                                        $(1.48)                      $(0.84)
     Pro Forma                                                          $(1.48)                      $(0.85)

Diluted Loss Per Share
     As Reported                                                        $(1.48)                      $(0.84)
     Pro Forma                                                          $(1.48)                      $(0.85)
-----------------------------------------------------------------------------------------------------------------------------
</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
------------------------------------------------------------------------------------------------------------------------

<S>                                                                                                 <C>
Risk-Free Interest Rate                                                                                3.7%
Expected Life                                                                                       5 Years
Expected Volatility                                                                                     20%
Dividend Growth Rate                                                                                     5%
------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table presents information regarding our outstanding stock options
for the six months ended June 30, 2006.

<TABLE>
<CAPTION>
                                                                                                 WEIGHTED-AVERAGE
                                                       WEIGHTED-AVERAGE         AGGREGATE            REMAINING
                                        NUMBER OF          EXERCISE             INTRINSIC           CONTRACTUAL
                                         SHARES              PRICE                VALUE                TERM
------------------------------------------------------------------------------------------------------------------------
                                                                                MILLIONS

<S>                                     <C>            <C>                      <C>              <C>
Outstanding at December 31, 2005          357,827           $34.29                 $3.5              7.4 years
Granted                                   115,653           $44.15
Exercised                                 (20,966)          $25.81
Forfeited or Expired                       (6,233)          $38.25
------------------------------------------------------------------------------------------------------------------------

Outstanding at June 30, 2006              446,281           $37.19                 $4.5              7.7 years
------------------------------------------------------------------------------------------------------------------------

Exercisable at June 30, 2006              225,618           $32.16                 $3.4              6.4 years
------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  weighted-average  grant-date  fair value of  options  was $6.49 for the six
months ended June 30, 2006.  The intrinsic  value of a stock award is the amount
by which the fair value of the  underlying  stock exceeds the exercise  price of
the award.  The total  intrinsic  value of options  exercised  was $0.4  million
during the six months ended June 30, 2006.

9                     ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 1.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The following table presents  information  regarding our  nonvested  performance
shares for the six months ended June 30, 2006.
<TABLE>
<CAPTION>
                                                                                                 WEIGHTED-AVERAGE
                                                                                NUMBER OF           GRANT DATE
                                                                                 SHARES             FAIR VALUE
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                             <C>              <C>
Nonvested at December 31, 2005                                                   97,884               $38.63
Granted                                                                          25,752               $44.00
Awarded                                                                         (49,076)              $37.76
Forfeited                                                                        (1,785)              $39.53
-----------------------------------------------------------------------------------------------------------------------------

Nonvested at June 30, 2006                                                       72,775               $41.10
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

NEW ACCOUNTING  STANDARDS.  FSP INTERPRETATION  NO. 46(R)-6.  In April 2006, the
FASB  issued  Staff  Position  Interpretation  No.  46(R)-6,   "Determining  the
Variability to Be Considered in Applying FASB  Interpretation  No. 46(R)," which
addresses how an enterprise should determine the variability to be considered in
applying  FASB  Interpretation  No.  46,  "Consolidation  of  Variable  Interest
Entities." The  variability  that is considered in applying  Interpretation  No.
46(R)  affects  the  determination  of:  (a)  whether  the  entity is a variable
interest entity (VIE); (b) which interests are variable interests in the entity;
and (c) which party,  if any, is the primary  beneficiary  of the VIE.  This FSP
provides a guide for the  qualitative  analysis  of the design of the entity and
clarifying  guidance to assist in  determining  the  variability  to consider in
applying  Interpretation  No. 46(R),  determining  which  interests are variable
interests, and ultimately determining which variable interest holder, if any, is
the primary beneficiary.

FSP  Interpretation  No. 46(R)-6 is applied  prospectively  to all entities with
which the Company first becomes involved and to all entities previously required
to be analyzed under  Interpretation No. 46(R) when a reconsideration  event has
occurred, effective as of the first day of the first reporting period after June
15,  2006.  We do not  expect  this FSP to have a  material  impact on  existing
contracts. We will evaluate the impact of this new guidance on any new contracts
or any  changes to  existing  contracts  executed  after the  effective  date to
determine applicability of this FSP.

INTERPRETATION  NO. 48. In June 2006,  the FASB  issued  Interpretation  No. 48,
"Accounting  for  Uncertainty  in  Income  Taxes  - an  interpretation  of  FASB
Statement No. 109." Interpretation No. 48 clarifies the accounting for uncertain
tax positions in accordance  with SFAS 109,  "Accounting  for Income Taxes." The
Company will be required to recognize in its  financial  statements  the largest
tax benefit of a tax position that is  "more-likely-than-not" to be sustained on
audit based solely on the  technical  merits of the position as of the reporting
date.  The  term  "more-likely-than-not"  means a  likelihood  of  more  than 50
percent.  Interpretation  No.  48  also  provides  guidance  on  new  disclosure
requirements,  reporting  and accrual of interest and  penalties,  accounting in
interim  periods and  transition.  Interpretation  No. 48 is effective as of the
beginning of the first fiscal year after December 15, 2006,  which will be as of
January 1, 2007, for  calendar-year  companies. Only tax positions that meet the
"more-likely-than-not"  threshold at that date may be recognized. The cumulative
effect of  initially  applying  Interpretation  No. 48 will be  recognized  as a
change  in  accounting   principle  as  of  the  end  of  the  period  in  which
Interpretation  No. 48 is adopted.  The Company has begun an  evaluation  of the
impact of applying this  interpretation as of January 1, 2007, which will be the
effective  date  of  the  interpretation  for  the  Company.  We do  not  expect
Interpretation No. 48 to have a material impact on our financial position,
results of operation or cash flows.

                      ALLETE Second Quarter 2006 Form 10-Q                    10

<PAGE>

NOTE 2.    BUSINESS SEGMENTS

Financial  results by segment for the  periods  presented  were  impacted by the
integration of our Taconite Harbor  facility into the Regulated  Utility segment
effective  January  1,  2006.  The  redirection  of  Taconite  Harbor  from  our
Nonregulated  Energy Operations  segment to our Regulated Utility segment was in
accordance with the Company's  Resource Plan, as approved by the MPUC. Under the
terms of our Resource Plan, we have operated the Taconite  Harbor  facility as a
rate-based asset within the Minnesota retail  jurisdiction  effective January 1,
2006.  Prior to January 1, 2006,  we operated  our Taconite  Harbor  facility as
nonregulated  generation  (non-rate base generation  sold at market-based  rates
primarily to the wholesale  market).  Historical  financial  results of Taconite
Harbor for periods  prior to the  redirection  are included in our  Nonregulated
Energy Operations segment.

<TABLE>
<CAPTION>
                                                                              ENERGY
                                                                    ----------------------------
                                                                                  NONREGULATED
                                                                    REGULATED        ENERGY         REAL
                                                   CONSOLIDATED      UTILITY       OPERATIONS      ESTATE        OTHER
--------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                <C>              <C>           <C>              <C>           <C>
FOR THE QUARTER ENDED JUNE 30, 2006

Operating Revenue                                       $178.3        $146.5           $16.5        $15.2         $ 0.1
Fuel and Purchased Power                                  63.0          63.0               -            -             -
Operating and Maintenance                                 76.8          57.2            14.1          4.9           0.6
Depreciation Expense                                      12.2          11.1             1.0            -           0.1
--------------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
  Continuing Operations                                   26.3          15.2             1.4         10.3          (0.6)
Interest Expense                                          (6.4)         (4.9)           (0.5)           -          (1.0)
Other Income                                               3.4           0.5               -            -           2.9
--------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations
    Before Minority Interest and Income Taxes             23.3          10.8             0.9         10.3           1.3
Minority Interest                                          0.8             -               -          0.8             -
--------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations
    Before Income Taxes                                   22.5          10.8             0.9          9.5           1.3
Income Tax Expense                                         8.9           4.0               -          3.9           1.0
--------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations                         13.6        $  6.8            $0.9        $ 5.6         $ 0.3
                                                                    ------------------------------------------------------

Loss from Discontinued Operations - Net of Tax            (0.4)
----------------------------------------------------------------

Net Income                                              $ 13.2
----------------------------------------------------------------


FOR THE QUARTER ENDED JUNE 30, 2005

Operating Revenue                                       $174.4        $137.8           $26.5        $10.0         $ 0.1
Fuel and Purchased Power                                  68.9          63.2             5.7            -             -
Operating and Maintenance                                 71.7          47.9            17.6          5.0           1.2
Kendall County Charge                                     77.9             -            77.9            -             -
Depreciation Expense                                      11.9           9.8             2.1            -             -
--------------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing Operations       (56.0)         16.9           (76.8)         5.0          (1.1)
Interest Expense                                          (6.7)         (4.4)           (1.6)        (0.2)         (0.5)
Other Income                                               1.5           0.4               -            -           1.1
--------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Minority Interest and Income Taxes            (61.2)         12.9           (78.4)         4.8          (0.5)
Minority Interest                                          0.2             -               -          0.2             -
--------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Income Taxes                                  (61.4)         12.9           (78.4)         4.6          (0.5)
Income Tax Expense (Benefit)                             (21.6)          5.1           (27.9)         1.8          (0.6)
--------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations                 (39.8)       $  7.8          $(50.5)       $ 2.8         $ 0.1
                                                                    ------------------------------------------------------

Loss from Discontinued Operations - Net of Tax            (0.5)
----------------------------------------------------------------

Net Loss                                                $(40.3)
----------------------------------------------------------------
</TABLE>

11                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 2.    BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
                                                                               ENERGY
                                                                    ----------------------------
                                                                                  NONREGULATED
                                                                    REGULATED        ENERGY         REAL
                                                   CONSOLIDATED      UTILITY       OPERATIONS      ESTATE        OTHER
--------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                <C>              <C>           <C>              <C>          <C>
FOR THE SIX MONTHS ENDED JUNE 30, 2006

Operating Revenue                                      $370.8        $308.9           $32.8        $28.9         $ 0.2
Fuel and Purchased Power                                132.4         132.4               -            -             -
Operating and Maintenance                               151.3         113.0            28.2          8.3           1.8
Depreciation Expense                                     24.4          22.2             2.1            -           0.1
--------------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing Operations       62.7          41.3             2.5         20.6          (1.7)
Interest Expense                                        (12.8)        (10.0)           (1.0)           -          (1.8)
Other Income                                              5.1           0.5             0.3            -           4.3
--------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations
    Before Minority Interest and Income Taxes            55.0          31.8             1.8         20.6           0.8
Minority Interest                                         2.1             -               -          2.1             -
--------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations
    Before Income Taxes                                  52.9          31.8             1.8         18.5           0.8
Income Tax Expense                                       20.5          12.0               -          7.9           0.6
--------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations                        32.4        $ 19.8           $ 1.8        $10.6         $ 0.2
                                                                    ------------------------------------------------------

Loss from Discontinued Operations - Net of Tax           (0.4)
--------------------------------------------------------------------

Net Income                                             $ 32.0
--------------------------------------------------------------------

AT JUNE 30, 2006

Total Assets                                         $1,386.1        $995.0          $104.6        $72.4        $214.1
Property, Plant and Equipment - Net                    $871.6        $813.6           $53.2            -          $4.8
Accumulated Depreciation                               $807.4        $769.4           $36.4            -          $1.6
Capital Expenditures                                    $35.3         $34.5            $0.8            -             -


FOR THE SIX MONTHS ENDED JUNE 30, 2005

Operating Revenue                                      $367.7        $285.4          $ 54.4        $27.7         $ 0.2
Fuel and Purchased Power                                136.5         123.2            13.3            -             -
Operating and Maintenance                               144.4         100.5            32.7          9.5           1.7
Kendall County Charge                                    77.9             -            77.9            -             -
Depreciation Expense                                     23.8          19.6             4.1            -           0.1
--------------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from Continuing Operations      (14.9)         42.1           (73.6)        18.2          (1.6)
Interest Expense                                        (13.5)         (8.7)           (2.9)        (0.2)         (1.7)
Other Income (Expense)                                   (2.7)          0.4             0.2            -          (3.3)
--------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Minority Interest and Income Taxes           (31.1)         33.8           (76.3)        18.0          (6.6)
Minority Interest                                         1.4             -               -          1.4             -
--------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations
    Before Income Taxes                                 (32.5)         33.8           (76.3)        16.6          (6.6)
Income Tax Expense (Benefit)                            (10.1)         13.1           (27.4)         6.9          (2.7)
--------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations                (22.4)       $ 20.7          $(48.9)       $ 9.7         $(3.9)
                                                                    ------------------------------------------------------

Loss from Discontinued Operations - Net of Tax           (0.5)
--------------------------------------------------------------------

Net Loss                                               $(22.9)
--------------------------------------------------------------------

AT JUNE 30, 2005

Total Assets                                         $1,353.4 <F1>   $899.4          $178.6        $75.7        $150.2
Property, Plant and Equipment - Net                    $849.3        $728.8          $115.5            -          $5.0
Accumulated Depreciation                               $778.6        $733.6           $43.5            -          $1.5
Capital Expenditures                                    $24.2 <F1>    $20.7            $1.9            -             -

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

<FN>
<F1>  Discontinued Operations represented $49.5 million of total assets and $1.6 million of capital expenditures in 2005.
</FN>
</TABLE>

                      ALLETE Second Quarter 2006 Form 10-Q                    12

<PAGE>

NOTE 3.    INVESTMENTS

SHORT-TERM  INVESTMENTS.  At June 30, 2006 and December 31, 2005, we held $120.4
million and $116.9 million, respectively, of short-term investments,  consisting
of  auction  rate  bonds  and  variable   rate  demand   notes   classified   as
available-for-sale  securities. Our investments in these securities are recorded
at fair market value which equates to cost because the variable  interest  rates
for these securities  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.

