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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2023
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File Number 1-3548
ALLETE, Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-0418150
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
30 West Superior Street
Duluth, Minnesota 55802-2093
(Address of principal executive offices)
(Zip Code)

(218) 279-5000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common Stock, without par valueALENew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
         Large Accelerated Filer                 Accelerated Filer    
         Non-Accelerated Filer             Smaller Reporting Company    
                             Emerging Growth Company    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Common Stock, without par value,
57,316,155 shares outstanding
as of March 31, 2023




Index
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLETE, Inc. First Quarter 2023 Form 10-Q
2



Definitions

The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.
Abbreviation or AcronymTerm
AFUDCAllowance for Funds Used During Construction – the cost of both debt and equity funds used to finance regulated utility plant additions during construction periods
ALLETEALLETE, Inc.
ALLETE Clean EnergyALLETE Clean Energy, Inc. and its subsidiaries
ALLETE PropertiesALLETE Properties, LLC and its subsidiaries
ALLETE South WindALLETE South Wind, LLC
ALLETE Transmission HoldingsALLETE Transmission Holdings, Inc.
ATCAmerican Transmission Company LLC
BisonBison Wind Energy Center
BNI EnergyBNI Energy, Inc. and its subsidiary
BoswellBoswell Energy Center
CliffsCleveland-Cliffs Inc.
CompanyALLETE, Inc. and its subsidiaries
COVID-192019 novel coronavirus
CSAPRCross-State Air Pollution Rule
EPAUnited States Environmental Protection Agency
ESOPEmployee Stock Ownership Plan
FERCFederal Energy Regulatory Commission
Form 10-KALLETE Annual Report on Form 10-K
Form 10-QALLETE Quarterly Report on Form 10-Q
GAAPGenerally Accepted Accounting Principles in the United States of America
GHGGreenhouse Gases
Invest DirectALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
Item ___Item ___ of this Form 10-Q
kWh
Kilowatt-hour(s)
LaskinLaskin Energy Center
Lampert Capital MarketsLampert Capital Markets, Inc.
Minnesota PowerAn operating division of ALLETE, Inc.
Minnkota PowerMinnkota Power Cooperative, Inc.
MISOMidcontinent Independent System Operator, Inc.
Moody’sMoody’s Investors Service, Inc.
MPCAMinnesota Pollution Control Agency
MPUCMinnesota Public Utilities Commission
MWMegawatt(s)
NAAQSNational Ambient Air Quality Standards
NDPSCNorth Dakota Public Service Commission
New EnergyNew Energy Equity LLC
Nobles 2Nobles 2 Power Partners, LLC
NOLNet Operating Loss
NOX
Nitrogen Oxides
Northshore MiningNorthshore Mining Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
Note ___Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDESNational Pollutant Discharge Elimination System
ALLETE, Inc. First Quarter 2023 Form 10-Q
3



Abbreviation or AcronymTerm
NTECNemadji Trail Energy Center
PPA / PSAPower Purchase Agreement / Power Sales Agreement
PPACAPatient Protection and Affordable Care Act of 2010
PSCWPublic Service Commission of Wisconsin
SECSecurities and Exchange Commission
Silver Bay PowerSilver Bay Power Company, a wholly-owned subsidiary of Cleveland-Cliffs Inc.
SO2
Sulfur Dioxide
Square ButteSquare Butte Electric Cooperative, a North Dakota cooperative corporation
South Shore EnergySouth Shore Energy, LLC
ST PaperST Paper LLC
SWL&PSuperior Water, Light and Power Company
Taconite HarborTaconite Harbor Energy Center
U.S.United States of America
USS CorporationUnited States Steel Corporation

ALLETE, Inc. First Quarter 2023 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 or changes in tax rates or policies;
changes in rates of inflation or availability of key materials and supplies;
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 deteriorate; 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 2022 Form 10-K and Part II, Item 1A. Risk Factors of this Form 10-Q. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can it assess the impact of each of these factors on the businesses of ALLETE or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by ALLETE in this Form 10-Q and in other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect ALLETE’s business.
ALLETE, Inc. First Quarter 2023 Form 10-Q
5



PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
March 31,
2023
December 31,
2022
Millions
Assets  
Current Assets  
Cash and Cash Equivalents$29.9 $36.4 
Accounts Receivable (Less Allowance of $1.7 and $1.6)120.3 137.9 
Inventories – Net346.9 455.9 
Prepayments and Other72.6 87.8 
Total Current Assets569.7 718.0 
Property, Plant and Equipment – Net4,979.3 5,004.0 
Regulatory Assets469.1 441.0 
Equity Investments323.9 322.7 
Goodwill and Intangible Assets – Net155.5 155.6 
Other Non-Current Assets207.0 204.3 
Total Assets$6,704.5 $6,845.6 
Liabilities and Equity  
Liabilities  
Current Liabilities  
Accounts Payable$84.9 $103.0 
Accrued Taxes81.4 69.1 
Accrued Interest14.9 20.5 
Long-Term Debt Due Within One Year176.4 272.6 
Other106.8 251.0 
Total Current Liabilities464.4 716.2 
Long-Term Debt1,755.5 1,648.2 
Deferred Income Taxes156.3 158.1 
Regulatory Liabilities526.4 526.1 
Defined Benefit Pension and Other Postretirement Benefit Plans173.8 179.7 
Other Non-Current Liabilities270.4 269.0 
Total Liabilities3,346.8 3,497.3 
Commitments, Guarantees and Contingencies (Note 6)
Equity  
ALLETE Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 57.3 and 57.2 Shares Issued and Outstanding1,785.6 1,781.5 
Accumulated Other Comprehensive Loss(24.3)(24.4)
Retained Earnings954.2 934.8 
Total ALLETE Equity2,715.5 2,691.9 
Non-Controlling Interest in Subsidiaries642.2 656.4 
Total Equity3,357.7 3,348.3 
Total Liabilities and Equity$6,704.5 $6,845.6 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2023 Form 10-Q
6



ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
Three Months Ended
March 31
 20232022
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility$312.6 $329.0 
Contracts with Customers – Non-utility251.0 51.7 
Other – Non-utility1.3 2.8 
Total Operating Revenue564.9 383.5 
Operating Expenses
Fuel, Purchased Power and Gas – Utility118.6 137.4 
Transmission Services – Utility20.1 19.9 
Cost of Sales – Non-utility210.5 17.0 
Operating and Maintenance85.7 75.3 
Depreciation and Amortization62.3 61.7 
Taxes Other than Income Taxes19.4 18.8 
Total Operating Expenses516.6 330.1 
Operating Income48.3 53.4 
Other Income (Expense)
Interest Expense(19.3)(18.3)
Equity Earnings6.0 5.5 
Other4.1 2.0 
Total Other Expense(9.2)(10.8)
Income Before Income Taxes39.1 42.6 
Income Tax Expense (Benefit)1.5 (3.9)
Net Income37.6 46.5 
Net Loss Attributable to Non-Controlling Interest(20.6)(19.8)
Net Income Attributable to ALLETE$58.2 $66.3 
Average Shares of Common Stock
Basic57.3 53.3 
Diluted57.3 53.3 
Basic Earnings Per Share of Common Stock$1.02 $1.24 
Diluted Earnings Per Share of Common Stock$1.02 $1.24 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2023 Form 10-Q
7



ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
Three Months Ended
March 31,
20232022
Millions  
Net Income$37.6 $46.5 
Other Comprehensive Income (Loss)  
Unrealized Gain (Loss) on Securities
Net of Income Tax Expense of $0.1 and $–0.1 (0.3)
Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense of $– and $0.1 0.1 
Total Other Comprehensive Income (Loss)0.1 (0.2)
Total Comprehensive Income37.7 46.3 
Net Loss Attributable to Non-Controlling Interest(20.6)(19.8)
Total Comprehensive Income Attributable to ALLETE$58.3 $66.1 
The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2023 Form 10-Q
8



ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Three Months Ended
March 31
 20232022
Millions
Operating Activities  
Net Income$37.6 $46.5 
Adjustments to Reconcile Net Income to Cash provided by (used in) Operating Activities:
AFUDC – Equity(0.5)(0.9)
Income from Equity Investments – Net of Dividends 0.4 
Loss on Investments and Property, Plant and Equipment0.4 0.1 
Depreciation Expense62.3 61.7 
Amortization of PSAs(1.3)(2.8)
Amortization of Other Intangible Assets and Other Assets1.9 2.1 
Deferred Income Tax Benefit(6.3)(4.0)
Share-Based and ESOP Compensation Expense0.8 1.3 
Defined Benefit Pension and Postretirement Benefit(0.8)(0.4)
Fuel Adjustment Clause15.3 (1.9)
Bad Debt Expense0.3 0.4 
Provision for Interim Rate Refund5.1  
Changes in Operating Assets and Liabilities  
Accounts Receivable17.3 4.9 
Inventories109.0 (98.9)
Prepayments and Other11.0 (7.4)
Accounts Payable(10.7)(10.6)
Other Current Liabilities(142.2)(1.0)
Cash Contributions to Defined Benefit Pension Plans(6.5) 
Changes in Regulatory and Other Non-Current Assets(0.7)3.9 
Changes in Regulatory and Other Non-Current Liabilities0.4 1.8 
Cash provided by (used in) Operating Activities92.4 (4.8)
Investing Activities  
Proceeds from Sale of Available-for-sale Securities 0.5 
Payments for Purchase of Available-for-sale Securities (0.4)
Payments for Equity Method Investments(0.8)(2.7)
Additions to Property, Plant and Equipment(70.0)(57.7)
Other Investing Activities(3.9)0.2 
Cash used in Investing Activities(74.7)(60.1)
Financing Activities  
Proceeds from Issuance of Common Stock3.3 3.3 
Proceeds from Issuance of Short-Term and Long-Term Debt238.5 228.9 
Repayments of Short-Term and Long-Term Debt(227.8)(259.2)
Proceeds from Non-Controlling Interest in Subsidiaries – Net6.7 154.1 
Dividends on Common Stock(38.8)(34.5)
Other Financing Activities(0.2)(0.4)
Cash provided by (used in) Financing Activities(18.3)92.2 
Change in Cash, Cash Equivalents and Restricted Cash(0.6)27.3 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period40.2 47.7 
Cash, Cash Equivalents and Restricted Cash at End of Period$39.6 $75.0 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2023 Form 10-Q
9



ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
Three Months Ended
March 31
20232022
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period$1,781.5 $1,536.7 
Common Stock Issued4.1 4.6 
Balance, End of Period1,785.6 1,541.3 
Accumulated Other Comprehensive Loss
Balance, Beginning of Period(24.4)(23.8)
Other Comprehensive Income – Net of Income Taxes
Unrealized Gain (Loss) on Debt Securities0.1 (0.3)
Defined Benefit Pension and Other Postretirement Plans 0.1 
Balance, End of Period(24.3)(24.0)
Retained Earnings
Balance, Beginning of Period934.8 900.2 
Net Income Attributable to ALLETE58.2 66.3 
Common Stock Dividends (38.8)(34.5)
Balance, End of Period954.2 932.0 
Non-Controlling Interest in Subsidiaries
Balance, Beginning of Period656.4533.2
Proceeds from Non-Controlling Interest in Subsidiaries – Net 6.7 181.2 
Net Loss Attributable to Non-Controlling Interest(20.6)(19.8)
Distributions to Non-Controlling Interest(0.3)(0.4)
Balance, End of Period642.2 694.2 
Total Equity$3,357.7 $3,143.5 
Dividends Per Share of Common Stock$0.6775 $0.65 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. First Quarter 2023 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, 2022, Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. The presentation of certain prior period amounts on the Consolidated Financial Statements have been adjusted for comparative purposes. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the three months ended March 31, 2023, are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2023. For further information, refer to the Consolidated Financial Statements and notes included in our 2022 Form 10-K.


NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Cash, Cash Equivalents and Restricted Cash. We consider all investments purchased with original maturities of three months or less to be cash equivalents. As of March 31, 2023, restricted cash amounts included in Prepayments and Other on the Consolidated Balance Sheet include collateral deposits required under an ALLETE Clean Energy loan. The restricted cash amounts included in Other Non-Current Assets represent collateral deposits required under an ALLETE Clean Energy loan agreement as well as PSAs. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheet that aggregate to the amounts presented in the Consolidated Statement of Cash Flows.
Cash, Cash Equivalents and Restricted CashMarch 31,
2023
December 31,
2022
March 31,
2022
December 31,
2021
Millions  
Cash and Cash Equivalents$29.9 $36.4 $60.1 $45.1 
Restricted Cash included in Prepayments and Other 7.4 1.5 7.1 0.3 
Restricted Cash included in Other Non-Current Assets2.3 2.3 7.8 2.3 
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows$39.6 $40.2 $75.0 $47.7 

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

Inventories – NetMarch 31,
2023
December 31,
2022
Millions  
Fuel (a)
$39.6 $33.4 
Materials and Supplies119.2 75.1 
Renewable Energy Facilities Under Development (b)
188.1 347.4 
Total Inventories – Net$346.9 $455.9 
(a)    Fuel consists primarily of coal inventory at Minnesota Power.
(b)    Renewable Energy Facilities Under Development consists primarily of project costs related to ALLETE Clean Energy’s Northern Wind project sold in the first quarter of 2023 and Red Barn wind project sold in April 2023. (See Other Current Liabilities.)
Goodwill. The aggregate carrying amount of goodwill was $154.9 million as of March 31, 2023 ($154.9 million as of December 31, 2022). There have been no changes to goodwill by reportable segment for the three months ended March 31, 2023.

ALLETE, Inc. First Quarter 2023 Form 10-Q
11



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Non-Current AssetsMarch 31,
2023
December 31,
2022
Millions
Contract Assets (a)
$20.3 $21.0 
Operating Lease Right-of-use Assets11.8 12.7 
ALLETE Properties19.5 19.1 
Restricted Cash2.3 2.3 
Other Postretirement Benefit Plans59.6 58.8 
Other93.5 90.4 
Total Other Non-Current Assets$207.0 $204.3 
(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 LiabilitiesMarch 31,
2023
December 31,
2022
Millions  
Customer Deposits (a)
$10.3 $150.7 
PSAs6.1 6.1 
Provision for Interim Rate Refund23.5 18.4 
Manufactured Gas Plant (b)
14.5 14.7 
Operating Lease Liabilities3.0 3.2 
Other49.4 57.9 
Total Other Current Liabilities$106.8 $251.0 
(a) Primarily related to deposits received by ALLETE Clean Energy for the Northern Wind and Red Barn wind projects sold in the first quarter of 2023 and April 2023, respectively. (See Inventories – Net.)
(b) The manufactured gas plant represents the current liability for remediation of a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P.

