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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 September 30, 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,
57,477,405 shares outstanding
as of September 30, 2023




Index
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALLETE, Inc. Third 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
BNI EnergyBNI Energy, Inc. and its subsidiary
BoswellBoswell Energy Center
CliffsCleveland-Cliffs Inc.
CompanyALLETE, Inc. and its subsidiaries
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
NTECNemadji Trail Energy Center
PPA / PSAPower Purchase Agreement / Power Sales Agreement
ALLETE, Inc. Third Quarter 2023 Form 10-Q
3



Abbreviation or AcronymTerm
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. Third 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;
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. 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. Third Quarter 2023 Form 10-Q
5



PART I.  FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

ALLETE
CONSOLIDATED BALANCE SHEET
Unaudited
September 30,
2023
December 31,
2022
Millions
Assets  
Current Assets  
Cash and Cash Equivalents$125.5 $36.4 
Accounts Receivable (Less Allowance of $1.5 and $1.6)
119.6 137.9 
Inventories – Net180.3 455.9 
Prepayments and Other77.8 87.8 
Total Current Assets503.2 718.0 
Property, Plant and Equipment – Net4,996.8 5,004.0 
Regulatory Assets443.3 441.0 
Equity Investments329.7 322.7 
Goodwill and Intangible Assets – Net155.5 155.6 
Other Non-Current Assets216.3 204.3 
Total Assets$6,644.8 $6,845.6 
Liabilities and Equity  
Liabilities  
Current Liabilities  
Accounts Payable$112.3 $103.0 
Accrued Taxes63.5 69.1 
Accrued Interest16.2 20.5 
Long-Term Debt Due Within One Year111.0 272.6 
Other110.5 251.0 
Total Current Liabilities413.5 716.2 
Long-Term Debt1,686.1 1,648.2 
Deferred Income Taxes171.2 158.1 
Regulatory Liabilities549.3 526.1 
Defined Benefit Pension and Other Postretirement Benefit Plans164.2 179.7 
Other Non-Current Liabilities263.8 269.0 
Total Liabilities3,248.1 3,497.3 
Commitments, Guarantees and Contingencies (Note 6)
Equity  
ALLETE Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 57.5 and 57.2 Shares Issued and Outstanding
1,797.2 1,781.5 
Accumulated Other Comprehensive Loss(24.5)(24.4)
Retained Earnings1,013.9 934.8 
Total ALLETE Equity2,786.6 2,691.9 
Non-Controlling Interest in Subsidiaries610.1 656.4 
Total Equity3,396.7 3,348.3 
Total Liabilities and Equity$6,644.8 $6,845.6 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2023 Form 10-Q
6



ALLETE
CONSOLIDATED STATEMENT OF INCOME
Unaudited
Quarter EndedNine Months Ended
September 30,September 30,
 2023202220232022
Millions Except Per Share Amounts
Operating Revenue
Contracts with Customers – Utility$314.3 $322.6 $919.1 $960.3 
Contracts with Customers – Non-utility63.2 64.5 554.1 178.3 
Other – Non-utility1.3 1.2 3.9 6.3 
Total Operating Revenue378.8 388.3 1,477.1 1,144.9 
Operating Expenses  
Fuel, Purchased Power and Gas – Utility124.9 136.8 350.8 417.4 
Transmission Services – Utility22.7 19.3 66.3 57.5 
Cost of Sales – Non-utility33.0 38.4 436.7 96.9 
Operating and Maintenance83.6 83.2 254.2 238.1 
Depreciation and Amortization63.1 58.7 188.2 181.4 
Taxes Other than Income Taxes15.5 18.5 43.1 53.1 
Total Operating Expenses342.8 354.9 1,339.3 1,044.4 
Operating Income36.0 33.4 137.8 100.5 
Other Income (Expense)  
Interest Expense(20.5)(18.4)(60.9)(55.3)
Equity Earnings4.7 2.3 16.1 13.1 
Other68.7 2.3 75.3 16.4 
Total Other Income (Expense)52.9 (13.8)30.5 (25.8)
Income Before Income Taxes88.9 19.6 168.3 74.7 
Income Tax Expense (Benefit)19.3 (7.2)20.4 (19.4)
Net Income69.6 26.8 147.9 94.1 
Net Loss Attributable to Non-Controlling Interest(16.3)(6.9)(47.7)(43.5)
Net Income Attributable to ALLETE$85.9 $33.7 $195.6 $137.6 
Average Shares of Common Stock  
Basic57.4 57.1 57.3 55.5 
Diluted57.5 57.2 57.4 55.6 
Basic Earnings Per Share of Common Stock$1.50 $0.59 $3.41 $2.48 
Diluted Earnings Per Share of Common Stock$1.49 $0.59 $3.41 $2.48 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2023 Form 10-Q
7



ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited
Quarter EndedNine Months Ended
September 30,September 30,
2023202220232022
Millions    
Net Income$69.6 $26.8 $147.9 $94.1 
Other Comprehensive Income (Loss)    
Unrealized Gain (Loss) on Securities
Net of Income Tax Expense (Benefit) of $, $, $0.1 and $(0.2)
  0.1 (0.4)
Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Tax Expense (Benefit) of $, $0.1, $(0.1) and $0.2
(0.1)0.1 (0.2)0.4 
Total Other Comprehensive Income (Loss)(0.1)0.1 (0.1) 
Total Comprehensive Income69.5 26.9 147.8 94.1 
Net Loss Attributable to Non-Controlling Interest(16.3)(6.9)(47.7)(43.5)
Total Comprehensive Income Attributable to ALLETE$85.8 $33.8 $195.5 $137.6 
The accompanying notes are an integral part of these statements.

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



ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited
Nine Months Ended
September 30,
 20232022
Millions
Operating Activities  
Net Income$147.9 $94.1 
Adjustments to Reconcile Net Income to Cash provided by (used in) Operating Activities:
AFUDC – Equity(2.5)(2.4)
Income from Equity Investments – Net of Dividends0.6 3.8 
Loss on Investments and Property, Plant and Equipment0.6 2.1 
Depreciation Expense188.2 181.3 
Amortization of PSAs(3.9)(6.3)
Amortization of Other Intangible Assets and Other Assets5.3 6.3 
Deferred Income Tax Benefit1.3 (19.7)
Share-Based and ESOP Compensation Expense4.3 4.2 
Defined Benefit Pension and Postretirement Benefit(2.5)(2.2)
Fuel Adjustment Clause53.8 (3.5)
Bad Debt Expense1.2 1.4 
Provision for Interim Rate Refund21.0  
Residential Interim Rate Adjustment (5.9)
Changes in Operating Assets and Liabilities  
Accounts Receivable17.2 3.2 
Inventories275.6 (261.4)
Prepayments and Other0.6 (7.7)
Accounts Payable(8.0)8.0 
Other Current Liabilities(167.9)63.5 
Cash Contributions to Defined Benefit Pension Plans(17.3) 
Changes in Regulatory and Other Non-Current Assets4.1 28.0 
Changes in Regulatory and Other Non-Current Liabilities0.4 (5.6)
Cash provided by Operating Activities520.0 81.2 
Investing Activities  
Proceeds from Sale of Available-for-sale Securities0.5 1.7 
Payments for Purchase of Available-for-sale Securities(0.8)(1.7)
Acquisition of Subsidiaries - Net of Cash & Restricted Cash Acquired (155.0)
Payments for Equity Method Investments(6.6)(5.1)
Additions to Property, Plant and Equipment(184.1)(153.5)
Other Investing Activities(9.6)2.5 
Cash used in Investing Activities(200.6)(311.1)
Financing Activities  
Proceeds from Issuance of Common Stock11.4 244.4 
Equity Issuance Costs (8.1)
Proceeds from Issuance of Short-Term and Long-Term Debt409.8 710.5 
Repayments of Short-Term and Long-Term Debt(533.4)(761.0)
Proceeds from Non-Controlling Interest in Subsidiaries – Net9.9 155.7 
Distributions to Non-Controlling Interest(8.5) 
Dividends on Common Stock(116.5)(108.6)
Other Financing Activities(1.1)(2.1)
Cash provided by (used in) Financing Activities(228.4)230.8 
Change in Cash, Cash Equivalents and Restricted Cash91.0 0.9 
Cash, Cash Equivalents and Restricted Cash at Beginning of Period40.2 47.7 
Cash, Cash Equivalents and Restricted Cash at End of Period$131.2 $48.6 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third Quarter 2023 Form 10-Q
9