LONG-TERM  INVESTMENTS.  At June 30, 2006,  Investments included the real estate
assets of ALLETE  Properties,  our investment in ATC, debt and equity securities
consisting  primarily of  securities  held to fund  employee  benefits,  and our
emerging technology investments.

<TABLE>
<CAPTION>
                                                                            JUNE 30,                 DECEMBER 31,
INVESTMENTS                                                                   2006                       2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                         <C>                      <C>
Real Estate Assets                                                           $ 72.4                     $ 73.7
Debt and Equity Securities                                                     34.9                       34.8
Investment in ATC                                                              11.5                          -
Emerging Technology Investments                                                 9.0                        9.2
------------------------------------------------------------------------------------------------------------------------

Total Investments                                                            $127.8                     $117.7
------------------------------------------------------------------------------------------------------------------------
</TABLE>


<TABLE>
<CAPTION>
                                                                        SIX MONTHS ENDED              YEAR ENDED
                                                                            JUNE 30,                 DECEMBER 31,
REAL ESTATE ASSETS                                                            2006                       2005
------------------------------------------------------------------------------------------------------------------------

MILLIONS

<S>                                                                     <C>                          <C>
Land Held for Sale Beginning Balance                                          $48.0                      $47.2
    Additions during period: Capitalized Improvements                           6.1                        9.4
    Deductions during period: Cost of Real Estate Sold                         (4.6)                      (8.6)
------------------------------------------------------------------------------------------------------------------------

Land Held for Sale Ending Balance                                              49.5                       48.0
Long-Term Finance Receivables                                                   7.5                        7.4
Other <F1>                                                                     15.4                       18.3
------------------------------------------------------------------------------------------------------------------------

Total Real Estate Assets                                                      $72.4                      $73.7
------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Consisted primarily of a shopping center.
</FN>
</TABLE>


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 $0.4
million at June 30, 2006 ($0.6 million at December 31, 2005).


NOTE 4.    SHORT-TERM AND LONG-TERM DEBT

In January  2006, we renewed,  increased  and extended a committed,  syndicated,
unsecured   revolving   credit   facility  (Line)  with  LaSalle  Bank  National
Association, as Agent, for $150 million ($100 million at December 31, 2005). The
Line  matures on January 11,  2011,  and  requires an annual  commitment  fee of
0.125%.  At our  request  and  subject  to certain  conditions,  the Line may be
increased to $200 million and extended for two additional 12-month periods.  The
Line may be used for general corporate purposes,  working capital and to provide
liquidity in support of our  commercial  paper  program.  We may prepay  amounts
outstanding under the Line in whole or in part at our discretion without premium
or penalty. Additionally, we may irrevocably terminate or reduce the size of the
Line prior to maturity  without  premium or  penalty.  No funds were drawn under
this Line at June 30, 2006.

In March  2006,  we issued $50  million in  principal  amount of First  Mortgage
Bonds, 5.69% Series due March 1, 2036.  Proceeds were used to redeem $50 million
in principal amount of First Mortgage Bonds, 7% Series due March 1, 2008.

13                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 4.  SHORT-TERM AND LONG-TERM DEBT (CONTINUED)

On July 5, 2006,  the Collier County  Industrial  Development  Authority  issued
$27.8 million of Industrial  Development  Variable Rate Demand Refunding Revenue
Bonds Series 2006 due 2025 (Refunding Bonds) on behalf of ALLETE.  Proceeds from
the Refunding Bonds and internally  generated funds will be used to redeem $29.1
million of outstanding Collier County Industrial  Development  Refunding Revenue
Bonds  6.5%  Series  1996  due 2025  which  were  called  on July 5,  2006,  for
redemption on August 9, 2006.  As a result of an early  redemption  premium,  we
will  recognize a $0.6 million  charge to other  expense in the third quarter of
2006.


NOTE 5.    COMMON STOCK

SHAREHOLDER  RIGHTS PLAN.  In 1996, we adopted a rights plan that provides for a
dividend  distribution  of one  preferred  share  purchase  right  (Right) to be
attached to each share of common stock. In July 2006, we amended the rights plan
to extend the  expiration  of the Rights to July 11, 2009.  The  amendment  also
provides that the Company may not consolidate,  merge, or sell a majority of its
assets or earning power if doing so would be counter to the intended benefits of
the Rights or would result in the  distribution of Rights to the shareholders of
the other parties to the transaction.  Finally,  the amendment  provides for the
creation of a committee of  independent  directors to annually  review the terms
and conditions of the amended rights plan (Rights Plan),  as well as to consider
whether  termination  or  modification  of the Rights  Plan would be in the best
interests of the shareholders and to make a recommendation  based on such review
to the Board of Directors.

The Rights,  which are currently not exercisable or transferable  apart from our
common  stock,  entitle  the holder to  purchase  one-and-a-half  one-hundredths
(three  two-hundredths)  of a share of ALLETE's Junior Serial Preferred Stock A,
without par value. The purchase price, as defined in the Rights Plan, remains at
$90.  These  Rights  would  become  exercisable  if a person  or group  acquires
beneficial  ownership  of 15 percent or more of our common  stock or announces a
tender offer which would increase the person's or group's  beneficial  ownership
interest  to 15  percent  or  more  of our  common  stock,  subject  to  certain
exceptions.  If the 15 percent  threshold is met, each Right entitles the holder
(other  than the  acquiring  person or group) to  receive,  upon  payment of the
purchase  price,   the  number  of  shares  of  common  stock  (or,  in  certain
circumstances, cash, property or other securities of ours) having a market value
equal to twice the exercise  price of the Right.  If we are acquired in a merger
or business  combination,  or 50 percent or more of our assets or earning  power
are sold, each exercisable Right entitles the holder to receive, upon payment of
the purchase  price,  the number of shares of common  stock of the  acquiring or
surviving company having a value equal to twice the exercise price of the Right.
Certain stock acquisitions will also trigger a provision permitting the Board of
Directors to exchange each Right for one share of our common stock.

The  Rights are  nonvoting  and may be  redeemed  by us at a price of $0.005 per
Right at any time they are not exercisable.  One million shares of Junior Serial
Preferred  Stock A have been  authorized and are reserved for issuance under the
Rights Plan.


NOTE 6.    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  that  remains 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
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.

                      ALLETE Second Quarter 2006 Form 10-Q                    14

<PAGE>

NOTE 7.    OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
                                                                     QUARTER ENDED              SIX MONTHS ENDED
                                                                       JUNE 30,                     JUNE 30,
                                                                   2006         2005           2006        2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                <C>          <C>            <C>        <C>
Gain (Loss) on Emerging Technology Investments                        -         $0.1           $(1.2)     $(5.8)
Investment and Other Income                                        $3.4          1.4             6.3        3.1
------------------------------------------------------------------------------------------------------------------------

Total Other Income (Expense)                                       $3.4         $1.5           $ 5.1      $(2.7)
------------------------------------------------------------------------------------------------------------------------
</TABLE>



NOTE 8.    INCOME TAX EXPENSE
<TABLE>
<CAPTION>
                                                                     QUARTER ENDED             SIX MONTHS ENDED
                                                                       JUNE 30,                    JUNE 30,
                                                                   2006         2005          2006         2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                               <C>         <C>             <C>          <C>
Current Tax Expense
     Federal                                                      $ 9.6        $ 7.4 <F1>     $20.4         $19.5 <F1>
     State                                                          2.3          1.4 <F1>       4.8           4.5 <F1>
------------------------------------------------------------------------------------------------------------------------

                                                                   11.9          8.8           25.2          24.0
------------------------------------------------------------------------------------------------------------------------

Deferred Tax Benefit
     Federal                                                       (1.9)       (29.5) <F1>     (3.5)        (32.6) <F1>
     State                                                         (0.7)        (0.5)          (0.5)         (0.8)
------------------------------------------------------------------------------------------------------------------------

                                                                   (2.6)       (30.0)          (4.0)        (33.4)
------------------------------------------------------------------------------------------------------------------------

Deferred Tax Credits                                               (0.4)        (0.4)          (0.7)         (0.7)
------------------------------------------------------------------------------------------------------------------------

Income Tax Expense (Benefit) from Continuing Operations             8.9        (21.6)          20.5         (10.1)
Income Tax Benefit from Discontinued Operations                    (0.3)        (0.1)          (0.3)            -
------------------------------------------------------------------------------------------------------------------------

Total Income Tax Expense (Benefit)                                $ 8.6       $(21.7)         $20.2        $(10.1)
------------------------------------------------------------------------------------------------------------------------

<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 6.)
</FN>
</TABLE>

For the six months ended June 30, 2006,  the effective rate for income taxes was
37.3 percent (32.5 percent benefit for the six months ended June 30, 2005).  The
increase in the effective  rate over last year was primarily due to the emerging
technology  impairment  and the Kendall  County  capital loss  recorded in April
2005. The current  benefit for these items was limited to the federal benefit as
the state net capital loss carryforwards  from 2005 are entirely  reserved.  The
effective  rate of 37.3 percent for the six months ended June 30, 2006, was less
than the  statutory  rate  primarily  because of  investment  tax  credits,  and
deductions for Medicare health subsidies and depletion.

15                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 9.    DISCONTINUED OPERATIONS

ENVENTIS  TELECOM.  On  December  30,  2005,  we  sold  all  the  stock  of  our
telecommunications subsidiary,  Enventis Telecom, to Hickory Tech Corporation of
Mankato,  Minnesota. In accordance with SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," we reported our  telecommunications  business
in discontinued operations for the quarter and six months ended June 30, 2005.

WATER  SERVICES.  In early 2005, we completed  the exit from our Water  Services
businesses with the sale of our wastewater assets in Georgia,  which resulted in
an immaterial gain. In 2005, the Florida Public Service Commission  approved the
transfer of 63 water and wastewater systems from Florida Water to Aqua Utilities
Florida,  Inc. (Aqua  Utilities)  and ordered a $1.7 million  reduction to plant
investment.  The Company  reserved for the reduction in 2005. On March 15, 2006,
the Company paid Aqua Utilities the adjustment refund amount of $1.7 million.

