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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

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

For the quarterly period ended June 30, 2021
or

☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
| For the transition period from ______________ to ______________

Commission File Number 1-3548
ALLETE, Inc.
(Exact name of registrant as specified in its charter)

Minnesota |  | 41-0418150
(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

30 West Superior Street
Duluth, Minnesota 55802-2093
(Address of principal executive offices)
(Zip Code)
(218) 279-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class | Trading symbol | Name of each exchange on which registered
Common Stock, without par value | ALE | New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ Accelerated Filer ☐
Non-Accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Common Stock, without par value,
52,268,119 shares outstanding
as of June 30, 2021

Index

Definitions | 3
Forward-Looking Statements | 5
Part I. | Financial Information |
| Item 1. | Consolidated Financial Statements - Unaudited | 6
|  | Consolidated Balance Sheet | 6
|  | Consolidated Statement of Income | 7
|  | Consolidated Statement of Comprehensive Income | 8
|  | Consolidated Statement of Cash Flows | 9
|  | Consolidated Statement of Equity | 10
|  | Notes to Consolidated Financial Statements | 11
|  | Note 1. Operations and Significant Accounting Policies | 11
|  | Note 2. Regulatory Matters | 13
|  | Note 3. Equity Investments | 16
|  | Note 4. Fair Value | 17
|  | Note 5. Short-Term and Long-Term Debt | 19
|  | Note 6. Commitments, Guarantees and Contingencies | 20
|  | Note 7. Earnings Per Share and Common Stock | 25
|  | Note 8. Income Tax Expense | 25
|  | Note 9. Pension and Other Postretirement Benefit Plans | 27
|  | Note 10. Business Segments | 27
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29
|  | Comparison of the Quarters Ended | 31
|  | Comparison of the Six Months Ended | 34
|  | Critical Accounting Policies | 37
|  | Outlook | 38
|  | Liquidity and Capital Resources | 46
|  | Other | 48
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 48
| Item 4. | Controls and Procedures | 49
Part II. | Other Information |
| Item 1. | Legal Proceedings | 49
| Item 1A. | Risk Factors | 50
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 50
| Item 3. | Defaults Upon Senior Securities | 50
| Item 4. | Mine Safety Disclosures | 50
| Item 5. | Other Information | 51
| Item 6. | Exhibits | 52
Signatures | 53

ALLETE, Inc. Second Quarter 2021 Form 10-Q
2

Definitions
The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.

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

ALLETE, Inc. Second Quarter 2021 Form 10-Q
3

Abbreviation or Acronym | Term
MPUC | Minnesota Public Utilities Commission
MW / MWh | Megawatt(s) / Megawatt-hour(s)
NAAQS | National Ambient Air Quality Standards
NDPSC | North Dakota Public Service Commission
Nobles 2 | Nobles 2 Power Partners, LLC
NOL | Net Operating Loss
NO X | Nitrogen Oxides
Northshore Mining | Northshore Mining Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
Note ___ | Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDES | National Pollutant Discharge Elimination System
NTEC | Nemadji Trail Energy Center
Oliver Wind I | Oliver Wind I Energy Center
Oliver Wind II | Oliver Wind II Energy Center
PolyMet | PolyMet Mining Corp.
PPA / PSA | Power Purchase Agreement / Power Sales Agreement
PPACA | Patient Protection and Affordable Care Act of 2010
PSCW | Public Service Commission of Wisconsin
SEC | Securities and Exchange Commission
Silver Bay Power | Silver Bay Power Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
SO 2 | Sulfur Dioxide
Square Butte | Square Butte Electric Cooperative, a North Dakota cooperative corporation
SWL&P | Superior Water, Light and Power Company
Taconite Harbor | Taconite Harbor Energy Center
Town Center District | Town Center at Palm Coast Community Development District in Florida
U.S. | United States of America
USS Corporation | United States Steel Corporation
WTG | Wind Turbine Generator

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

Forward-Looking Statements
Statements in this report that are not statements of historical facts are considered “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there can be no assurance that the expected results will be achieved. Any statements that express, or involve discussions as to, future expectations, risks, beliefs, plans, objectives, assumptions, events, uncertainties, financial performance, or growth strategies (often, but not always, through the use of words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “likely,” “will continue,” “could,” “may,” “potential,” “target,” “outlook” or words of similar meaning) are not statements of historical facts and may be forward-looking.
In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are providing this cautionary statement to identify important factors that could cause our actual results to differ materially from those indicated in forward-looking statements made by or on behalf of ALLETE in this Form 10-Q, in presentations, on our website, in response to questions or otherwise. These statements are qualified in their entirety by reference to, and are accompanied by, the following important factors, in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements that could cause our actual results to differ materially from those indicated in the forward-looking statements:
•our ability to successfully implement our strategic objectives;
•global and domestic economic conditions affecting us or our customers;
•changes in and compliance with laws and regulations;
•changes in tax rates or policies or in rates of inflation;
•the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;
•weather conditions, natural disasters and pandemic diseases, including the ongoing COVID-19 pandemic;
•our ability to access capital markets, bank financing and other financing sources;
•changes in interest rates and the performance of the financial markets;
•project delays or changes in project costs;
•changes in operating expenses and capital expenditures and our ability to raise revenues from our customers;
•the impacts of commodity prices on ALLETE and our customers;
•our ability to attract and retain qualified, skilled and experienced personnel;
•effects of emerging technology;
•war, acts of terrorism and cybersecurity attacks;
•our ability to manage expansion and integrate acquisitions;
•population growth rates and demographic patterns;
•wholesale power market conditions;
•federal and state regulatory and legislative actions that impact regulated utility economics, including our allowed rates of return, capital structure, ability to secure financing, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities and utility infrastructure, recovery of purchased power, capital investments and other expenses, including present or prospective environmental matters;
•effects of competition, including competition for retail and wholesale customers;
•effects of restructuring initiatives in the electric industry;
•the impacts on our businesses of climate change and future regulation to restrict the emissions of GHG;
•effects of increased deployment of distributed low-carbon electricity generation resources;
•the impacts of laws and regulations related to renewable and distributed generation;
•pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;
•our current and potential industrial and municipal customers’ ability to execute announced expansion plans;
•real estate market conditions where our legacy Florida real estate investment is located may not improve; and
•the success of efforts to realize value from, invest in, and develop new opportunities.
Additional disclosures regarding factors that could cause our results or performance to differ from those anticipated by this report are discussed in Part I, Item 1A. Risk Factors of our 2020 Form 10-K and Part II, Item 1A. Risk Factors of this Form 10-Q. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can it assess the impact of each of these factors on the businesses of ALLETE or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by ALLETE in this Form 10-Q and in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
5

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited

| June 30, 2021 |  | December 31, 2020
Millions |  |  |
Assets |  |  |
Current Assets |  |  |
Cash and Cash Equivalents | $62.5 |  |  | $44.3 |
Accounts Receivable (Less Allowance of $2.7 and $2.5) | 105.2 |  |  | 111.9 |
Inventories – Net | 88.1 |  |  | 74.2 |
Prepayments and Other | 23.5 |  |  | 24.5 |
Total Current Assets | 279.3 |  |  | 254.9 |
Property, Plant and Equipment – Net | 5,021.6 |  |  | 4,840.8 |
Regulatory Assets | 491.9 |  |  | 480.9 |
Equity Investments | 317.8 |  |  | 301.2 |
Other Non-Current Assets | 182.7 |  |  | 206.8 |
Total Assets | $6,293.3 |  |  | $6,084.6 |
Liabilities and Equity |  |  |
Liabilities |  |  |
Current Liabilities |  |  |
Accounts Payable | $100.0 |  |  | $110.0 |
Accrued Taxes | 53.0 |  |  | 59.4 |
Accrued Interest | 19.5 |  |  | 19.8 |
Long-Term Debt Due Within One Year | 362.6 |  |  | 203.7 |
Other | 60.4 |  |  | 66.7 |
Total Current Liabilities | 595.5 |  |  | 459.6 |
Long-Term Debt | 1,664.6 |  |  | 1,593.2 |
Deferred Income Taxes | 188.7 |  |  | 195.7 |
Regulatory Liabilities | 514.9 |  |  | 524.8 |
Defined Benefit Pension and Other Postretirement Benefit Plans | 210.7 |  |  | 225.8 |
Other Non-Current Liabilities | 277.0 |  |  | 285.3 |
Total Liabilities | 3,451.4 |  |  | 3,284.4 |
Commitments, Guarantees and Contingencies (Note 6) |  |  |
Equity |  |  |
ALLETE Equity |  |  |
Common Stock Without Par Value, 80.0 Shares Authorized, 52.3 and 52.1 Shares Issued and Outstanding | 1,474.1 |  |  | 1,460.9 |
Accumulated Other Comprehensive Loss | (30.3) |  |  | (31.1) |
Retained Earnings | 878.8 |  |  | 864.8 |
Total ALLETE Equity | 2,322.6 |  |  | 2,294.6 |
Non-Controlling Interest in Subsidiaries | 519.3 |  |  | 505.6 |
Total Equity | 2,841.9 |  |  | 2,800.2 |
Total Liabilities and Equity | $6,293.3 |  |  | $6,084.6 |

The accompanying notes are an integral part of these statements.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
6

ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited

| Quarter Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2021 | 2020 |  | 2021 | 2020
Millions Except Per Share Amounts |  |  |  |  |
Operating Revenue |  |  |  |  |
Contracts with Customers – Utility | $290.4 |  | $200.8 |  |  | $583.4 |  | $466.1 |
Contracts with Customers – Non-utility | 42.3 |  | 39.6 |  |  | 85.7 |  | 83.1 |
Other – Non-utility | 2.9 |  | 2.8 |  |  | 5.7 |  | 5.6 |
Total Operating Revenue | 335.6 |  | 243.2 |  |  | 674.8 |  | 554.8 |
Operating Expenses |  |  |  |  |
Fuel, Purchased Power and Gas – Utility | 128.9 |  | 69.3 |  |  | 249.3 |  | 158.3 |
Transmission Services – Utility | 19.2 |  | 16.4 |  |  | 36.9 |  | 34.9 |
Cost of Sales – Non-utility | 15.8 |  | 16.3 |  |  | 32.6 |  | 33.2 |
Operating and Maintenance | 67.1 |  | 59.0 |  |  | 133.4 |  | 120.0 |
Depreciation and Amortization | 57.9 |  | 54.5 |  |  | 115.9 |  | 107.9 |
Taxes Other than Income Taxes | 18.5 |  | 15.0 |  |  | 36.5 |  | 27.6 |
Total Operating Expenses | 307.4 |  | 230.5 |  |  | 604.6 |  | 481.9 |
Operating Income | 28.2 |  | 12.7 |  |  | 70.2 |  | 72.9 |
Other Income (Expense) |  |  |  |  |
Interest Expense | (17.4) |  | (15.9) |  |  | (34.5) |  | (31.6) |
Equity Earnings | 5.1 |  | 6.4 |  |  | 9.9 |  | 11.6 |
Other | 1.8 |  | 5.2 |  |  | 5.1 |  | 6.2 |
Total Other Expense | (10.5) |  | (4.3) |  |  | (19.5) |  | (13.8) |
Income Before Income Taxes | 17.7 |  | 8.4 |  |  | 50.7 |  | 59.1 |
Income Tax Benefit | (4.0) |  | (8.5) |  |  | (14.4) |  | (22.3) |
Net Income | 21.7 |  | 16.9 |  |  | 65.1 |  | 81.4 |
Net Loss Attributable to Non-Controlling Interest | (6.2) |  | (3.2) |  |  | (14.6) |  | (5.0) |
Net Income Attributable to ALLETE | $27.9 |  | $20.1 |  |  | $79.7 |  | $86.4 |
Average Shares of Common Stock |  |  |  |  |
Basic | 52.2 |  | 51.8 |  |  | 52.2 |  | 51.8 |
Diluted | 52.3 |  | 51.9 |  |  | 52.2 |  | 51.8 |
Basic Earnings Per Share of Common Stock | $0.53 |  | $0.39 |  |  | $1.53 |  | $1.67 |
Diluted Earnings Per Share of Common Stock | $0.53 |  | $0.39 |  |  | $1.53 |  | $1.67 |

The accompanying notes are an integral part of these statements.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
7

ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited

| Quarter Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2021 |  | 2020 |  | 2021 |  | 2020
Millions |  |  |  |  |  |  |
Net Income | $21.7 |  |  | $16.9 |  |  | $65.1 |  |  | $81.4 |
Other Comprehensive Income |  |  |  |  |  |  |
Unrealized Gain on Securities |  |  |  |  |  |  |
Net of Income Tax Expense of $–, $0.1, $– and $– | — |  |  | 0.4 |  |  | — |  |  | — |
Defined Benefit Pension and Other Postretirement Benefit Plans |  |  |  |  |  |  |
Net of Income Tax Expense of $0.2, $–, $0.3 and $0.1 | 0.4 |  |  | 0.1 |  |  | 0.8 |  |  | 0.3 |
Total Other Comprehensive Income | 0.4 |  |  | 0.5 |  |  | 0.8 |  |  | 0.3 |
Total Comprehensive Income | 22.1 |  |  | 17.4 |  |  | 65.9 |  |  | 81.7 |
Net Loss Attributable to Non-Controlling Interest | (6.2) |  |  | (3.2) |  |  | (14.6) |  |  | (5.0) |
Total Comprehensive Income Attributable to ALLETE | $28.3 |  |  | $20.6 |  |  | $80.5 |  |  | $86.7 |

The accompanying notes are an integral part of these statements.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
8

ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited

| Six Months Ended
| June 30,
| 2021 |  | 2020
Millions |  |  |
Operating Activities |  |  |
Net Income | $65.1 |  |  | $81.4 |
AFUDC – Equity | (1.1) |  |  | (1.4) |
Income from Equity Investments – Net of Dividends | 1.1 |  |  | (2.2) |
Realized and Unrealized (Gain) Loss on Investments and Property, Plant and Equipment | (0.7) |  |  | 1.1 |
Depreciation Expense | 115.8 |  |  | 107.9 |
Amortization of PSAs | (5.7) |  |  | (5.6) |
Amortization of Other Intangible Assets and Other Assets | 5.1 |  |  | 4.6 |
Deferred Income Tax Benefit | (14.4) |  |  | (22.3) |
Share-Based and ESOP Compensation Expense | 3.1 |  |  | 3.1 |
Defined Benefit Pension and Postretirement Benefit Expense | 2.2 |  |  | — |
Provision for Interim Rate Refund | — |  |  | 11.7 |
Payments for Tax Reform Refund | — |  |  | (0.1) |
Bad Debt Expense | 0.6 |  |  | 1.1 |
Changes in Operating Assets and Liabilities |  |  |
Accounts Receivable | 5.7 |  |  | 9.5 |
Inventories | (13.9) |  |  | (9.3) |
Prepayments and Other | 1.7 |  |  | 3.3 |
Accounts Payable | (1.2) |  |  | (11.6) |
Other Current Liabilities | (13.0) |  |  | (8.5) |
Cash Contributions to Defined Benefit Pension Plans | (10.3) |  |  | (10.7) |
Changes in Regulatory and Other Non-Current Assets | (25.6) |  |  | (16.8) |
Changes in Regulatory and Other Non-Current Liabilities | (8.8) |  |  | 8.1 |
Cash from Operating Activities | 105.7 |  |  | 143.3 |
Investing Activities |  |  |
Proceeds from Sale of Available-for-sale Securities | 2.6 |  |  | 2.1 |
Payments for Purchase of Available-for-sale Securities | (2.0) |  |  | (2.3) |
Payments for Equity Method Investments | (17.1) |  |  | (66.6) |
Additions to Property, Plant and Equipment | (293.4) |  |  | (419.9) |
Other Investing Activities | 4.2 |  |  | 0.5 |
Cash for Investing Activities | (305.7) |  |  | (486.2) |
Financing Activities |  |  |
Proceeds from Issuance of Common Stock | 10.1 |  |  | 7.9 |
Proceeds from Issuance of Short-Term and Long-Term Debt | 379.0 |  |  | 297.4 |
Repayments of Short-Term and Long-Term Debt | (149.3) |  |  | (20.9) |
Proceeds from Non-Controlling Interest in Subsidiaries | 28.9 |  |  | 67.8 |
Dividends on Common Stock | (65.7) |  |  | (63.9) |
Other Financing Activities | (0.9) |  |  | (0.5) |
Cash from Financing Activities | 202.1 |  |  | 287.8 |
Change in Cash, Cash Equivalents and Restricted Cash | 2.1 |  |  | (55.1) |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period | 65.2 |  |  | 92.5 |
Cash, Cash Equivalents and Restricted Cash at End of Period | $67.3 |  |  | $37.4 |

The accompanying notes are an integral part of these statements.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
9

ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited

| Quarter Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2021 | 2020 |  | 2021 | 2020
Millions Except Per Share Amounts |  |  |  |  |
Common Stock |  |  |  |  |
Balance, Beginning of Period | $1,467.6 |  | $1,441.7 |  |  | $1,460.9 |  | $1,436.7 |
Common Stock Issued | 6.5 |  | 6.0 |  |  | 13.2 |  | 11.0 |
Balance, End of Period | 1,474.1 |  | 1,447.7 |  |  | 1,474.1 |  | 1,447.7 |
Accumulated Other Comprehensive Loss |  |  |  |  |
Balance, Beginning of Period | (30.7) |  | (23.8) |  |  | (31.1) |  | (23.6) |
Other Comprehensive Income - Net of Income Taxes |  |  |  |  |
Unrealized Gain on Debt Securities | — |  | 0.4 |  |  | — |  | — |
Defined Benefit Pension and Other Postretirement Plans | 0.4 |  | 0.1 |  |  | 0.8 |  | 0.3 |
Balance, End of Period | (30.3) |  | (23.3) |  |  | (30.3) |  | (23.3) |
Retained Earnings |  |  |  |  |
Balance, Beginning of Period | 883.8 |  | 853.2 |  |  | 864.8 |  | 818.8 |
Net Income Attributable to ALLETE | 27.9 |  | 20.1 |  |  | 79.7 |  | 86.4 |
Common Stock Dividends | (32.9) |  | (32.0) |  |  | (65.7) |  | (63.9) |
Balance, End of Period | 878.8 |  | 841.3 |  |  | 878.8 |  | 841.3 |
Non-Controlling Interest in Subsidiaries |  |  |  |  |
Balance, Beginning of Period | 525.7 |  | 101.9 |  |  | 505.6 |  | 103.7 |
Proceeds from Non-Controlling Interest in Subsidiaries | — |  | 67.8 |  |  | 28.9 |  | 67.8 |
Net Loss Attributable to Non-Controlling Interest | (6.2) |  | (3.2) |  |  | (14.6) |  | (5.0) |
Distributions to Non-Controlling Interest | (0.2) |  | — |  |  | (0.6) |  | — |
Balance, End of Period | 519.3 |  | 166.5 |  |  | 519.3 |  | 166.5 |
Total Equity | $2,841.9 |  | $2,432.2 |  |  | $2,841.9 |  | $2,432.2 |
Dividends Per Share of Common Stock | $0.63 |  | $0.6175 |  |  | $1.26 |  | $1.235 |

The accompanying notes are an integral part of these statements.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – UNAUDITED
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2020, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the six months ended June 30, 2021, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2021. For further information, refer to the Consolidated Financial Statements and notes included in our 2020 Form 10-K.
NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of June 30, 2021, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan agreement. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under ALLETE Clean Energy loan and tax equity financing agreements as well as PSAs. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.

