SEC Filing | ALLETE, Inc.

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ale-20201231

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K


(Mark One)
	☒	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the year ended December 31, 2020


			☐			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)						(I.R.S. Employer Identification No.)

30 West Superior Street, Duluth, Minnesota 55802-2093

(Address of principal executive offices, including 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

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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

The aggregate market value of voting stock held by nonaffiliates on June 30, 2020, was $2,825,208,722.

As of February 1, 2021, there were 52,116,629 shares of ALLETE Common Stock, without par value, outstanding.

Documents Incorporated By Reference

Portions of the Proxy Statement for the 2021 Annual Meeting of Shareholders are incorporated by reference in Part III.

Index


Definitions		4

Forward-Looking Statements		6

Part I		7
	Item 1. Business	7
	Regulated Operations	9
	Electric Sales / Customers	9
	Seasonality	12
	Power Supply	12
	Transmission and Distribution	14
	Investment in ATC	15
	Properties	15
	Regulatory Matters	15
	Regional Organizations	16
	Minnesota Legislation	17
	Competition	17
	Franchises	17
	ALLETE Clean Energy	18
	U.S. Water Services	18
	Corporate and Other	19
	BNI Energy	19
	Investment in Nobles 2	19
	ALLETE Properties	19
	Non-Rate Base Generation and Miscellaneous	19
	Environmental Matters	20
	Human Capital Management	20
	Availability of Information	21
	Information about our Executive Officers	22
	Item 1A. Risk Factors	23
	Item 1B. Unresolved Staff Comments	32
	Item 2. Properties	32
	Item 3. Legal Proceedings	32
	Item 4. Mine Safety Disclosures	32
Part II		33
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
	Item 6. Selected Financial Data	34
	Item 7 . Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Overview	34
	2020 Compared to 2019	36

	Critical Accounting Policies	39
	Outlook	40
	Liquidity and Capital Resources	48
	Capital Requirements	51
	Environmental and Other Matters	51
	Market Risk	52
	Recently Adopted Accounting Standards	52
	Item 7 A. Quantitative and Qualitative Disclosures about Market Risk	53
	Item 8 . Financial Statements and Supplementary Data	53

ALLETE, Inc. 2020 Form 10-K

Index (Continued)


	Item 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
	Item 9 A. Controls and Procedures	53
	Item 9 B. Other Information	53
Part III		54
	Item 10 . Directors, Executive Officers and Corporate Governance	54
	Item 1 1 . Executive Compensation	54
	Item 1 2 . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
	Item 1 3 . Certain Relationships and Related Transactions, and Director Independence	55
	Item 1 4 . Principal Accounting Fees and Services	56
Part IV		56
	Item 1 5 . Exhibits and Financial Statement Schedules	56
	Item 1 6 . Form 10-K Summary	61

Signatures		62

Report of Independent Registered Public Accounting Firm		64

Consolidated Financial Statements - Audited		66
	Consolidated Balance Sheet	66
	Consolidated Statement of Income	67
	Consolidated Statement of Comprehensive Income	68
	Consolidated Statement of Cash Flows	69
	Consolidated Statement of Equity	70
	Notes to Consolidated Financial Statements	71
	Note 1. Operations and Significant Accounting Policies	71
	Note 2. Property, Plant and Equipment	82
	Note 3. Jointly-Owned Facilities and Assets	83
	Note 4. Regulatory Matters	84
	Note 5. Equity Investments	89

	Note 6 . Fair Value	90
	Note 7 . Short-Term and Long-Term Debt	92
	Note 8 . Commitments, Guarantees and Contingencies	95
	Note 9 . Common Stock and Earnings Per Share	102
	Note 1 0 . Income Tax Expense	103
	Note 1 1 . Pension and Other Postretirement Benefit Plans	105
	Note 1 2 . Employee Stock and Incentive Plans	114
	Note 1 3 . Business Segments	116
	Note 1 4 . Quarterly Financial Data (Unaudited)	119
Schedule II		119

ALLETE, Inc. 2020 Form 10-K

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 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 USA LLC
ATC			American Transmission Company LLC
Basin			Basin Electric Power Cooperative
Bison			Bison Wind Energy Center
BNI Energy			BNI Energy, Inc. and its subsidiary
Boswell			Boswell Energy Center
Camp Ripley			Camp Ripley Solar Array
CIP			Conservation Improvement Program
Cliffs			Cleveland-Cliffs Inc.
Company			ALLETE, Inc. and its subsidiaries
COVID-19			2019 novel coronavirus
DC			Direct Current
EIS			Environmental Impact Statement