Other Non-Current LiabilitiesMarch 31,
2023
December 31,
2022
Millions  
Asset Retirement Obligation (a)
$204.4 $200.4 
PSAs25.4 26.9 
Operating Lease Liabilities8.8 9.3 
Other31.8 32.4 
Total Other Non-Current Liabilities$270.4 $269.0 
(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 $32.4 million in Other Non-Current Assets on the Consolidated Balance Sheet as of March 31, 2023, ($32.4 million as of December 31, 2022).

ALLETE, Inc. First Quarter 2023 Form 10-Q
12



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Three Months Ended
March 31
Other Income20232022
Millions
Pension and Other Postretirement Benefit Plan Non-Service Credits (a)
$2.0 $2.6 
Interest and Investment Income1.1 0.1 
AFUDC - Equity0.5 0.9 
Other0.5 (1.6)
Total Other Income$4.1 $2.0 
(a)These are components of net periodic pension and other postretirement benefit cost other than service cost. (See Note 9. Pension and Other Postretirement Benefit Plans.)

Supplemental Statement of Cash Flows Information.
Three Months Ended March 31,20232022
Millions  
Cash Paid for Interest – Net of Amounts Capitalized$24.6$22.4
Cash Paid for Income Taxes $0.3
Noncash Investing and Financing Activities  
Decrease in Accounts Payable for Capital Additions to Property, Plant and Equipment$(7.1)$(24.5)
Capitalized Asset Retirement Costs$2.4$3.0
AFUDC–Equity$0.5$0.9
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, 303 MW Diamond Spring and 303 MW Caddo 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.

On April 5, 2023, ALLETE Clean Energy closed on the sale of the Red Barn wind project and received cash proceeds of approximately $160 million.

ALLETE, Inc. First Quarter 2023 Form 10-Q
13



NOTE 2. REGULATORY MATTERS

Regulatory matters are summarized in Note 4. Regulatory Matters to the Consolidated Financial Statements in our 2022 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 $16.4 million for the three months ended March 31, 2023 ($6.5 million for the three months ended March 31, 2022).

2022 Minnesota General Rate Case. On November 1, 2021, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 18 percent for retail customers. The rate filing sought a return on equity of 10.25 percent and a 53.81 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $108 million in additional revenue.

In an order dated February 28, 2023, the MPUC made determinations regarding Minnesota Power’s general rate case including allowing a return on common equity of 9.65 percent and a 52.50 percent equity ratio. Upon commencement of final rates, we expect additional revenue from base rates of approximately $60 million and an additional $10 million in revenue recognized under cost recovery riders on an annualized basis, subject to final written order and reconsideration. On March 20, 2023, Minnesota Power filed a petition for reconsideration with the MPUC requesting reconsideration and clarification of certain decisions in the MPUC’s order. Minnesota Power’s petition included requesting reconsideration of the ratemaking treatment of the Taconite Harbor Energy Center and the Company’s prepaid pension asset as well as clarification on interim rate treatment for sales to certain customers that did not operate during 2022. The MPUC denied the requests for reconsideration at a hearing on April 27, 2023, and provided clarification in support of Minnesota Power’s treatment of certain customers that did not operate during 2022. Final rates are expected to commence in the third quarter of 2023; interim rates will be collected through this period with reserves recorded as necessary. Minnesota Power has recorded a reserve for an interim rate refund of $23.5 million pre-tax as of March 31, 2023 ($18.4 million as of December 31, 2022), which is subject to MPUC approval of Minnesota Power’s refund calculation.

Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place to charge retail customers on a current basis for the costs of certain renewable investments and expenditures, including a return on the capital invested. Current customer billing rates for the renewable cost recovery rider were approved by the MPUC in an order dated January 24, 2023. On March 29, 2023, Minnesota Power submitted its latest renewable factor filing. If the filing is approved, Minnesota Power would be authorized to include updated billing rates on customer bills.

Fuel Adjustment Clause. Minnesota Power incurred higher fuel and purchased power costs in 2022 than those factored in its fuel adjustment forecast filed in May 2021 for 2022, which resulted in the recognition of an approximately $13 million regulatory asset as of March 31, 2023, and December 31, 2022. Minnesota Power requested recovery of the regulatory asset as part of its annual true-up filing submitted to the MPUC on March 1, 2023.

Conservation Improvement Program. On April 3, 2023, Minnesota Power submitted its 2022 consolidated filing detailing Minnesota Power’s CIP program results and requesting a CIP financial incentive of $2.2 million based upon MPUC procedures, which will be recognized upon approval by the MPUC. In 2022, a CIP financial incentive of $1.9 million was recognized in the second quarter upon approval by the MPUC of Minnesota Power’s 2021 CIP consolidated filing. CIP financial incentives are recognized in the period in which the MPUC approves the filing.