Cash, Cash Equivalents and Restricted Cash | June 30, 2021 |  | December 31, 2020 |  | June 30, 2020 |  | December 31, 2019
Millions |  |  |  |  |  |  |
Cash and Cash Equivalents | $62.5 |  |  | $44.3 |  |  | $25.7 |  |  | $69.3 |
Restricted Cash included in Prepayments and Other | 1.6 |  |  | 0.8 |  |  | 7.3 |  |  | 2.8 |
Restricted Cash included in Other Non-Current Assets | 3.2 |  |  | 20.1 |  |  | 4.4 |  |  | 20.4 |
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows | $67.3 |  |  | $65.2 |  |  | $37.4 |  |  | $92.5 |

Inventories – Net. Inventories are stated at the lower of cost or net realizable value. Inventories in our Regulated Operations segment are carried at an average cost or first-in, first-out basis. Inventories in our ALLETE Clean Energy segment and Corporate and Other businesses are carried at an average cost, first-in, first-out or specific identification basis.

Inventories – Net | June 30, 2021 |  | December 31, 2020
Millions |  |  |
Fuel (a) | $17.2 |  |  | $23.1 |
Materials and Supplies | 53.7 |  |  | 51.1 |
Construction of Wind Energy Facilities (b) | 17.2 |  |  | — |
Total Inventories – Net | $88.1 |  |  | $74.2 |

(a) Fuel consists primarily of coal inventory at Minnesota Power.
(b) Project costs related to ALLETE Clean Energy’s Northern Wind and Red Barn wind projects which are expected be sold in late 2022. (See Outlook – ALLETE Clean Energy.)
ALLETE, Inc. Second Quarter 2021 Form 10-Q
11

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Non-Current Assets | June 30, 2021 |  | December 31, 2020
Millions |  |  |
Contract Assets (a) | $24.1 |  |  | $25.5 |
Operating Lease Right-of-use Assets | 18.9 |  |  | 22.4 |
ALLETE Properties | 18.3 |  |  | 18.2 |
Restricted Cash | 3.2 |  |  | 20.1 |
Other Postretirement Benefit Plans | 35.2 |  |  | 34.2 |
Other | 83.0 |  |  | 86.4 |
Total Other Non-Current Assets | $182.7 |  |  | $206.8 |

(a) Contract Assets consist of payments made to customers as an incentive to execute or extend service agreements. The contract payments are being amortized over the term of the respective agreements as a reduction to revenue.

Other Current Liabilities | June 30, 2021 |  | December 31, 2020
Millions |  |  |
PSAs | $12.6 |  |  | $12.5 |
Fuel Adjustment Clause | 3.7 |  |  | 3.7 |
Operating Lease Liabilities | 5.6 |  |  | 5.9 |
Other | 38.5 |  |  | 44.6 |
Total Other Current Liabilities | $60.4 |  |  | $66.7 |

Other Non-Current Liabilities | June 30, 2021 |  | December 31, 2020
Millions |  |  |
Asset Retirement Obligation (a) | $170.6 |  |  | $166.6 |
PSAs | 45.8 |  |  | 52.1 |
Operating Lease Liabilities | 13.4 |  |  | 16.5 |
Other | 47.2 |  |  | 50.1 |
Total Other Non-Current Liabilities | $277.0 |  |  | $285.3 |

(a)The asset retirement obligation is primarily related to our Regulated Operations and is funded through customer rates over the life of the related assets. Additionally, BNI Energy funds its obligation through its cost-plus coal supply agreements for which BNI Energy has recorded a receivable of $25.0 million in Other Non-Current Assets on the Consolidated Balance Sheet as of June 30, 2021 and December 31, 2020.

Other Income |  |
Six Months Ended June 30, | 2021 | 2020
Millions |  |
Pension and Other Postretirement Benefit Plan Non-Service Credits (a) | $2.8 |  | $4.8 |
Interest and Investment Income (Loss) | 1.8 |  | (0.5) |
AFUDC - Equity | 1.1 |  | 1.4 |
Other | (0.6) |  | 0.5 |
Total Other Income | $5.1 |  | $6.2 |

(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 9. Pension and Other Postretirement Benefit Plans.)
ALLETE, Inc. Second Quarter 2021 Form 10-Q
12

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Supplemental Statement of Cash Flows Information.

Six Months Ended June 30, | 2021 |  | 2020
Millions |  |  |
Cash Paid for Interest – Net of Amounts Capitalized | $33.8 |  | $30.9
Noncash Investing and Financing Activities |  |  |
Increase in Accounts Payable for Capital Additions to Property, Plant and Equipment | $(8.8) |  | $(67.5)
Capitalized Asset Retirement Costs | $3.5 |  | $2.1
AFUDC–Equity | $1.1 |  | $1.4

Non-Controlling Interest in Subsidiaries. Non-controlling interest in subsidiaries on the Consolidated Balance Sheet and net loss attributable to non-controlling interest on the Consolidated Statement of Income represent the portion of equity ownership and earnings, respectively, of subsidiaries that are not attributable to equity holders of ALLETE. These amounts are primarily related to the tax equity financing structures for ALLETE Clean Energy’s 106 MW Glen Ullin, 80 MW South Peak and 303 MW Diamond Spring wind energy facilities as well as ALLETE’s equity investment in the 250 MW Nobles 2 wind energy facility.
Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the date of the financial statements issuance.
NOTE 2. REGULATORY MATTERS
Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2020 Form 10-K, with additional disclosure provided in the following paragraphs.
Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, PSCW or FERC. As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable, and environmental investments and expenditures. Revenue from cost recovery riders was $22.1 million for the six months ended June 30, 2021 ($14.9 million for the six months ended June 30, 2020).
2020 Minnesota General Rate Case. In November 2019, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 10.6 percent for retail customers. The rate filing sought a return on equity of 10.05 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would have generated approximately $66 million in additional revenue. In December 2019 orders, the MPUC accepted the filing as complete and authorized an annual interim rate increase of $36.1 million beginning January 1, 2020.
In April 2020, Minnesota Power filed a request with the MPUC that proposed a resolution of Minnesota Power’s 2020 general rate case. Key components of our proposal included removing the power marketing margin credit in base rates and reflecting actual power marketing margins in the fuel adjustment clause effective May 1, 2020; refunding to customers interim rates collected through April 2020; increasing customer rates 4.1 percent compared to the 5.8 percent increase reflected in interim rates; and a provision that Minnesota Power would not file another rate case until at least November 1, 2021, unless certain events occur. In a June 2020 order, the MPUC approved Minnesota Power’s petition and proposal to resolve and withdraw the general rate case. Effective May 1, 2020, customer rates were set at an increase of 4.1 percent with the removal of the power marketing margin credit from base rates. Actual power marketing margins will be reflected in the fuel adjustment clause. Reserves for interim rates of $11.7 million were recorded in the second quarter of 2020 and refunded in the third and fourth quarters of 2020.
Environmental Improvement Rider. Minnesota Power has an approved environmental improvement rider for investments and expenditures related to the implementation of the Boswell Unit 4 mercury emissions reduction plan completed in 2015. Updated customer billing rates for the environmental improvement rider were approved by the MPUC in a November 2018 order. On January 19, 2021, Minnesota Power filed a petition seeking MPUC approval to end the environmental improvement rider, which was approved in an order dated April 20, 2021.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
13

NOTE 2. REGULATORY MATTERS (Continued)
Electric Rates (Continued)
Solar Cost Recovery Rider. In June 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard, which was approved by the MPUC in an order dated April 20, 2021. New customer billing rates for the solar cost recovery rider were implemented on June 1, 2021.
Electric Vehicle Charging Infrastructure Petition. On April 8, 2021, Minnesota Power filed a petition seeking approval to install and own DC fast charger stations for electric vehicles across its service territory, implement accompanying rates for those stations, and track and recover investments and expenses for the project.
COVID-19 Related Deferred Accounting. In an order dated March 24, 2020, the PSCW authorized public utilities, including SWL&P, to defer expenditures incurred by the utility resulting from its compliance with state government or regulator orders during Wisconsin’s declared public health emergency for COVID-19. On April 20, 2020, Minnesota Power along with other regulated electric and natural gas service providers in Minnesota filed a joint petition to request MPUC authorization to track incremental costs and expenses incurred as a result of the COVID-19 pandemic, and to defer and record such costs as a regulatory asset, subject to recovery in a future proceeding. In an order dated May 22, 2020, the MPUC approved the joint petition requiring the joint petitioners to track cost and revenue impacts resulting from the COVID-19 pandemic with review for recovery in a future rate proceeding. As of June 30, 2021, Minnesota Power has not deferred any costs or lost revenue, and SWL&P has deferred an immaterial amount of costs.
Minnesota Power submitted a petition in November 2020 to the MPUC requesting authority to track and record as a regulatory asset lost large industrial customer revenue resulting from the idling of USS Corporation’s Keetac plant and Verso Corporation’s paper mill in Duluth, Minnesota. Keetac and Verso Corporation represent revenue of approximately $30 million annually, net of associated expense savings such as fuel costs. Minnesota Power proposed in this petition to defer any lost revenue related to the idling of the Keetac facility and the Verso Corporation paper mill to its next general rate case or other proceeding for review for recovery by the MPUC. In an order dated May 13, 2021, the MPUC denied Minnesota Power’s request.
Fuel Adjustment Clause. In March 2020, Minnesota Power filed its fuel adjustment clause report covering the period July 2018 through December 2019. In a September 2020 order, the MPUC referred the review of Minnesota Power’s forced outage costs during the period of the report, which totaled approximately $8 million, to an administrative law judge for a contested case hearing to recommend to the MPUC if any of those costs should be returned to customers. A recommendation by the administrative law judge is expected in the third quarter of 2021. We cannot predict the outcome of this proceeding.
Conservation Improvement Program. On April 1, 2021, Minnesota Power submitted its 2020 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $2.4 million based upon MPUC procedures. CIP financial incentives are recognized in the period in which the MPUC approves the filing.
2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in early 2022.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
14

NOTE 2. REGULATORY MATTERS (Continued)
Nemadji Trail Energy Center. In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of a 250 MW natural gas capacity dedication and other affiliated-interest agreements for NTEC, a proposed 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. In a January 2019 order, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication and other affiliated-interest agreements. In 2019, the Minnesota Court of Appeals reversed and remanded the MPUC’s decision to approve certain affiliated-interest agreements. The MPUC was ordered to determine whether NTEC may have the potential for significant environmental effects and, if so, to prepare an environmental assessment before reassessing the agreements. On January 22, 2020, Minnesota Power filed a petition for further review with the Minnesota Supreme Court requesting that it review and overturn the Minnesota Court of Appeals decision. On April 21, 2021, the Minnesota Supreme Court reversed the Minnesota Court of Appeal’s decision by ruling that the MPUC is not required to conduct a review under the Minnesota Environmental Policy Act before approving affiliated-interest agreements that govern construction and operation of a Wisconsin power plant by a Minnesota utility, and remanded the case back to the Minnesota Court of Appeals for review of remaining issues on appeal. In January 2019, an application for a certificate of public convenience and necessity for NTEC was submitted to the PSCW, which was approved by the PSCW at a hearing in January 2020. Construction of NTEC is subject to obtaining additional permits from local, state and federal authorities. The total project cost is estimated to be approximately $700 million, of which ALLETE’s portion is expected to be approximately $350 million. ALLETE’s portion of NTEC project costs incurred through June 30, 2021, is approximately $15 million.
Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidance for the effect of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. With the exception of the regulatory asset for Boswell Units 1 and 2 net plant and equipment, no other regulatory assets are currently earning a return. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
15

NOTE 2. REGULATORY MATTERS (Continued)
Regulatory Assets and Liabilities (Continued)

Regulatory Assets and Liabilities | June 30, 2021 |  | December 31, 2020 |  |
Millions |  |  |  |  |
Non-Current Regulatory Assets |  |  |  |  |
Defined Benefit Pension and Other Postretirement Benefit Plans | $252.0 |  |  | $259.7 |  |  |
Income Taxes | 109.4 |  |  | 113.7 |  |  |
Cost Recovery Riders | 63.2 |  |  | 54.0 |  |  |
Asset Retirement Obligations | 31.4 |  |  | 31.6 |  |  |
Manufactured Gas Plant | 6.0 |  |  | 8.8 |  |  |
Fuel Adjustment Clause | 18.3 |  |  | — |  |  |
PPACA Income Tax Deferral | 4.5 |  |  | 4.5 |  |  |
Boswell Units 1 and 2 Net Plant and Equipment | 2.2 |  |  | 5.0 |  |  |
Other | 4.9 |  |  | 3.6 |  |  |
Total Non-Current Regulatory Assets | $491.9 |  |  | $480.9 |  |  |
Current Regulatory Liabilities (a) |  |  |  |  |
Fuel Adjustment Clause | $3.7 |  |  | $3.7 |  |  |
Transmission Formula Rates Refund | 2.4 |  |  | 2.9 |  |  |
Other | 0.1 |  |  | 1.0 |  |  |
Total Current Regulatory Liabilities | 6.2 |  |  | 7.6 |  |  |
Non-Current Regulatory Liabilities |  |  |  |  |
Income Taxes | 364.5 |  |  | 375.3 |  |  |
Wholesale and Retail Contra AFUDC | 85.1 |  |  | 86.6 |  |  |
Plant Removal Obligations | 45.5 |  |  | 41.2 |  |  |
Defined Benefit Pension and Other Postretirement Benefit Plans | 2.4 |  |  | 4.4 |  |  |
North Dakota Investment Tax Credits | 12.4 |  |  | 12.0 |  |  |
Conservation Improvement Program | 1.3 |  |  | 1.5 |  |  |
Other | 3.7 |  |  | 3.8 |  |  |
Total Non-Current Regulatory Liabilities | 514.9 |  |  | 524.8 |  |  |
Total Regulatory Liabilities | $521.1 |  |  | $532.4 |  |  |

(a)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
NOTE 3. EQUITY INVESTMENTS
Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our investment in ATC under the equity method of accounting. We expect to make cash investments of approximately $2.0 million in 2021.

ALLETE’s Investment in ATC |
Millions |
Equity Investment Balance as of December 31, 2020 | $149.0 |
Equity in ATC Earnings | 10.5 |
Distributed ATC Earnings | (8.5) |
Amortization of the Remeasurement of Deferred Income Taxes | 0.6 |
Equity Investment Balance as of June 30, 2021 | $151.6 |

ATC’s authorized return on equity is 10.02 percent, or 10.52 percent including an incentive adder for participation in a regional transmission organization, based on a May 2020 FERC order that granted rehearing of a 2019 FERC order.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
16

NOTE 3. EQUITY INVESTMENTS (Continued)
Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that owns and operates the 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. We account for our investment in Nobles 2 under the equity method of accounting.