EPA			United States Environmental Protection Agency
ESG			Environmental, Social and Governance
ESOP			Employee Stock Ownership Plan
FASB			Financial Accounting Standards Board
FERC			Federal Energy Regulatory Commission
Form 8-K			ALLETE Current Report on Form 8-K
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-K
kV			Kilovolt(s)
kW / kWh			Kilowatt(s) / Kilowatt-hour(s)
Lampert Capital Markets			Lampert Capital Markets, Inc.
Laskin			Laskin Energy Center


Manitoba Hydro			Manitoba Hydro-Electric Board
MBtu			Million British thermal units

ALLETE, Inc. 2020 Form 10-K

Definitions (continued)


Abbreviation or Acronym			Term

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
Montana-Dakota Utilities			Montana-Dakota Utilities Co., a subsidiary of MDU Resources Group, Inc.
Moody’s			Moody’s Investors Service, Inc.
MPCA			Minnesota Pollution Control Agency
MPUC			Minnesota Public Utilities Commission
MW / MWh			Megawatt(s) / Megawatt-hour(s)
NAAQS			National Ambient Air Quality Standards
NDPSC			North Dakota Public Service Commission
NERC			North American Electric Reliability Corporation
Nobles 2			Nobles 2 Power Partners, LLC
NOL			Net Operating Loss

NOX			Nitrogen Oxides

Northshore Mining			Northshore Mining Company, a wholly-owned subsidiary of Cliffs
Note ___			Note ___ to the consolidated financial statements in this Form 10-K

NPDES			National Pollutant Discharge Elimination System
NTEC			Nemadji Trail Energy Center
NYSE			New York Stock Exchange
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
RSOP			Retirement Savings and Stock Ownership Plan
SEC			Securities and Exchange Commission
S&P			S&P Global Ratings
Silver Bay Power			Silver Bay Power Company, a wholly-owned subsidiary of Cliffs

SO2			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
Taconite Ridge			Taconite Ridge Energy Center


TCJA			Tax Cuts and Jobs Act of 2017 (Public Law 115-97)

Town Center District			Town Center at Palm Coast Community Development District in Florida
United Taconite			United Taconite LLC, a wholly-owned subsidiary of Cliffs
UPM Blandin			UPM, Blandin paper mill owned by UPM-Kymmene Corporation
U.S.			United States of America
U.S. Water Services			U.S. Water Services, Inc. and its subsidiaries
USS Corporation			United States Steel Corporation
WTG			Wind Turbine Generator

ALLETE, Inc. 2020 Form 10-K

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-K, 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 1, Item 1A under the heading “Risk Factors” of this Form 10-K. 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-K and in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.

ALLETE, Inc. 2020 Form 10-K

Part I

Item 1. Business

Overview.

ALLETE is a clean-energy leader committed to answering the call to transform the nation’s energy landscape through innovative and sustainable solutions. Our businesses deliver critical, quality-of-life services in ways that respect the environment, support communities and the people who live there, and provide value to customers and investors. 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. ALLETE Clean Energy also operates more than 1,000 MW of renewable wind energy generation in addition to approximately 300 MW currently under construction and 155 MW previously constructed and sold to others. Delivery of these sustainable energy solutions helps the customers and communities we serve achieve their sustainability goals.

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 late 2021.

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 is also committed to earning a financial return that rewards our shareholders, allows for reinvestment in our businesses, and sustains growth. 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 also investing in ALLETE Clean Energy and our Corporate and Other businesses to complement its regulated businesses, balance exposure to the utility’s industrial customers, and provide potential long-term earnings growth.

The ongoing COVID-19 pandemic has resulted in widespread impacts on the global economy and on our employees, customers, contractors, and suppliers. There is considerable uncertainty regarding the extent to which COVID-19 will spread and the extent and duration of measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders (including those in effect in areas our businesses operate), and business and government shutdowns. Additional disclosures in this Form 10-K regarding the impacts of the ongoing COVID-19 pandemic are located in Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 4. 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.

ALLETE, Inc. 2020 Form 10-K

Overview (Continued)

U.S. Water Services provided integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage, and improve efficiency. In March 2019, the Company sold U.S. Water Services to a subsidiary of Kurita Water Industries Ltd.

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 December 31, 2020, 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.