ALLETE, Inc. First Quarter 2023 Form 10-Q
14



NOTE 2. REGULATORY MATTERS (Continued)

Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting standards for the effects 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. 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.

Regulatory Assets and LiabilitiesMarch 31,
2023
December 31,
2022
Millions 
Current Regulatory Assets (a)
  
Fuel Adjustment Clause $15.3 $25.6 
Total Current Regulatory Assets$15.3 $25.6 
Non-Current Regulatory Assets  
Defined Benefit Pension and Other Postretirement Plans$225.2 $225.9 
Income Taxes95.3 97.6 
Cost Recovery Riders42.2 41.2 
Asset Retirement Obligations 36.1 35.6 
Taconite Harbor Energy Center (b)
29.7  
Fuel Adjustment Clause 15.5 14.5 
Manufactured Gas Plant
14.5 15.1 
PPACA Income Tax Deferral4.1 4.1 
Other6.5 7.0 
Total Non-Current Regulatory Assets$469.1 $441.0 
Current Regulatory Liabilities (c)
  
Provision for Interim Rate Refund (d)
$23.5 $18.4 
Transmission Formula Rates Refund$3.7 4.9 
Other3.1 0.1 
Total Current Regulatory Liabilities $30.3 $23.4 
Non-Current Regulatory Liabilities  
Income Taxes $326.2 $332.5 
Wholesale and Retail Contra AFUDC 80.0 80.7 
Plant Removal Obligations61.6 60.0 
North Dakota Investment Tax Credits 16.8 16.9 
Defined Benefit Pension and Other Postretirement Benefit Plans15.7 17.6 
Fuel Adjustment Clause5.3  
Boswell Units 1 and 2 Net Plant and Equipment6.7 6.7 
Non-Jurisdictional Land Sales9.2 7.5 
Other4.9 4.2 
Total Non-Current Regulatory Liabilities$526.4 $526.1 
(a)Current regulatory assets are presented within Prepayments and Other on the Consolidated Balance Sheet.
(b)In the first quarter of 2023, Minnesota Power retired Taconite Harbor Units 1 and 2. The remaining net book value was reclassified from property, plant and equipment to a regulatory asset on the Consolidated Balance Sheet when the units were retired. Minnesota Power expects to receive recovery of the remaining net book value from customers.
(c)Current regulatory liabilities are presented within Other Current Liabilities on the Consolidated Balance Sheet.
(d)See 2022 Minnesota General Rate Case.
ALLETE, Inc. First Quarter 2023 Form 10-Q
15



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.
ALLETE’s Investment in ATC 
Millions 
Equity Investment Balance as of December 31, 2022$165.4 
Cash Investments0.8 
Equity in ATC Earnings6.0 
Distributed ATC Earnings(4.8)
Amortization of the Remeasurement of Deferred Income Taxes0.4 
Equity Investment Balance as of March 31, 2023$167.8 

ATC’s authorized return on equity was 10.02 percent, or 10.52 percent including an incentive adder for participation in a regional transmission organization, based on a 2020 FERC order which is subject to various outstanding legal challenges related to the return on equity calculation and refund period ordered by the FERC. In August 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated and remanded the 2020 FERC order back to FERC. We cannot predict the return on equity the FERC will ultimately authorize in the remanded proceeding.

In addition, the FERC issued a Notice of Proposed Rulemaking in 2021 proposing to limit the 50 basis point incentive adder for participation in a regional transmission organization to only the first three years of membership in such an organization. If this proposal is adopted, our equity in earnings from ATC would be reduced by approximately $1 million pre-tax annually.

Investment in Nobles 2. Our subsidiary, ALLETE South Wind, owns 49 percent of Nobles 2, the entity that owns and operates a 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, 2022$157.3 
Equity in Nobles 2 Earnings (a)
 
Distributed Nobles 2 Earnings(1.2)
Equity Investment Balance as of March 31, 2023$156.1 
(a)The Company also recorded earnings from net loss attributable to non-controlling interest of $3.3 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 7. Fair Value to the Consolidated Financial Statements in our 2022 Form 10-K.


ALLETE, Inc. First Quarter 2023 Form 10-Q
16



NOTE 4. FAIR VALUE (Continued)

The following tables set forth, by level within the fair value hierarchy, our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2023, and December 31, 2022. 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 on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the following tables.

 Fair Value as of March 31, 2023
Recurring Fair Value MeasuresLevel 1Level 2Level 3Total
Millions    
Assets    
Investments (a)
Available-for-sale – Equity Securities$8.3   $8.3 
Available-for-sale – Corporate and Governmental Debt Securities (b)
 $5.7  5.7 
Cash Equivalents4.5   4.5 
Total Fair Value of Assets$12.8 $5.7  $18.5 
Liabilities    
Deferred Compensation (c)
 $15.0  $15.0 
Total Fair Value of Liabilities $15.0  $15.0 
 Fair Value as of December 31, 2022
Recurring Fair Value MeasuresLevel 1Level 2Level 3Total
Millions
Assets
Investments (a)
Available-for-sale – Equity Securities$7.7   $7.7 
Available-for-sale – Corporate and Governmental Debt Securities $5.7  5.7 
Cash Equivalents4.2   4.2 
Total Fair Value of Assets$11.9 $5.7  $17.6 
Liabilities
Deferred Compensation (c)
 $15.0  $15.0 
Total Fair Value of Liabilities $15.0  $15.0 
(a)Included in Other Non-Current Assets on the Consolidated Balance Sheet.
(b)As of March 31, 2023, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $1.2 million, in one year to less than three years was $2.4 million, in three years to less than five years was $1.7 million and in five or more years was $0.4 million.
(c)Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.