ALLETE’s Investment in Nobles 2 |
Millions |
Equity Investment Balance as of December 31, 2020 | $152.2 |
Cash Investments | 17.1 |
Equity in Nobles 2 Earnings (a) | (0.6) |
Distributed Nobles 2 Earnings | (2.5) |
Equity Investment Balance as of June 30, 2021 | $166.2 |

(a)The Company also recorded net loss attributable to non-controlling interest of $3.4 million related to its investment in Nobles 2.
NOTE 4. FAIR VALUE
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 6. Fair Value to the Consolidated Financial Statements in our 2020 Form 10-K.
The following tables set forth, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2021, and December 31, 2020. Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
17

NOTE 4. FAIR VALUE (Continued)

| Fair Value as of June 30, 2021
Recurring Fair Value Measures | Level 1 |  | Level 2 |  | Level 3 |  | Total
Millions |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Investments (a) |  |  |  |  |  |  |
Available-for-sale – Equity Securities | $9.1 |  |  | — |  |  | — |  |  | $9.1 |
Available-for-sale – Corporate and Governmental Debt Securities (b) | — |  |  | $8.5 |  |  | — |  |  | 8.5 |
Cash Equivalents | 1.9 |  |  | — |  |  | — |  |  | 1.9 |
Total Fair Value of Assets | $11.0 |  |  | $8.5 |  |  | — |  |  | $19.5 |
Liabilities |  |  |  |  |  |  |
Deferred Compensation (c) | — |  |  | $22.1 |  |  | — |  |  | $22.1 |
Total Fair Value of Liabilities | — |  |  | $22.1 |  |  | — |  |  | $22.1 |
Total Net Fair Value of Assets (Liabilities) | $11.0 |  |  | $(13.6) |  | — |  |  | $(2.6)
| Fair Value as of December 31, 2020
Recurring Fair Value Measures | Level 1 |  | Level 2 |  | Level 3 |  | Total
Millions |  |  |  |  |  |  |
Assets |  |  |  |  |  |  |
Investments (a) |  |  |  |  |  |  |
Available-for-sale – Equity Securities | $7.2 |  |  | — |  |  | — |  |  | $7.2 |
Available-for-sale – Corporate and Governmental Debt Securities | — |  |  | $10.4 |  |  | — |  |  | 10.4 |
Cash Equivalents | 5.5 |  |  | — |  |  | — |  |  | 5.5 |
Total Fair Value of Assets | $12.7 |  |  | $10.4 |  |  | — |  |  | $23.1 |
Liabilities |  |  |  |  |  |  |
Deferred Compensation (c) | — |  |  | $21.0 |  |  | — |  |  | $21.0 |
Total Fair Value of Liabilities | — |  |  | $21.0 |  |  | — |  |  | $21.0 |
Total Net Fair Value of Assets (Liabilities) | $12.7 |  |  | $(10.6) |  | — |  |  | $2.1 |

(a)Included in Other Non-Current Assets on the Consolidated Balance Sheet.
(b)As of June 30, 2021, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $2.0 million, in one year to less than three years was $2.6 million, in three years to less than five years was $3.6 million and in five or more years was $0.3 million.
(c)Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instruments approximates the carrying amount. The fair value of the item listed in the following table was based on quoted market prices for the same or similar instruments (Level 2).

Financial Instruments | Carrying Amount |  | Fair Value
Millions |  |  |
Short-Term and Long-Term Debt (a) |  |  |
June 30, 2021 | $2,036.1 |  | $2,271.7
December 31, 2020 | $1,806.4 |  | $2,122.0

(a)Excludes unamortized debt issuance costs.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, land inventory, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the quarter and six months ended June 30, 2021, and the year ended December 31, 2020, there were no indicators of impairment for these non-financial assets.
We continue to monitor changes in the broader energy markets that could indicate impairment at ALLETE Clean Energy wind energy facilities upon contract expirations. A continued decline in energy prices could result in a future impairment.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
18

NOTE 5. SHORT-TERM AND LONG-TERM DEBT
The following tables present the Company’s short-term and long-term debt as of June 30, 2021, and December 31, 2020:

June 30, 2021 | Principal |  | Unamortized Debt Issuance Costs |  | Total
Millions |  |  |  |  |
Short-Term Debt | $362.8 |  |  | $(0.2) |  | $362.6 |
Long-Term Debt | 1,673.3 |  |  | (8.7) |  | 1,664.6 |
Total Debt | $2,036.1 |  |  | $(8.9) |  | $2,027.2 |

December 31, 2020 | Principal |  | Unamortized Debt Issuance Costs |  | Total
Millions |  |  |  |  |
Short-Term Debt | $204.0 |  |  | $(0.3) |  | $203.7 |
Long-Term Debt | 1,602.4 |  |  | (9.2) |  | 1,593.2 |
Total Debt | $1,806.4 |  |  | $(9.5) |  | $1,796.9 |

We had $18.7 million outstanding in standby letters of credit and $63.8 million outstanding draws under our lines of credit as of June 30, 2021 ($22.3 million in standby letters of credit and no outstanding draws as of December 31, 2020).
On March 25, 2021, ALLETE entered into a $150 million unsecured term loan agreement (Term Loan) of which we have borrowed the full amount as of June 30, 2021. An additional draw of $35 million through the exercise of an accordion feature was made during the second quarter of 2021. The Term Loan is due March 24, 2022, and may be repaid at any time. Interest is payable monthly at a rate per annum equal to LIBOR plus 0.75 percent. Proceeds from the Term Loan were used for general corporate purposes.
On April 21, 2021, ALLETE agreed to sell $100 million of its First Mortgage Bonds (Bonds) to certain institutional buyers in the private placement market. The Bonds, which will be issued on or before September 1, 2021, will bear interest at 2.79 percent. The Bonds will mature in September 2031 and pay interest semi-annually in March and September of each year, commencing on March 1, 2022. ALLETE has the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision. The Bonds are subject to additional terms and conditions which are customary for these types of transactions. ALLETE intends to use the proceeds from the sale of the Bonds to fund utility capital investment and for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.
Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00, measured quarterly. As of June 30, 2021, our ratio was approximately 0.43 to 1.00. Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. ALLETE has no significant restrictions on its ability to pay dividends from retained earnings or net income. As of June 30, 2021, ALLETE was in compliance with its financial covenants.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
19

NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Power Purchase and Sale Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined that either we have no variable interest in the PPAs or, where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required. These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses or receive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.
Our PPAs are summarized in Note 8. Commitments, Guarantees and Contingencies to the Consolidated Financial Statements in our 2020 Form 10-K, with additional disclosure provided in the following paragraphs.
Square Butte PPA. As of June 30, 2021, Square Butte had total debt outstanding of $261.2 million. Fuel expenses are recoverable through Minnesota Power’s fuel adjustment clause and include the cost of coal purchased from BNI Energy under a long-term contract. Minnesota Power’s cost of power purchased from Square Butte during the six months ended June 30, 2021, was $39.8 million ($40.8 million for the same period in 2020). This reflects Minnesota Power’s pro rata share of total Square Butte costs based on the 50 percent output entitlement. Included in this amount was Minnesota Power’s pro rata share of interest expense of $2.9 million ($3.7 million for the same period in 2020). Minnesota Power’s payments to Square Butte are approved as a purchased power expense for ratemaking purposes by both the MPUC and the FERC.
Minnkota Power PSA. Minnesota Power has a PSA with Minnkota Power, which commenced in 2014. Under the PSA, Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power, resulting in Minnkota Power’s net entitlement increasing and Minnesota Power’s net entitlement decreasing until Minnesota Power’s share is eliminated at the end of 2025. Of Minnesota Power’s 50 percent output entitlement, it sold to Minnkota Power approximately 28 percent in 2021 and in 2020.
Coal, Rail and Shipping Contracts. Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirements through December 2021. Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2021. The costs of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s retail and municipal utility customers through the fuel adjustment clause.
Environmental Matters.
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have been promulgated by both the EPA and state authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation.
We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have been obtained. We anticipate that with many state and federal environmental regulations and requirements finalized, or to be finalized in the near future, potential expenditures for future environmental matters may be material and require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.
We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers.
Air. The electric utility industry is regulated both at the federal and state level to address air emissions. Minnesota Power’s thermal generating facilities mainly burn low-sulfur western sub-bituminous coal. All of Minnesota Power’s coal-fired generating facilities are equipped with pollution control equipment such as scrubbers, baghouses and low NO X technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with emission requirements.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
20

NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
Cross-State Air Pollution Rule (CSAPR). The CSAPR requires certain states in the eastern half of the U.S., including Minnesota, to reduce power plant emissions that contribute to ozone or fine particulate pollution in other states. The CSAPR does not require installation of controls but does require facilities have sufficient allowances to cover their emissions on an annual basis. These allowances are allocated to facilities from each state’s annual budget, and can be bought and sold. Based on our review of the NO X and SO 2 allowances issued and pending issuance, we currently expect generation levels and emission rates will result in continued compliance with the CSAPR. The EPA’s CSAPR Update Rule issued on March 15, 2021 to revise the 2016 CSAPR Update does not apply to the state of Minnesota and is therefore not currently projected to affect Minnesota Power’s CSAPR compliance. The State of Minnesota has not been identified in litigation as a culpable upwind emission source to downwind states, and previous EPA air quality modeling has demonstrated that Minnesota is not a significant contributor to downwind air quality attainment challenges. Minnesota Power will continue to monitor ongoing CSAPR rulemakings and compliance implementation.
National Ambient Air Quality Standards (NAAQS). The EPA is required to review the NAAQS every five years. If the EPA determines that a state’s air quality is not in compliance with the NAAQS, the state is required to adopt plans describing how it will reduce emissions to attain the NAAQS. Minnesota Power actively monitors NAAQS developments and compliance costs for existing standards or proposed NAAQS revisions are not currently expected to be material. The EPA is currently reviewing the secondary NAAQS for NO x and SO 2, as well as particulate matter. On June 10, 2021, the EPA announced it will reconsider the December 2020 final rule retaining the 2012 NAAQS, with a proposed rulemaking anticipated in mid-2022. The EPA has not stated its intent with regard to the 2020 Ozone NAAQS rule finalized in December 2020.
Climate Change. The scientific community generally accepts that emissions of GHG are linked to global climate change which creates physical and financial risks. Physical risks could include, but are not limited to: increased or decreased precipitation and water levels in lakes and rivers; increased or other changes in temperatures; and changes in the intensity and frequency of extreme weather events. These all have the potential to affect the Company’s business and operations. We are addressing climate change by taking the following steps that also ensure reliable and environmentally compliant generation resources to meet our customers’ requirements:
•Expanding renewable power supply for both our operations and the operations of others;
•Providing energy conservation initiatives for our customers and engaging in other demand side management efforts;
•Improving efficiency of our generating facilities;
•Supporting research of technologies to reduce carbon emissions from generating facilities and carbon sequestration efforts;
•Evaluating and developing less carbon intensive future generating assets such as efficient and flexible natural gas-fired generating facilities;
•Managing vegetation on right-of-way corridors to reduce potential wildfire or storm damage risks; and
•Practicing sound forestry management in our service territories to create landscapes more resilient to disruption from climate-related changes, including planting and managing long-lived conifer species.
EPA Regulation of GHG Emissions. In 2019, the EPA finalized several separate rulemakings regarding regulating carbon emissions from electric utility generating units. These rulemakings included repealing the Clean Power Plan (CPP) and adopting the Affordable Clean Energy Rule under Section 111(d) of the Clean Air Act (CAA) to regulate CO2 emissions at existing coal-fired power plants. The CPP was first announced as a proposed rule under Section 111(d) of the CAA for existing power plants entitled “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Generating Units”. The Affordable Clean Energy Rule established emissions guidelines for states to use when developing plans to limit CO2 coal-fired power plants. The EPA also published regulations for the state implementation of the Affordable Clean Energy Rule and other Section 111(d) rules. Affected facilities for Minnesota Power included Boswell Units 3 and 4, and Taconite Harbor Units 1 and 2, which are currently economically idled.
On January 19, 2021, the D.C. Circuit issued an opinion vacating the Affordable Clean Energy Rule and remanded the Affordable Clean Energy Rule back to the EPA for further consideration, consistent with the D.C. Circuit’s finding that the EPA erred in interpreting the CAA, pending rehearing or appeal. The EPA has indicated that it is working on a new set of emission guidelines to establish a Best System of Emissions Reduction for existing fossil fuel-fired electric generating units to direct states in regulating GHGs within their borders; however, no timeline has been disclosed. Minnesota Power will continue to monitor any related guidelines and rulemakings issued by the EPA or state regulatory authorities.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
21

NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
On April 22, 2021, the Biden Administration announced a goal to reach 100 percent carbon pollution-free electricity by 2035 as part of the U.S.’s Nationally Determined Contributions pledge, which is part of an international effort to limit global warming. At this time, no specific regulatory pathway to achieve these reductions has been proposed. Minnesota Power will continue to monitor these developments.
Minnesota had already initiated several measures consistent with those called for under the now repealed CPP and vacated Affordable Clean Energy Rule. Minnesota Power continues implementing its EnergyForward strategic plan that provides for significant emission reductions and diversifying its electricity generation mix to include more renewable and natural gas energy. We are unable to predict the GHG emission compliance costs we might incur as a result of a replacement for the Affordable Clean Energy Rule or other future laws, regulations or administrative policies; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Additionally on January 13, 2021, the EPA issued a rulemaking to apply CO 2 emission New Source Performance Standards (NSPS) to new, modified and reconstructed fossil fuel-fired electric generating units under Section 111(b) of the CAA. Minnesota Power is monitoring the NSPS final rule and any further Section 111(b) developments including their potential impact to the Company. The Company’s proposed combined-cycle natural gas-fired generating facility, NTEC, is expected to meet these NSPS requirements.
Water. The Clean Water Act requires NPDES permits be obtained from the EPA (or, when delegated, from individual state pollution control agencies) for any wastewater discharged into navigable waters. We have obtained all necessary NPDES permits, including NPDES storm water permits for applicable facilities, to conduct our operations.
Steam Electric Power Generating Effluent Limitations Guidelines. In 2015, the EPA issued revised federal effluent limitation guidelines (ELG) for steam electric power generating stations under the Clean Water Act. It set effluent limits and prescribed BACT for several wastewater streams, including flue gas desulphurization (FGD) water, bottom ash transport water and coal combustion landfill leachate. In 2017, the EPA announced a two-year postponement of the ELG compliance date of November 1, 2018, to November 1, 2020, while the agency reconsidered the bottom ash transport water and FGD wastewater provisions. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded back to the EPA portions of the ELG that allowed for continued discharge of legacy wastewater and leachate. On October 13, 2020, the EPA published a final ELG Rule allowing re-use of bottom ash transport water in FGD scrubber systems with limited discharges related to maintaining system water balance. The rule sets technology standards and numerical pollutant limits for discharges of bottom ash transport water and FGD wastewater. Compliance deadlines depend on subcategory, with compliance generally required as soon as possible, beginning after October 13, 2021, but no later than December 31, 2025, or December 31, 2028, in some specific cases. The rule also establishes new subcategories for retiring high-flow and low-utilization units, and establishes a voluntary incentives program for FGD wastewater.
The ELG's potential impact on Minnesota Power operations is primarily at Boswell. Boswell currently discharges bottom ash contact water through its NPDES permit, and also has a closed-loop FGD system that does not discharge to surface waters, but may do so in the future. With Boswell’s planned conversion to dry FGD handling and storage, ongoing FGD water generation will be reduced, and the majority of FGD waters will be legacy waters to be dewatered from existing impoundments. Re-use and onsite consumption for the majority of FGD waters is planned at Boswell.
Under the new ELG rule, most bottom ash transport water discharge to surface waters must cease no later than December 31, 2025, except for small discharges needed to retain water balance. The majority of bottom ash transport water will either need to be re-used in a closed-loop process or routed to a FGD scrubber. At Boswell, the bottom ash handling systems are planned to be converted to a dry process, which will eliminate the discharge of bottom ash transport water.
The EPA’s additional reconsideration of legacy wastewater discharge requirements has the potential to reduce timelines for dewatering Boswell’s existing ponds. The timing of a draft rule addressing legacy wastewater and leachate is currently unknown. Additionally, in accordance with Executive Order 13990, the EPA has also announced it is reviewing the October 2020 ELG Rule for potential revisions, but has not disclosed a timeframe for any additional or replacement rulemaking.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
22

NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)
At this time, we estimate that the planned dry conversion of bottom ash handling and storage at Boswell in response to the CCR revisions requiring closure of clay-lined impoundments, as well as other water re-use practices, will reduce or eliminate the need for additional significant compliance costs for ELG bottom ash water and FGD requirements. Compliance costs we might incur related to other ELG waste streams (e.g. legacy leachate) or other potential future water discharge regulations cannot be estimated; however, the costs could be material, including costs associated with wastewater treatment and re-use. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Permitted Water Discharges – Sulfate. In 2017, the MPCA released a draft water quality standard in an attempt to update Minnesota’s existing 10 mg/L sulfate limit for waters used for the production of wild rice with the proposed rulemaking heard before an administrative law judge (ALJ). In 2018, the ALJ rejected significant portions of the proposed rulemaking and the MPCA subsequently withdrew the rulemaking. The existing 10 mg/L limit remains in place, but the MPCA is currently prohibited under state law from listing wild rice waters as impaired or requiring sulfate reduction technology.
In April 2021, the MPCA’s proposed list of impaired waters submitted pursuant to the Clean Water Act was partially rejected by the EPA due to the absence of wild rice waters listed for sulfate impairment. The EPA subsequently proposed a list of 30 wild rice waters in a separate listing process on April 29, 2021, with a public comment period extended through June 30, 2021. A final impaired waters listing is expected to follow the public comment period, which could subsequently be used to set sulfate limits in discharge permits for power generation facilities and municipal and industrial customers, including paper and pulp facilities, and mining operations. At this time we are unable to determine the specific impacts these developments may have on Minnesota Power operations, if any. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Solid and Hazardous Waste. The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We are required to notify the EPA of hazardous waste activity and, consequently, routinely submit reports to the EPA.
Coal Ash Management Facilities. Minnesota Power produces the majority of its coal ash at Boswell, with small amounts of ash generated at Hibbard Renewable Energy Center. Ash storage and disposal methods include storing ash in clay-lined onsite impoundments (ash ponds), disposing of dry ash in a lined dry ash landfill, applying ash to land as an approved beneficial use, and trucking ash to state permitted landfills.
Coal Combustion Residuals from Electric Utilities (CCR). In 2015, the EPA published the final rule regulating CCR as nonhazardous waste under Subtitle D of the Resource Conservation and Recovery Act (RCRA) in the Federal Register. The rule includes additional requirements for new landfill and impoundment construction as well as closure activities related to certain existing impoundments. Costs of compliance for Boswell and Laskin are expected to be incurred primarily over the next 15 years and be between approximately $65 million and $120 million. Compliance costs for CCR at Taconite Harbor are not expected to be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.
Minnesota Power continues to work on minimizing costs through evaluation of beneficial re-use and recycling of CCR and CCR-related waters. In 2017, the EPA announced its intention to formally reconsider the CCR rule under Subtitle D of the RCRA. In March 2018, the EPA published the first phase of the proposed rule revisions in the Federal Register. In 2018, the EPA finalized revisions to elements of the CCR rule, including extending certain deadlines by two years, the establishment of alternative groundwater protection standards for certain constituents and the potential for risk-based management options at facilities based on site characteristics. In 2018, a U.S. District Court for the District of Columbia decision vacated specific provisions of the CCR rule. The court decision resulted in a change to the status of three existing clay-lined impoundments at Boswell that must now be considered unlined. The EPA proposed additional rule revisions in 2019 to address outstanding issues from litigation and closure timelines for unlined impoundments, respectively. The first of these rules, CCR Part A Rule, was finalized in September 2020. The Part A Rule revision requires unlined impoundments to cease disposal of waste as soon as technically feasible but no later than April 11, 2021, which tolls forward if the EPA does not make a determination on a variance application by that date. Minnesota Power sought EPA approval to extend the closure date for the two active Boswell impoundments in November 2020 through a variance application, and continues to operate the impoundments pending a final determination by the EPA. Additionally, the EPA released a proposed Part B rulemaking in February 2020 that addressed options for beneficial reuse of CCR materials, alternative liner demonstrations, and other CCR regulatory revisions. Portions of the Part B Rule addressing alternative liner equivalency standards were finalized in November 2020. According to the EPA’s current regulatory agenda, the remainder of the proposed Part B Rule is expected to be finalized in mid-2021. Expected compliance costs at Boswell due to the court decision and subsequent rule revisions are reflected in our estimate of compliance costs for the CCR rule noted previously. Minnesota Power would seek recovery of additional costs through a rate proceeding.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
23

NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Other Environmental Matters
Manufactured Gas Plant Site. We are reviewing and addressing environmental conditions at a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P. SWL&P has been working with the Wisconsin Department of Natural Resources (WDNR) in determining the extent and location of contamination at the site and surrounding properties. In January 2021, SWL&P submitted a final remedial actions options report to the WDNR with remedial site design expected to be completed in 2021. As of June 30, 2021, we have recorded a liability of approximately $7 million for remediation costs at this site (approximately $7 million as of December 31, 2020); however, SWL&P continues to work with the WDNR on the extent of contamination which may result in additional remediation costs being identified. SWL&P has also recorded an associated regulatory asset as we expect recovery of these remediation costs to be allowed by the PSCW. Remediation costs are expected to be incurred through 2023.
Other Matters.
Letters of Credit and Surety Bonds.
We have multiple credit facility agreements in place that provide the ability to issue standby letters of credit to satisfy contractual security requirements across our businesses. As of June 30, 2021, we had $113.4 million of outstanding letters of credit issued, including those issued under our revolving credit facility.
Regulated Operations. As of June 30, 2021, we had $28.8 million outstanding in standby letters of credit at our Regulated Operations which are pledged as security to MISO and a state agency as well as energy facilities under development.
ALLETE Clean Energy. ALLETE Clean Energy’s wind energy facilities have PSAs in place for their entire output and expire in various years between 2022 and 2039. As of June 30, 2021, ALLETE Clean Energy has $70.8 million outstanding in standby letters of credit, the majority of which are pledged as security under these PSAs and PSAs for wind energy facilities under development. ALLETE Clean Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.
Corporate and Other.
Investment in Nobles 2. The Nobles 2 wind energy facility requires standby letters of credit as security for certain contractual obligations. As of June 30, 2021, ALLETE South Wind has $13.8 million outstanding in standby letters of credit, related to its portion of the security requirements relative to its ownership in Nobles 2. We do not believe it is likely that any of these outstanding letters of credit will be drawn upon.
BNI Energy. As of June 30, 2021, BNI Energy had surety bonds outstanding of $71.2 million related to the reclamation liability for closing costs associated with its mine and mine facilities. Although its coal supply agreements obligate the customers to provide for the closing costs, additional assurance is required by federal and state regulations. BNI Energy’s total reclamation liability is currently estimated at $70.7 million. BNI Energy does not believe it is likely that any of these outstanding surety bonds will be drawn upon.
ALLETE Properties. As of June 30, 2021, ALLETE Properties had surety bonds outstanding and letters of credit to governmental entities totaling $2.0 million primarily related to development and maintenance obligations for various projects. The estimated cost of the remaining development work is $1.0 million. ALLETE Properties does not believe it is likely that any of these outstanding surety bonds or letters of credit will be drawn upon.
Community Development District Obligations. As of June 30, 2021, we owned 48 percent of the assessable land in the Town Center District (48 percent as of December 31, 2020). As of June 30, 2021, ownership levels, our annual assessments related to capital improvement and special assessment bonds for the ALLETE Properties project within the district is approximately $1.8 million. As we sell property at this project, the obligation to pay special assessments will pass to the new landowners. In accordance with accounting guidance, these bonds are not reflected as debt on our Consolidated Balance Sheet.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
24

NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Other Matters (Continued)
Legal Proceedings.
We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base and cost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations or cash flows.
NOTE 7. EARNINGS PER SHARE AND COMMON STOCK
We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from non-vested restricted stock units and performance share awards granted under our Executive Long-Term Incentive Compensation Plan.

|  |  | 2021 |  |  |  |  |  | 2020 |  |
Reconciliation of Basic and Diluted |  |  | Dilutive |  |  |  |  |  | Dilutive |  |
Earnings Per Share | Basic |  | Securities |  | Diluted |  | Basic |  | Securities |  | Diluted
Millions Except Per Share Amounts |  |  |  |  |  |  |  |  |  |  |
Quarter ended June 30, |  |  |  |  |  |  |  |  |  |  |
Net Income Attributable to ALLETE | $27.9 |  |  |  |  | $27.9 |  |  | $20.1 |  |  |  |  | $20.1 |
Average Common Shares | 52.2 |  |  | 0.1 |  |  | 52.3 |  |  | 51.8 |  |  | 0.1 |  |  | 51.9 |
Earnings Per Share | $0.53 |  |  |  |  | $0.53 |  |  | $0.39 |  |  |  |  | $0.39 |
Six Months Ended June 30, |  |  |  |  |  |  |  |  |  |  |
Net Income Attributable to ALLETE | $79.7 |  |  |  |  | $79.7 |  |  | $86.4 |  |  |  |  | $86.4 |
Average Common Shares | 52.2 |  |  | — |  |  | 52.2 |  |  | 51.8 |  |  | — |  |  | 51.8 |
Earnings Per Share | $1.53 |  |  |  |  | $1.53 |  |  | $1.67 |  |  |  |  | $1.67 |

NOTE 8. INCOME TAX EXPENSE

|  | Quarter Ended |  | Six Months Ended
|  | June 30, |  | June 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Millions |  |  |  |  |  |  |  |
Current Income Tax Expense (a) |  |  |  |  |  |  |  |
Federal |  | — |  |  | — |  |  | — |  |  | — |
State |  | — |  |  | — |  |  | — |  |  | — |
Total Current Income Tax Expense |  | — |  |  | — |  |  | — |  |  | — |
Deferred Income Tax Expense (Benefit) |  |  |  |  |  |  |  |
Federal (b) |  | $(6.4) |  | $(8.6) |  | $(20.5) |  | $(26.2)
State |  | 2.5 |  | 0.2 |  | 6.4 |  | 4.2
Investment Tax Credit Amortization |  | (0.1) |  | (0.1) |  | (0.3) |  | (0.3)
Total Deferred Income Tax Benefit |  | $(4.0) |  | $(8.5) |  | $(14.4) |  | $(22.3)
Total Income Tax Benefit |  | $(4.0) |  | $(8.5) |  | $(14.4) |  | $(22.3)

(a)For each of the six months ended June 30, 2021 and 2020, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of certain tax legislation. Federal and state NOLs are being carried forward to offset current and future taxable income.
(b)For each of the six months ended June 30, 2021 and 2020, the federal income tax benefit is primarily due to production tax credits.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
25

NOTE 8. INCOME TAX EXPENSE (Continued)
The Company's tax provision for interim periods is determined using an estimate of its annual effective tax rate, adjusted for discrete items arising in that quarter. In each quarter, the Company updates its estimate of the annual effective tax rate and if the estimated annual effective tax rate changes, the Company would make a cumulative adjustment in that quarter.

| Quarter Ended | Six Months Ended
Reconciliation of Taxes from Federal Statutory | June 30, | June 30,
Rate to Total Income Tax Expense | 2021 |  | 2020 | 2021 |  | 2020
Millions |  |  |  |  |  |
Income Before Income Taxes | $17.7 |  |  | $8.4 |  | $50.7 |  |  | $59.1 |
Statutory Federal Income Tax Rate | 21 | % |  | 21 | % | 21 | % |  | 21 | %
Income Taxes Computed at Statutory Federal Rate | $3.7 |  |  | $1.7 |  | $10.6 |  |  | $12.4 |
Increase (Decrease) in Income Tax Due to: |  |  |  |  |  |
State Income Taxes – Net of Federal Income Tax Benefit | 2.0 |  |  | 0.1 |  | 5.1 |  |  | 3.3 |
Production Tax Credits | (8.5) |  |  | (9.6) |  | (27.1) |  |  | (33.4) |
Regulatory Differences – Excess Deferred Tax | (1.4) |  |  | (0.9) |  | (4.6) |  |  | (5.3) |
Non-Controlling Interest in Subsidiaries | 1.3 |  |  | 0.7 |  | 3.1 |  |  | 1.1 |
Share-Based Compensation | — |  |  | — |  | 0.5 |  |  | (0.1) |
Other | (1.1) |  |  | (0.5) |  | (2.0) |  |  | (0.3) |
Total Income Tax Benefit | $(4.0) |  | $(8.5) | $(14.4) |  | $(22.3)

For the six months ended June 30, 2021, the effective tax rate was a benefit of 28.4 percent (benefit of 37.8 percent for the six months ended June 30, 2020). The effective tax rate for 2021 and 2020 was primarily impacted by production tax credits.
Uncertain Tax Positions. As of June 30, 2021, we had gross unrecognized tax benefits of $1.5 million ($1.4 million as of December 31, 2020). Of the total gross unrecognized tax benefits, $0.6 million represents the amount of unrecognized tax benefits included on the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.
ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2017, or state examination for years before 2016.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
26

NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

| Pension |  | Other Postretirement
Components of Net Periodic Benefit Cost (Credit) | 2021 |  | 2020 |  | 2021 |  | 2020
Millions |  |  |  |  |  |  |
Quarter Ended June 30, |  |  |  |  |  |  |
Service Cost | $2.8 |  |  | $2.7 |  |  | $0.9 |  |  | $0.9 |
Non-Service Cost Components (a) |  |  |  |  |  |  |
Interest Cost | 6.2 |  |  | 7.0 |  |  | 1.1 |  |  | 1.2 |
Expected Return on Plan Assets | (10.9) |  |  | (10.7) |  |  | (2.5) |  |  | (2.4) |
Amortization of Prior Service Credits | (0.1) |  |  | (0.1) |  |  | (1.9) |  |  | (2.0) |
Amortization of Net Loss | 4.7 |  |  | 3.2 |  |  | 0.8 |  |  | 0.2 |
Net Periodic Benefit Cost (Credit) | $2.7 |  |  | $2.1 |  |  | $(1.6) |  | $(2.1)
Six Months Ended June 30, |  |  |  |  |  |  |
Service Cost | $5.5 |  |  | $5.3 |  |  | $1.8 |  |  | $1.7 |
Non-Service Cost Components (a) |  |  |  |  |  |  |
Interest Cost | 12.3 |  |  | 14.0 |  |  | 2.2 |  |  | 2.5 |
Expected Return on Plan Assets | (21.7) |  |  | (21.4) |  |  | (4.9) |  |  | (4.9) |
Amortization of Prior Service Credits | (0.1) |  |  | (0.1) |  |  | (3.8) |  |  | (4.0) |
Amortization of Net Loss | 9.4 |  |  | 6.4 |  |  | 1.5 |  |  | 0.5 |
Net Periodic Benefit Cost (Credit) | $5.4 |  |  | $4.2 |  |  | $(3.2) |  | $(4.2)

(a)These components of net periodic benefit cost (credit) are included in the line item “Other” under Other Income (Expense) on the Consolidated Statement of Income.
Employer Contributions. For the six months ended June 30, 2021, we contributed $10.3 million in cash to the defined benefit pension plans ($10.7 million for the six months ended June 30, 2020); we do not expect to make additional contributions to our defined benefit pension plans in 2021. For the six months ended June 30, 2021 and 2020, we made no contributions to our other postretirement benefit plans; we do not expect to make any contributions to our other postretirement benefit plans in 2021.
NOTE 10. BUSINESS SEGMENTS
We present two reportable segments: Regulated Operations and ALLETE Clean Energy. We measure performance of our operations through budgeting and monitoring of contributions to consolidated net income by each business segment.
Regulated Operations includes three operating segments which consist of our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC. ALLETE Clean Energy is our business focused on developing, acquiring and operating clean and renewable energy projects. We also present Corporate and Other which includes two operating segments, BNI Energy, our coal mining operations in North Dakota, and ALLETE Properties, our legacy Florida real estate investment, along with our investment in Nobles 2, other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 4,000 acres of land in Minnesota, and earnings on cash and investments.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
27

NOTE 10. BUSINESS SEGMENTS (Continued)

| Quarter Ended |  | Six Months Ended
| June 30, |  | June 30,
| 2021 | 2020 |  | 2021 | 2020
Millions |  |  |  |  |
Operating Revenue |  |  |  |  |
Regulated Operations |  |  |  |  |
Residential | $35.4 |  | $27.4 |  |  | $81.0 |  | $68.3 |
Commercial | 40.7 |  | 28.8 |  |  | 80.4 |  | 66.1 |
Municipal | 11.5 |  | 9.0 |  |  | 24.1 |  | 19.3 |
Industrial | 139.1 |  | 88.0 |  |  | 268.1 |  | 206.8 |
Other Power Suppliers | 37.3 |  | 27.4 |  |  | 75.7 |  | 65.7 |
Other | 26.4 |  | 20.2 |  |  | 54.1 |  | 39.9 |
Total Regulated Operations | 290.4 |  | 200.8 |  |  | 583.4 |  | 466.1 |
ALLETE Clean Energy |  |  |  |  |
Long-term PSA | 18.7 |  | 14.8 |  |  | 36.8 |  | 32.1 |
Other | 2.9 |  | 2.8 |  |  | 5.7 |  | 5.6 |
Total ALLETE Clean Energy | 21.6 |  | 17.6 |  |  | 42.5 |  | 37.7 |
Corporate and Other |  |  |  |  |
Long-term Contract | 21.4 |  | 22.5 |  |  | 43.1 |  | 44.9 |
Other | 2.2 |  | 2.3 |  |  | 5.8 |  | 6.1 |
Total Corporate and Other | 23.6 |  | 24.8 |  |  | 48.9 |  | 51.0 |
Total Operating Revenue | $335.6 |  | $243.2 |  |  | $674.8 |  | $554.8 |
Net Income Attributable to ALLETE |  |  |  |  |
Regulated Operations | $21.5 |  | $11.1 |  |  | $66.5 |  | $68.6 |
ALLETE Clean Energy | 5.1 |  | 4.0 |  |  | 12.5 |  | 15.7 |
Corporate and Other | 1.3 |  | 5.0 |  |  | 0.7 |  | 2.1 |
Total Net Income Attributable to ALLETE | $27.9 |  | $20.1 |  |  | $79.7 |  | $86.4 |

| June 30, 2021 | December 31, 2020
Millions |  |
Assets |  |
Regulated Operations | $4,200.1 |  | $4,196.8 |
ALLETE Clean Energy | 1,653.5 |  | 1,483.3 |
Corporate and Other | 439.7 |  | 404.5 |
Total Assets | $6,293.3 |  | $6,084.6 |