Year Ended December 31	2020		2019		2018

Consolidated Operating Revenue – Millions (a)(b)	$1,169.1		$1,240.5		$1,498.6

Percentage of Consolidated Operating Revenue
Regulated Operations	84	%	84	%	71	%
ALLETE Clean Energy (a)	7	%	5	%	11	%
U.S. Water Services (b)	—		3	%	11	%
Corporate and Other	9	%	8	%	7	%
	100	%	100	%	100	%

(a) Includes the sale of a wind energy facility to Montana-Dakota Utilities for $81.1 million in 2018.

(b) ALLETE sold U.S. Water Services in the first quarter of 2019.

For a detailed discussion of results of operations and trends, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. For business segment information, see Note 1. Operations and Significant Accounting Policies and Note 13. Business Segments.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS

Electric Sales / Customers


Regulated Utility Kilowatt-hours Sold
Year Ended December 31	2020	%	2019	%	2018	%
Millions
Retail and Municipal
Residential	1,134	9	1,130	8	1,140	8
Commercial	1,306	10	1,390	10	1,426	10
Industrial	6,192	47	7,277	54	7,261	50
Municipal	584	4	672	5	798	5
Total Retail and Municipal	9,216	70	10,469	77	10,625	73
Other Power Suppliers	4,039	30	3,185	23	3,953	27
Total Regulated Utility Kilowatt-hours Sold	13,255	100	13,654	100	14,578	100

Industrial Customers. In 2020, industrial customers represented 47 percent of total regulated utility kWh sales. Our industrial customers are primarily in the taconite mining, paper, pulp and secondary wood products, and pipeline industries.

The ongoing COVID-19 pandemic and related governmental responses has led to a disruption of economic activity, and could result in an extended disruption of economic activity. This disruption has resulted in reduced sales and revenue from industrial customers as many industrial customers operated at reduced levels or were temporarily closed or idled during 2020. In addition, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Paper, Pulp and Secondary Wood Products – Verso Corporation.) The current disruption of economic activity or an extended disruption of economic activity may lead to additional adverse impacts on our taconite and paper, pulp and secondary wood products, pipeline and other industrial customers’ operations including further reduced production or the temporary idling or indefinite shutdown of other facilities, which would result in lower sales and revenue from these customers.


Industrial Customer Kilowatt-hours Sold
Year Ended December 31	2020	%	2019	%	2018	%
Millions
Taconite	4,296	69	5,039	69	5,039	69
Paper, Pulp and Secondary Wood Products	752	12	1,014	14	987	14
Pipelines and Other Industrial	1,144	19	1,224	17	1,235	17
Total Industrial Customer Kilowatt-hours Sold	6,192	100	7,277	100	7,261	100

Six taconite facilities served by Minnesota Power made up approximately 80 percent of 2019 iron ore pellet production in the U.S. according to data from the Minnesota Department of Revenue 2020 Mining Tax Guide. These taconite facilities were all owned by Cliffs and USS Corporation at the end of the 2020. (See Large Power Customer Contracts.) Sales to taconite customers represented 4,296 million kWh, or 69 percent of total industrial customer kWh sales in 2020. Taconite, an iron‑bearing rock of relatively low iron content, is abundantly available in northern Minnesota and an important domestic source of raw material for the steel industry. Taconite processing plants use large quantities of electric power to grind the iron-bearing rock, and agglomerate and pelletize the iron particles into taconite pellets.

Minnesota Power’s taconite customers are capable of producing 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 continues to lead the world in environmental performance among steelmaking countries. According to the U.S. Department of Energy, steel produced 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. 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 all requires steel. Historically, less than 10 percent of Minnesota taconite production has been exported outside of North America.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Industrial Customers (Continued)

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 68 percent of capacity in 2020 (80 percent in 2019 and 78 percent in 2018). 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 U.S. steel consumption in 2021 will increase by approximately 7 percent compared to 2020.

The following table reflects Minnesota Power’s taconite customers’ production levels for the past ten years:


Minnesota Power Taconite Customer Production
Year						Tons (Millions)
2020*						30
2019						37
2018						39
2017						38
2016						28
2015						31
2014						39
2013						37
2012						39
2011						39
Source: Minnesota Department of Revenue 2020 Mining Tax Guide for years 2011 - 2019.
* Preliminary data from the Minnesota Department of Revenue.

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.