For the quarter and six months ended June 30, 2006,  financial results reflected
additional  legal  and  administrative  expenses  to  exit  the  Water  Services
businesses.
<TABLE>
<CAPTION>
                                                                      QUARTER ENDED            SIX MONTHS ENDED
DISCONTINUED OPERATIONS                                                  JUNE 30,                  JUNE 30,
SUMMARY INCOME STATEMENT                                              2006      2005           2006      2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                  <C>        <C>          <C>        <C>
Operating Revenue - Enventis Telecom                                     -      $12.4             -     $26.1
------------------------------------------------------------------------------------------------------------------------


Pre-Tax Income from Operations
     Enventis Telecom                                                    -      $ 0.4             -     $ 1.5

Income Tax Expense
     Enventis Telecom                                                    -        0.1             -       0.6
------------------------------------------------------------------------------------------------------------------------

         Total Income from Operations                                    -        0.3             -       0.9
------------------------------------------------------------------------------------------------------------------------


Loss on Disposal
     Water Services                                                  $(0.7)      (0.8)        $(0.7)     (1.8)
     Enventis Telecom                                                    -       (0.2)            -      (0.2)
------------------------------------------------------------------------------------------------------------------------

                                                                      (0.7)      (1.0)         (0.7)     (2.0)
------------------------------------------------------------------------------------------------------------------------

Income Tax Benefit
     Water Services                                                   (0.3)      (0.1)         (0.3)     (0.5)
     Enventis Telecom                                                    -       (0.1)            -      (0.1)
------------------------------------------------------------------------------------------------------------------------

                                                                      (0.3)      (0.2)         (0.3)     (0.6)
------------------------------------------------------------------------------------------------------------------------

         Net Loss on Disposal                                         (0.4)      (0.8)         (0.4)     (1.4)
------------------------------------------------------------------------------------------------------------------------

Loss from Discontinued Operations                                    $(0.4)     $(0.5)        $(0.4)    $(0.5)
------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS                                                             DECEMBER 31,
SUMMARY BALANCE SHEET INFORMATION                                                       2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                                 <C>
Assets of Discontinued Operations
     Other Current Assets                                                               $0.4
     Property, Plant and Equipment                                                      $2.2

Liabilities of Discontinued Operations
     Current Liabilities                                                               $13.0
------------------------------------------------------------------------------------------------------------------------
</TABLE>


                      ALLETE Second Quarter 2006 Form 10-Q                    16

<PAGE>

NOTE 10.      COMPREHENSIVE INCOME (LOSS)

For the quarter ended June 30, 2006, total  comprehensive  income (loss), net of
tax, was  comprehensive  income of $13.2 million (a $40.4 million  comprehensive
loss, net of tax, for the quarter ended June 30, 2005). For the six months ended
June 30, 2006, total comprehensive  income (loss), net of tax, was comprehensive
income of $32.3 million (a $22.9 million comprehensive loss, net of tax, for the
six months ended June 30, 2005). 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                                                          JUNE 30,
INCOME (LOSS) - NET OF TAX                                                    2006                       2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                          <C>                        <C>
Unrealized Gain on Securities                                                $  2.4                     $  1.5
Additional Pension Liability                                                  (14.9)                     (12.9)
------------------------------------------------------------------------------------------------------------------------

                                                                             $(12.5)                    $(11.4)
------------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 11.     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 quarter and six months ended June
30, 2006,  no options to purchase  shares of common  stock were  excluded in the
computation of diluted earnings per share because the average market prices were
greater  than  the  option  exercise  prices.  In  2005,  0.1  million  dilutive
securities  were  excluded  in the  computation  of diluted  earnings  per share
because  their  effect  would  have  been  anti-dilutive  due to our  loss  from
continuing  operations  for the quarter ended June 30, 2005 (0.2 million for the
six months ended June 30, 2005).

<TABLE>
<CAPTION>
                                                            2006                                2005
                                               -------------------------------------------------------------------------
RECONCILIATION OF BASIC AND DILUTED                       DILUTIVE                            DILUTIVE
EARNINGS PER SHARE                               BASIC   SECURITIES    DILUTED       BASIC   SECURITIES    DILUTED
------------------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS

FOR THE QUARTER ENDED JUNE 30,

<S>                                              <C>      <C>          <C>          <C>      <C>          <C>
Income (Loss) from Continuing Operations         $13.6         -        $13.6       $(39.8)       -       $(39.8)
Common Shares                                     27.7       0.2         27.9         27.2        -         27.2
Per Share from Continuing Operations             $0.50         -        $0.49       $(1.46)       -       $(1.46)
------------------------------------------------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30,

Income (Loss) from Continuing Operations         $32.4         -        $32.4       $(22.4)       -       $(22.4)
Common Shares                                     27.6       0.2         27.8         27.2        -         27.2
Per Share from Continuing Operations             $1.18         -        $1.17       $(0.82)       -       $(0.82)
------------------------------------------------------------------------------------------------------------------------
</TABLE>


17                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 12.     PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
<TABLE>
<CAPTION>
                                                                                               POSTRETIREMENT
                                                                  PENSION                      HEALTH AND LIFE
------------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT EXPENSE                 2006             2005             2006            2005
------------------------------------------------------------------------------------------------------------------------
MILLIONS

FOR THE QUARTER ENDED JUNE 30,
<S>                                                       <C>              <C>              <C>              <C>
Service Cost                                               $2.3             $2.2            $1.1             $1.0
Interest Cost                                               5.6              5.3             1.8              1.6
Expected Return on Plan Assets                             (7.2)            (7.1)           (1.4)            (1.2)
Amortization of Prior Service Costs                         0.2              0.2               -                -
Amortization of Net Loss                                    1.2              0.8             0.5              0.2
Amortization of Transition Obligation                      (0.1)               -             0.6              0.7
------------------------------------------------------------------------------------------------------------------------

Net Periodic Benefit Expense                               $2.0             $1.4            $2.6             $2.3
------------------------------------------------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30,

Service Cost                                               $4.6             $4.4            $2.2             $2.0
Interest Cost                                              11.1             10.6             3.7              3.3
Expected Return on Plan Assets                            (14.3)           (14.2)           (2.8)            (2.4)
Amortization of Prior Service Costs                         0.4              0.4               -                -
Amortization of Net Loss                                    2.4              1.6             0.9              0.4
Amortization of Transition Obligation                      (0.1)             0.1             1.2              1.3
------------------------------------------------------------------------------------------------------------------------

Net Periodic Benefit Expense                               $4.1             $2.9            $5.2             $4.6
------------------------------------------------------------------------------------------------------------------------
</TABLE>

In 2005,  we  determined  that our  postretirement  health  care  plans meet the
requirements   of  the  Centers  for  Medicare  and  Medicaid   Services'  (CMS)
regulations,  and enrolled  with the CMS to begin  recovering  the  subsidy.  We
expect to receive the first  subsidy  check in early 2007 for 2006  credits.

In July 2006,  we made an $8.3 million  contribution  to the  Company's  defined
benefit plan.

                      ALLETE Second Quarter 2006 Form 10-Q                    18

<PAGE>

NOTE 13.     COMMITMENTS, GUARANTEES AND CONTINGENCIES

OFF-BALANCE SHEET ARRANGEMENTS. 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 was entitled to  approximately  71 percent of the Unit's output
under the Agreement.  Beginning in 2006,  Minnkota Power exercised its option to
reduce Minnesota Power's entitlement by approximately 5 percent annually,  to 66
percent.  We received  notices from Minnkota Power that they will further reduce
our output  entitlement by  approximately 5 percent on January 1, 2007 and 2008,
to 60 percent and 55  percent,  respectively.  Minnkota  Power has the option to
reduce Minnesota Power's entitlement to 50 percent. 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 June 30,  2006,  Square  Butte had  total  debt
outstanding  of $304.6  million.  Total  annual debt service for Square Butte is
expected to be approximately $26 million in each of the years 2006 through 2010.
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.  BNI Coal is obligated to make lease payments for a dragline
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 operating leases is $6.4
million in 2006,  $5.9 million in 2007,  $5.2  million in 2008,  $4.7 million in
2009, $4.2 million in 2010 and $46.9 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  2006 to December  2011.  Our
minimum  annual  payment   obligations  under  these  coal,  rail  and  shipping
agreements  are  currently  $45.2  million in 2006,  $9.5 million in 2007,  $9.7
million in 2008, $5.8 million in 2009 and no specific  commitments  beyond 2009.
Our minimum annual payment obligations will increase when annual nominations are
made for coal deliveries in future years.

FUEL CLAUSE RECOVERY OF MISO DAY 2 COSTS.  Minnesota Power filed a petition with
the MPUC in  February  2005 to amend its fuel  clause to  accommodate  costs and
revenue  related  to the MISO Day 2 energy  market,  the  market  through  which
Minnesota Power engages in wholesale energy transactions in MISO's day-ahead and
real-time  markets  (MISO Day 2). On April 7, 2005,  the MPUC  approved  interim
accounting  treatment of MISO Day 2 costs to be accounted for on a net basis and
recovered through the fuel clause, subject to refund with interest. This interim
treatment has continued while the MPUC has addressed the cost recovery petitions
from Xcel Energy Inc., Otter Tail Power Company,  Alliant Energy Corporation and
Minnesota Power.

On December 21, 2005, the MPUC issued an order which denied recovery through the
fuel  clause  of  uplift   charges,   congestion   revenue  and  expenses,   and
administrative  costs related to Minnesota Power's MISO Day 2 market activities.
Minnesota Power requested  rehearing of the order in a filing made with the MPUC
on January 10, 2006. The other three utilities  affected by the order also filed
for  rehearing,  as did the DOC and MISO. In a hearing on February 9, 2006,  the
MPUC  granted  rehearing  of the MISO  Day 2 docket  and  suspended  the  refund
obligation for charges  recovered through the fuel clause denied in the December
21, 2005 order.  The MPUC requested  that the affected  utilities and interested
parties  provide  a joint  recommendation  regarding  the  MISO  Day 2 costs  to
determine  which costs should be recovered on a current  basis  through the fuel
clause and which costs are more appropriately deferred for

19                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 13.     COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

potential   recovery   through  base  rates.  The  requested  joint  report  and
recommendations were filed with the MPUC on June 23, 2006. The Company is unable
to predict the outcome of this matter.

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 June 30, 2006,  and December 31, 2005.  We have
committed to make additional  investments in certain emerging technology venture
capital  funds.  The total future  commitment  was $2.5 million at June 30, 2006
($3.1  million at December  31,  2005),  and may be  invested  at various  times
through 2007.  We do not have plans to make any  additional  investments  beyond
this commitment.

INVESTMENT IN ATC. In December 2005, we entered into an agreement with Wisconsin
Public  Service  Corporation  and WPS  Investments,  LLC that  provides  for our
Wisconsin subsidiary,  Rainy River Energy Corporation - Wisconsin, to invest $60
million in ATC. Our  investment  is expected to represent an estimated 9 percent
ownership  interest in ATC. On May 4, 2006,  the PSCW  reviewed and approved the
request  that allows us to invest in ATC. As of June 30,  2006,  we had invested
$11.5 million in ATC and anticipate investing an additional $48.5 million by the
end of 2006.

ENVIRONMENTAL MATTERS. Our businesses are subject to regulation of environmental
matters by various federal, state and local authorities.  Due to future stricter
environmental  requirements through legislation and/or rulemaking, we anticipate
that potential  expenditures for environmental matters will be material and will
require significant capital investments.  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 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.  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  March and April  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.  Site work for this
phase of the  investigation  was performed during October 2004, and a report was
sent to the WDNR in March 2005.  Additional  site  investigation  was  performed
during September and October 2005. The  investigation  will continue through the
summer of 2006. It is anticipated  that the final report for this portion of the
investigation will be completed by the end of 2006.  Although it is not possible
to quantify the potential clean-up cost until the investigation is completed,  a
$0.5 million  liability was recorded in December 2003 to address the known areas
of  contamination.  The Company has 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  clean-up 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  at the time SWL&P filed their 2005
rate  request.  In May  2006,  SWL&P  filed  an  application  with  the PSCW for
authority to increase  retail  utility rates by an average of 5.2 percent.  This
filing   includes  a  request  to  recover  an   additional   $186,000  of  site
investigation  costs  that had been  incurred  through  2005.  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 the Company  continues to work with the insurer
to determine the availability of insurance coverage.

                      ALLETE Second Quarter 2006 Form 10-Q                    20

<PAGE>

NOTE 13.     COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

SQUARE BUTTE GENERATING FACILITY.  On April 24, 2006, Minnkota Power announced a
settlement  agreement  with  the EPA and the  State of  North  Dakota  regarding
emissions at the M.R. Young Station,  which includes the Square Butte generating
unit. 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. The EPA claimed 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 and
possible  significant  capital  expenditures  to  comply.  As a  result  of  the
settlement agreement,  the current Square Butte flue gas desulfurization  system
(FGD) will be  upgraded  in 2010 to  increase  its  removal  efficiency  from 70
percent to 90 percent,  and an  over-fire  air system will also be  installed in
2007 to reduce NOx  emissions.  Capital  expenditures  for the emission  control
additions and modifications on Square Butte are estimated at $35 million.  These
estimated  capital  expenditures  may be  significantly  offset  by the  sale of
surplus SO2  allowance  credits  created by the early upgrade of the FGD system,
which is being  upgraded two years  earlier than required by Federal  rules.  We
expect Square Butte will utilize debt to finance such capital expenditures.  Our
future  cost of  purchased  power from the Square  Butte  generating  unit would
include our pro rata share of this additional debt service. On April 24, 2006, a
Complaint and a Consent  Decree with respect to this  settlement  agreement were
filed in U.S.  District  Court for the  District of North  Dakota  (Court).  The
Consent  Decree was open to public  comment during which time one comment letter
was received from the Dakota  Resource  Council.  We believe the items raised in
the letter will not  compromise  the  agreement  and Minnkota  Power expects the
final order will be issued by the Court  constituting a final settlement of this
issue.  On July 25,  2006,  the EPA filed a motion with the Court to approve the
Consent Decree. When finalized, the Consent Decree settlement would also require
Square  Butte to pay  approximately  $0.6  million in  administrative  costs and
penalties in 2006, and $3.3 million  toward  additional  environmental  projects
including wind power installations or power purchase agreements. Minnesota Power
is  obligated  to pay its pro  rata  share  of  Square  Butte's  costs  based on
Minnesota  Power's  entitlement  to the output from the Square Butte  generating
unit.