ALLETE
CONSOLIDATED STATEMENT OF EQUITY
Unaudited
Quarter EndedNine Months Ended
September 30,September 30,
2023202220232022
Millions Except Per Share Amounts
Common Stock
Balance, Beginning of Period$1,791.6 $1,771.7 $1,781.5 $1,536.7 
Common Stock Issued5.6 5.5 15.7 240.5 
Balance, End of Period1,797.2 1,777.2 1,797.2 1,777.2 
Accumulated Other Comprehensive Loss
Balance, Beginning of Period(24.4)(23.9)(24.4)(23.8)
Other Comprehensive Income – Net of Income Taxes
Unrealized Gain (Loss) on Debt Securities— — 0.1 (0.4)
Defined Benefit Pension and Other Postretirement Plans(0.1)0.1 (0.2)0.4 
Balance, End of Period(24.5)(23.8)(24.5)(23.8)
Retained Earnings
Balance, Beginning of Period966.9 932.6 934.8 900.2 
Net Income Attributable to ALLETE85.9 33.7 195.6 137.6 
Common Stock Dividends (38.9)(37.1)(116.5)(108.6)
Balance, End of Period1,013.9 929.2 1,013.9 929.2 
Non-Controlling Interest in Subsidiaries
Balance, Beginning of Period634.4 678.5 656.4533.2
Proceeds from Non-Controlling Interest in Subsidiaries – Net — — 9.9 182.9 
Net Loss Attributable to Non-Controlling Interest(16.3)(6.9)(47.7)(43.5)
Distributions to Non-Controlling Interest(8.0)(0.3)(8.5)(1.3)
Balance, End of Period610.1 671.3 610.1 671.3 
Total Equity$3,396.7 $3,353.9 $3,396.7 $3,353.9 
Dividends Per Share of Common Stock$0.6775 $0.65 $2.0325 $1.95 
The accompanying notes are an integral part of these statements.
ALLETE, Inc. Third 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 pursuant to such rules and regulations. 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 nine months ended September 30, 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

Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the date of the financial statements issuance.

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 September 30, 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 CashSeptember 30,
2023
December 31,
2022
September 30,
2022
December 31,
2021
Millions  
Cash and Cash Equivalents$125.5 $36.4 $42.1 $45.1 
Restricted Cash included in Prepayments and Other 3.3 1.5 4.2 0.3 
Restricted Cash included in Other Non-Current Assets2.4 2.3 2.3 2.3 
Cash, Cash Equivalents and Restricted Cash on the Consolidated Statement of Cash Flows$131.2 $40.2 $48.6 $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 – NetSeptember 30,
2023
December 31,
2022
Millions  
Fuel (a)
$33.0 $33.4 
Materials and Supplies 115.4 75.1 
Renewable Energy Facilities Under Development (b)
31.9 347.4 
Total Inventories – Net$180.3 $455.9 
(a)    Fuel consists primarily of coal inventory at Minnesota Power.
(b)    Renewable Energy Facilities Under Development as of September 30, 2023, consists primarily of project costs related to renewable energy development projects at New Energy. As of December 31, 2022, it consisted primarily of project costs related to ALLETE Clean Energy’s Northern Wind and Red Barn wind projects sold in the first quarter of 2023 and second quarter of 2023, respectively. (See Other Current Liabilities.)
Goodwill. The aggregate carrying amount of goodwill was $154.9 million as of September 30, 2023 ($154.9 million as of December 31, 2022). There have been no changes to goodwill by reportable segment for the quarter and nine months ended September 30, 2023.
ALLETE, Inc. Third Quarter 2023 Form 10-Q
11