In addition to serving the taconite industry, Minnesota Power serves a number of customers in the paper, pulp and secondary wood products industry, which represented 752 million kWh, or 12 percent of total industrial customer kWh sales in 2020. Minnesota Power also has agreements to provide steam for two paper and pulp customers for use in the customers’ operations. The four major paper and pulp mills we serve reported operating at lower levels in 2020 compared to 2019 resulting from the ongoing COVID-19 pandemic. In addition, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Paper, Pulp and Secondary Wood Products – Verso Corporation.)

Large Power Customer Contracts. Minnesota Power has eight Large Power Customer contracts, each serving requirements of 10 MW or more of customer load. The customers consist of six taconite facilities owned by Cliffs and USS Corporation at the end of the 2020 as well as four paper and pulp mills. Certain facilities with common ownership are served under combined contracts.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Large Power Customer Contracts (Continued)

Large Power Customer contracts require Minnesota Power to have a certain amount of generating capacity available. In turn, each Large Power Customer is required to pay a minimum monthly demand charge that covers the fixed costs associated with having this capacity available to serve the customer, including a return on common equity. Most contracts allow customers to establish the level of megawatts subject to a demand charge on a three to four-month basis and require that a portion of their megawatt needs be committed on a take-or-pay basis for at least a portion of the term of the agreement. In addition to the demand charge, each Large Power Customer is billed an energy charge for each kWh used that recovers the variable costs incurred in generating electricity. Five of the Large Power Customer contracts have interruptible service which provides a discounted demand rate in exchange for the ability to interrupt the customers during system emergencies. Minnesota Power also provides incremental production service for customer demand levels above the contractual take-or-pay levels. There is no demand charge for this service and energy is priced at an increment above Minnesota Power’s cost. Incremental production service is interruptible.

All contracts with Large Power Customers continue past the contract termination date unless the required advance notice of cancellation has been given. The required advance notice of cancellation varies from two to four years. Such contracts reduce the impact on earnings that otherwise would result from significant reductions in kWh sales to such customers. Large Power Customers are required to take all of their purchased electric service requirements from Minnesota Power for the duration of their contracts. The rates and corresponding revenue associated with capacity and energy provided under these contracts are subject to change through the same regulatory process governing all retail electric rates. (See Regulatory Matters – Electric Rates.)

Minnesota Power, as permitted by the MPUC, requires most of its Large Power Customers to pay weekly for electric usage based on monthly energy usage estimates. These customers receive estimated bills or make weekly prepayments based on Minnesota Power’s estimate of the customer’s energy usage, forecasted energy prices and fuel adjustment clause estimates. Minnesota Power’s taconite‑producing Large Power Customers have generally predictable energy usage on a week-to-week basis and any differences that occur are trued-up the following month.

Contract Status for Minnesota Power Large Power Customers

As of December 31, 2020

Customer

Industry

Location

Ownership

Earliest
Termination Date

Cliffs – Minorca Mine (a)

Taconite

Virginia, MN

Cliffs

December 31, 2025

Hibbing Taconite (a)(b)

Taconite

Hibbing, MN

85.3% Cliffs
14.7% USS Corporation

December 31, 2024

United Taconite and Northshore Mining

Taconite

Eveleth, MN and Babbitt, MN

Cliffs

December 31, 2026

USS Corporation

(USS – Minnesota Ore) (b)(c)

Taconite

Mtn. Iron, MN and Keewatin, MN

USS Corporation

December 31, 2024

Boise, Inc. (b)

Paper

International Falls, MN

Packaging Corporation of America

December 31, 2024

UPM Blandin

Paper

Grand Rapids, MN

UPM-Kymmene Corporation

December 31, 2029

Verso Duluth Mill (d)

Paper and Pulp

Duluth, MN

Verso Corporation

January 31, 2025

Sappi Cloquet LLC (b)

Paper and Pulp

Cloquet, MN

Sappi Limited

December 31, 2024

(a)In December 2020, Cliffs acquired substantially all of the operations of ArcelorMittal and its subsidiaries. The transaction included ArcelorMittal’s Minorca mine in Virginia, Minnesota, and its ownership share of Hibbing Taconite in Hibbing, Minnesota. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Cliffs Acquisition.)

(b)The contract will terminate four years from the date of written notice from either Minnesota Power or the customer. No notice of contract cancellation has been given by either party. Thus, the earliest date of cancellation is December 31, 2024.

(c)USS Corporation owns both the Minntac Plant in Mountain Iron, MN, and the Keewatin Taconite Plant in Keewatin, MN.