Fair Value of Financial Instruments. With the exception of the item listed in the following table, the estimated fair value of all financial instruments approximates the carrying amount. The fair value of the item listed in the following table was based on quoted market prices for the same or similar instruments (Level 2).
Financial InstrumentsCarrying AmountFair Value
Millions  
Short-Term and Long-Term Debt (a)
  
March 31, 2023$1,939.9$1,835.9
December 31, 2022$1,929.1$1,782.7
(a)Excludes unamortized debt issuance costs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, land inventory, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the three months ended March 31, 2023, and the year ended December 31, 2022, there were no indicators of impairment for these non-financial assets.
ALLETE, Inc. First Quarter 2023 Form 10-Q
17



NOTE 4. FAIR VALUE (Continued)

We continue to monitor changes in the broader energy markets along with wind resource expectations that could indicate impairment at ALLETE Clean Energy wind energy facilities upon contract expirations or for facilities without long-term contracts for their entire output. A continued decline in energy prices or lower wind resource expectations could result in a future impairment.


NOTE 5. SHORT-TERM AND LONG-TERM DEBT

The following tables present the Company’s short-term and long-term debt as of March 31, 2023, and December 31, 2022:
March 31, 2023PrincipalUnamortized Debt Issuance CostsTotal
Millions  
Short-Term Debt$176.5 $(0.1)$176.4 
Long-Term Debt1,763.4 (7.9)1,755.5 
Total Debt$1,939.9 $(8.0)$1,931.9 
December 31, 2022PrincipalUnamortized Debt Issuance CostsTotal
Millions  
Short-Term Debt $272.7 $(0.1)$272.6 
Long-Term Debt1,656.4 (8.2)1,648.2 
Total Debt$1,929.1 $(8.3)$1,920.8 

We had $25.3 million outstanding in standby letters of credit and $211.2 million outstanding draws under our lines of credit as of March 31, 2023 ($32.8 million in standby letters of credit and $31.3 million outstanding draws as of December 31, 2022). We also have standby letters of credit outstanding under other letter of credit facilities. (See Note 6. Commitments, Guarantees and Contingencies.)

On April 27, 2023, ALLETE issued $125 million of its First Mortgage Bonds (Bonds) to certain institutional buyers in the private placement market. The Bonds, which bear interest at 4.98 percent, will mature in April 2033 and pay interest semi-annually in May and November of each year, commencing on November 1, 2023. 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. Proceeds from the sale of the Bonds were used to refinance existing indebtedness and for general corporate purposes. The Bonds were sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors.

Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00, measured quarterly. As of March 31, 2023, our ratio was approximately 0.38 to 1.00. Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. ALLETE has no significant restrictions on its ability to pay dividends from retained earnings or net income. As of March 31, 2023, ALLETE was in compliance with its financial covenants.


ALLETE, Inc. First Quarter 2023 Form 10-Q
18



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Power Purchase and Sale Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined that either we have no variable interest in the PPAs or, where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required. These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses or receive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.

Our PPAs are summarized in Note 9. Commitments, Guarantees and Contingencies to the Consolidated Financial Statements in our 2022 Form 10-K, with additional disclosure provided in the following paragraphs.

Square Butte PPA. As of March 31, 2023, Square Butte had total debt outstanding of $187.0 million. Fuel expenses are recoverable through Minnesota Power’s fuel adjustment clause and include the cost of coal purchased from BNI Energy under a long-term contract. Minnesota Power’s cost of power purchased from Square Butte during the three months ended March 31, 2023, was $22.1 million ($20.3 million for the same period in 2022). This reflects Minnesota Power’s pro rata share of total Square Butte costs based on the 50 percent output entitlement. Included in this amount was Minnesota Power’s pro rata share of interest expense of $1.3 million ($1.0 million for the same period in 2022). 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, Minnesota Power sold to Minnkota Power approximately 37 percent in 2023 and 32 percent in 2022.

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 2023. Minnesota Power also has coal transportation agreements in place for the delivery of a significant portion of its coal requirements through December 2024. The costs of fuel and related transportation costs for Minnesota Power’s generation are recoverable from Minnesota Power’s retail and municipal utility customers through the fuel adjustment clause.

Environmental Matters.