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Non-Current AssetsSeptember 30,
2023
December 31,
2022
Millions
Contract Assets (a)
$19.1 $21.0 
Operating Lease Right-of-use Assets11.6 12.7 
Finance Lease Right-of-use Assets2.1  
ALLETE Properties19.4 19.1 
Restricted Cash2.4 2.3 
Other Postretirement Benefit Plans60.2 58.8 
Other101.5 90.4 
Total Other Non-Current Assets$216.3 $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 LiabilitiesSeptember 30,
2023
December 31,
2022
Millions  
Customer Deposits (a)
$6.0 $150.7 
PSAs6.0 6.1 
Provision for Interim Rate Refund39.4 18.4 
Manufactured Gas Plant (b)
3.4 14.7 
Operating Lease Liabilities3.0 3.2 
Finance Lease Liabilities0.4  
Other52.3 57.9 
Total Other Current Liabilities$110.5 $251.0 
(a) Customer Deposits as of December 31, 2022, 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 second quarter of 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 LiabilitiesSeptember 30,
2023
December 31,
2022
Millions  
Asset Retirement Obligation (a)
$200.8 $200.4 
PSAs22.4 26.9 
Operating Lease Liabilities8.5 9.3 
Finance Lease Liabilities1.7  
Other30.4 32.4 
Total Other Non-Current Liabilities$263.8 $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 September 30, 2023 ($32.4 million as of December 31, 2022).

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



NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Quarter EndedNine Months Ended
September 30,September 30,
Other Income2023202220232022
Millions
Pension and Other Postretirement Benefit Plan Non-Service Credits (a)
$1.8 $1.9 $5.5 $7.2 
Interest and Investment Income (b)
6.6 (0.4)8.7 (1.3)
AFUDC - Equity1.1 0.7 2.5 2.4 
PSA Liability (c)
   10.2 
Gain on Arbitration Award (d)
58.4  58.4  
Other0.8 0.1 0.2 (2.1)
Total Other Income$68.7 $2.3 $75.3 $16.4 
(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.)
(b)Interest and Investment Income for the quarter and nine months ended September 30, 2023, reflects $5.1 million of interest income related to interest awarded as part of an arbitration ruling involving a subsidiary of ALLETE Clean Energy. (See Note 6. Commitments, Guarantees, and Contingencies.)
(c)The gain on removal of the PSA liability for the Northern Wind project upon decommissioning of the legacy wind energy facility assets, which was more than offset by a reserve for an anticipated loss on the sale of the Northern Wind project that was recorded in Cost of Sales - Non-Utility on the Consolidated Statement of Income.
(d)This reflects a gain recognized for the favorable outcome of an arbitration ruling involving a subsidiary of ALLETE Clean Energy. (See Note 6. Commitments, Guarantees, and Contingencies.)

Supplemental Statement of Cash Flows Information.
Nine Months Ended September 30,20232022
Millions  
Cash Paid for Interest – Net of Amounts Capitalized$64.8$60.5
Cash Paid for Income Taxes – Net $14.1$1.1
Noncash Investing and Financing Activities  
Increase in Accounts Payable for Capital Additions to Property, Plant and Equipment$11.8$2.4
Reclassification of Property, Plant and Equipment to Inventory (a)
$99.8
Capitalized Asset Retirement Costs$2.4$9.0
AFUDC–Equity$2.5$2.4
(a)The decommissioning of the legacy Northern Wind assets resulted in a reclassification from Property, Plant and Equipment – Net to Inventories – Net in the second quarter of 2022 as they were repowered and subsequently sold to a subsidiary of Xcel Energy Inc.

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.

In the third quarter of 2023, we recognized a $5.7 million increase in Net Loss Attributable to Non-Controlling Interest on the Consolidated Statement of Income for the correction of an error related to the calculation of non-controlling interest in subsidiaries under the hypothetical liquidation at book value method, of which $3.6 million related to 2022. We have evaluated the effect of this out-of-period adjustment on the quarter and nine months ended September 30, 2023, as well as on the previous interim and annual periods in which they should have been recognized and concluded that this adjustment is not material to any of the periods affected.