(d)In June 2020, Verso Corporation indefinitely idled its paper mill in Duluth, Minnesota. On January 29, 2021, Verso Corporation provided notice of termination for its contract effective in January 2025. (See Outlook – Regulated Operations – Industrial Customers and Prospective Additional Load – Paper, Pulp and Secondary Wood Products – Verso Corporation.)

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Residential and Commercial Customers. In 2020, residential and commercial customers represented 19 percent of total regulated utility kWh sales.

Municipal Customers. In 2020, municipal customers represented 4 percent of total regulated utility kWh sales. All of the municipal customer contracts include a termination clause requiring a three-year notice to terminate.

Minnesota Power’s wholesale electric contracts with 15 non-affiliated municipal customers in Minnesota have termination dates ranging from 2024 through 2037, with a majority of contracts effective through 2024. All wholesale contracts include a termination clause requiring a three-year notice to terminate. (See Note 4. Regulatory Matters.)

The contract with a former municipal customer expired in June 2019. Minnesota Power historically provided approximately 29 MW of average monthly demand to this customer.

Other Power Suppliers. The Company also enters into off-system sales with Other Power Suppliers. These sales are at market‑based prices into the MISO market on a daily basis or through bilateral agreements of various durations.

Our PSAs are detailed in Note 8. Commitments, Guarantees and Contingencies, with additional disclosure provided in the following paragraphs.

Basin PSAs. Minnesota Power had an agreement to sell 100 MW of capacity and energy to Basin for a ten-year period which expired in April 2020. Minnesota Power has two additional agreements to sell capacity to Basin at fixed prices. (See Note 8. Commitments, Guarantees and Contingencies.)

Minnkota Power PSA. Minnesota Power has a PSA with Minnkota Power where 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 approximately 28 percent to Minnkota Power in 2020 (28 percent in 2019 and in 2018). Minnkota Power’s net entitlement increases to approximately 32 percent in 2022, 37 percent in 2023, 41 percent in 2024, 46 percent in 2025 and 50 percent in 2026. (See Power Supply – Long-Term Purchased Power.)

Silver Bay Power PSA. 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.

Seasonality

The operations of our industrial customers, which make up a large portion of our electric sales, are not typically subject to significant seasonal variations. (See Electric Sales / Customers.) As a result, Minnesota Power is generally not subject to significant seasonal fluctuations in electric sales; however, Minnesota Power and SWL&P electric and natural gas sales to other customers may be affected by seasonal differences in weather. In general, peak electric sales occur in the winter and summer months with fewer electric sales in the spring and fall months. Peak sales of natural gas generally occur in the winter months. Additionally, our regulated utilities have historically generated fewer sales and less revenue when weather conditions are milder in the winter and summer.

Power Supply

In order to meet its customers’ electric requirements, Minnesota Power utilizes a mix of its own generation and purchased power. As of December 31, 2020, approximately 50 percent of Minnesota Power’s power supply is expected to be provided by renewable energy sources with the completion of the 250 MW Nobles 2 wind energy facility in December 2020 and the GNTL in June 2020, which will be used to deliver 250 MW of hydroelectric energy from Manitoba Hydro. Minnesota Power’s remaining operating coal-fired facilities are Boswell Units 3 and 4, which Minnesota Power proposed in its latest IRP to retire by 2030 and coal-free by 2035, respectively. (See Regulatory Matters.) The following table reflects Minnesota Power’s generating capabilities as of December 31, 2020, and total electrical supply for 2020. Minnesota Power had an annual net peak load of 1,588 MW on February 14, 2020.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Power Supply (Continued)


					Year Ended
	Unit	Year	Net		December 31, 2020
Regulated Utility Power Supply	No.	Installed	Capability		Generation and Purchases
			MW		MWh	%
Coal-Fired
Boswell Energy Center (a)	3	1973	355
in Cohasset, MN	4	1980	468	(b)
			823		3,673,480	26.9
Taconite Harbor Energy Center	1	1957	75
in Schroeder, MN	2	1957	75
			150	(c)	—	—
Total Coal-Fired			973		3,673,480	26.9
Biomass Co-Fired / Natural Gas
Hibbard Renewable Energy Center in Duluth, MN	3 & 4	1949, 1951	62		30,858	0.2