ALLETE, Inc. Second Quarter 2021 Form 10-Q
28

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with our Consolidated Financial Statements and notes to those statements, Management’s Discussion and Analysis of Financial Condition and Results of Operations from our 2020 Form 10-K, and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this Form 10-Q contain forward-looking information that involves risks and uncertainties. Readers are cautioned that forward-looking statements should be read in conjunction with our disclosures in this Form 10-Q, including Part II, Item 1A Risk Factors, and our 2020 Form 10-K under the headings: “Forward-Looking Statements” located on page 6 and “Risk Factors” located in Part I, Item 1A, beginning on page 23 of our 2020 Form 10-K. The risks and uncertainties described in this Form 10-Q and our 2020 Form 10-K are not the only risks facing our Company. Additional risks and uncertainties that we are not presently aware of, or that we currently consider immaterial, may also affect our business operations. Our business, financial condition or results of operations could suffer if the risks are realized.
The COVID-19 pandemic has had widespread impacts on the global economy and on our employees, customers, contractors, and suppliers. Additional disclosures regarding the impacts of the COVID-19 pandemic are located in our 2020 Form 10-K located in Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load, Liquidity and Capital Resources – Liquidity Position and Part I, Item 1A. Risk Factors.
Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. Minnesota Power provides regulated utility electric service in northeastern Minnesota to approximately 145,000 retail customers. Minnesota Power also has 15 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a wholesale customer of Minnesota Power. SWL&P provides regulated utility electric, natural gas and water service in northwestern Wisconsin to approximately 15,000 electric customers, 13,000 natural gas customers and 10,000 water customers. Our regulated utility operations include retail and wholesale activities under the jurisdiction of state and federal regulatory authorities. (See Note 2. Regulatory Matters.)
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in seven states, more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300 MW of wind energy facilities under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.
Corporate and Other is comprised of BNI Energy, our coal mining operations in North Dakota; our investment in Nobles 2, an entity that owns and operates a 250 MW wind energy facility in southwestern Minnesota; ALLETE Properties, our legacy Florida real estate investment; other business development and corporate expenditures; unallocated interest expense; a small amount of non-rate base generation; approximately 4,000 acres of land in Minnesota, and earnings on cash and investments.
ALLETE is incorporated under the laws of Minnesota. Our corporate headquarters are in Duluth, Minnesota. Statistical information is presented as of June 30, 2021, unless otherwise indicated. All subsidiaries are wholly-owned unless otherwise specifically indicated. References in this report to “we,” “us” and “our” are to ALLETE and its subsidiaries, collectively.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
29

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Financial Overview
The following net income discussion summarizes a comparison of the six months ended June 30, 2021, to the six months ended June 30, 2020.
Net income attributable to ALLETE for the six months ended June 30, 2021, was $79.7 million, or $1.53 per diluted share, compared to $86.4 million, or $1.67 per diluted share, for the same period in 2020. Net income in 2021 included an approximately $5 million after-tax, or $0.10 per share, negative impact related to ALLETE Clean Energy’s Diamond Spring wind energy facility due to an extreme winter storm event in the southwest United States in February 2021. This winter storm event caused volatility in power prices in the regional power market resulting in losses being incurred under one of the facility’s power sales agreements during portions of the winter storm event. Net income in 2020 included margins of $10.2 million after-tax, or $0.20 per share, in Regulated Operations for sales under a 100 MW PSA which expired in April 2020. Net income in 2020 also included reserves for interim rates of $8.3 million after-tax, or $0.16 per share, for the refund of interim rates collected between January 1, 2020 and April 30, 2020.
Regulated Operations net income attributable to ALLETE was $66.5 million for the six months ended June 30, 2021, compared to $68.6 million for the same period in 2020. Net income at Minnesota Power was lower than 2020 primarily due to: lower margins from Other Power Suppliers resulting from the expiration of a PSA; and higher operating and maintenance, property tax and depreciation expenses. These negative impacts were partially offset by increased earnings related to the GNTL; higher kWh sales to residential, commercial, and municipal customers; and the timing of income taxes. Net income in 2020 also included reserves for interim rates of $8.3 million after-tax for the refund of interim rates collected between January 1, 2020 and April 30, 2020. Net income at SWL&P was similar to 2020. Our after-tax equity earnings in ATC were lower compared to 2020 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints in 2020.
ALLETE Clean Energy net income attributable to ALLETE was $12.5 million for the six months ended June 30, 2021, compared to $15.7 million for the same period in 2020. Net income in 2021 included an approximately $5 million after-tax negative impact related to ALLETE Clean Energy’s Diamond Spring wind energy facility due to an extreme winter storm event in the southwest United States in February 2021 as well as a lower wind resources at other wind energy facilities.
Corporate and Other net income attributable to ALLETE was $0.7 million for the six months ended June 30, 2021, compared to net income of $2.1 million for the same period in 2020. Net income in 2021 included higher interest and income tax expenses, partially offset by earnings from our investment in Nobles 2 which commenced operations in December 2020.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
30

COMPARISON OF THE QUARTER ENDED JUNE 30, 2021 AND 2020
(See Note 10. Business Segments for financial results by segment.)
Regulated Operations

Quarter Ended June 30, | 2021 | 2020
Millions |  |
Operating Revenue – Utility | $290.4 |  | $200.8 |
Fuel, Purchased Power and Gas – Utility | 128.9 |  | 69.3 |
Transmission Services – Utility | 19.2 |  | 16.4 |
Operating and Maintenance | 55.3 |  | 48.0 |
Depreciation and Amortization | 42.6 |  | 41.9 |
Taxes Other than Income Taxes | 15.9 |  | 13.3 |
Operating Income | 28.5 |  | 11.9 |
Interest Expense | (14.4) |  | (14.7) |
Equity Earnings | 5.2 |  | 6.4 |
Other Income | 0.7 |  | 3.3 |
Income Before Income Taxes | 20.0 |  | 6.9 |
Income Tax Benefit | (1.5) |  | (4.2) |
Net Income Attributable to ALLETE | $21.5 |  | $11.1 |

Operating Revenue – Utility increased $89.6 million from 2020 primarily due to higher fuel adjustment clause recoveries, higher kWh sales, higher cost recovery rider revenue and increased transmission revenue related to the GNTL. Revenue in 2020 also included reserves for the refund of interim rates collected between January 1, 2020 and April 30, 2020.
Fuel adjustment clause revenue increased $38.6 million due to higher fuel and purchased power costs attributable to retail and municipal customers. (See Fuel, Purchased Power and Gas – Utility.)
Revenue from kWh sales increased $19.7 million from 2020 reflecting higher sales to residential, commercial, industrial and municipal customers as well as other power suppliers. These increases were partially offset by lower revenue related to the expiration of a 100 MW PSA in April 2020. Sales to commercial and industrial customers increased primarily due to improving business conditions related to the COVID-19 pandemic and its impact on customer operations. Many commercial and industrial customers operated at reduced levels or were temporarily closed or idled during the second quarter of 2020 as a result of the COVID-19 pandemic and related governmental responses while business conditions have improved in 2021. These higher sales to commercial and industrial customers were partially offset by lower sales to Verso Corporation which indefinitely idled its paper mill in Duluth, Minnesota, beginning in June 2020. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) Sales to residential and municipal customers increased from 2020 primarily due to warmer weather in the second quarter of 2021 compared to 2020. Sales to other power suppliers, which are sold at market-based prices into the MISO market on a daily basis or through PSAs of various durations, increased primarily due to additional kWh sales made to mitigate the uncertainty of customers’ energy needs and potential load loss due to the COVID-19 pandemic.

Kilowatt-hours Sold |  |  |  |  | Variance
Quarter Ended June 30, | 2021 |  | 2020 |  | Quantity |  | %
Millions |  |  |  |  |  |  |
Regulated Utility |  |  |  |  |  |  |
Retail and Municipal |  |  |  |  |  |  |
Residential | 247 |  |  | 246 |  |  | 1 |  |  | 0.4 | %
Commercial | 317 |  |  | 286 |  |  | 31 |  |  | 10.8 | %
Industrial | 1,775 |  |  | 1,235 |  |  | 540 |  |  | 43.7 | %
Municipal | 138 |  |  | 131 |  |  | 7 |  |  | 5.3 | %
Total Retail and Municipal | 2,477 |  |  | 1,898 |  |  | 579 |  |  | 30.5 | %
Other Power Suppliers | 1,194 |  |  | 706 |  |  | 488 |  |  | 69.1 | %
Total Regulated Utility Kilowatt-hours Sold | 3,671 |  |  | 2,604 |  |  | 1,067 |  |  | 41.0 | %

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

COMPARISON OF THE QUARTER ENDED JUNE 30, 2021 AND 2020 (Continued)
Regulated Operations (Continued)
Revenue from electric sales to taconite customers accounted for 34 percent of regulated operating revenue in 2021 (28 percent in 2020). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 5 percent of regulated operating revenue in 2021 (7 percent in 2020). Revenue from electric sales to pipelines and other industrial customers accounted for 9 percent of regulated operating revenue in 2021 (9 percent in 2020).
Revenue in 2020 included reserves of $11.7 million for the refund of interim rates collected between January 1, 2020 and April 30, 2020. (See Note 2. Regulatory Matters.)
Cost recovery rider revenue increased $7.1 million primarily due to fewer production tax credits recognized by Minnesota Power. If production tax credits are recognized at a level below those assumed in Minnesota Power’s base rates, an increase in cost recovery rider revenue is recognized to offset the impact of lower production tax credits on income tax expense.
Transmission revenue related to GNTL increased $5.5 million primarily due to recovery of related expenses resulting from the GNTL being placed into service in June 2020.
Operating Expenses increased $73.0 million, or 39 percent, from 2020.
Fuel, Purchased Power and Gas – Utility expense increased $59.6 million, or 86 percent, from 2020 primarily due to higher kWh sales and higher purchased power prices. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause.
Transmission Services – Utility expense increased $2.8 million, or 17 percent, from 2020 primarily due to higher MISO-related expense.
Operating and Maintenance expense increased $7.3 million, or 15 percent, from 2020 primarily due to an increase in contract and professional services for planned maintenance at generation facilities and higher vegetation management expenses. In addition, 2021 included higher labor and benefit expenses as well as increased conservation improvement program expenses as compared to 2020.
Taxes Other than Income Taxes increased $2.6 million, or 20 percent, from 2020 primarily due to higher property tax expense resulting from the GNTL being placed into service in June 2020.
Equity Earnings decreased $1.2 million, or 19 percent, from 2020 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints in 2020.
Income Tax Benefit decreased $2.7 million from 2020 primarily due to lower production tax credits and higher pre-tax income, partially offset by the timing of income taxes in 2021 compared to 2020. The income tax benefit in 2020 included additional income tax expense recorded in 2020 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.
We expect our annual effective tax rate in 2021 to be a lower income tax benefit than in 2020 primarily due to lower production tax credits.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
32

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

Quarter Ended June 30, | 2021 | 2020
Millions |  |
Operating Revenue |  |
Contracts with Customers – Non-utility | $18.7 |  | $14.8 |
Other – Non-utility (a) | 2.9 |  | 2.8 |
Operating and Maintenance | 9.2 |  | 7.8 |
Depreciation and Amortization | 12.2 |  | 8.9 |
Taxes and Other | 1.6 |  | 0.9 |
Operating Income (Loss) | (1.4) |  | — |
Interest Expense | (0.4) |  | (0.5) |
Other Income | 0.1 |  | — |
Loss Before Income Taxes | (1.7) |  | (0.5) |
Income Tax Benefit | (2.6) |  | (1.3) |
Net Income | 0.9 |  | 0.8 |
Net Loss Attributable to Non-Controlling Interest | (4.2) |  | (3.2) |
Net Income Attributable to ALLETE | $5.1 |  | $4.0 |

(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs.
Operating Revenue increased $4.0 million, or 23 percent, from 2020 primarily due to revenue from the Diamond Spring wind energy facility which commenced operations in December 2020.

| Quarter Ended June 30,
| 2021 | 2020
Production and Operating Revenue | kWh | Revenue | kWh | Revenue
Millions |  |  |  |
Wind Energy Regions |  |  |  |
East | 47.9 |  | $4.3 |  | 57.1 |  | $5.1 |
Midwest | 221.5 |  | 8.1 |  | 207.4 |  | 7.7 |
South | 237.4 |  | 4.2 |  | — |  | — |
West | 167.7 |  | 5.0 |  | 202.5 |  | 4.8 |
Total Production and Operating Revenue | 674.5 |  | $21.6 |  | 467.0 |  | $17.6 |

Operating and Maintenance expense increased $1.4 million, or 18 percent, from 2020 primarily due to operating and maintenance expenses related to the Diamond Spring wind energy facility.
Depreciation and Amortization expense increased $3.3 million, or 37 percent, from 2020 primarily due to additional property, plant and equipment in service related to the Diamond Spring wind energy facility.
Income Tax Benefit increased $1.3 million from 2020 primarily due to the timing of income taxes in 2021 compared to 2020. The income tax benefit in 2021 included additional income tax benefit recorded as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.
Net Loss Attributable to Non-Controlling Interest increased $1.0 million from 2020 reflecting net losses attributable to non-controlling interest for the Diamond Spring wind energy facility.
Corporate and Other
Operating Revenue decreased $1.2 million, or 5 percent, from 2020 primarily due to lower revenue at BNI Energy, which operates under cost-plus fixed fee contracts, as a result of lower expenses and fewer tons sold in 2021 compared to 2020.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
33

COMPARISON OF THE QUARTER ENDED JUNE 30, 2021 AND 2020 (Continued)
Corporate and Other (Continued)
Net Income Attributable to ALLETE decreased $3.7 million from 2020 primarily due to lower earnings from marketable equity securities held in benefit trusts as well as additional income tax expense recorded in 2021 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate. These decreases were partially offset by earnings from our investment in Nobles 2 which commenced operations in December 2020. Net income at BNI Energy was $1.8 million in 2021 compared to $2.5 million in 2020 reflecting lower earnings from marketable equity securities held in benefit trusts in 2021. The net loss at ALLETE Properties was $0.4 million in 2021 compared to a net loss of $0.5 million in 2020.
Income Taxes – Consolidated
For the quarter ended June 30, 2021, the effective tax rate was a benefit of 22.6 percent (benefit of 102.4 percent for the quarter ended June 30, 2020). The effective tax rate for 2021 was a lower benefit primarily due to lower production tax credits.
We expect our annual effective tax rate in 2021 to be a lower income tax benefit than in 2020 primarily due to lower production tax credits. The estimated annual effective tax rate can differ from what a quarterly effective tax rate would otherwise be on a standalone basis, and this may cause quarter to quarter differences in the timing of income taxes.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(See Note 10. Business Segments for financial results by segment.)
Regulated Operations

Six Months Ended June 30, | 2021 | 2020
Millions |  |
Operating Revenue – Utility | $583.4 |  | $466.1 |
Fuel, Purchased Power and Gas – Utility | 249.3 |  | 158.3 |
Transmission Services – Utility | 36.9 |  | 34.9 |
Operating and Maintenance | 105.7 |  | 97.3 |
Depreciation and Amortization | 85.6 |  | 83.6 |
Taxes Other than Income Taxes | 31.6 |  | 24.6 |
Operating Income | 74.3 |  | 67.4 |
Interest Expense | (28.6) |  | (29.3) |
Equity Earnings | 10.5 |  | 11.6 |
Other Income | 3.1 |  | 6.7 |
Income Before Income Taxes | 59.3 |  | 56.4 |
Income Tax Benefit | (7.2) |  | (12.2) |
Net Income Attributable to ALLETE | $66.5 |  | $68.6 |

Operating Revenue – Utility increased $117.3 million from 2020 primarily due to higher fuel adjustment clause recoveries, higher kWh sales, increased transmission revenue related to the GNTL, higher cost recovery rider revenue, higher FERC formula-based rates and increased gas sales. Revenue in 2020 also included reserves for the refund of interim rates collected between January 1, 2020 and April 30, 2020.
Fuel adjustment clause revenue increased $56.2 million due to higher fuel and purchased power costs attributable to retail and municipal customers. (See Fuel, Purchased Power and Gas – Utility.)
ALLETE, Inc. Second Quarter 2021 Form 10-Q
34

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (Continued)
Regulated Operations (Continued)
Revenue from kWh sales increased $19.1 million from 2020 reflecting higher sales to residential, commercial, industrial and municipal customers as well as other power suppliers. These increases were partially offset by lower revenue related to the expiration of a 100 MW PSA in April 2020. Sales to commercial and industrial customers increased primarily due to improving business conditions related to the COVID-19 pandemic and its impact on customer operations. Many commercial and industrial customers operated at reduced levels or were temporarily closed or idled during 2020 as a result of the COVID-19 pandemic and related governmental responses while business conditions have improved in 2021. These higher sales to commercial and industrial customers were partially offset by lower sales and demand revenue from Verso Corporation which indefinitely idled its paper mill in Duluth, Minnesota, beginning in June 2020. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load.) Sales to residential and municipal customers increased from 2020 primarily due to more favorable weather conditions in 2021 compared to 2020. Sales to other power suppliers, which are sold at market-based prices into the MISO market on a daily basis or through PSAs of various durations, increased primarily due to additional kWh sales made to mitigate the uncertainty of customers’ energy needs and potential load loss due to the COVID-19 pandemic.