ALLETE, Inc. Third 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 $44.9 million for the nine months ended September 30, 2023 ($19.5 million for the nine months ended September 30, 2022).

2024 Minnesota General Rate Case. On November 1, 2023, Minnesota Power filed a retail rate increase request with the MPUC seeking an average increase of approximately 12.00 percent for retail customers, net of rider revenue incorporated into base rates. The rate filing seeks a return on equity of 10.30 percent and a 53.00 percent equity ratio. On an annualized basis, the requested final rate increase would generate approximately $89 million in additional revenue. Once the filing is accepted as complete, an annual interim rate increase of approximately $64 million, net of rider revenue incorporated into base rates and subject to refund, is expected to be implemented within 60 days, subject to MPUC adjustment and authorization. We cannot predict the level of interim or final rates that may be authorized by the MPUC.

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 have generated 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. 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. 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 Taconite Harbor and Minnesota Power’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 in an order dated May 15, 2023, and provided clarification in support of the interim rate refund treatment for sales to certain customers that did not operate during 2022.

On June 14, 2023, Minnesota Power filed notice with the Minnesota Court of Appeals (Court) to appeal specific aspects of the MPUC’s rate case orders. Minnesota Power is appealing the ratemaking treatment of Taconite Harbor and Minnesota Power’s prepaid pension asset. We are unable to predict the outcome of this proceeding.

In an order dated September 29, 2023, the MPUC approved Minnesota Power’s final rates, which were implemented beginning on October 1, 2023. The MPUC order also approved Minnesota Power’s interim rate refund plan. Interim rates were collected through the third quarter with reserves recorded as necessary. Minnesota Power has recorded a reserve for an interim rate refund of $39.4 million pre-tax as of September 30, 2023 ($18.4 million as of December 31, 2022). The reserve will be refunded to customers beginning in the fourth quarter of 2023.

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 cost recovery rider factor filing, which the MPUC approved in an order dated October 3, 2023. Updated billing rates were included on customer bills starting in the fourth quarter of 2023.

Solar Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place to charge retail customers on a current basis for solar costs related to investments and expenditures for meeting the state of Minnesota’s solar energy standard. Current customer billing rates for the solar cost recovery rider were approved by the MPUC in an August 2022 order. On August 23, 2023, Minnesota Power submitted its latest solar cost recovery rider factor filing to the MPUC. Upon approval of the filing, Minnesota Power would be authorized to include updated billing rates on customer bills.

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



NOTE 2. REGULATORY MATTERS (Continued)

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 in 2022. Minnesota Power requested recovery of the regulatory asset over 12 months as part of its annual true-up filing submitted to the MPUC on March 1, 2023, which was approved by the MPUC in an order dated July 31, 2023. We began recovery of the regulatory asset in the third quarter of 2023.

Minnesota Power has incurred lower fuel and purchased power costs in 2023 than those factored in its fuel adjustment forecast filed in May 2022 for 2023, which resulted in the recognition of a $28.3 million regulatory liability as of September 30, 2023. On August 30, 2023, Minnesota Power submitted a filing with the MPUC requesting to refund a portion of over-collected fuel adjustment clause recoveries for 2023 from October 2023 through December 2023. No parties objected to the request and lower rates were implemented in October 2023 to refund the over-collection of fuel adjustment clause recoveries, subject to final approval by the MPUC which is expected in 2024.

Energy Conservation and Optimization (ECO) Plan. On April 3, 2023, Minnesota Power submitted its 2022 ECO, formerly known as the conservation improvement program, annual filing detailing Minnesota Power’s ECO plan results and proposed financial incentive, which was approved by the MPUC July 21, 2023. As a result, Minnesota Power recognized revenue of $2.2 million for the approved financial inventive in the third quarter of 2023. A financial incentive of $1.9 million was recognized in the second quarter of 2022 upon approval by the MPUC of Minnesota Power’s 2021 ECO annual filing. The financial incentives are recognized in the period in which the MPUC approves the filing.