Laskin Energy Center in Hoyt Lakes, MN	1 & 2	1953	110		16,473	0.1
Total Biomass Co-Fired / Natural Gas			172		47,331	0.3
Hydro (d)
Group consisting of ten stations in MN	Multiple	Multiple	120		546,847	4.0
Wind (e)
Taconite Ridge Energy Center in Mt. Iron, MN	Multiple	2008	25		59,419	0.5
Bison Wind Energy Center in Oliver and Morton Counties, ND	Multiple	2010-2014	497		1,700,098	12.4
Total Wind			522		1,759,517	12.9
Solar (f)
Group consisting of two solar arrays in MN	Multiple	Multiple	10		16,230	0.1
Total Generation			1,797		6,043,405	44.2

Long-Term Purchased Power
Lignite Coal - Square Butte near Center, ND (g)					1,466,584	10.7
Wind - Oliver Wind I and II in Oliver County, ND					309,324	2.3
Wind - Nobles 2 in Nobles County, MN (h)					52,477	0.4
Hydro - Manitoba Hydro in Manitoba, Canada					1,052,539	7.7
Total Long-Term Purchased Power					2,880,924	21.1
Other Purchased Power (i)					4,749,729	34.7
Total Purchased Power					7,630,653	55.8
Total Regulated Utility Power Supply					13,674,058	100.0

(a) Minnesota Power retired Boswell Units 1 and 2 in the fourth quarter of 2018. Minnesota Power proposed in its latest IRP to retire Boswell Unit 3 by 2030 and for Boswell Unit 4 to be coal-free by 2035. (See Regulatory Matters.)

(b)Boswell Unit 4 net capability shown above reflects Minnesota Power’s ownership percentage of 80 percent. WPPI Energy owns 20 percent of Boswell Unit 4. (See Note 3. Jointly-Owned Facilities and Assets.)

(c)Taconite Harbor Units 1 and 2 were idled in 2016. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook – EnergyForward.)

(d)Hydro consists of 10 stations with 34 generating units.

(e)Taconite Ridge consists of 10 WTGs and Bison consists of 165 WTGs.

(f)Solar includes the 10 MW Camp Ripley Solar Array near Little Falls, MN, and a 40 kW community solar garden in Duluth, MN.

(g)Minnesota Power has a PSA with Minnkota Power whereby Minnesota Power is selling a portion of its entitlement from Square Butte to Minnkota Power. (See Electric Sales / Customers – Minnkota Power PSA.)

(h)See Item 1. Business – Corporate and Other – Investment in Nobles 2.

(i)Includes short-term market purchases in the MISO market and from Other Power Suppliers.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Power Supply (Continued)

Fuel. Minnesota Power purchases low-sulfur, sub-bituminous coal from the Powder River Basin region located in Montana and Wyoming. Coal consumption in 2020 for electric generation at Minnesota Power’s coal-fired generating stations was 2.2 million tons (2.5 million tons in 2019; 3.8 million tons in 2018). As of December 31, 2020, Minnesota Power had coal inventories of 0.8 million tons (0.9 million tons as of December 31, 2019). Minnesota Power has coal supply agreements providing for the purchase of a significant portion of its coal requirements through December 2021. In 2021, Minnesota Power expects to obtain coal under these coal supply agreements and in the spot market. Minnesota Power continues to explore other future coal supply options and believes that adequate supplies of low-sulfur, sub-bituminous coal will continue to be available.

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 utility customers through the fuel adjustment clause.


Coal Delivered to Minnesota Power
Year Ended December 31	2020	2019	2018
Average Price per Ton	$34.94	$35.31	$38.89
Average Price per MBtu	$1.93	$1.94	$2.10

Long-Term Purchased Power. Minnesota Power has contracts to purchase capacity and energy from various entities, including output from certain coal, wind, hydro and solar generating facilities.

Our PPAs are detailed in Note 8. Commitments, Guarantees and Contingencies, with additional disclosure provided in the following paragraph.

Square Butte PPA. Under the PPA with Square Butte that extends through 2026, Minnesota Power is entitled to 50 percent of the output of Square Butte’s 455 MW coal-fired generating unit. (See Note 8. Commitments, Guarantees and Contingencies.) BNI Energy mines and sells lignite coal to Square Butte. This lignite supply is sufficient to provide fuel for the anticipated useful life of the generating unit. Square Butte’s cost of lignite consumed in 2020 was approximately $1.75 per MBtu ($1.88 per MBtu in 2019; $1.60 per MBtu in 2018). (See Electric Sales / Customers – Minnkota Power PSA.)

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.