Kilowatt-hours Sold |  |  |  |  | Variance
Six Months Ended June 30, | 2021 |  | 2020 |  | Quantity |  | %
Millions |  |  |  |  |  |  |
Regulated Utility |  |  |  |  |  |  |
Retail and Municipal |  |  |  |  |  |  |
Residential | 578 |  |  | 567 |  |  | 11 |  |  | 1.9 | %
Commercial | 658 |  |  | 638 |  |  | 20 |  |  | 3.1 | %
Industrial | 3,573 |  |  | 3,137 |  |  | 436 |  |  | 13.9 | %
Municipal | 298 |  |  | 287 |  |  | 11 |  |  | 3.8 | %
Total Retail and Municipal | 5,107 |  |  | 4,629 |  |  | 478 |  |  | 10.3 | %
Other Power Suppliers | 2,442 |  |  | 1,528 |  |  | 914 |  |  | 59.8 | %
Total Regulated Utility Kilowatt-hours Sold | 7,549 |  |  | 6,157 |  |  | 1,392 |  |  | 22.6 | %

Revenue from electric sales to taconite customers accounted for 32 percent of regulated operating revenue in 2021 (29 percent in 2020). Revenue from electric sales to paper, pulp and secondary wood product customers accounted for 4 percent of regulated operating revenue in 2021 (6 percent in 2020). Revenue from electric sales to pipelines and other industrial customers accounted for 9 percent of regulated operating revenue in 2021 (9 percent in 2020).
Revenue in 2020 included reserves of $11.7 million for the refund of interim rates collected between January 1, 2020 and April 30, 2020. (See Note 2. Regulatory Matters.)
Transmission revenue related to GNTL increased $13.9 million primarily due to recovery of related expenses resulting from the GNTL being placed into service in June 2020 and additional expenditures for property, plant and equipment.
Cost recovery rider revenue increased $7.2 million primarily due to fewer production tax credits recognized by Minnesota Power. If production tax credits are recognized at a level below those assumed in Minnesota Power’s base rates, an increase in cost recovery rider revenue is recognized to offset the impact of lower production tax credits on income tax expense.
Revenue from wholesale customers under FERC formula-based rates increased $3.2 million primarily due to higher rates.
Gas sales at SWL&P increased $2.8 million as a result of colder weather in the first quarter of 2021 and higher gas prices in 2021 compared to 2020. (See Fuel, Purchased Power and Gas – Utility.)
Operating Expenses increased $110.4 million, or 28 percent, from 2020.
Fuel, Purchased Power and Gas – Utility expense increased $91.0 million, or 57 percent, from 2020 primarily due to higher purchased power prices, kWh sales and fuel costs as well as increased gas sales and higher gas prices at SWL&P. Fuel and purchased power expense related to our retail and municipal customers is recovered through the fuel adjustment clause.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
35

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (Continued)
Regulated Operations (Continued)
Transmission Services – Utility expense increased $2.0 million, or 6 percent, from 2020 primarily due to higher MISO-related expense.
Operating and Maintenance expense increased $8.4 million, or 9 percent, from 2020 primarily due to an increase in contract and professional services for planned maintenance at generation facilities and higher vegetation management expenses. In addition, 2021 included higher labor and benefit expenses as compared to 2020.
Depreciation and Amortization expense increased $2.0 million, or 2 percent, from 2020 primarily due to additional property, plant and equipment in service resulting from the GNTL being placed into service in June 2020.
Taxes Other than Income Taxes increased $7.0 million, or 28 percent, from 2020 primarily due to higher property tax expense resulting from the GNTL being placed into service in June 2020.
Equity Earnings decreased $1.1 million, or 9 percent, from 2020 primarily due to period over period changes in ATC’s estimate of a refund liability related to the FERC decision on MISO return on equity complaints in 2020.
Income Tax Benefit decreased $5.0 million from 2020 primarily due to lower production tax credits, partially offset by the timing of income taxes in 2021 compared to 2020. The income tax benefit in 2021 included additional income tax benefit recorded in 2021 as GAAP requires the recognition of income taxes at the estimated annual effective tax rate.
We expect the annual effective tax rate for Regulated Operations in 2021 to be a lower income tax benefit than in 2020 primarily due to lower production tax credits.
ALLETE Clean Energy

Six Months Ended June 30, | 2021 | 2020
Millions |  |
Operating Revenue |  |
Contracts with Customers – Non-utility | $36.8 | $32.1
Other – Non-utility (a) | 5.7 |  | 5.6 |
Operating and Maintenance | 21.4 |  | 16.0 |
Depreciation and Amortization | 24.3 |  | 17.1 |
Taxes Other than Income Taxes | 3.5 |  | 1.6 |
Operating Income (Loss) | (6.7) |  | 3.0 |
Interest Expense | (0.8) |  | (1.0) |
Other Income | 0.3 |  | 0.2 |
Income (Loss) Before Income Taxes | (7.2) |  | 2.2 |
Income Tax Benefit | (8.5) |  | (8.5) |
Net Income | 1.3 |  | 10.7 |
Net Loss Attributable to Non-Controlling Interest | (11.2) |  | (5.0) |
Net Income Attributable to ALLETE | $12.5 |  | $15.7 |

(a)Represents non-cash amortization of differences between contract prices and estimated market prices on assumed PSAs.
Operating Revenue increased $4.8 million, or 13 percent, from 2020 primarily due to revenue from the South Peak and Diamond Spring wind energy facilities which commenced operations in April 2020 and December 2020, respectively, partially offset by the negative impact related to ALLETE Clean Energy’s Diamond Spring wind energy facility due to an extreme winter storm event in the southwest United States in February 2021.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
36

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020 (Continued)
ALLETE Clean Energy (Continued)

| Six Months Ended June 30,
| 2021 | 2020
Production and Operating Revenue | kWh | Revenue | kWh | Revenue
Millions |  |  |  |
Wind Energy Regions |  |  |  |
East | 127.3 |  | $11.5 |  | 135.7 |  | $12.2 |
Midwest | 461.6 |  | 16.5 |  | 451.8 |  | 16.2 |
South | 513.8 |  | 3.4 |  | — |  | — |
West | 389.5 |  | 11.1 |  | 344.3 |  | 9.3 |
Total Production and Operating Revenue | 1,492.2 |  | $42.5 |  | 931.8 |  | $37.7 |

Operating and Maintenance expense increased $5.4 million, or 34 percent, from 2020 primarily due to operating and maintenance expenses related to the South Peak and Diamond Spring wind energy facilities.
Depreciation and Amortization expense increased $7.2 million, or 42 percent, from 2020 primarily due to additional property, plant and equipment in service related to the South Peak and Diamond Spring wind energy facilities.
Taxes Other than Income Taxes increased $1.9 million from 2020 primarily due to higher property tax expense related to the South Peak and Diamond Spring wind energy facilities.
Net Loss Attributable to Non-Controlling Interest increased $6.2 million from 2020 primarily due to net losses attributable to non-controlling interest for the Diamond Spring wind energy facility.
Corporate and Other
Operating Revenue decreased $2.1 million, or 4 percent, from 2020 primarily due to lower revenue at BNI Energy, which operates under cost-plus fixed fee contracts, as a result of lower expenses and fewer tons sold in 2021 compared to 2020 as well as lower land sales at ALLETE Properties.
Net Income Attributable to ALLETE was $0.7 million in 2021 compared to net income of $2.1 million in 2020. Net income in 2021 included higher interest and income tax expenses, partially offset by earnings from our investment in Nobles 2 which commenced operations in December 2020. Net income at BNI Energy was $3.4 million in 2021 compared to net income of $3.2 million in 2020. The net loss at ALLETE Properties was $1.0 million in 2021 and in 2020.
Income Taxes – Consolidated
For the six months ended June 30, 2021, the effective tax rate was a benefit of 28.4 percent (benefit of 37.8 percent for the six months ended June 30, 2020). The effective tax rate for 2021 was a lower benefit primarily due to higher non-controlling interest and lower production tax credits.
We expect our annual effective tax rate in 2021 to be a lower benefit as compared to 2020 primarily due to higher pre-tax income. The effective rate deviated from the combined statutory rate of approximately 28 percent primarily due to higher non-controlling interest and lower production tax credits. (See Note 8. Income Tax Expense.)
CRITICAL ACCOUNTING POLICIES
Certain accounting measurements under 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: regulatory accounting, pension and postretirement health and life actuarial assumptions, impairment of long-lived assets, and taxation. These policies are reviewed with the Audit Committee of our Board of Directors on a regular basis and summarized in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2020 Form 10-K.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
37

OUTLOOK
For additional information see our 2020 Form 10-K.
ALLETE is an energy company committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses, and sustains growth. The Company has a long-term objective of achieving consolidated average annual earnings per share growth of 5 percent to 7 percent; with a Regulated Operations growth objective of 4 percent to 5 percent, and an ALLETE Clean Energy and Corporate and Other businesses growth objective of at least 15 percent over the long-term. We have made steady progress over the past several quarters in the evolution of our ALLETE Clean Energy strategy as we position the business to provide more comprehensive clean energy solutions. We believe that the renewable energy industry continues to have tremendous potential driven by societal demands for climate action and fulfilling ESG commitments. ALLETE Clean Energy’s existing platform provides a strong foundation for growth as we seek to expand our product offerings, further diversify our portfolio and deliver financial returns within our expected criteria over the long-term. Our current projection of ALLETE’s consolidated average annual earnings per share growth rate, using 2019 as a base year, is in line with our stated long-term (5-year) growth objective of 5 percent to 7 percent; with a Regulated Operations growth projection of approximately 3 percent, and an ALLETE Clean Energy and Corporate and Other businesses growth projection of approximately 30 percent to 40 percent.
Portions of our ALLETE Clean Energy business are experiencing return pressures that are impacting our earnings per share growth from increased competition, and lower forward price curves, as a growing amount of investment capital is being directed into wind generation opportunities. In addition, current and potential new project developments can be negatively affected by a lower ALLETE stock price, which may result in such projects not being accretive, or otherwise unable to satisfy our financial objectives criteria to proceed. In response to these market pressures, we are actively evaluating additional growth opportunities to deliver more comprehensive clean energy solutions for customers at ALLETE Clean Energy, which may include solar, storage solutions, and related energy infrastructure investments and services. We believe that the renewable energy industry is entering a new phase of growth and that we are well-positioned to serve customers and drive future growth at ALLETE. ALLETE Clean Energy will continue to optimize its existing wind energy facility portfolio, seek development of its remaining safe harbor inventory of tax credit qualified turbines, and explore other renewable energy opportunities to expand its service offerings to further enhance its growth and profitability.
ALLETE is predominately a regulated utility through Minnesota Power, SWL&P, and an investment in ATC. ALLETE’s strategy is to remain predominately a regulated utility while investing in ALLETE Clean Energy and its Corporate and Other businesses to complement its regulated businesses, balance exposure to the utility’s industrial customers, and provide potential long-term earnings growth. ALLETE expects net income from Regulated Operations to be approximately 80 percent of total consolidated net income in 2021. Over the next several years, the contribution of ALLETE Clean Energy and our Corporate and Other businesses to net income is expected to increase as ALLETE grows these operations. ALLETE expects its businesses to provide regulated, contracted or recurring revenues, and to support sustained growth in net income and cash flow.
Regulated Operations. Minnesota Power’s long-term strategy is to be the leading electric energy provider in northeastern Minnesota by providing safe, reliable and cost-competitive electric energy, while complying with environmental permit conditions and renewable energy requirements. Keeping the cost of energy production competitive enables Minnesota Power to effectively compete in the wholesale power markets and minimizes retail rate increases to help maintain customer viability. As part of maintaining cost competitiveness, Minnesota Power intends to reduce its exposure to possible future carbon and GHG legislation by reshaping its generation portfolio, over time, to reduce its reliance on coal. Minnesota Power has a goal of delivering 100 percent carbon-free energy by 2050. (See EnergyForward.) We will monitor and review proposed environmental regulations and may challenge those that add considerable cost with limited environmental benefit. Minnesota Power will continue to pursue customer growth opportunities and cost recovery rider approvals for transmission, renewable and environmental investments, as well as work with regulators to earn a fair rate of return. Minnesota Power anticipates filing a general rate case in November 2021 with a 2022 test year.
Minnesota Power also submitted its IRP with the MPUC on February 1, 2021. The outcome of this IRP is likely to be instrumental in the evolution of our EnergyForward strategic plan that provides for significant emission reductions and diversifying our electricity generation mix to include more renewables, and is expected to provide potential earnings growth over the long-term. (See EnergyForward.)
Regulatory Matters. Entities within our Regulated Operations segment are under the jurisdiction of the MPUC, FERC, PSCW and NDPSC. See Note 2. Regulatory Matters for discussion of regulatory matters within these jurisdictions.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
38

OUTLOOK (Continued)
Industrial Customers and Prospective Additional Load.
Industrial Customers. Electric power is one of several key inputs in the taconite mining, paper, pulp and secondary wood products, pipeline and other industries. Approximately 47 percent of our regulated utility kWh sales in the six months ended June 30, 2021, were made to our industrial customers (51 percent in the six months ended June 30, 2020).
Taconite. Minnesota Power’s taconite customers are capable of producing up to approximately 41 million tons of taconite pellets annually. Taconite pellets produced in Minnesota are primarily shipped to North American steel making facilities that are part of the integrated steel industry, which continue to lead the world in environmental performance among steelmaking countries. According to the U.S. Department of Energy, steel production in the U.S. is the most energy efficient of any major steel producing country. Steel produced from these North American facilities is used primarily in the manufacture of automobiles, appliances, tubular applications for all industries, and in the construction industry. Steel is also a critical component of the clean energy transformation underway today. Meeting the demand for more renewable energy and the need for additional infrastructure to transport green energy from the point of generation to the end user both require steel. Historically, less than 10 percent of Minnesota taconite production has been exported outside of North America.
There has been a general historical correlation between U.S. steel production and Minnesota taconite production. The American Iron and Steel Institute, an association of North American steel producers, reported that U.S. raw steel production operated at approximately 79 percent of capacity during the first six months of 2021 compared to 68 percent in the first six months of 2020. The World Steel Association, an association of steel producers, national and regional steel industry associations, and steel research institutes representing approximately 85 percent of world steel production, projected in April 2021 that U.S. steel consumption will increase in 2021 by approximately 8 percent compared to 2020.
Minnesota Power’s taconite customers may experience annual variations in production levels due to such factors as economic conditions, short-term demand changes or maintenance outages. We estimate that a one million ton change in Minnesota Power’s taconite customers’ production would impact our annual earnings per share by approximately $0.04, net of expected power marketing sales at current prices. Changes in wholesale electric prices or customer contractual demand nominations could impact this estimate. Minnesota Power proactively sells power in the wholesale power markets that is temporarily not required by industrial customers to optimize the value of its generating facilities. Long-term reductions in taconite production or a permanent shut down of a taconite customer may lead Minnesota Power to file a general rate case to recover lost revenue.
Northshore Mining. Cliffs completed construction of a hot briquetted iron production plant in Toledo, Ohio, in 2020, which utilizes direct reduced-grade pellets from Northshore Mining. In April 2020, Cliffs announced that, based on market conditions, it would be temporarily idling Northshore Mining. Cliffs idled production at Northshore Mining in April 2020 and resumed normal production at the facility in August 2020. Northshore Mining has the capability to produce approximately 6 million tons annually. Minnesota Power has a PSA through 2031 with Silver Bay Power, which provides the majority of the electric service requirements for Northshore Mining. (See Silver Bay Power.)
Silver Bay Power. In 2016, Minnesota Power and Silver Bay Power entered into a PSA through 2031. Silver Bay Power supplies approximately 90 MW of load to Northshore Mining, an affiliate of Silver Bay Power, which had previously been served predominately through self-generation by Silver Bay Power. Starting in 2016, Minnesota Power supplied Silver Bay Power with at least 50 MW of energy and Silver Bay Power had the option to purchase additional energy from Minnesota Power as it transitioned away from self-generation. In the third quarter of 2019, Silver Bay Power ceased self-generation and Minnesota Power began supplying the full energy requirements for Silver Bay Power.
USS Corporation. In April 2020, USS Corporation stated it would idle its Keetac facility in Keewatin, Minnesota, in response to the sudden and dramatic decline in business conditions resulting from the COVID-19 pandemic. In addition, in May 2020, USS Corporation announced that production was expected to be temporarily reduced at its Minntac Plant in Mountain Iron, Minnesota. USS Corporation resumed normal production at its Minntac Plant beginning in late July 2020 and resumed operations at its Keetac facility in December 2020. USS Corporation has the capability to produce approximately 15 million and 5 million tons annually at its Minntac and Keetac plants, respectively.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
39

OUTLOOK (Continued)
Industrial Customers and Prospective Additional Load (Continued)
Hibbing Taconite. In April 2020, ArcelorMittal announced that Hibbing Taconite in Hibbing, Minnesota, would idle production due to the COVID-19 pandemic. Hibbing Taconite resumed normal production in August 2020. Hibbing Taconite’s current mineable ore reserves are expected to be exhausted in 2025. Cliffs, which in December 2020 became majority owner and resumed management of Hibbing Taconite, has stated that it has a plan to extend the mine life of Hibbing Taconite with ore reserves already under control of Cliffs. There are ample ore reserves in northeastern Minnesota that could supply operations for decades to come, and Minnesota Power’s taconite customers routinely develop and extend their mine plans to optimize assets. Hibbing Taconite has the capability to produce approximately 8 million tons annually.
Cliffs Acquisition. In December 2020, Cliffs announced that it had completed the previously announced acquisition of substantially all of the operations of ArcelorMittal USA LLC and its subsidiaries. Cliffs had stated that upon closure of the acquisition Cliffs would be the largest flat-rolled steel producer and the largest iron ore pellet producer in North America. The acquisition included ArcelorMittal’s Minorca mine in Virginia, Minnesota, and its ownership share of Hibbing Taconite in Hibbing, Minnesota, which are both large industrial customers of Minnesota Power. Cliffs is now Minnesota Power’s largest customer. The acquisition has increased customer concentration risk for the Company and could lead to further capacity consolidation for both steel blast furnaces and the related Minnesota iron ore production.
Minnesota Sulfate Wild Rice Water Quality Standard. On April 29, 2021, the EPA identified rivers and lakes in Minnesota in which wild rice grows that have sulfate levels that exceed Minnesota’s sulfate limit for wild rice waters. The EPA directed the MPCA to add these rivers and lakes to its list of impaired waters which can be used to set limits in discharge permits for industrial activities such as mining. Minnesota Power’s taconite customers could be adversely impacted if they are required to significantly reduce sulfate discharges.
Paper, Pulp and Secondary Wood Products. The North American paper and pulp industry faces declining demand due to the impact of electronic substitution for print and changing customer needs. As a result, certain paper and pulp customers have reduced their existing operations in recent years and have pursued or are pursuing product changes in response to the declining demand. We expect operating levels in 2021 at the four major paper and pulp mills we serve to be lower than 2020 primarily due to the indefinite idling of Verso Corporation’s paper mill in Duluth, Minnesota. (See Verso Corporation.)
Verso Corporation. In June 2020, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota (Duluth Mill). Verso Corporation stated the decision was due to the accelerated decline in graphic paper demand resulting from the COVID-19 pandemic and has disclosed it is considering options for the Duluth Mill, including marketing for a sale. On January 29, 2021, Verso Corporation provided notice of termination for its contract effective in January 2025, with no demand charge expected after February 2023 (minimal demand charge through January 2023). On May 17, 2021, Verso Corporation announced the completion of the sale of the Duluth Mill to ST Paper LLC. At that time, ST Paper LLC stated it plans to convert the Duluth Mill to produce tissue.
Pipeline and Other Industries.
Husky Energy. In 2018, a fire at Husky Energy’s refinery in Superior, Wisconsin, disrupted operations at the facility. Under normal operating conditions, SWL&P provides approximately 14 MW of average monthly demand to Husky Energy in addition to water service. In 2019, Husky Energy announced that it had received the required permit approvals to begin reconstruction. In June 2020, Husky Energy announced that rebuild construction at the refinery had resumed following a suspension in March 2020 due to the COVID-19 pandemic. The facility remains at minimal operations, and the refinery is not expected to resume normal operations until 2023. In October 2020, Husky Energy announced a transaction to combine with Cenovus Energy Inc., which closed in the first quarter of 2021.
Prospective Additional Load. Minnesota Power is pursuing new wholesale and retail loads in and around its service territory. Currently, several companies in northeastern Minnesota continue to progress in the development of natural resource-based projects that represent long-term growth potential and load diversity for Minnesota Power. We cannot predict the outcome of these projects.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
40