On June 30, 2023, Minnesota Power submitted its triennial filing for 2024 through 2026 to the MPUC and Minnesota Department of Commerce, which outlines Minnesota Power’s ECO spending and energy-saving goals for those years. Minnesota Power’s investment goals are $12.5 million for 2024, $12.7 million for 2025 and $12.8 million for 2026, subject to MPUC and Minnesota Department of Commerce approval.

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.

























ALLETE, Inc. Third Quarter 2023 Form 10-Q
15



NOTE 2. REGULATORY MATTERS (Continued)
Regulatory Assets and LiabilitiesSeptember 30,
2023
December 31,
2022
Millions 
Current Regulatory Assets (a)
  
Fuel Adjustment Clause $12.1 $25.6 
Other1.8  
Total Current Regulatory Assets$13.9 $25.6 
Non-Current Regulatory Assets  
Defined Benefit Pension and Other Postretirement Plans$223.6 $225.9 
Income Taxes91.4 97.6 
Cost Recovery Riders40.8 41.2 
Asset Retirement Obligations 37.1 35.6 
Taconite Harbor (b)
24.2  
Manufactured Gas Plant
14.1 15.1 
Fuel Adjustment Clause 4.1 14.5 
PPACA Income Tax Deferral4.0 4.1 
Other4.0 7.0 
Total Non-Current Regulatory Assets$443.3 $441.0 
Current Regulatory Liabilities (c)
  
Provision for Interim Rate Refund (d)
$39.4 $18.4 
Transmission Formula Rates Refund1.2 4.9 
Other1.3 0.1 
Total Current Regulatory Liabilities $41.9 $23.4 
Non-Current Regulatory Liabilities  
Income Taxes $315.7 $332.5 
Wholesale and Retail Contra AFUDC 78.6 80.7 
Plant Removal Obligations65.9 60.0 
Fuel Adjustment Clause28.3  
Non-Jurisdictional Land Sales20.7 7.5 
North Dakota Investment Tax Credits 16.4 16.9 
Defined Benefit Pension and Other Postretirement Benefit Plans11.8 17.6 
Boswell Units 1 and 2 Net Plant and Equipment6.7 6.7 
Other5.2 4.2 
Total Non-Current Regulatory Liabilities$549.3 $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. Third Quarter 2023 Form 10-Q
16



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 Investments6.6 
Equity in ATC Earnings17.3 
Distributed ATC Earnings(13.8)
Amortization of the Remeasurement of Deferred Income Taxes1.0 
Equity Investment Balance as of September 30, 2023$176.5 

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 0.50 percent 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)
(1.2)
Distributed Nobles 2 Earnings(2.9)
Equity Investment Balance as of September 30, 2023$153.2 
(a)The Company also recorded earnings from net loss attributable to non-controlling interest of $7.2 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. Third Quarter 2023 Form 10-Q
17



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 September 30, 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 September 30, 2023
Recurring Fair Value MeasuresLevel 1Level 2Level 3Total
Millions    
Assets    
Investments (a)
Available-for-sale – Equity Securities$8.1   $8.1 
Available-for-sale – Corporate and Governmental Debt Securities (b)
 $5.8  5.8 
Cash Equivalents5.8   5.8 
Total Fair Value of Assets$13.9 $5.8  $19.7 
Liabilities    
Deferred Compensation (c)
 $15.9  $15.9 
Total Fair Value of Liabilities $15.9  $15.9 
 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 September 30, 2023, the aggregate amount of available-for-sale corporate and governmental debt securities maturing in one year or less was $1.6 million, in one year to less than three years was $2.9 million, in three years to less than five years was $0.9 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)
  
September 30, 2023$1,805.5$1,582.5
December 31, 2022$1,929.1$1,782.7
(a)Excludes unamortized debt issuance costs.