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 and NOx in many states in the eastern United
States.  The CAIR  includes  Minnesota  as one of the 28 states it  considers an
"eastern"  state. The EPA also announced the final Clean Air Mercury Rule (CAMR)
that reduces and  permanently  caps electric  utility  mercury  emissions in the
continental  United  States.  The  CAIR  and  the  CAMR  regulations  have  been
challenged in the federal court system, which may delay implementation or modify
provisions.  Minnesota Power is  participating in a legal challenge to the CAIR,
but is not participating in the challenge of 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; or (3) use a combination of both.

We believe that the CAIR  contains  flaws in its  methodology  and  application,
which will cause Minnesota Power to incur higher compliance costs. Consequently,
on July 11,  2005,  Minnesota  Power  filed a Petition  for Review with the U.S.
Court of Appeals for the District of Columbia  Circuit  (Court of  Appeals).  On
November 22, 2005,  the EPA agreed to  reconsider  certain  aspects of the CAIR,
including the Minnesota  Power  petition  addressing  modeling used to determine
Minnesota's  inclusion in the CAIR region and our claims about inequities in the
SO2 allowance  methodology.  On March 15, 2006,  the EPA announced that it would
not  make  any  changes  to  the  CAIR  as  a  result  of  the   petitions   for
reconsideration.  Petitions  for Review  (including  Minnesota  Power's)  remain
pending at the Court of  Appeals.  If the  Petitions  for Review  filed with the
Court of Appeals  are  successful,  we expect to incur lower  compliance  costs,
consistent  with the rules  applicable  to those states  considered as "western"
states under the CAIR. Resolution of the CAIR Petition for Review with the Court
of Appeals is anticipated by mid-2007.

21                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NOTE 13.      COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

COMMUNITY DEVELOPMENT DISTRICT OBLIGATIONS. TOWN CENTER. In March 2005, the Town
Center  District  issued $26.4  million of  tax-exempt,  6% Capital  Improvement
Revenue  Bonds,  Series 2005,  due May 1, 2036.  The bonds were issued to fund a
portion of the Town Center development project. 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 imposed, levied and collected by
the Town Center District.  The assessments  represent an allocation of the costs
of the  improvements,  including bond financing  costs,  to the lands within the
Town Center District  benefiting from the improvements.  The assessments will be
included in the annual  property tax bills of  landowners  beginning in November
2006.  To the extent  that we still own land at the time of the  assessment,  in
accordance  with EITF  91-10,  we will  recognize  an  expense  for our pro rata
portion of assessments,  based upon our ownership of benefited property. At June
30, 2006, we owned  approximately  85 percent of the assessable land in the Town
Center District.

PALM COAST PARK. In May 2006,  the Palm Coast  District  issued $31.8 million of
tax-exempt,  5.7% Special  Assessment  Bonds,  Series 2006, due May 1, 2037. The
bonds were issued to fund a portion of the Palm Coast Park development  project.
Bond  proceeds  of  $26.3  million  will  be  used  for  the   construction   of
environmental,  traffic  mitigation and infrastructure  improvements,  including
utility  extensions,   roadways,   parks,  drainage,   recreational  facilities,
landscaping and a multi-purpose  trail system.  The remaining funds will be used
for capitalized interest, a debt service reserve fund and the costs of issuance.
The bonds are payable from and secured by the revenue  derived from  assessments
imposed,  levied and  collected  by the Palm  Coast  District.  The  assessments
represent  an  allocation  of the  costs  of the  improvements,  including  bond
financing costs, to the lands within the Palm Coast District benefiting from the
improvements.  The assessments will be included in the annual property tax bills
of  landowners  beginning  in 2007.  To the extent that we still own land at the
time of the  assessment,  in accordance  with EITF 91-10,  we will  recognize an
expense for our pro rata  portion of  assessments,  based upon our  ownership of
benefited  property.  At June 30, 2006, we owned all assessable land in the Palm
Coast District.

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  materially  change our
present liquidity position,  nor have a material adverse effect on our financial
condition.

                      ALLETE Second Quarter 2006 Form 10-Q                    22

<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.  Readers are
cautioned that forward-looking statements should be read in conjunction with our
disclosures in this Form 10-Q under the headings:  "Safe Harbor  Statement Under
the  Private  Securities  Litigation  Reform Act of 1995"  located on page 3 and
"Risk  Factors"  located  in Part I,  Item 1A of our 2005 Form 10-K and Part II,
Item  1A of our  Quarterly  Reports  on  Form  10-Q  for  2006.  The  risks  and
uncertainties  described  in this  Form  10-Q and our 2005 Form 10-K are not the
only risks facing our Company.  Additional risks and  uncertainties  that we are
not  presently  aware of, or that we  currently  consider  immaterial,  may also
affect our business operations. Our business,  financial condition or results of
operations could suffer if the concerns set forth are realized.

EXECUTIVE SUMMARY

ALLETE's  operations focus on two core  businesses - ENERGY  and REAL ESTATE. In
addition, we have other operations that provide earnings to the Company.

ENERGY is comprised of Regulated  Utility,  Nonregulated  Energy  Operations and
will include Investment in ATC.

   - 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 our coal mining activities in North
     Dakota,  approximately 50 MW of nonregulated  generation and Minnesota land
     sales.

     In  2005,   Nonregulated  Energy  Operations  also  included   nonregulated
     generation  (non-rate base generation sold at market-based  rates primarily
     to the  wholesale  market)  from our Taconite  Harbor  facility in northern
     Minnesota, and generation secured through the Kendall County power purchase
     agreement.  Effective January 1, 2006,  Taconite Harbor was integrated into
     our Regulated  Utility  business to help meet  forecasted  base load energy
     requirements.  In April 2005, the Kendall  County power purchase  agreement
     was assigned to Constellation Energy Commodities.

   - INVESTMENT IN ATC includes our ownership interest in ATC. In December 2005,
     we entered into an agreement  that provides for us to invest $60 million in
     ATC.  As of  June  30,  2006,  we had  invested  $11.5  million  in ATC and
     anticipate investing an additional $48.5 million by the end of 2006.

REAL ESTATE includes our Florida real estate operations.

OTHER includes our investments in emerging  technologies,  and earnings on cash,
cash equivalents and short-term investments.

Financial  results by segment for the periods  presented  and  discussed in this
Form 10-Q were impacted by the  integration of our Taconite Harbor facility into
the Regulated  Utility  segment  effective  January 1, 2006. The  redirection of
Taconite Harbor from our Nonregulated Energy Operations segment to our Regulated
Utility segment was in accordance with the Company's  Resource Plan, as approved
by the MPUC. Under the terms of our Resource Plan, we have operated the Taconite
Harbor facility as a rate-based asset within the Minnesota  retail  jurisdiction
effective  January 1, 2006.  Prior to January 1, 2006,  we operated our Taconite
Harbor  facility as nonregulated  generation.  Historical  financial  results of
Taconite  Harbor  for  periods  prior to the  redirection  are  included  in our
Nonregulated Energy Operations segment.

Financial results for the periods presented and discussed in this Form 10-Q were
also impacted by the assignment of our Kendall  County power purchase  agreement
to Constellation  Energy Commodities,  which was a key strategic  accomplishment
for the  Company.  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) in the second quarter of 2005 (Kendall County Charge).

23                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

EXECUTIVE SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
                                                              QUARTER ENDED            SIX MONTHS ENDED
                                                                 JUNE 30,                  JUNE 30,
                                                            2006         2005         2006         2005
-------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS
<S>                                                        <C>          <C>          <C>          <C>
Operating Revenue
     Regulated Utility                                     $146.5       $137.8       $308.9       $285.4
     Nonregulated Energy Operations                          16.5         26.5         32.8         54.4
     Real Estate                                             15.2         10.0         28.9         27.7
     Other                                                    0.1          0.1          0.2          0.2
-------------------------------------------------------------------------------------------------------------

                                                           $178.3       $174.4       $370.8       $367.7
-------------------------------------------------------------------------------------------------------------

Operating Expenses
     Regulated Utility                                     $131.3       $120.9       $267.6       $243.3
     Nonregulated Energy Operations                          15.1        103.3 <F1>    30.3        128.0 <F1>
     Real Estate                                              4.9          5.0          8.3          9.5
     Other                                                    0.7          1.2          1.9          1.8
-------------------------------------------------------------------------------------------------------------

                                                           $152.0       $230.4       $308.1       $382.6
-------------------------------------------------------------------------------------------------------------

Interest Expense
     Regulated Utility                                       $4.9         $4.4        $10.0        $ 8.7
     Nonregulated Energy Operations                           0.5          1.6          1.0          2.9
     Real Estate                                                -          0.2            -          0.2
     Other                                                    1.0          0.5          1.8          1.7
-------------------------------------------------------------------------------------------------------------

                                                             $6.4         $6.7        $12.8        $13.5
--------------------------------------------------------------------------------------------------------------

Other Income (Expense)
     Regulated Utility                                       $0.5         $0.4         $0.5        $ 0.4
     Nonregulated Energy Operations                             -            -          0.3          0.2
     Other                                                    2.9          1.1          4.3         (3.3)
-------------------------------------------------------------------------------------------------------------

                                                             $3.4         $1.5         $5.1        $(2.7)
-------------------------------------------------------------------------------------------------------------

Income (Loss)
     Regulated Utility                                      $ 6.8       $  7.8        $19.8       $ 20.7
     Nonregulated Energy Operations                           0.9        (50.5) <F1>    1.8        (48.9) <F1>
     Real Estate                                              5.6          2.8         10.6          9.7
     Other                                                    0.3          0.1          0.2         (3.9)
-------------------------------------------------------------------------------------------------------------

     Income (Loss) from Continuing Operations                13.6        (39.8)        32.4        (22.4)
     Loss from Discontinued Operations                       (0.4)        (0.5)        (0.4)        (0.5)
-------------------------------------------------------------------------------------------------------------

Net Income (Loss)                                           $13.2       $(40.3)       $32.0       $(22.9)
-------------------------------------------------------------------------------------------------------------

Diluted Average Shares of Common Stock                       27.9         27.2         27.8         27.2
-------------------------------------------------------------------------------------------------------------

Diluted Earnings (Loss)
     Per Share of Common Stock
         Continuing Operations                              $0.49       $(1.46)       $1.17       $(0.82)
         Discontinued Operations                            (0.02)       (0.02)       (0.02)       (0.02)
-------------------------------------------------------------------------------------------------------------

                                                            $0.47       $(1.48)       $1.15       $(0.84)
-------------------------------------------------------------------------------------------------------------
<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. (See Note 6.)
</FN>
</TABLE>

                      ALLETE Second Quarter 2006 Form 10-Q                    24
<PAGE>

EXECUTIVE SUMMARY (CONTINUED)

Net income for the quarter ended June 30, 2006, was $13.2 million,  or $0.47 per
diluted share (a $40.3  million,  or $1.48 per diluted  share,  net loss for the
quarter ended June 30,  2005).  Net income was higher in 2006 due to the absence
of the $50.4 million, or $1.84 per share,  Kendall County Charge incurred in the
second quarter of 2005, a $2.8 million increase in income from Real Estate and a
$0.8 million increase in earnings on our excess cash.

Net income for the six months ended June 30, 2006, was $32.0  million,  or $1.15
per diluted share (a $22.9 million, or $0.84 per diluted share, net loss for the
six  months  ended  June 30,  2005).  Net  income  was higher in 2006 due to the
absence of: (1) the $50.4  million,  or $1.84 per share,  Kendall  County Charge
incurred in the second  quarter of 2005;  (2) Kendall  County  operating  losses
($1.9 million in 2005); and (3) emerging technology impairments ($3.3 million in
2005).  Net income in 2006 also reflected a $0.9 million increase in income from
Real Estate and a $1.3 million increase in earnings on our excess cash.