OUTLOOK (Continued)
Industrial Customers and Prospective Additional Load (Continued)
PolyMet. PolyMet is planning to start a new copper-nickel and precious metal (non-ferrous) mining operation in northeastern Minnesota. In 2015, PolyMet announced the completion of the final EIS by state and federal agencies, which was subsequently published in the Federal Register and Minnesota Environmental Quality Board Monitor. The Minnesota Department of Natural Resources (DNR) and the U.S. Army Corps of Engineers have both issued final Records of Decision, finding the final EIS adequate.
PolyMet was issued all necessary permits to construct and operate its new mining operation; however, in early 2020, the Minnesota Court of Appeals reversed decisions granting PolyMet’s permit to mine, dam-safety permits and air permits. PolyMet filed petitions for further review with the Minnesota Supreme Court seeking to overturn the Minnesota Court of Appeals decisions. In February 2021, the Minnesota Supreme Court overturned a decision by the Minnesota Court of Appeals that had remanded the air permit back to the MPCA and returned the case to the Minnesota Court of Appeals. On July 19, 2021, the Minnesota Court of Appeals remanded PolyMet’s air permit to the MPCA seeking additional explanation supporting the MPCA’s permitting decision. On March 8, 2021, the U.S. District Court of Minnesota granted an EPA request to conduct a 90-day review of downstream water quality under Section 401(a)(2) of the Clean Water Act. Given the EPA's downstream water quality determination is necessary for PolyMet's federal Section 404 wetlands permit, on March 17, 2021, the U.S Army Corps of Engineers notified PolyMet it had suspended the permit for the duration of the EPA's review. On April 28, 2021, the Minnesota Supreme Court reversed the Minnesota Court of Appeals decision on the dam-safety permits while also upholding its decision on PolyMet’s permit to mine. The decision requires the DNR to hold a contested case hearing regarding the effectiveness of bentonite clay capping for eventual closure of PolyMet’s planned tailings basin and to also determine a fixed term for the permit to mine. Minnesota Power could supply between 45 MW and 50 MW of load under a 10-year power supply contract with PolyMet that would begin upon start-up of operations.
EnergyForward. Minnesota Power is executing EnergyForward, its strategy assuring reliability, protecting affordability and further improving environmental performance. The plan includes completed and planned investments in wind, solar, natural gas and hydroelectric power, construction of additional transmission capacity, the installation of emissions control technology and the idling and retirement of certain coal-fired generating facilities. Minnesota Power has a vision to deliver 100 percent carbon-free energy to customers by 2050, continuing its commitment to climate, customers and communities through its EnergyForward strategy. This vision builds on Minnesota Power’s recent achievement of now providing 50 percent renewable energy to its customers.
2021 Integrated Resource Plan. On February 1, 2021, Minnesota Power filed its latest IRP with the MPUC, which outlines its clean-energy transition plans through 2035. These plans include expanding its renewable energy supply to 70 percent by 2030, achieving coal-free operations at its facilities by 2035, and investing in a resilient and flexible transmission and distribution grid. Minnesota Power has also set a target to achieve an 80 percent reduction in carbon emissions by 2035 compared to 2005 levels. As part of these plans, Minnesota Power anticipates adding approximately 400 MW of new wind and solar energy resources, retiring Boswell Unit 3 by 2030 and transforming Boswell Unit 4 to be coal-free by 2035. Minnesota Power’s plans recognize that advances in technology will play a significant role in completing its transition to carbon-free energy supply, reliably and affordably. A final decision on the IRP is expected in early 2022.
In recent years, Minnesota Power has transformed its energy supply from more than a 95 percent reliance on coal to become a leader in the nation’s clean-energy transformation. Since 2013, the company has closed or converted seven of its nine coal-fired units and added nearly 900 megawatts of renewable energy sources. Additionally, Minnesota Power has been a leader in energy conservation, surpassing the state’s conservation goals each year for the past decade.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
41

OUTLOOK (Continued)
EnergyForward (Continued)
Nemadji Trail Energy Center. In 2017, Minnesota Power submitted a resource package to the MPUC which included requesting approval of a 250 MW natural gas capacity dedication and other affiliated-interest agreements for NTEC, a proposed 525 MW to 550 MW combined-cycle natural gas-fired generating facility which will be jointly owned by Dairyland Power Cooperative and a subsidiary of ALLETE. Minnesota Power would purchase approximately 50 percent of the facility's output starting in 2025. In a January 2019 order, the MPUC approved Minnesota Power’s request for approval of the NTEC natural gas capacity dedication and other affiliated-interest agreements. In 2019, the Minnesota Court of Appeals reversed and remanded the MPUC’s decision to approve certain affiliated-interest agreements. The MPUC was ordered to determine whether NTEC may have the potential for significant environmental effects and, if so, to prepare an environmental assessment before reassessing the agreements. On January 22, 2020, Minnesota Power filed a petition for further review with the Minnesota Supreme Court requesting that it review and overturn the Minnesota Court of Appeals decision. On April 21, 2021, the Minnesota Supreme Court reversed the Minnesota Court of Appeal’s decision by ruling that the MPUC is not required to conduct a review under the Minnesota Environmental Policy Act before approving affiliated-interest agreements that govern construction and operation of a Wisconsin power plant by a Minnesota utility, and remanded the case back to the Minnesota Court of Appeals for review of remaining issues on appeal. In January 2019, an application for a certificate of public convenience and necessity for NTEC was submitted to the PSCW, which was approved by the PSCW at a hearing in January 2020. Construction of NTEC is subject to obtaining additional permits from local, state and federal authorities. The total project cost is estimated to be approximately $700 million, of which ALLETE’s portion is expected to be approximately $350 million. ALLETE’s portion of NTEC project costs incurred through June 30, 2021, is approximately $15 million.
Renewable Energy. Minnesota Power continues to execute its renewable energy strategy and expects approximately 50 percent of its energy will be supplied by renewable energy sources in 2021. Minnesota Power also has a goal of delivering 100 percent carbon-free energy by 2050. (See EnergyForward.)
Wind Energy. Minnesota Power’s wind energy facilities consist of Bison (497 MW) located in North Dakota, and Taconite Ridge (25 MW) located in northeastern Minnesota. Minnesota Power also has two long-term wind energy PPAs with an affiliate of NextEra Energy, Inc. to purchase the output from Oliver Wind I (50 MW) and Oliver Wind II (48 MW) located in North Dakota.
Minnesota Power uses the 465-mile, 250-kV DC transmission line that runs from Center, North Dakota, to Duluth, Minnesota, to transport wind energy from North Dakota while gradually phasing out coal-based electricity delivered to its system over this transmission line from Square Butte’s lignite coal-fired generating unit. Minnesota Power is currently pursuing a modernization and capacity upgrade of its DC transmission system to continue providing reliable operations and additional system capabilities.
Minnesota Power has an approved cost recovery rider for certain renewable investments and expenditures. The cost recovery rider allows Minnesota Power to charge retail customers on a current basis for the costs of certain renewable investments plus a return on the capital invested. Updated customer billing rates were approved by the MPUC in an order dated December 10, 2020.
Nobles 2 PPA. Minnesota Power has a long-term PPA with Nobles 2 that provides for Minnesota Power to purchase the energy and associated capacity from a 250 MW wind energy facility in southwestern Minnesota through 2040. The agreement provides for the purchase of output from the facility at fixed energy prices. There are no fixed capacity charges, and Minnesota Power will only pay for energy as it is delivered. (See Corporate and Other – Investment in Nobles 2.)
Manitoba Hydro. Minnesota Power has three long-term PPAs with Manitoba Hydro. Under the first PPA, Minnesota Power is purchasing surplus energy through April 2022. This energy-only agreement primarily consists of surplus hydro energy on Manitoba Hydro’s system that is delivered to Minnesota Power on a non-firm basis. Under this agreement, Minnesota Power will purchase at least one million MWh of energy over the contract term. The second PPA provides for Minnesota Power to purchase 250 MW of capacity and energy from Manitoba Hydro through May 2035. The third PPA provides for Minnesota Power to purchase up to 133 MW of energy from Manitoba Hydro through June 2040.
Solar Energy. Minnesota Power’s solar energy supply consists of Camp Ripley, a 10 MW solar energy facility at the Camp Ripley Minnesota Army National Guard base and training facility near Little Falls, Minnesota, and a community solar garden in northeastern Minnesota, which is comprised of a 1 MW solar array owned and operated by a third party with the output purchased by Minnesota Power and a 40 kW solar array that is owned and operated by Minnesota Power. SWL&P also plans to construct a 470 kW solar array as part of a community solar garden in Superior, Wisconsin, which was approved by the PSCW in October 2020.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
42

OUTLOOK (Continued)
EnergyForward (Continued)
In June 2020, Minnesota Power filed a proposal with the MPUC to accelerate plans for solar energy with an estimated $40 million investment in approximately 20 MW of solar energy projects in Minnesota which was approved in an order dated June 29, 2021.
Minnesota Power has approval for current cost recovery of investments and expenditures related to compliance with the Minnesota Solar Energy Standard. In June 2020, Minnesota Power filed a petition seeking MPUC approval of a customer billing rate for solar costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard, which were approved by the MPUC at a hearing on April 14, 2021. New customer billing rates for the solar cost recovery rider were implemented on June 1, 2021.
Transmission. We continue to make investments in transmission opportunities that strengthen or enhance the transmission grid or take advantage of our geographical location between sources of renewable energy and end users. These include the GNTL, investments to enhance our own transmission facilities, investments in other transmission assets (individually or in combination with others) and our investment in ATC.
Great Northern Transmission Line. As a condition of the 250 MW long-term PPA entered into with Manitoba Hydro, construction of additional transmission capacity was required. As a result, Minnesota Power constructed the GNTL, an approximately 220‑mile 500-kV transmission line between Manitoba and Minnesota’s Iron Range that was proposed by Minnesota Power and Manitoba Hydro in order to strengthen the electric grid, enhance regional reliability and promote a greater exchange of sustainable energy. In June 2020, Minnesota Power placed the GNTL into service with project costs of approximately $310 million incurred by Minnesota Power. Total project costs, including those costs contributed by a subsidiary of Manitoba Hydro, totaled approximately $660 million. Also in June 2020, Manitoba Hydro placed the MMTP into service. The 250 MW PPA with Manitoba Hydro commenced when the GNTL was placed into service.
Investment in ATC. Our wholly-owned subsidiary, ALLETE Transmission Holdings, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in portions of Wisconsin, Michigan, Minnesota and Illinois. We account for our inve s tment in ATC under the equity method of accounting. (See Note 3. Equity Investments.) As of June 30, 2021, our equity investment in ATC was $151.6 million ($149.0 million as of December 31, 2020).
ATC’s authorized return on equity is 10.02 percent, or 10.52 percent including an incentive adder for participation in a regional transmission organization, based on a May 2020 FERC order that granted rehearing of a 2019 FERC order.
ATC’s 10-year transmission assessment, which covers the years 2020 through 2029, identifies a need for between $2.9 billion and $3.5 billion in transmission system investments. These investments by ATC, if undertaken, are expected to be funded through a combination of internally generated cash, debt and investor contributions. As opportunities arise, we plan to make additional investments in ATC through capital calls based upon our pro rata ownership interest in ATC.
ALLETE Clean Energy.
ALLETE Clean Energy focuses on developing, acquiring, and operating clean and renewable energy projects. ALLETE Clean Energy currently owns and operates, in seven states, more than 1,000 MW of nameplate capacity wind energy generation that is contracted under PSAs of various durations. In addition, ALLETE Clean Energy currently has approximately 300 MW of wind energy facilities under construction. ALLETE Clean Energy also engages in the development of wind energy facilities to operate under long-term PSAs or for sale to others upon completion.
ALLETE Clean Energy believes the market for renewable energy in North America is robust, driven by several factors including environmental regulation, tax incentives such as the extension of production tax credit and investment tax credits, societal expectations and continual technology advances. State renewable portfolio standards, state or federal regulations to limit GHG emissions and the extension of production tax credit and investment tax credits are examples of environmental regulation or public policy that we believe will drive renewable energy development.
ALLETE Clean Energy’s strategy includes the safe, reliable, optimal and profitable operation of its existing facilities. This includes a strong safety culture, the continuous pursuit of operational efficiencies at existing facilities and cost controls. ALLETE Clean Energy generally acquires facilities in liquid power markets and its strategy includes the exploration of PSA extensions upon expiration of existing contracts, production tax credit requalification of existing facilities or the sale of facilities.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
43

OUTLOOK (Continued)
ALLETE Clean Energy (Continued)
ALLETE Clean Energy will pursue growth through acquisitions or project development. ALLETE Clean Energy is targeting acquisitions of existing operating portfolios which have a mix of long-term PSAs in place and/or available for repowering and recontracting. Further, ALLETE Clean Energy will evaluate actions that will lead to the addition of complimentary clean energy products and services. At this time, ALLETE Clean Energy expects acquisitions or development of new facilities will be primarily wind, solar, energy storage or storage ready facilities across North America. ALLETE Clean Energy is also targeting the development of new facilities up to 300 MW each, which will have long-term PSAs in place for the output or may be sold upon completion.
Federal production tax credit qualification is important to the economics of project development, and ALLETE Clean Energy has invested in equipment to meet production tax credit safe harbor provisions which provides an opportunity to seek development of its remaining safe harbor production tax credit qualified equipment through 2025 based on the most recent PTC safe harbor extension by the IRS. ALLETE Clean Energy has completed its investment of approximately $80 million for production tax credit requalification of approximately 470 WTGs at its Storm Lake I, Storm Lake II, Lake Benton and Condon wind energy facilities. We anticipate annual production tax credits relating to these projects of approximately $20 million annually through 2027 and decreasing thereafter through 2030. Disruptions in our supply chains or a lack of available financing resulting from the ongoing COVID-19 pandemic, if they occur, could jeopardize our ability to complete certain capital projects in time to qualify them for production tax credits. To date we have not experienced disruptions in our supply chains related to the COVID-19 pandemic.
In March 2020, ALLETE Clean Energy acquired the rights to the approximately 300 MW Caddo wind development project in Oklahoma from Apex Clean Energy. The Caddo wind project is fully contracted to sell wind power under long-term power sales agreements. Construction is expected to be completed in late 2021.
On February 4, 2021, ALLETE Clean Energy entered into a purchase and sale agreement with a subsidiary of Xcel Energy Inc. to sell a 120 MW wind energy facility for approximately $210 million. ALLETE Clean Energy will repower and expand its Northern Wind project, consisting of its 98 MW Chanarambie and Viking wind energy facilities located in southwest Minnesota, as part of the transaction. Construction is expected to begin in late 2021 with the Northern Wind project expected to continue operating until early 2022. At a hearing on June 10, 2021, the MPUC approved the sale, which is expected to close in late 2022, subject to receipt of permits.
On May 5, 2021, ALLETE Clean Energy announced it has acquired the rights to the approximately 92 MW Red Barn wind development project and the approximately 68 MW Whitetail renewable development project in southwestern Wisconsin. ALLETE Clean Energy also signed an asset sale agreement for the completed Red Barn wind project with Wisconsin Public Service Corporation and Madison Gas and Electric Company. Construction and sale of the Red Barn wind project is expected to be completed in late 2022, subject to receipt of regulatory approvals and permits.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
44

OUTLOOK (Continued)
ALLETE Clean Energy (Continued)
ALLETE Clean Energy manages risk by having a diverse portfolio of assets, which includes PSA expiration, technology and geographic diversity. The current operating portfolio is subject to typical variations in seasonal wind with higher wind resources typically available in the winter months. The majority of its planned maintenance leverages this seasonality and is performed during lower wind periods. ALLETE Clean Energy’s current operating portfolio is as follows:

Region | Wind Energy Facility | Capacity MW | PSA MW | PSA Expiration
East | Armenia Mountain | 101 | 100% | 2024
Midwest | Chanarambie/Viking (a) | 98 |  |
| PSA 1 |  | 12% | 2023
| PSA 2 |  | 88% | 2023
| Lake Benton | 104 | 100% | 2028
| Storm Lake I | 108 | 100% | 2027
| Storm Lake II | 77 |  |
| PSA 1 |  | 90% | 2022
| PSA 2 |  | 10% | 2032
| Other | 17 | 100% | 2028
South | Diamond Spring | 303 |  |
| PSA 1 |  | 58% | 2035
| PSA 2 |  | 25% | 2032
| PSA 3 |  | 16% | 2035
West | Condon | 50 | 100% | 2022
| Glen Ullin | 106 | 100% | 2039
| South Peak | 80 | 100% | 2035

(a)Under contract for sale to a subsidiary of Xcel Energy Inc. The sale is expected to close in late 2022, subject to receipt of permits. ALLETE Clean Energy will repower and expand the wind energy facilities as part of the transaction.
Corporate and Other.
BNI Energy. BNI Energy anticipates selling 3.6 million tons of lignite coal in 2021 (4.2 million tons were sold in 2020) and has sold 1.9 million tons for the six months ended June 30, 2021 (2.1 million tons were sold for the six months ended June 30, 2020). BNI Energy operates under cost-plus fixed fee agreements extending through December 31, 2037.
Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns a 49 percent equity interest in Nobles 2, the entity that owns and operates the 250 MW wind energy facility in southwestern Minnesota pursuant to a 20-year PPA with Minnesota Power. We account for our investment in Nobles 2 under the equity method of accounting. (See Note 3. Equity Investments.) As of June 30, 2021, our equity investment in Nobles 2 was $166.2 million ($152.2 million at December 31, 2020).
ALLETE Properties. ALLETE Properties represents our legacy Florida real estate investment. ALLETE Properties’ primary project in Florida is Town Center at Palm Coast, with approximately 600 acres of land available for sale. In addition to this project, ALLETE Properties has approximately 600 acres of other land available for sale. Market conditions can impact land sales and could result in our inability to cover our cost basis and operating expenses including fixed carrying costs such as community development district assessments and property taxes.
Our strategy incorporates the possibility of a bulk sale of the entire ALLETE Properties portfolio. Proceeds from a bulk sale would be strategically deployed to support growth initiatives at our Regulated Operations and ALLETE Clean Energy. ALLETE Properties also continues to pursue sales of individual parcels over time and will continue to maintain key entitlements and infrastructure.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
45

OUTLOOK (Continued)
Income Taxes.
ALLETE’s aggregate federal and multi-state statutory tax rate is approximately 28 percent for 2021. ALLETE also has tax credits and other tax adjustments that reduce the combined statutory rate to the effective tax rate. These tax credits and adjustments historically have included items such as investment tax credits, production tax credits, AFUDC-Equity, depletion, as well as other items. The annual effective rate can also be impacted by such items as changes in income before income taxes, state and federal tax law changes that become effective during the year, business combinations, tax planning initiatives and resolution of prior years’ tax matters. We expect our effective tax rate to be a benefit of approximately 25 to 30 percent for 2021 primarily due to federal production tax credits as a result of wind energy generation. We also expect that our effective tax rate will be lower than the combined statutory rate over the next 10 years due to production tax credits attributable to our wind energy generation.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position. ALLETE is well-positioned to meet the Company’s liquidity needs. As of June 30, 2021, we had cash and cash equivalents of $62.5 million, $349.5 million in available consolidated lines of credit, 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets and a debt-to-capital ratio of 42 percent. (See Working Capital.)
Capital Structure. ALLETE’s capital structure is as follows:

| June 30, 2021 |  | % |  | December 31, 2020 |  | %
Millions |  |  |  |  |  |  |
ALLETE Equity | $2,322.6 |  |  | 47 |  |  | $2,294.6 |  |  | 50 |
Non-Controlling Interest in Subsidiaries | 519.3 |  |  | 11 |  |  | 505.6 |  |  | 11 |
Short-Term and Long-Term Debt (a) | 2,036.1 |  |  | 42 |  |  | 1,806.4 |  |  | 39 |
| $4,878.0 |  |  | 100 |  |  | $4,606.6 |  |  | 100 |

(a)Excludes unamortized debt issuance costs.
Cash Flows. Selected information from the Consolidated Statement of Cash Flows is as follows:

For the Six Months Ended June 30, | 2021 |  | 2020
Millions |  |  |
Cash, Cash Equivalents and Restricted Cash at Beginning of Period | $65.2 |  |  | $92.5 |
Cash Flows from (used for) |  |  |
Operating Activities | 105.7 |  |  | 143.3 |
Investing Activities | (305.7) |  |  | (486.2) |
Financing Activities | 202.1 |  |  | 287.8 |
Change in Cash, Cash Equivalents and Restricted Cash | 2.1 |  |  | (55.1) |
Cash, Cash Equivalents and Restricted Cash at End of Period | $67.3 |  |  | $37.4 |

Operating Activities. Cash from operating activities was lower in 2021 compared to 2020. Cash from operating activities in 2021 included lower net income compared to 2020, higher payments for inventories and timing in recovery and refund of the fuel adjustment clause. Cash from operating activities in 2020 included provision of payments for interim rates collected as part of the 2020 general rate case.
Investing Activities. Cash used for investing activities was lower in 2021 compared to 2020. Cash used for investing activities in 2021 reflected lower additions to property, plant and equipment and fewer payments for equity method investments compared to 2020.
Financing Activities. Cash from financing activities was lower in 2021 compared to 2020 primarily due to higher repayments of short-term and long-term debt, and lower proceeds from non-controlling interest in subsidiaries in 2021. These decreases were partially offset by higher proceeds from the issuance of short-term and long-term debt in 2021.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
46

LIQUIDITY AND CAPITAL RESOURCES (Continued)
Working Capital. Additional working capital, if and when needed, generally is provided by consolidated bank lines of credit and the issuance of securities, including long-term debt, common stock and commercial paper. As of June 30, 2021, we had consolidated bank lines of credit aggregating $432.0 million ($407.0 million as of December 31, 2020), the majority of which expire in January 2024. We had $18.7 million outstanding in standby letters of credit and $63.8 million outstanding draws under our lines of credit as of June 30, 2021 ($22.3 million in standby letters of credit and no outstanding draws as of December 31, 2020). We also have other credit facility agreements in place that provide the ability to issue up to $100.0 million in standby letters of credit. As of June 30, 2021, we had $82.7 million outstanding in standby letters of credit under these agreements.
In addition, as of June 30, 2021, we had 3.2 million original issue shares of our common stock available for issuance through Invest Direct, our direct stock purchase and dividend reinvestment plan, and 2.9 million original issue shares of common stock available for issuance through a distribution agreement with Lampert Capital Markets, as amended most recently in May 2020. The amount and timing of future sales of our securities will depend upon market conditions and our specific needs. In 2019, we filed Registration Statement No. 333-232905, pursuant to which the remaining shares under this agreement will continue to be offered for sale, from time to time.
Securities. During the six months ended June 30, 2021, we issued 0.2 million shares of common stock through Invest Direct, the Employee Stock Purchase Plan, and the Retirement Savings and Stock Ownership Plan, resulting in net proceeds of $10.1 million (0.2 million shares were issued for the six months ended June 30, 2020, resulting in net proceeds of $7.9 million). These shares of common stock were registered under Registration Statement Nos. 333-231030, 333-183051 and 333-162890.
Financial Covenants. See Note 5. Short-Term and Long-Term Debt for information regarding our financial covenants.
Pension and Other Postretirement Benefit Plans. Management considers various factors when making funding decisions, such as regulatory requirements, actuarially determined minimum contribution requirements and contributions required to avoid benefit restrictions for the defined benefit pension plans. (See Note 9. Pension and Other Postretirement Benefit Plans.)
Off-Balance Sheet Arrangements. Off-balance sheet arrangements are summarized in our 2020 Form 10-K, with additional disclosure in Note 6. Commitments, Guarantees and Contingencies.
Credit Ratings. Access to reasonably priced capital markets is dependent in part on credit and ratings. Our securities have been rated by S&P Global Ratings and by Moody’s. Rating agencies use both quantitative and qualitative measures in determining a company’s credit rating. These measures include business risk, liquidity risk, competitive position, capital mix, financial condition, predictability of cash flows, management strength and future direction. Some of the quantitative measures can be analyzed through a few key financial ratios, while the qualitative ones are more subjective. Our current credit ratings are listed in the following table:

Credit Ratings | S&P Global Ratings | Moody’s
Issuer Credit Rating | BBB | Baa1
Commercial Paper | A-2 | P-2
First Mortgage Bonds | (a) | A2

(a) Not rated by S&P Global Ratings.
The disclosure of these credit ratings is not a recommendation to buy, sell or hold our securities. Ratings are subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Capital Requirements. Our capital expenditures for 2021 are expected to be approximately $500 million. For the six months ended June 30, 2021, capital expenditures totaled $288.3 million ($356.1 million for the six months ended June 30, 2020). The expenditures were primarily made in the ALLETE Clean Energy segment.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
47

OTHER
Environmental Matters.
Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have been promulgated by both the EPA and state authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation. (See Note 6. Commitments, Guarantees and Contingencies.)
Employees.
As of June 30, 2021, ALLETE had 1,356 employees, of which 1,331 were full-time.
Minnesota Power and SWL&P have an aggregate of 459 employees covered under collective bargaining agreements, of which most are members of International Brotherhood of Electrical Workers (IBEW) Local 31. The current labor agreements with IBEW Local 31 expire on April 30, 2023, for Minnesota Power and on January 31, 2022, for SWL&P.
BNI Energy has 184 employees, of which 135 are subject to a labor agreement with IBEW Local 1593. The current labor agreement with IBEW Local 1593 expires on March 31, 2023.
NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed in Note 1. Operations and Significant Accounting Policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SECURITIES INVESTMENTS
Available-for-Sale Securities. As of June 30, 2021, our available-for-sale securities portfolio consisted primarily of securities held in other postretirement plans to fund employee benefits.
COMMODITY PRICE RISK
Our regulated utility operations incur costs for power and fuel (primarily coal and related transportation) in Minnesota, and power and natural gas purchased for resale in our regulated service territory in Wisconsin. Minnesota Power’s exposure to price risk for these commodities is significantly mitigated by the current ratemaking process and regulatory framework, which allows recovery of fuel costs in excess of those included in base rates or distribution of savings in fuel costs to ratepayers. SWL&P’s exposure to price risk for natural gas is significantly mitigated by the current ratemaking process and regulatory framework, which allows the commodity cost to be passed through to customers. We seek to prudently manage our customers’ exposure to price risk by entering into contracts of various durations and terms for the purchase of power and coal and related transportation costs (Minnesota Power), and natural gas (SWL&P).
ALLETE, Inc. Second Quarter 2021 Form 10-Q
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)
POWER MARKETING
Minnesota Power’s power marketing activities consist of: (1) purchasing energy in the wholesale market to serve its regulated service territory when energy requirements exceed generation output; and (2) selling excess available energy and purchased power. From time to time, Minnesota Power may have excess energy that is temporarily not required by retail and municipal customers in our regulated service territory. Minnesota Power actively sells any excess energy to the wholesale market to optimize the value of its generating facilities.
We are exposed to credit risk primarily through our power marketing activities. We use credit policies to manage credit risk, which includes utilizing an established credit approval process and monitoring counterparty limits.
INTEREST RATE RISK
We are exposed to risks resulting from changes in interest rates as a result of our issuance of variable rate debt. We manage our interest rate risk by varying the issuance and maturity dates of our fixed rate debt, limiting the amount of variable rate debt, and continually monitoring the effects of market changes in interest rates. We may also enter into derivative financial instruments, such as interest rate swaps, to mitigate interest rate exposure. Interest rates on variable rate long-term debt are reset on a periodic basis reflecting prevailing market conditions. Based on the variable rate debt outstanding as of June 30, 2021, an increase of 100 basis points in interest rates would impact the amount of pre-tax interest expense by $3.8 million. This amount was determined by considering the impact of a hypothetical 100 basis point increase to the average variable interest rate on the variable rate debt outstanding as of June 30, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of June 30, 2021, evaluations were performed, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, on the effectiveness of the design and operation of ALLETE’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)). Based upon those evaluations, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are effective to provide assurance that information required to be disclosed in ALLETE’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Changes in Internal Controls. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding material legal and regulatory proceedings, see Note 4. Regulatory Matters and Note 8. Commitments, Guarantees and Contingencies to the Consolidated Financial Statements in our 2020 Form 10-K and Note 2. Regulatory Matters and Note 6. Commitments, Guarantees and Contingencies herein. Such information is incorporated herein by reference.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
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ITEM 1A. RISK FACTORS
Our 2020 Form 10-K includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors disclosed in Part I, Item 1A. Risk Factors of our 2020 Form 10-K.
ALLETE Clean Energy / Corporate and Other Risks
The price of electricity may be volatile, which may impact results of operations at ALLETE Clean Energy wind energy facilities under contracts with customer and industrial (C&I) customers.
Unusual, adverse weather conditions or other natural events can cause volatility in market prices for electricity and adversely affect our financial position, results of operations and cash flows. ALLETE Clean Energy’s power sales agreements with its three C&I customers at its Diamond Spring wind energy facility are contracts for differences where power is delivered to the market, and a fixed price is paid by the customers to ALLETE Clean Energy, and differences between the market price and the fixed price are paid to or received from the customers. One of these power sales agreements settles with the customer based on day-ahead electricity prices, while deliveries to the market are settled based on real-time electricity prices. This settlement provision can result in an adverse impact to the Company when market prices are extremely volatile as happened in February 2021 during an extreme winter weather event in the southwest United States. This winter weather event caused extreme volatility, with large differences in the day-ahead and real-time market prices; the settlement provision resulted in an approximately $5 million after-tax negative impact related to the Diamond Spring wind energy facility.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires issuers to include in periodic reports filed with the SEC certain information relating to citations or orders for violations of standards under the Federal Mine Safety and Health Act of 1977 (Mine Safety Act). Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Act and this Item are included in Exhibit 95 to this Form 10-Q.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
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ITEM 5. OTHER INFORMATION
The proxy statement for ALLETE’s 2021 Annual Meeting of Shareholders, which was filed with the SEC on March 25, 2021, contained typographical errors in the section entitled “Other Business—Shareholder Proposals for the 2022 Annual Meeting” related to the dates by which a shareholder must (a) submit a shareholder proposal to be considered for inclusion in the proxy materials for ALLETE’s 2022 annual meeting of shareholders (2022 Annual Meeting) and (b) provide notice to ALLETE if a shareholder would like to bring business before the 2022 Annual Meeting. The corrected information is set forth below:
Shareholder Proposals for the 2022 Annual Meeting
All proposals from shareholders submitted pursuant to SEC Rule 14a-8 under the Exchange Act to be considered for inclusion in the proxy statement relating to the 2022 Annual Meeting scheduled for May 10, 2022, must be received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN 55802-2093 not later than November 25, 2021.
In addition, ALLETE’s Bylaws provide that for proposals, other than those described in the preceding paragraph, including nominations for director and other shareholder proposals to be properly brought before an annual meeting by a shareholder, the shareholder must have delivered timely notice to ALLETE’s Secretary. To be timely, notice for business to be brought before an annual meeting of shareholders generally must be received not less than 90 days nor more than 120 days prior to the anniversary of the immediately preceding annual meeting. Therefore, for the 2022 Annual Meeting scheduled for May 10, 2022, ALLETE must receive notice between January 11, 2022 and February 10, 2022. Notice must also comply with the applicable informational and other requirements set forth in ALLETE’s Bylaws.
The persons to be named as proxies in the proxy card relating to the 2022 Annual Meeting may have the discretion to vote their proxies in accordance with their judgment on any matter as to which ALLETE did not have advance notice in accordance with the notice provisions in ALLETE’s Bylaws, without discussion of such matter in the proxy statement relating to the 2022 Annual Meeting of shareholders.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
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ITEM 6. EXHIBITS

Exhibit Number |
4(a) |  | Fourteenth Supplemental Indenture, dated as of June 14, 2021, between Superior Water, Light and Power Company and U.S. Bank National Association, as trustee. |
4(b) |  | Fifteenth Supplemental Indenture, dated as of June 14, 2021, between Superior Water, Light and Power Company and U.S. Bank National Association, as trustee. |
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 the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
95 |  | Mine Safety. |
99 |  | ALLETE News Release dated August 4, 2021, announcing 2021 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.) |
101.INS |  | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH |  | XBRL Schema |
101.CAL |  | XBRL Calculation |
101.DEF |  | XBRL Definition |
101.LAB |  | XBRL Label |
101.PRE |  | XBRL Presentation |
104 |  | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |

ALLETE agrees to furnish to the SEC upon request any instrument with respect to long-term debt that ALLETE has not filed as an exhibit pursuant to the exemption provided by Item 601(b)(4)(iii)(A) of Regulation S-K.
ALLETE, Inc. Second Quarter 2021 Form 10-Q
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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.
August 4, 2021 |  | /s/ Robert J. Adams
|  | Robert J. Adams
|  | Senior Vice President and Chief Financial Officer
|  | (Principal Financial Officer)
August 4, 2021 |  | /s/ Steven W. Morris
|  | Steven W. Morris
|  | Vice President, Controller and Chief Accounting Officer
|  | (Principal Accounting Officer)

ALLETE, Inc. Second Quarter 2021 Form 10-Q
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