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



NOTE 4. FAIR VALUE (Continued)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, land inventory, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. For the quarter and nine months ended September 30, 2023, and the year ended December 31, 2022, there were no indicators of impairment for these non-financial assets.

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 or volatility 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 September 30, 2023, and December 31, 2022:
September 30, 2023PrincipalUnamortized Debt Issuance CostsTotal
Millions  
Short-Term Debt$111.1 $(0.1)$111.0 
Long-Term Debt1,694.4 (8.3)1,686.1 
Total Debt$1,805.5 $(8.4)$1,797.1 
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 $19.8 million outstanding in standby letters of credit and $33.3 million outstanding draws under our lines of credit as of September 30, 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 October 17, 2023, ALLETE amended its $400 million credit facility (Credit Agreement), which was scheduled to expire in January 2026, to $355 million and extended the expiration date to January 10, 2027. The amended Credit Agreement is unsecured and has a variable interest rate. ALLETE may request a single, one-year extension to the maturity date. Advances may be used by ALLETE for general corporate purposes, to provide liquidity in support of ALLETE's commercial paper program and to issue up to $80 million in letters of credit.

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.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
19



NOTE 5. SHORT-TERM AND LONG-TERM DEBT (Continued)

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 September 30, 2023, our ratio was approximately 0.36 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 September 30, 2023, ALLETE was in compliance with its financial covenants.


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 September 30, 2023, Square Butte had total debt outstanding of $176.9 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 nine months ended September 30, 2023, was $64.8 million ($63.8 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 $4.1 million ($3.7 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 2025. 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.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
20



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

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.

Cross-State Air Pollution Rule (CSAPR). The CSAPR requires certain states, 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. Minnesota Power continues to monitor ongoing CSAPR rulemakings and compliance implementation, including the EPA’s Good Neighbor Plan published June 5, 2023, modifying 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. The rule was advanced to the White House Office of Management and Budget (OMB) on September 22, 2023 and a final rule is tentatively expected by the end of the year. 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 on March 1, 2023. Subsequently on August 21, 2023, the EPA announced it would cease reconsideration of the Ozone NAAQS and initiate a new review instead. This new NAAQS review is expected to take several years, during which time the existing 2020 ozone NAAQS will remain in place. Anticipated timelines and 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 June 5, 2023, the EPA published a final Federal Implementation Plan (FIP) rule in the Federal Register, 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 with the 2023 ozone season. 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.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
21



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

Minnesota Power previously submitted public comments to the EPA on the April 2022 proposed Good Neighbor Plan. 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. 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 U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit Court). 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. On May 31, 2023, the parties filed a motion to stay the SIP disapproval with the Eighth Circuit Court, which granted the stay on July 5, 2023, which prevents the Good Neighbor Plan from taking effect in Minnesota while the stay remains in effect.

On September 29, 2023, the EPA issued an updated final interim rule addressing the stays in Minnesota and five other states, formally staying the effectiveness of the final FIP for states with active stays in place. The state of Minnesota was therefore not subject to compliance obligations for the 2023 ozone season, which would have gone into effect on August 4, 2023. Future compliance obligations will depend on the eventual resolution of the stay and appeal. Additionally, challenges have been filed against the final SIP rule by the Minnesota coalition parties and other entities. Anticipated compliance costs related to final Good Neighbor Plan compliance cannot yet be estimated due to uncertainties about SIP approval status, implementation timing, and 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.

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 compliance deadline of October 6, 2025. Minnesota Power’s review of this new rule indicates that the revisions should not significantly impact its 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 24, 2023, the EPA published 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 facility, which is currently well-controlled for these emissions and is in full compliance with existing requirements. Initial review of this draft regulation indicates that compliance costs should not be material based on the proposed revision. The EPA expects to issue the final rule in March 2024. Compliance costs cannot yet be estimated; however, recovery of any additional costs would be sought through a rate proceeding.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
22