Transmission and Distribution

We have electric transmission and distribution lines of 500 kV (232 miles), 345 kV (242 miles), 250 kV (465 miles), 230 kV (714 miles), 161 kV (43 miles), 138 kV (130 miles), 115 kV (1,252 miles) and less than 115 kV (6,369 miles). We own and operate 158 substations with a total capacity of 10,066 megavoltamperes. Some of our transmission and distribution lines interconnect with other utilities.

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. On June 1, 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 on June 1, 2020, Manitoba Hydro placed the MMTP into service. The 250 MW PPA with Manitoba Hydro commenced when the GNTL was placed into service.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

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. As of December 31 2020, our equity investment in ATC was $149.0 million ($141.6 million as of December 31, 2019). (See Note 5. Equity Investments.)

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 21, 2020, FERC order that granted rehearing of a November 2019 FERC order. (See Note 4. Regulatory Matters.)

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 general capital calls based upon our pro rata ownership interest in ATC.

Properties

Our Regulated Operations businesses own office and service buildings, an energy control center, repair shops, electric plants, transmission facilities and storerooms in various localities in Minnesota, Wisconsin and North Dakota. All of the electric plants are subject to mortgages, which collateralize the outstanding first mortgage bonds of Minnesota Power and SWL&P. Most of the generating plants and substations are located on real property owned by Minnesota Power or SWL&P, subject to the lien of a mortgage, whereas most of the transmission and distribution lines are located on real property owned by others with appropriate easement rights or necessary permits from governmental authorities. WPPI Energy owns 20 percent of Boswell Unit 4. WPPI Energy has the right to use our transmission line facilities to transport its share of Boswell generation. (See Note 3. Jointly-Owned Facilities and Assets.)

Regulatory Matters

We are subject to the jurisdiction of various regulatory authorities and other organizations. Regulatory matters and proceedings are detailed in Note 4. Regulatory Matters, with a summary included in the following paragraphs.

Electric Rates. All rates and contract terms in our Regulated Operations are subject to approval by applicable regulatory authorities. Minnesota Power and SWL&P design their retail electric service rates based on cost of service studies under which allocations are made to the various classes of customers as approved by the MPUC or the PSCW. Nearly all retail sales include billing adjustment clauses, which may adjust electric service rates for changes in the cost of fuel and purchased energy, recovery of current and deferred conservation improvement program expenditures and recovery of certain transmission, renewable and environmental investments.

Minnesota Public Utilities Commission. The MPUC has regulatory authority over Minnesota Power’s retail service area in Minnesota, retail rates, retail services, capital structure, issuance of securities and other matters. Minnesota Power’s current retail rates are based on a March 2018 MPUC retail rate order that allows for a 9.25 percent return on common equity and a 53.81 percent equity ratio. The resolution of Minnesota Power’s 2020 general rate case did not change its allowed return on equity or equity ratio. (See 2020 Minnesota General Rate Case.) As authorized by the MPUC, Minnesota Power also recognizes revenue under cost recovery riders for transmission, renewable and environmental investments.

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 orders dated December 23, 2019, the MPUC accepted the filing as complete and authorized an annual interim rate increase of $36.1 million beginning January 1, 2020.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Regulatory Matters (Continued)

On April 23, 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 an order dated June 30, 2020, 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 on an ongoing basis. 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.

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 late 2021.

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.

Public Service Commission of Wisconsin. The PSCW has regulatory authority over SWL&P’s retail sales of electricity, natural gas and water, issuances of securities and other matters. SWL&P’s current retail rates are based on a December 2018 order that allows for a return on equity of 10.4 percent and a 55.0 percent equity ratio. The PSCW had directed SWL&P to file its next general rate case in 2020; however, the PSCW granted an extension request made by SWL&P to delay filing its next general rate case until on or before December 20, 2022. SWL&P requested the extension primarily due to impacts of the COVID-19 pandemic.

North Dakota Public Service Commission. The NDPSC has jurisdiction over site and route permitting of generation and transmission facilities in North Dakota.

Federal Energy Regulatory Commission. The FERC has jurisdiction over the licensing of hydroelectric projects, the establishment of rates and charges for transmission of electricity in interstate commerce, electricity sold at wholesale (including the rates for Minnesota Power’s municipal and wholesale customers), natural gas transportation, certain accounting and record‑keeping practices, certain activities of our regulated utilities and the operations of ATC. FERC jurisdiction also includes enforcement of NERC mandatory electric reliability standards. Violations of FERC rules are subject to enforcement action by the FERC including financial penalties up to $1 million per day per violation.