<TABLE>
<CAPTION>
                                                              QUARTER ENDED             SIX MONTHS ENDED
                                                                 JUNE 30,                   JUNE 30,
KILOWATTHOURS SOLD                                         2006          2005          2006          2005
-------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                       <C>           <C>           <C>           <C>
     Regulated Utility
         Retail and Municipals
              Residential                                   229.1         229.9         537.1         549.7
              Commercial                                    315.5         300.5         644.2         640.3
              Industrial                                  1,769.9       1,746.9       3,592.2       3,524.0
              Municipals                                    216.1         199.3         435.4         421.3
              Other                                          18.6          18.1          38.6          38.5
-------------------------------------------------------------------------------------------------------------

                                                          2,549.2       2,494.7       5,247.5       5,173.8
         Other Power Suppliers                              515.5         366.9       1,020.6         603.6
-------------------------------------------------------------------------------------------------------------

                                                          3,064.7       2,861.6       6,268.1       5,777.4
     Nonregulated Energy Operations                          55.3         399.9         120.9         753.8
-------------------------------------------------------------------------------------------------------------

                                                          3,120.0       3,261.5       6,389.0       6,531.2
-------------------------------------------------------------------------------------------------------------
</TABLE>

25                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

EXECUTIVE SUMMARY (CONTINUED)
<TABLE>
<CAPTION>
                                                QUARTER ENDED                           SIX MONTHS ENDED
                                                   JUNE 30,                                 JUNE 30,
                                          2006               2005                   2006               2005
                                   -------------------------------------------------------------------------------
REAL ESTATE
REVENUE AND SALES ACTIVITY             QTY    AMOUNT      QTY    AMOUNT         QTY     AMOUNT     QTY     AMOUNT
------------------------------------------------------------------------------------------------------------------
DOLLARS IN MILLIONS
<S>                                 <C>       <C>      <C>       <C>          <C>       <C>      <C>       <C>
Town Center Sales
    Commercial Sq. Ft.              170,695    $ 4.7   397,000    $10.1       250,695    $ 6.2   397,000   $10.1
    Residential Units                   186      5.6         -        -           186      5.6         -       -

Other Land Sales
    Acres                                10      5.2        54      6.9           466     15.5       537    24.5
    Lots                                  -        -         -        -             -        -         7     0.4
------------------------------------------------------------------------------------------------------------------

Contract Sales Price <F1>                       15.5               17.0                   27.3               35.0

Revenue Recognized from
    Previously Deferred Sales                    2.7                  -                    4.3                  -

Deferred Revenue                                (3.2)              (7.5)                  (4.0)              (8.5)

Adjustments <F2>                                (1.4)              (0.9)                  (1.5)              (0.9)
------------------------------------------------------------------------------------------------------------------

Revenue from Land Sales                         13.6                8.6                   26.1               25.6

Other Revenue                                    1.6                1.4                    2.8                2.1
------------------------------------------------------------------------------------------------------------------

                                               $15.2              $10.0                  $28.9              $27.7
------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Reflected total contract sales price on closed land transactions.
<F2> Contributed development dollars, which are credited to cost of real estate sold.
</FN>
</TABLE>

NET INCOME

The following income discussion  summarizes a comparison of the six months ended
June 30, 2006, to the six months ended June 30, 2005, by segment.

REGULATED UTILITY  contributed income of $19.8 million in 2006 ($20.7 million in
2005).  Lower earnings in 2006 reflected  higher  operating  expenses  partially
offset by an 8 percent increase in kilowatthour  sales.  Operating expenses were
higher in 2006 due to the  inclusion of Taconite  Harbor,  effective  January 1,
2006,  and increased  planned  maintenance,  employee  compensation  and pension
expenses.  Electric sales increased 490.7 million  kilowatthours,  or 8 percent,
primarily due to the inclusion of Taconite Harbor and its pre-existing wholesale
energy sales obligation.

NONREGULATED  ENERGY  OPERATIONS  reported income of $1.8 million in 2006 ($48.9
million loss in 2005). 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.  In 2006,  financial  results
reflected  the absence of income from  Taconite  Harbor  ($2.5  million in 2005)
which is now reported as part of  Regulated  Utility and  operating  losses from
Kendall County ($1.9 million in 2005).  Net income from our coal  operations was
up $0.5 million from 2005 primarily due to a 2 percent  increase in tons of coal
sold.

                      ALLETE Second Quarter 2006 Form 10-Q                    26

<PAGE>

NET INCOME (CONTINUED)

REAL ESTATE  contributed income of $10.6 million in 2006 ($9.7 million in 2005).
Income was  higher in 2006 due to the  timing  and mix of land sale  transaction
closings,  and increased  earnings from prior and current year land sales at our
Town   Center   development   project   which  are   accounted   for  under  the
percentage-of-completion  method. The timing of the closing of real estate sales
varies from period to period and impacts comparisons between years.

In 2005, we began selling property from our Town Center  development  project in
northeast  Florida.  Since land is being sold before  completion  of the project
infrastructure,  revenue,  cost of real  estate sold and  selling  expenses  are
recorded using the  percentage-of-completion  method as development  obligations
are completed.  As of June 30, 2006, we had $8.1 million ($11.2 million revenue;
$2.7 million cost of real estate sold; $0.4 million selling expense) of deferred
profit on sales of real  estate,  before  taxes and  minority  interest,  on our
balance  sheet.  The majority of deferred  profit  relates to Town Center and we
expect most will be reflected in income by the end of 2006.

At June 30, 2006,  total pending land sales under  contract were $128.9  million
and are  anticipated  to close at various times  through 2012.  Pricing on these
contracts  range from $20 to $50 per commercial  square foot,  $8,600 to $40,000
per residential  unit and $8,700 to $126,000 per acre for all other  properties.
The majority of the other  properties  under  contract are zoned  commercial  or
mixed use. Prices per acre are stated on a gross acreage basis and are dependent
on the type and location of the properties sold. In addition,  certain contracts
allow us to receive  participation revenue when gross revenue from land sales by
our purchaser  exceeds  contractually  defined price levels.  Deposits have been
made for all pending contracts;  however,  most pending contracts are subject to
due  diligence  that allows the purchaser to terminate the contract for a period
of time. One of the currently  pending  contracts is subject to an unexpired due
diligence  period.  If a  purchaser  defaults  under a  contract,  our remedy is
limited to forfeiture of the deposit as liquidated and agreed upon damages.

<TABLE>
<CAPTION>
REAL ESTATE
PENDING CONTRACTS                                               CONTRACT
AT JUNE 30, 2006                       QUANTITY <F1>           SALES PRICE
--------------------------------------------------------------------------------
DOLLARS IN MILLIONS
<S>                                    <C>                     <C>
Town Center
     Commercial Sq. Ft.                 981,290                  $ 30.5
     Residential Units                    1,214                    22.7

Palm Coast Park
     Commercial Sq. Ft.                  50,000                     2.5
     Residential Units                    2,469                    61.8

Other Land
     Acres                                  607                    11.4
--------------------------------------------------------------------------------

                                                                  $128.9
--------------------------------------------------------------------------------
<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.  Commercial square feet and residential
     units are  estimated and include  minority  interest.  The actual  property
     allocation at full build-out may be different than these estimates.
</FN>
</TABLE>

OTHER  reflected  net  income of $0.2  million in 2006 (a $3.9  million  loss in
2005). In 2006, a $1.3 million increase in earnings on excess cash offset equity
losses related to emerging  technology  investments  ($0.6 million in 2006; $0.2
million in 2005).  In 2005,  the Company  recorded  $3.3 million of  impairments
related to two privately-held emerging technology investments.

DISCONTINUED OPERATIONS included our Water Services businesses that we sold over
the   three-year   period  from  2003  to  2005,  and  Enventis   Telecom,   our
telecommunications business that we sold in December 2005. In 2006, discontinued
operations reflected a $0.4 million loss for additional legal and administrative
expenses related to exiting the Water Services businesses. In 2005, $0.8 million
of income from Enventis Telecom was offset by $1.3 million of administrative and
other expenses incurred to support Florida Water transfer proceedings. (See Note
9.)

27                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

COMPARISON OF THE QUARTERS ENDED JUNE 30, 2006 AND 2005

REGULATED UTILITY

     OPERATING REVENUE was up $8.7 million, or 6 percent,  from 2005,  primarily
     due to increased kilowatthour sales. Electric sales increased 203.1 million
     kilowatthours,  or 7 percent, due mostly to the addition of Taconite Harbor
     wholesale  power  agreements to the  Regulated  Utility  segment  effective
     January 1, 2006.  The majority of Taconite  Harbor  sales are  reflected in
     sales to other power suppliers  which were up 148.6 million  kilowatthours,
     or 41 percent,  and $6.4  million.  Absent the  inclusion  of  pre-existing
     Taconite Harbor wholesale obligations,  sales to other power suppliers were
     down  reflecting  less excess  energy  available  for sale due to a planned
     outage at our Boswell Unit 4 generating facility in 2006. Electric sales to
     retail and municipal customers increased 54.5 million  kilowatthours,  or 2
     percent, and $0.7 million, due to strong demand from commercial, industrial
     and municipal customers.

     Revenue from electric sales to taconite customers  accounted for 24 percent
     of  consolidated  operating  revenue in 2006 (25 percent in 2005).  Revenue
     from  electric  sales to paper and pulp  mills  accounted  for 9 percent of
     consolidated operating revenue in both 2006 and 2005.

     OPERATING EXPENSES were up $10.4 million, or 9 percent, from 2005.

     FUEL AND PURCHASED POWER EXPENSE. Fuel and purchased power expense was down
     $0.2  million  from  2005  reflecting  the  inclusion  of  Taconite  Harbor
     beginning in 2006 ($5.5 million) offset by reduced fuel expense,  primarily
     at our Boswell  Unit 4  generating  facility  due to a planned  maintenance
     outage in 2006.

     OTHER OPERATING EXPENSES.  In total, other operating expenses were up $10.6
     million from 2005.  In total,  plant  maintenance  expense  increased  $3.5
     million from 2005 reflecting the inclusion of Taconite  Harbor  maintenance
     in 2006 ($0.7 million) and increased  maintenance  expense at other Company
     generating  facilities,  primarily  due to a planned  outage at our Boswell
     Unit 4 generating  facility ($1.9 million).  Employee  compensation  was up
     $3.1 million primarily due to the inclusion of Taconite Harbor, annual wage
     increases  and the  inclusion  of union  employees  in our results  sharing
     compensation  awards program.  Depreciation  expense increased $1.3 million
     primarily  due to the inclusion of Taconite  Harbor.  MISO expenses were up
     $0.8 million.  Pension expense increased $0.6 million due to a reduction in
     the discount rate.

     INTEREST EXPENSE was up $0.5 million,  or 11 percent,  from 2005 due to the
     inclusion of Taconite Harbor in 2006,  partially  offset by lower effective
     interest rates (5.91 percent in 2006; 6.19 percent in 2005).

NONREGULATED ENERGY OPERATIONS

     OPERATING REVENUE was down $10.0 million,  or 38 percent,  from 2005 due to
     the  absence of  revenue  from  Taconite  Harbor  ($13.3  million in 2005).
     Effective  January  1, 2006,  Taconite  Harbor is  reported  as part of the
     Regulated  Utility  segment.  Coal  revenue,  realized  under  a  cost-plus
     contract,  was up $1.7 million from 2005 reflecting a 6 percent increase in
     the  delivery  price per ton due to higher coal  production  expenses  (see
     operating  expenses below),  and a 10 percent increase in tons of coal sold
     in 2006.  Tons of coal sold were lower in 2005 due to a plant outage at the
     Square Butte generating facility.

     OPERATING  EXPENSES  were down  $88.2  million,  or 85  percent,  from 2005
     reflecting  the absence of a $77.9 million charge related to the assignment
     of the Kendall  County power  purchase  agreement to  Constellation  Energy
     Commodities  on April 1, 2005,  and  expenses  related to  Taconite  Harbor
     ($12.3 million in 2005).  Expenses  related to coal operations were up $1.3
     million,  mainly due to  increased  equipment  leases and fuel  expenses in
     2006.

     INTEREST EXPENSE was down $1.1 million, or 69 percent,  from 2005 primarily
     due to the absence of Taconite Harbor in 2006.

                      ALLETE Second Quarter 2006 Form 10-Q                    28

<PAGE>

COMPARISON OF THE QUARTERS ENDED JUNE 30, 2006 AND 2005 (CONTINUED)

REAL ESTATE

     OPERATING REVENUE was up $5.2 million, or 52 percent, from 2005, due to the
     timing and mix of land sale  transaction  closings,  and increased  revenue
     from  prior and  current  year land  sales at our Town  Center  development
     project which are accounted for under the percentage-of-completion  method.
     Revenue  from land  sales was $13.6  million in 2006  which  included  $2.7
     million of previously  deferred revenue.  In 2005,  revenue from land sales
     was $8.6  million.  In 2006,  10 acres of other land were sold (54 acres in
     2005).  Sales at Town  Center  represented  186  residential  units and the
     rights  to build up to  170,695  square  feet of  commercial  space in 2006
     (397,000  commercial square feet in 2005). In 2006, revenue of $3.2 million
     ($7.5   million  in  2005)  was  deferred  and  will  be  recognized  on  a
     percentage-of-completion basis as development obligations are completed.