Our businesses are subject to regulation of environmental matters by various federal, state and local authorities. A number of regulatory changes to the Clean Air Act, the Clean Water Act and various waste management requirements have been promulgated by both the EPA and state authorities over the past several years. Minnesota Power’s facilities are subject to additional requirements under many of these regulations. Minnesota Power is reshaping its generation portfolio, over time, to reduce its reliance on coal, has installed cost-effective emission control technology, and advocates for sound science and policy during rulemaking implementation.

We consider our businesses to be in substantial compliance with currently applicable environmental regulations and believe all necessary permits have been obtained. We anticipate that with many state and federal environmental regulations and requirements finalized, or to be finalized in the near future, potential expenditures for future environmental matters may be material and require significant capital investments. Minnesota Power has evaluated various environmental compliance scenarios using possible outcomes of environmental regulations to project power supply trends and impacts on customers.

We review environmental matters on a quarterly basis. Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on current law and existing technologies. Accruals are adjusted as assessment and remediation efforts progress, or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the Consolidated Balance Sheet at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Costs related to environmental contamination treatment and cleanup are expensed unless recoverable in rates from customers.

Air. The electric utility industry is regulated both at the federal and state level to address air emissions. Minnesota Power’s thermal generating facilities mainly burn low-sulfur western sub-bituminous coal. All of Minnesota Power’s coal-fired generating facilities are equipped with pollution control equipment such as scrubbers, baghouses and low NOX technologies. Under currently applicable environmental regulations, these facilities are substantially compliant with emission requirements.

ALLETE, Inc. First Quarter 2023 Form 10-Q
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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. The EPA’s CSAPR Update Rule issued in March 2021 revising 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. Minnesota Power will continue to monitor ongoing CSAPR rulemakings and compliance implementation, including the EPA’s new Good Neighbor Rule finalized on March 15, 2023, to modify certain aspects of the CSAPR’s program scope and extent.

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 NOx and SO2, as well as particulate matter. In June 2021, the EPA announced it would reconsider the December 2020 final rule retaining the 2012 particulate matter NAAQS. On January 6, 2023, the EPA announced a proposed rule to revise the primary annual particulate matter NAAQS from its current level while retaining the other primary and secondary particulate matter NAAQS. A final rule is expected by the end of 2023. The EPA also announced in October 2021 that it was reconsidering the 2020 Ozone NAAQS rule finalized in December 2020, and issued an initial draft policy assessment on April 28, 2022, recommending retention of the current standard. A second version of the draft policy assessment was then published for public comment, and a proposed ozone NAAQS rule is expected in the first half of 2023. Anticipated compliance costs related to the proposed and expected NAAQS revisions cannot yet be estimated; however, costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.

EPA Good Neighbor Plan for 2015 Ozone NAAQS. On March 15, 2023, the EPA published a final rule, the Good Neighbor Plan, to address regional ozone transport for the 2015 Ozone NAAQS by reducing NOx emissions during the period of May 1 through September 30 (ozone season). This rule addresses certain good neighbor or interstate transport provisions of the Clean Air Act relative to the 2015 Ozone NAAQS. In the justification for the final rule, the EPA asserts that 23 states, including Minnesota, are modeled as significant contributors to downwind states’ challenges in attaining or maintaining ozone NAAQS compliance within their state borders. The Good Neighbor Plan is designed to resolve this interstate transport issue by implementing a variety of NOx reduction strategies, including federal implementation plan requirements, NOx emission limitations, and ozone season allowance program requirements, beginning during the 2023 ozone season and sixty days after the final rule is published in the Federal Register. The final rule imposes restrictions on fossil-fuel fired power plants in 22 states and on certain industrial sources in 20 states. Implementation of the rule will occur in part through changes to the existing CSAPR program for power plants.

Minnesota Power previously submitted public comments to the EPA on the April 2022 proposed Good Neighbor Rule. Concerns noted by Minnesota Power and other entities included the technical accuracy of the EPA’s assumptions and methods used to identify Minnesota as a significant contributor state, as well as the proposed rule’s intended timeline. The Company is now reviewing the EPA’s final rule in light of previously expressed concerns with the draft rule, while preparing to comply when the rule becomes effective during the 2023 ozone season. Anticipated compliance costs related to the final Good Neighbor Rule cannot yet be estimated due to uncertainties about allowance costs and facility emissions during the ozone season; however, the costs could be material, including costs of additional NOx controls, emission allowance program participation, or operational changes, if any are required. Minnesota Power would seek recovery of additional costs through a rate proceeding. On February 13, 2023, the EPA also published its final rule to partially disapprove the Good Neighbor State Implementation Plans (SIPs) for the states of Minnesota and Wisconsin, and to disapprove 19 other SIP submissions. The SIP final action subjects Minnesota to the final Good Neighbor Plan and associated compliance costs will be known when the final SIP rule evaluation and implementation has been completed. On April 14, 2023, Minnesota Power and a coalition of other Minnesota utilities and industry (“the parties”) co-filed challenges to the EPA’s final Minnesota SIP disapproval, submitting a petition for reconsideration and stay to the EPA and a petition for judicial review to the United States Court of Appeals for the Eighth Circuit. The parties are challenging and requesting reconsideration of certain technical components of the EPA’s review and subsequent partial disapproval of the state of Minnesota’s SIP, including the rulemaking process, air modeling practices and other emissions inventory aspects.