Regional Organizations

Midcontinent Independent System Operator, Inc. Minnesota Power, SWL&P and ATC are members of MISO, a regional transmission organization. While Minnesota Power and SWL&P retain ownership of their respective transmission assets, their transmission networks are under the regional operational control of MISO. Minnesota Power and SWL&P take and provide transmission service under the MISO open access transmission tariff. In cooperation with stakeholders, MISO manages the delivery of electric power across 15 states and the Canadian province of Manitoba.

North American Electric Reliability Corporation. The NERC has been certified by the FERC as the national electric reliability organization. The NERC ensures the reliability of the North American bulk power system. The NERC oversees six regional entities that establish requirements, approved by the FERC, for reliable operation and maintenance of power generation facilities and transmission systems. Minnesota Power is subject to these reliability requirements and can incur significant penalties for non‑compliance.

ALLETE, Inc. 2020 Form 10-K

REGULATED OPERATIONS (Continued)

Regional Organizations (Continued)

Midwest Reliability Organization (MRO). Minnesota Power and ATC are members of the MRO, one of the six regional entities overseen by the NERC. The MRO's primary responsibilities are to: ensure compliance with mandatory reliability standards by entities who own, operate or use the interconnected, international bulk power system; conduct assessments of the grid's ability to meet electricity demand in the region; and analyze regional system events. The MRO region spans the Canadian provinces of Saskatchewan and Manitoba, and all or parts of 16 states.

Minnesota Legislation

Renewable Energy. Minnesota law requires 25 percent of electric utilities’ applicable retail and municipal energy sales in Minnesota to be from renewable energy sources by 2025. Minnesota law also requires Minnesota Power to meet interim milestones including 20 percent by 2020. The law allows the MPUC to modify or delay meeting a milestone if implementation will cause significant ratepayer cost or technical reliability issues. If a utility is not in compliance with a milestone, the MPUC may order the utility to construct facilities, purchase renewable energy or purchase renewable energy credits. Minnesota Power has exceeded the interim milestone requirements to date.

As of December 31, 2020, approximately 50 percent of Minnesota Power’s power supply is expected to be provided by renewable energy sources. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Outlook – EnergyForward.)

Minnesota Solar Energy Standard. Minnesota law required at least 1.5 percent of total retail electric sales, excluding sales to certain customers, to be generated by solar energy by the end of 2020. At least 10 percent of the 1.5 percent mandate must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 40 kW or less and community solar garden subscriptions. Minnesota Power has met both parts of the solar mandate.

Competition

Retail electric energy sales in Minnesota and Wisconsin are made to customers in assigned service territories. As a result, most retail electric customers in Minnesota do not have the ability to choose their electric supplier. Large energy users of 2 MW and above that are located outside of a municipality are allowed to choose a supplier upon MPUC approval. Minnesota Power serves 8 Large Power Customers under contracts of at least 10 MW, none of which have engaged in a competitive rate process. No other large commercial or small industrial customers in Minnesota Power’s service territory have sought a provider outside Minnesota Power’s service territory. Retail electric and natural gas customers in Wisconsin do not have the ability to choose their energy supplier. In both states, however, electricity may compete with other forms of energy. Customers may also choose to generate their own electricity, or substitute other forms of energy for their manufacturing processes.

In 2020, 4 percent of total regulated utility kWh sales were to municipal customers in Minnesota. These customers have the right to seek an energy supply from any wholesale electric service provider upon contract expiration. Minnesota Power’s wholesale electric contract with the Nashwauk Public Utilities Commission was extended in October 2020 and is effective through December 31, 2037. Minnesota Power wholesale electric contracts with 14 municipal customers are effective through varying dates ranging from 2024 through 2029. The contract with a former municipal customer expired on June 30, 2019. (See Electric Sales / Customers.)

The FERC has continued with its efforts to promote a competitive wholesale market through open-access electric transmission and other means. As a result, our electric sales to Other Power Suppliers and our purchases to supply our retail and wholesale load are made in a competitive market.

Franchises

Minnesota Power holds franchises to construct and maintain an electric distribution and transmission system in 95 cities. The remaining cities, villages and towns served by Minnesota Power do not require a franchise to operate. SWL&P serves customers under electric, natural gas or water franchises in 1 city and 14 villages and towns.

ALLETE, Inc. 2020 Form 10-K

ALLETE CLEAN ENERGY

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 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