     OPERATING  EXPENSES  were  down  $0.1  million,  or 2  percent,  from  2005
     reflecting  a $0.5  million  decrease in the cost of real estate sold ($2.7
     million  in  2006; $3.2 million  in 2005)  due  to  the  mix of  land sold,
     partially offset by a $0.3 million  increase  in  selling  expenses  due to
     higher brokerage fees.

OTHER

     OPERATING  EXPENSES  were down $0.5  million,  or 42  percent,  from  2005,
     reflecting lower general and administrative expenses in 2006.

     OTHER INCOME (EXPENSE) reflected $1.8 million more income in 2006 primarily
     due to a $1.3 million increase in earnings on excess cash.

INCOME TAXES

For the quarter  ended June 30, 2006,  the  effective  rate for income taxes was
38.2 percent  (35.3 percent  benefit for the quarter  ended June 30, 2005).  The
increase in the effective  rate over last year was primarily due to the emerging
technology  impairment  and the Kendall  County  capital loss  recorded in April
2005. The current  benefit for these items was limited to the federal benefit as
the state net capital loss carryforwards  from 2005 are entirely  reserved.  The
effective  rate of 38.2 percent for the quarter  ended June 30,  2006,  was less
than the  statutory  rate,  primarily  because of  investment  tax credits,  and
deductions for Medicare health subsidies and depletion.


COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

REGULATED UTILITY

     OPERATING REVENUE was up $23.5 million, or 8 percent,  from 2005, primarily
     due to increased kilowatthour sales. Electric sales increased 490.7 million
     kilowatthours,  or 8 percent, due mostly to the addition of Taconite Harbor
     wholesale  power  agreements to the  Regulated  Utility  segment  effective
     January 1, 2006.  The majority of Taconite  Harbor  sales are  reflected in
     sales to other power suppliers which were up 417.0 million kilowatthours or
     69  percent,  and $17.8  million.  Absent  the  inclusion  of  pre-existing
     Taconite Harbor wholesale obligations,  sales to other power suppliers were
     down  reflecting  less excess  energy  available  for sale due to a planned
     outage at our Boswell Unit 4 generating facility in 2006. Electric sales to
     retail and municipal customers increased 73.7 million  kilowatthours,  or 1
     percent,  and $4.2  million,  mainly due to strong  demand from  industrial
     customers.

     Revenue from electric sales to taconite customers  accounted for 24 percent
     of  consolidated  operating  revenue in 2006 (23 percent in 2005).  Revenue
     from  electric  sales to paper and pulp  mills  accounted  for 9 percent of
     consolidated operating revenue in both 2006 and 2005.

29                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (CONTINUED)

REGULATED UTILITY (CONTINUED)

     OPERATING EXPENSES were up $24.3 million, or 10 percent, from 2005.

     FUEL AND PURCHASED  POWER EXPENSE.  Fuel and purchased power expense was up
     $9.2  million  from 2005,  reflecting  the  inclusion  of  Taconite  Harbor
     operations  beginning in 2006 ($10.8  million)  and higher  prices paid for
     purchased  power,  partially offset by lower fuel expense at our generating
     facilities due to planned outages.

     OTHER OPERATING EXPENSES.  In total, other operating expenses were up $15.1
     million from 2005. Employee  compensation was up $5.1 million primarily due
     to the  inclusion  of  Taconite  Harbor,  annual  wage  increases  and  the
     inclusion of union  employees in our results  sharing  compensation  awards
     program.  In total,  plant maintenance  expense increased $3.1 million from
     2005 reflecting the inclusion of Taconite Harbor  maintenance in 2006 ($2.2
     million) and increased planned  maintenance expense at Boswell Unit 4 ($2.1
     million) partially offset by a decrease in maintenance  expenses at Boswell
     Unit 3 ($2.3  million).  In 2005,  planned  maintenance  was  performed  at
     Boswell  Unit 3 while  the unit was down due to a  cooling  tower  failure.
     Depreciation  expense increased $2.6 million primarily due to the inclusion
     of  Taconite  Harbor.  Pension  expense  increased  $1.2  million  due to a
     reduction in the discount rate. Vegetation management expenses were up $1.0
     million  reflecting more work performed in 2006. MISO expenses were up $0.6
     million.

     INTEREST EXPENSE was up $1.3 million, or 15 percent,  from 2005, due to the
     inclusion of Taconite  Harbor in 2006 partially  offset by lower  effective
     interest rates (5.94 percent in 2006; 6.13 percent in 2005).

NONREGULATED ENERGY OPERATIONS

     OPERATING REVENUE was down $21.6 million,  or 40 percent,  from 2005 due to
     the absence of revenue from  Taconite  Harbor  ($24.7  million in 2005) and
     Kendall County ($3.1 million in 2005).  Effective January 1, 2006, Taconite
     Harbor is reported as part of Regulated Utility.  Kendall County operations
     ceased to be included with our operations effective April 1, 2005, when the
     Company  assigned  the power  purchase  agreement to  Constellation  Energy
     Commodities. Coal revenue, realized under a cost-plus contract, was up $2.2
     million from 2005  reflecting a 10 percent  increase in the delivery  price
     per ton due to higher coal  production  expenses  (see  operating  expenses
     below) and a 2 percent  increase in tons of coal sold in 2006. Tons of coal
     sold  were  lower  in  2005  due to a  plant  outage  at the  Square  Butte
     generating facility.

     OPERATING  EXPENSES  were down  $97.7  million,  or 76  percent,  from 2005
     reflecting  the absence of a $77.9 million charge related to the assignment
     of the Kendall  County power  purchase  agreement to  Constellation  Energy
     Commodities on April 1, 2005,  expenses  related to Taconite  Harbor ($19.0
     million in 2005) and other expenses related to Kendall County ($6.3 million
     in 2005) that were  incurred  prior to April 1, 2005.  Expenses  related to
     coal  operations  were up $1.6 million  mainly due to  increased  equipment
     leases and fuel expenses in 2006.

     INTEREST EXPENSE was down $1.9 million, or 66 percent,  from 2005 primarily
     due to the absence of Taconite Harbor in 2006.

                      ALLETE Second Quarter 2006 Form 10-Q                    30

<PAGE>


COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (CONTINUED)

REAL ESTATE

     OPERATING REVENUE was up $1.2 million, or 4 percent,  from 2005, due to the
     timing and mix of land sale  transaction  closings,  and increased  revenue
     from  prior and  current  year land  sales at our Town  Center  development
     project which are accounted for under the percentage-of-completion  method.
     Revenue  from land  sales was $26.1  million in 2006  which  included  $4.3
     million of previously  deferred revenue.  In 2005,  revenue from land sales
     was $25.6  million.  In 2006,  466 acres of other land were sold (537 acres
     and 7 lots in 2005). Sales at Town Center represented 186 residential units
     and the rights to build up to 250,695  square feet of  commercial  space in
     2006  (397,000  commercial  square feet in 2005).  The first land sales for
     Town Center were  recorded in June 2005.  In 2006,  revenue of $4.0 million
     ($8.5   million  in  2005)  was  deferred  and  will  be  recognized  on  a
     percentage-of-completion basis as development obligations are completed.

     OPERATING  EXPENSES  were  down  $1.2  million,  or 13  percent,  from 2005
     reflecting  a $1.2  million  decrease in the cost of real estate sold ($4.6
     million in 2006; $5.8 million in 2005), due to the mix of land sold.


OTHER

     OTHER INCOME (EXPENSE)  reflected $7.6 million more income in 2006 due to a
     $2.5  million  increase  in  earnings  on excess  cash and the  absence  of
     emerging technology impairments. In 2005, the Company recorded $5.1 million
     of  impairments   related  to  two   privately-held   emerging   technology
     investments. Other income (expense) also reflected equity losses related to
     emerging  technology  investments  of $0.8 million in 2006 ($0.3 million in
     2005).

INCOME TAXES

For the six months ended June 30, 2006,  the effective rate for income taxes was
37.3 percent (32.5 percent benefit for the six months ended June 30, 2005).  The
increase in the effective  rate over last year was primarily due to the emerging
technology  impairment  and the Kendall  County  capital loss  recorded in April
2005. The current  benefit for these items was limited to the federal benefit as
the state net capital loss carryforwards  from 2005 are entirely  reserved.  The
effective  rate of 37.3 percent for the six months ended June 30, 2006, was less
than the  statutory  rate  primarily  because  of  investment  tax  credits  and
deductions for Medicare health subsidies and depletion.


NON-GAAP FINANCIAL MEASURES

We  prepare  financial  statements  in  accordance  with  GAAP.  Along with this
information,  we disclose and discuss certain non-GAAP financial  information in
our  quarterly  earnings  releases,  on  investor  conference  calls and  during
investor  conferences  and related  events.  Management  believes  that non-GAAP
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 our results of operations
prepared and presented in accordance with GAAP.

As earlier mentioned, our financial results for 2005 were significantly impacted
by a $50.4 million after tax, or $1.84 per share,  charge due to the  assignment
of  the  Kendall  County  power  purchase  agreement  to  Constellation   Energy
Commodities. (See Note 6.)

Since the  Kendall  County  transaction  significantly  impacted  the  financial
results from  continuing  operations in 2005, we believe that,  for  comparative
purposes and a more accurate reflection of our ongoing operations,  it is useful
to present  diluted  earnings  per share  from  continuing  operations  for each
applicable  period  excluding  the impact of this  transaction.  The table below
reconciles actual reported diluted earnings per share from continuing operations
to the  adjusted  results  that exclude the Kendall  County  transaction  in the
respective periods.

31                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

NON-GAAP FINANCIAL MEASURES (CONTINUED)
<TABLE>
<CAPTION>
                                                               QUARTER ENDED                SIX MONTHS ENDED
                                                                 JUNE 30,                        JUNE 30,
                                                           2006            2005           2006            2005
-----------------------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>             <C>            <C>
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK
   Continuing Operations - As Reported                     $0.49          $(1.46)         $1.17          $(0.82)
      Add:   Kendall County Charge                             -            1.84              -            1.84
-----------------------------------------------------------------------------------------------------------------

   Continuing Operations - As Adjusted                     $0.49          $ 0.38          $1.17           $1.02
-----------------------------------------------------------------------------------------------------------------
</TABLE>


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 2005 Form 10-K.


OUTLOOK

EARNINGS  GUIDANCE.  We  continue  to expect  ALLETE's  earnings  per share from
continuing operations to grow by 15 percent to 20 percent in 2006 as outlined in
our 2005 Form  10-K.  The  growth is  expected  to come  from  continued  strong
electric  sales,  increased real estate sales and our investment in ATC. It also
reflects the absence of operating  losses from  Kendall  County and  impairments
related to our emerging  technology  investments  which  impacted the  Company's
financial results in 2005.

ENERGY.  Over the next several  years,  we believe  electric  utilities  will be
facing the  unfolding  impacts of three  major  developments  that  occurred  in
2005--changes in regional transmission operation,  the development of rulemaking
on the enactment of stricter  environmental  regulations and federal legislation
impacting the structure and  organization of the electric utility  industry.  We
believe our energy  businesses  are well  positioned to  successfully  deal with
these  issues  and to  compete  successfully.  Our  access to and  ownership  of
low-cost power are our greatest strengths. We anticipate that we will have ready
access to sufficient capital for general business purposes.

RESOURCE PLAN. In 2006, the MPUC approved our Resource Plan,  which detailed our
retail  energy  demand  projections  and our  energy  sourcing  options  to meet
projected  demand.  One of the  key  components  of the  Resource  Plan  was the
redirection of our Taconite Harbor generating  facility from nonregulated energy
operations  to  regulated  utility  operations  effective  January 1, 2006.  The
Taconite Harbor  generation  will be  supplemented  with a 50-MW long-term power
purchase  agreement  with Manitoba  Hydro which extends from 2009 to 2015.  This
agreement  was  executed  in June 2006 and will be filed for  approval  with the
MPUC. Expansion of our renewable generating assets to meet Minnesota's Renewable
Energy  Objective was also approved.  The Renewable  Energy Objective seeks a 10
percent  supply of  qualified  renewable  energy  resources  for each  Minnesota
utility by 2015. In April 2006,  construction  began on a 50-MW wind facility in
North  Dakota  and is  expected  to be  completed  by the end of  2006.  We will
purchase  the output  from this wind  facility  under a 25-year  power  purchase
agreement with an affiliate of FPL Energy, LLC. We anticipate that retail demand
by customers in our service territory will increase at an average annual rate of
1.5 percent to 2019. We project a load growth of  approximately  150 MW by 2010,
with another 200 MW of growth anticipated by 2015.