ALLETE, Inc. First Quarter 2023 Form 10-Q
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NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

EPA National Emission Standards for Hazardous Air Pollutants for Major Sources: Industrial, Commercial and Institutional Boilers and Process Heaters (Industrial Boiler MACT) Rule. A final rule issued by the EPA for Industrial Boiler MACT became effective in 2013 with compliance required at major existing sources in 2016. Minnesota Power’s Hibbard Renewable Energy Center and Rapids Energy Center are subject to this rule. Compliance with the Industrial Boiler MACT Rule consisted largely of adjustments to fuels and operating practices and compliance costs were not material. Subsequent to this initial rulemaking, litigation from 2016 through 2018 resulted in court orders directing that the EPA reconsider certain aspects of the regulation including the basis for and numerical value of several different emission limits. On October 6, 2022, the EPA published a final rule in the Federal Register incorporating these changes. The rule became effective on December 5, 2022, imposing a 3-year compliance deadline of October 6, 2025. Minnesota Power’s initial review of this new rule indicates that the revisions should not significantly impact the Company’s affected units. As such, compliance costs associated with the new Industrial Boiler MACT Rule are not currently expected to be material; however, Minnesota Power would seek recovery of additional costs through a rate proceeding.

EPA Mercury and Air Toxics Standards (MATS) Rule. On April 5, 2023, the EPA released a proposed revision to the existing MATS Rule as part of its mandatory 2020 MATS review. In this proposed rule, the EPA is proposing to alter certain compliance and operational requirements, and to lower several emission limits including filterable particulate matter as well as mercury for lignite units. Compliance would be due in the 2026 to 2027 timeframe. The MATS regulation applies at Minnesota Power’s Boswell Energy Center, which is currently well-controlled for these emissions and is in full compliance with existing requirements. The Company is currently reviewing the proposed rule. Compliance costs cannot yet be estimated; however, recovery of any additional costs would be sought through a rate proceeding.

Climate Change. The scientific community generally accepts that emissions of GHGs 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; increased risk of wildfires; 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 from 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, Hibbard Units 3 and 4, and Taconite Harbor Units 1 and 2; however, Taconite Harbor Units 1 and 2 are now retired.


ALLETE, Inc. First Quarter 2023 Form 10-Q
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NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

In January 2021, the United States Court of Appeals for the District of Columbia Circuit (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. Four petitions for review of the D.C. Circuit’s opinion were subsequently granted by the U.S. Supreme Court in October 2021, consolidated under West Virginia v. EPA et al. On June 30, 2022, the U.S. Supreme Court released its opinion in favor of West Virginia and aligned parties. The Supreme Court found the EPA’s CPP structure of generation shifting to be disallowed under Section 111(d) of the CCA on grounds of the major questions doctrine. The court did not opine upon the regulatory approach the EPA proposed in the Affordable Clean Energy Rule. The petitions were remanded to the D.C. Circuit. The EPA has indicated that it intends to issue a proposed rule in the first half of 2023 with a new set of emission guidelines for states to follow in submitting state plans to establish and implement standards of performance for GHG emissions from existing fossil fuel-fired electric generating units. Minnesota Power will continue to monitor any related guidelines and rulemakings issued by the EPA or state regulatory authorities.

In April 2021, the Biden Administration announced a goal to reach 100 percent carbon pollution-free electricity by 2035 as part of the 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 in January 2021, the EPA issued a rulemaking to apply CO2 emission New Source Performance Standards (NSPS) to new, modified and reconstructed fossil fuel-fired electric generating units under Section 111(b) of the CAA. Currently, the EPA is a performing a comprehensive review of the Section 111(b) GHG NSPS for electric generating units. Minnesota Power is monitoring the NSPS final rule and any further Section 111(b) developments including their potential impact to the Company. The proposed combined-cycle natural gas-fired generating facility, NTEC, is expected to meet these NSPS requirements.

On March 15, 2023, the EPA sent a proposed new CAA Section 111 regulation to the United States Office of Management and Budget (OMB) for interagency review, where OMB documentation now indicates this proposal may include proposed regulations for both new, modified and reconstructed sources (Section 111(b) of the CCA) as well as existing (Section 111(d) of the CCA) sources). The EPA’s Fall 2022 unified agenda identified the EPA’s goal of issuing draft regulations in April 2023 and final regulations by June 2024. Minnesota Power will continue to closely track this GHG rulemaking and analyze its potential impacts to our existing and proposed thermal generating facilities.

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.


ALLETE, Inc. First Quarter 2023 Form 10-Q
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NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

Steam Electric Power Generating Effluent Limitations Guidelines. In 2015, the EPA issued revised federal effluent limita