                      ALLETE Second Quarter 2006 Form 10-Q                    32

<PAGE>

OUTLOOK (CONTINUED)

AREA AND BOSWELL 3 EMISSION  REDUCTION PLANS. In May 2006, the MPUC approved our
filing for cost  recovery of planned  expenditures  to reduce  emissions to meet
pending federal  requirements at Taconite Harbor and Laskin under the AREA plan.
The approval  allows  Minnesota  Power to recover costs for SO2, NOx and mercury
emission  reductions  made  at  these  facilities  without  a  rate  proceeding.
Minnesota Power plans to complete  installation of new equipment at the first of
two  Laskin  units  this  fall,  with the first of three  Taconite  Harbor  unit
installations  anticipated  to be completed  by  mid-2007.  Work on all units is
anticipated  to be completed by the end of 2008.  Cost recovery  filings will be
made 90 days prior to the anticipated  in-service date for the equipment at each
unit, with rate recovery beginning the month following the in-service date.

In May 2006, we announced  plans to make emission  reduction  investments at our
Boswell Unit 3 generating  unit. Plans include  reductions of particulate,  SO2,
NOx and mercury  emissions to meet pending federal and state  requirements.  The
estimated cost for these  reductions is $200 million,  which the Company expects
to spend from 2007  through  2010.  Recovery  of capital  costs and  incremental
operating and  maintenance  expenses,  as well as a return on  investment,  will
commence  when the project is in service.  In  addition,  Minnesota  legislation
allows for a cash return on investment  for  construction  work in progress.  We
plan to file for MPCA and MPUC approval of these plans and related  expenditures
later this year.  The MPUC filing would  request  approval for cost recovery and
returns on these investments without a rate proceeding.

LARGE POWER  CONTRACTS.  Electric  power is a key component in the production of
taconite and paper, and these  industries  represent more than half of Minnesota
Power's  regulated  utility  electric  sales.  In March and April 2006, the MPUC
approved  new  all-requirements  agreements  with Stora Enso Oyj's  Duluth mills
through August 31, 2013,  and  UPM-Kymmene  Corporation's  Blandin Paper mill in
Grand Rapids  through  April 30, 2010.  Three other  long-term  agreements  were
approved by the MPUC in 2005,  extending  contracts  for an  additional  four to
eight years.  The  extension of our  electric  supply  contracts is an important
achievement  for our large  power  customers  and  Minnesota  Power  because  it
provides planning certainty for both our customers and us.

MISO AND FUEL  CLAUSE.  On  February  24,  2006,  the MPUC  issued an order that
granted rehearing of the MISO Day 2 docket and suspended the refund  obligation.
The  Company  worked  with  other  Minnesota   utilities,   the  DOC  and  other
stakeholders  to  prepare a joint  recommendation,  required  by the MPUC in its
February 24, 2006 order,  of which costs should be recovered on a current  basis
through  the fuel  clause and which costs are more  appropriately  deferred  for
potential recovery through base rates. The joint report and recommendations were
filed with the MPUC on June 23, 2006. The MPUC is requesting  public comments on
the report and further  action on the  recommendation  is  anticipated  later in
2006. (See Note 13.)

EXCELSIOR  ENERGY INC.  (Excelsior)  has proposed to construct  two 600 MW (net)
coal-gasification  generation units in northern Minnesota. The project is in the
early  development  stages  but may be an option  for our  long-term  forecasted
energy and capacity  needs.  Excelsior says the facility could be operational in
2011,  but needs to obtain the necessary  permits and  financing.  In 2003,  the
Minnesota  legislature  enacted several  provisions that provide  Excelsior with
special  considerations,  including  requiring  utilities  within  the  state to
"consider" Excelsior before pursuing new resource additions within Minnesota. In
December 2005,  Excelsior filed a petition with the MPUC seeking  approval of an
unexecuted  power  purchase  agreement  with Xcel Energy  Inc. In January  2006,
Minnesota  Power filed  comments  with the MPUC in  Excelsior's  proposed  power
purchase  agreement  proceeding,  focusing  on the  importance  to the  state of
maintaining a range of base load energy options,  including  multiple fuel types
and  generating  technologies.  In April  2006,  the MPUC  referred  Excelsior's
petition to an  administrative  law proceeding to further  develop the record in
the case for subsequent  MPUC  deliberations.  Minnesota Power continues to be a
participant  in these  proceedings,  focusing its comments on energy  policy and
infrastructure impacts.

INVESTMENT  IN ATC. On May 4, 2006,  the PSCW  reviewed and approved the request
that  allows  us to invest  $60  million  in ATC.  As of June 30,  2006,  we had
invested $11.5 million and anticipate  investing an additional  $48.5 million by
the end of 2006.

33                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

OUTLOOK (CONTINUED)

RATE  CASE.  On May 1,  2006,  SWL&P  filed  an  application  with  the PSCW for
authority  to  increase  retail  utility  rates an average of 5.2 percent and is
requesting an 11.7 percent return on common equity.  Cost of service studies and
rate designs for all retail  customer  classes  were filed on June 1, 2006.  The
PSCW has set tentative dates of August 8, 2006, for the  pre-hearing  conference
and November 21, 2006, for the hearing.  The Company  anticipates that new rates
will become effective in January 2007.

REAL ESTATE.  Progress continues on our three major planned development projects
in Florida--Town Center, which will be a new downtown for Palm Coast; Palm Coast
Park, which is located in northwest Palm Coast; and Ormond  Crossings,  which is
located in Ormond Beach along Interstate 95.

TOWN CENTER. We began selling property from our Town Center development  project
in northeast  Florida in 2005.  Developers  who have purchased land from us have
started construction  activities.  Since land is being sold before completion of
the project  infrastructure,  revenue and cost of real estate sold are  recorded
using a  percentage-of-completion  method. Pending land sales under contract for
properties at Town Center totaled $53.2 million at June 30, 2006.

PALM COAST  PARK.  In May 2006,  Palm Coast  District  issued  $31.8  million of
tax-exempt, special assessment bonds, the majority of which will be used to fund
the  construction  of  environmental,   traffic  mitigation  and  infrastructure
improvements  at Palm Coast Park.  At June 30,  2006,  pending  land sales under
contract for  properties at Palm Coast Park totaled $64.3 million which included
a  contract  for a $52.5  million  sale of land that will be  purchased  in four
phases,  with closings to occur in 2007 through 2009. We have the opportunity to
receive participation revenue as part of these sales contracts.

ORMOND CROSSINGS. We anticipate that the Development of Regional Impact approval
process  will be  concluded  in late  2006,  at which  time we would  receive  a
Development  Order  from the  City of  Ormond  Beach.  Engineering,  design  and
permitting will continue through 2007. It is not anticipated that any sales will
be made at Ormond Crossings until 2008.

As of June 30,  2006,  we had $8.1  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 by the end of 2006.

ALLETE  Properties  occasionally  provides  seller  financing,  and  outstanding
finance  receivables were $7.5 million at June 30, 2006, 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 INVENTORY                       RESIDENTIAL       COMMERCIAL
FOR THE SIX MONTHS ENDED JUNE 30, 2006          OWNERSHIP        UNITS <F1>       SQ. FT. <F1> <F2>
-------------------------------------------------------------------------------------------------
<S>                                             <C>             <C>               <C>
Town Center at Palm Coast                          80%
     At December 31, 2005                                          2,833           2,927,700
     Property Sold                                                  (186)           (250,695)
     Change in Estimate                                               87               6,375
-------------------------------------------------------------------------------------------------

                                                                   2,734           2,683,380

Palm Coast Park                                   100%             3,600           3,200,000

Ormond Crossings                                  100%               <F3>                <F3>
-------------------------------------------------------------------------------------------------

                                                                   6,334           5,883,380
-------------------------------------------------------------------------------------------------
<FN>
<F1> Estimated and includes minority interest. The actual property allocation at full build-out
     may be different than these estimates.
<F2> Includes industrial, office and retail square footage.
<F3> The Development of Regional  Impact  Application  for  Development  Approval  submitted 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>

                      ALLETE Second Quarter 2006 Form 10-Q                    34

<PAGE>

OUTLOOK (CONTINUED)

<TABLE>
<CAPTION>
SUMMARY OF OTHER LAND INVENTORIES
FOR THE SIX MONTHS ENDED
JUNE 30, 2006                         OWNERSHIP     TOTAL      MIXED USE     RESIDENTIAL     COMMERCIAL     AGRICULTURAL
---------------------------------------------------------------------------------------------------------------------------
ACRES <F1>
<S>                                   <C>           <C>        <C>           <C>             <C>            <C>
Palm Coast Holdings                      80%
     At December 31, 2005                           2,566        1,692           346            281             247
     Property Sold                                    (66)         (47)            -            (18)             (1)
     Change in Estimate                               (97)           -             -              -             (97)
---------------------------------------------------------------------------------------------------------------------------

                                                    2,403        1,645           346            263             149
---------------------------------------------------------------------------------------------------------------------------

Lehigh                                   80%
     At December 31, 2005                             613          390           140             74               9
     Property Sold                                   (390)        (390)            -              -               -
---------------------------------------------------------------------------------------------------------------------------

                                                      223            -           140             74               9
---------------------------------------------------------------------------------------------------------------------------

Cape Coral                              100%
     At December 31, 2005                              41            -             1             40               -
     Property Sold                                    (10)           -             -            (10)              -
---------------------------------------------------------------------------------------------------------------------------

                                                       31            -             1             30               -
---------------------------------------------------------------------------------------------------------------------------

Other <F2>                               100%         944            -             -              -             944
---------------------------------------------------------------------------------------------------------------------------

                                                    3,601        1,645           487            367           1,102
---------------------------------------------------------------------------------------------------------------------------
<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 allocation at full build-out may be different than these estimates.
<F2> Includes  land  located in Ormond  Beach,  Florida,  and other land  located in Palm Coast,  Florida not  included in
     development projects.
</FN>
</TABLE>

35                    ALLETE Second Quarter 2006 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 and short-term  investments of $183.2  million,  and a debt to total
capital ratio of 38 percent at June 30, 2006.

OPERATING ACTIVITIES.  Cash flow from operating activities was $36.4 million for
the six months ended June 30, 2006 (cash flow for operating  activities of $20.0
million for the six months ended June 30, 2005). Cash from operating  activities
was higher in 2006,  primarily due to the $77.9 million Kendall County charge in
2005.  Cash used for inventories was $5.4 million higher in 2006 reflecting more
coal purchases in anticipation of maintenance on some coal handling equipment in
the fall of 2006. Cash used for  discontinued  operations was higher in 2006 due
to the total payment of all 2005 accrued liabilities.

INVESTING  ACTIVITIES.  Cash flow for investing activities was $45.3 million for
the six months ended June 30, 2006 (cash flow from investing activities of $58.4
million  for the six  months  ended  June 30,  2005).  Cash  used for  investing
activities was higher in 2006 than 2005,  primarily due to activities within our
short-term  investments.  In 2006,  net  purchases of $3.5 million were used for
short-term  investments,  while 2005 included $87.6 million of net proceeds that
were received from the sale of short-term  investments.  Gross proceeds from the
sale of  available-for-sale  securities  were  $410.6  million  in 2006  ($271.1
million in 2005) and purchases  were $414.1  million  ($183.5  million in 2005).
Cash used for investing  activities in 2006 reflected $11.5 million  invested in
ATC and a $12.7 million  increase in additions to property,  plant and equipment
which vary from year to year.

FINANCING  ACTIVITIES.  Cash flow for financing activities was $17.9 million for
the six months  ended June 30, 2006 ($4.3  million for the six months ended June
30,  2005).  Cash  used for  financing  activities  increased  in 2006 due to an
additional $5.3 million of dividends paid because of more shares outstanding and
an  increase in the  dividend  rate.  Cash from  financing  activities  was $4.0
million lower in 2006,  primarily due to fewer shares issued under our long-term
incentive  compensation  plan.  In 2006,  we  refinanced  $50  million  of first
mortgage bonds at a lower rate. The new bonds mature in 2036.

WORKING CAPITAL.  Additional working capital,  if and when needed,  generally is
provided by the sale of commercial  paper.  We have 0.7 million  original  issue
shares of our common stock  available for issuance  through INVEST  DIRECT,  our
direct  stock  purchase and dividend  reinvestment  plan.  We have bank lines of
credit aggregating $170.0 million, the majority of which expire in January 2011.
In January  2006, we renewed,  increased  and extended a committed,  syndicated,
unsecured revolving credit facility with LaSalle Bank National  Association,  as
Agent,  for $150 million  (Line).  The Line matures on January 11, 2011.  At our
request and subject to certain  conditions,  the Line may be  increased  to $200
million and extended for two additional  12-month periods. We may prepay amounts
outstanding under the Line in whole or in part at our discretion without premium
or penalty. Additionally, we may irrevocably terminate or reduce the size of the
Line prior to  maturity  without  premium or  penalty.  The Line may be used for
general corporate purposes,  working capital and to provide liquidity in support
of our commercial  paper  program.  The amount and timing of future sales of our
securities  will depend upon market  conditions and our specific  needs.  We may
sell securities to meet capital  requirements,  to provide for the retirement or
early redemption of issues of long-term debt, to reduce  short-term debt and for
other corporate purposes.

In May 2006,  Palm Coast  District  issued  $31.8  million of  tax-exempt,  5.7%
Special Assessment Bonds, Series 2006, due May 1, 2037. The bonds were issued to
fund a portion of the Palm  Coast Park  development  project  in  Florida.  Bond
proceeds of $26.3 million will be used for the  construction  of  environmental,
traffic   mitigation  and   infrastructure   improvements,   including   utility
extensions, roadways, parks, drainage, recreational facilities,  landscaping and
a multi-purpose  trail system.  The remaining funds will be used for capitalized
interest,  a debt service reserve fund and the costs of issuance.  The bonds are
payable from and secured by the revenue derived from assessments imposed, levied
and  collected  by  the  Palm  Coast  District.  The  assessments  represent  an
allocation of the costs of the improvements,  including bond financing costs, to
the lands within the Palm Coast District  benefiting from the improvements.  The
assessments  will be included  in the annual  property  tax bills of  landowners
beginning in 2007.

                      ALLETE Second Quarter 2006 Form 10-Q                    36

<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.

In March  2006,  we issued $50  million in  principal  amount of First  Mortgage
Bonds, 5.69% Series due March 1, 2036.  Proceeds were used to redeem $50 million
in principal amount of First Mortgage Bonds, 7% Series due March 1, 2008.

On July 5, 2006,  the Collier County  Industrial  Development  Authority  issued
$27.8 million of Industrial  Development  Variable Rate Demand Refunding Revenue
Bonds Series 2006 due 2025 (Refunding Bonds) on behalf of ALLETE.  Proceeds from
the Refunding Bonds and internally  generated funds will be used to redeem $29.1
million of outstanding Collier County Industrial  Development  Refunding Revenue
Bonds  6.5%  Series  1996  due 2025  which  were  called  on July 5,  2006,  for
redemption on August 9, 2006.  As a result of an early  redemption  premium,  we
will  recognize a $0.6 million  charge to other  expense in the third quarter of
2006.

Long-term  debt due within one year includes $60 million of first mortgage bonds
due  February  2007 that  cannot be  redeemed  prior to  maturity.  We intend to
refinance this debt on a long-term basis.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance  sheet  arrangements  are  summarized  in our 2005 Form  10-K,  with
additional disclosure discussed in Note 13 of this Form 10-Q.

CAPITAL REQUIREMENTS

For the six months  ended June 30, 2006,  capital  expenditures  for  continuing
operations  totaled $35.3 million ($22.6 million in 2005).  Expenditures for the
six months ended June 30, 2006, included $34.5 million for Regulated Utility and
$0.8 million for Nonregulated Energy Operations. Internally-generated funds were
the source of funding for these expenditures.

Real  estate  development  expenditures  are and will be funded with a revolving
development loan and tax-exempt bonds issued by community development districts.
The Town Center  District  issued  $26.4  million of  tax-exempt  bonds in 2005.
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
Palm Coast District  issued $31.8 million of tax-exempt  bonds in May 2006. Bond
proceeds of $26.3 million will be used for the  construction  of  environmental,
traffic mitigation and infrastructure  improvements at Palm Coast Park, with the
remaining funds to be used for capitalized interest, a debt service reserve fund
and  costs  of  issuance.  Company  expenditures  related  to  our  real  estate
developments  in Florida  increase the carrying value of our land assets,  which
are classified as Investments on our consolidated balance sheet.

37                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

ENVIRONMENTAL MATTERS AND OTHER

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


NEW ACCOUNTING STANDARDS

New accounting standards are discussed in Note 1.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SECURITIES INVESTMENTS

AVAILABLE-FOR-SALE   SECURITIES.  Our  available-for-sale  securities  portfolio
consists of securities in a grantor trust  established to fund certain  employee
benefits  included in  Investments,  and various auction rate bonds and variable
rate  demand  notes  included  in  Short-Term  Investments.   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.  Our  short-term
investments  classified as  available-for-sale  securities  are recorded at fair
market value which equates to cost because the variable interest rates for these
securities  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. Our  available-for-sale  securities portfolio had a fair value of $143.9
million at June 30,  2006  ($139.5  million at  December  31,  2005) and a total
unrealized  after-tax  gain of $2.4  million at June 30,  2006 ($2.1  million at
December 31, 2005).

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  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 six months ended June 30,
2006.

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 based primarily on
our ownership  percentages.  The total carrying value of our emerging technology
portfolio was $9.0 million at June 30, 2006 ($9.2 million at December 31, 2005).
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.  Our
basis in direct investments in privately-held companies included in the emerging
technology portfolio was zero at June 30, 2006, and December 31, 2005.


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.

                     ALLETE Second Quarter 2006 Form 10-Q                    38

<PAGE>

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

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
generation and purchased power.

From time to time,  our 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.

Approximately 200 MW of generation from our Taconite Harbor facility in northern
Minnesota has been sold through various long-term capacity and energy contracts.
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, with formula pricing based on variable
production cost of a combustion-turbine, natural gas unit.


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.

39                    ALLETE Second Quarter 2006 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 1A.   RISK FACTORS

There have been no material  changes from the risk factors  disclosed  under the
heading  "Risk  Factors"  in Part I,  Item 1A of our 2005 Form 10-K and Part II,
Item 1A of our Form 10-Q for the Quarter Ended March 31, 2006.


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

(a)  We held our Annual Meeting of Shareholders on May 9, 2006.

(b)  Included in (c) below.

(c)  The  election of  directors  and the  ratification  of the  appointment  of
     PricewaterhouseCoopers  LLP, as the Company's independent registered public
     accounting   firm  for  2006  were  voted  on  at  the  Annual  Meeting  of
     Shareholders.

     The results were as follows:

<TABLE>
<CAPTION>
                                                                   VOTES
                                              VOTES FOR           WITHHELD
--------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                 <C>
     DIRECTORS

     Heidi J. Eddins                         26,116,843            432,795
     James J. Hoolihan                       25,425,168          1,124,470
     Peter J. Johnson                        25,791,795            757,843
     Madeleine W. Ludlow                     26,067,724            481,914
     George L. Mayer                         26,091,618            458,020
     Roger D. Peirce                         26,002,438            547,200
     Jack I. Rajala                          25,734,994            814,644
     Donald J. Shippar                       25,765,280            784,358
     Nick Smith                              25,715,577            834,061
     Bruce W. Stender                        25,765,606            784,032
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
                                                                    VOTES                                  BROKER
                                              VOTES FOR            AGAINST           ABSTENTIONS          NONVOTES
--------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                 <C>                 <C>                  <C>
     INDEPENDENT REGISTERED
     PUBLIC ACCOUNTING FIRM

     PricewaterhouseCoopers LLP              25,876,490            542,654             130,494               -
--------------------------------------------------------------------------------------------------------------------
</TABLE>

(d)  Not applicable.

                     ALLETE Second Quarter 2006 Form 10-Q                    40

<PAGE>

ITEM 5.    OTHER INFORMATION

Reference  is made to our 2005  Form  10-K  for  background  information  on the
following updates. Unless otherwise indicated,  cited references are to our 2005
Form 10-K.

Ref. Page 12 - First, Second and Third Full Paragraphs

In May  2006,  the MPUC  approved  our  filing  for  cost  recovery  of  planned
expenditures  to  reduce  emissions  to meet  pending  federal  requirements  at
Taconite  Harbor and Laskin under the AREA plan. The approval  allows  Minnesota
Power to recover  costs for SO2,  NOx and mercury  emission  reductions  made at
these facilities  without a rate  proceeding.  Minnesota Power plans to complete
installation  of new equipment at the first of two Laskin units this fall,  with
the  first  of  three  Taconite  Harbor  unit  installations  anticipated  to be
completed by mid-2007.  Work on all units is  anticipated to be completed by the
end of 2008. Cost recovery filings will be made 90 days prior to the anticipated
in-service date for the equipment at each unit, with rate recovery  beginning in
the month following the in-service date.


Ref. Page 20 - Sixth Full Paragraph

On June 16,  2006,  Minnesota  Power  filed an  application  with the MPCA for a
variance from a clarified ash pond  discharge  standard for mercury  included in
its National Pollutant  Discharge  Elimination System (NPDES) permit for Laskin.
The  variance  requests  an  extension  for  Laskin  to meet  mercury  discharge
requirements  which become  effective  March 23, 2007,  as set forth in Laskin's
NPDES  permit  issued by the MPCA in May 2005.  Currently  there is no  feasible
technology  available  that  would  enable  Laskin to meet the  March  23,  2007
deadline  to lower the  mercury  in its  wastewater  discharge.  The  Company is
actively  researching and testing treatment technology options, but is unable to
predict the outcome of this matter.


Ref. Page 20 - Seventh Full Paragraph

Minnesota  Power,  the Fond du Lac Band of Lake  Superior  Chippewa and the U.S.
Department  of Interior  (DOI)  reached a  settlement  agreement to resolve each
party's respective appeals of the St. Louis River Project hydroelectric license.
In December 2004,  Minnesota  Power filed an application for an amendment to the
St. Louis River Project license incorporating the settlement agreement.  On June
22, 2006,  the FERC issued an order  modifying and approving  Minnesota  Power's
application to amend the license consistent with the settlement  agreement.  The
FERC  declined a request by the DOI to vacate  portions of the original  license
order as part of the license amendment process. The order by the FERC, otherwise
adopts the material  provisions of the settlement as part of the amended project
license. The order became final and non-appealable on July 22, 2006.

41                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

ITEM 6.    EXHIBITS

EXHIBIT
NUMBER

   10(a)   First  Amendment to Fourth  Amended and Restated  Committed  Facility
           Letter  dated June 19,  2006,  by and among  ALLETE and LaSalle  Bank
           National Association, as Agent.

  10(b)1   Financing  Agreement  between Collier County  Industrial  Development
           Authority and ALLETE dated as of July 1, 2006.

  10(b)2   Letter of Credit  Agreement,  dated as of July 5, 2006, among ALLETE,
           Participating  Banks and Wells Fargo Bank, National  Association,  as
           Administrative Agent and Issuing Bank.

   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 July 28,  2006,  announcing  2006 second
           quarter  earnings.  (THIS EXHIBIT HAS BEEN FURNISHED AND SHALL NOT BE
           DEEMED "FILED" FOR PURPOSES OF SECTION 18 OF THE SECURITIES  EXCHANGE
           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 Second Quarter 2006 Form 10-Q                    42

<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.





July 28, 2006                                   Mark A. Schober
                               -------------------------------------------------
                                                Mark A. Schober
                               Senior Vice President and Chief Financial Officer




July 28, 2006                                   Steven Q. DeVinck
                               -------------------------------------------------
                                                Steven Q. DeVinck
                                                   Controller

43                    ALLETE Second Quarter 2006 Form 10-Q

<PAGE>

                                  EXHIBIT INDEX


EXHIBIT
NUMBER
--------------------------------------------------------------------------------

   10(a)   First  Amendment to Fourth  Amended and Restated  Committed  Facility
           Letter  dated June 19,  2006,  by and among  ALLETE and LaSalle  Bank
           National Association, as Agent.

  10(b)1   Financing  Agreement  between Collier County  Industrial  Development
           Authority and ALLETE dated as of July 1, 2006.

  10(b)2   Letter of Credit  Agreement,  dated as of July 5, 2006, among ALLETE,
           Participating  Banks and Wells Fargo Bank, National  Association,  as
           Administrative Agent and Issuing Bank.

   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 July 28,  2006,  announcing  2006 second
           quarter  earnings.  (THIS EXHIBIT HAS BEEN FURNISHED AND SHALL NOT BE
           DEEMED "FILED" FOR PURPOSES OF SECTION 18 OF THE SECURITIES  EXCHANGE
           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 Second Quarter 2006 Form 10-Q
</TEXT>
</DOCUMENT>