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

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. On May 23, 2023, the EPA published in the Federal Register a proposal for five separate regulatory actions under Section 111 of the Clean Air Act (CAA) addressing greenhouse gas (GHG) emissions from fossil fuel-fired electric generating units (EGUs). The EPA is proposing revised new source performance standards (NSPS) for new, modified and reconstructed EGUs (Section 111(b) of the CAA) as well as emission guidelines for certain existing (Section 111(d) of the CAA) EGUs. The EPA also proposed in this action to officially repeal the predecessor regulation “Affordable Clean Energy Rule”, first issued in 2019 and later vacated in 2021. The draft rules were open for public comment until August 8, 2023, and the EPA’s Spring 2023 unified agenda identifies the EPA’s goal of issuing final regulations in April 2024. The Company will continue to monitor this GHG rulemaking and analyze potential impacts to our existing and proposed thermal generating facilities from the draft Section 111 rules, which would apply to several Company assets including existing EGUs at the Boswell and Laskin facilities as well as the proposed combined cycle natural gas-fired generating facility, NTEC. Minnesota Power continues implementing its EnergyForward strategic plan that provides for significant emissions reductions and diversifying its electricity generation mix to include more renewable and natural gas energy. We are unable to predict compliance costs due to the draft status of the rules and the need for a state implementation plan for Section 111(d) existing units; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Water. The Clean Water Act requires NPDES permits be obtained from the EPA (or, when delegated, from individual state pollution control agencies) for any wastewater discharged into navigable waters. We have obtained all necessary NPDES permits, including NPDES storm water permits for applicable facilities, to conduct our operations.

Steam Electric Power Generating Effluent Limitations Guidelines. In 2015, the EPA issued revised federal effluent limitation guidelines (ELG) for steam electric power generating stations under the Clean Water Act. It set effluent limits and prescribed BACT for several wastewater streams, including flue gas desulphurization (FGD) water, bottom ash transport water and coal combustion landfill leachate. In 2017, the EPA announced a two-year postponement of the ELG compliance date of November 1, 2018, to November 1, 2020, while the agency reconsidered the bottom ash transport water (BATW) and FGD wastewater provisions. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded back to the EPA portions of the ELG that allowed for continued discharge of legacy wastewater and leachate. On October 13, 2020, the EPA published a final ELG Rule allowing re-use of bottom ash transport water in FGD scrubber systems with limited discharges related to maintaining system water balance. The rule sets technology standards and numerical pollutant limits for discharges of bottom ash transport water and FGD wastewater. Compliance deadlines depend on subcategory, with compliance generally required as soon as possible, beginning after October 13, 2021, but no later than December 31, 2025, or December 31, 2028, in some specific cases. The rule also established new subcategories for retiring high-flow and low-utilization units, and established a voluntary incentives program for FGD wastewater. In accordance with the January 2021 Executive Order 13990, the EPA was mandated to conduct a review of actions and polices taken during the prior administration, including the 2020 ELG Rule. On September 14, 2021, the EPA published a notice of availability for its preliminary effluent guidelines program plan. In the plan, the EPA confirmed the agency is initiating a rulemaking process to strengthen wastewater pollution limitations from FGD and bottom ash transport water discharges while the 2020 ELG Rule remains in effect.

ALLETE, Inc. Third Quarter 2023 Form 10-Q
23



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

On March 29, 2023, the EPA published a proposed new ELG rule in the Federal Register to update the 2020 ELGs; the public comment period was open until May 30, 2023. In the proposed rule, the EPA is revising ELGs for existing sources, including establishing zero discharge limitations for BATW and FGD wastewater; new limits for combustion residual leachate; and allowing states to set discharge limits for legacy wastewater in surface impoundments based on best professional judgment. The rule proposes to preserve flexibility and maintain exemptions for units permanently ceasing coal combustion by 2028, and adds a new category for units that have already complied with the 2020 ELG rule and which will retire by 2032. Additionally, the EPA is encouraging state permitting authorities to conduct functional equivalency tests for facilities with landfills or CCR surface impoundments to identify groundwater to surface water point source discharges. More stringent limitations would apply where point source discharges occur.

Bottom ash transport and FGD wastewater ELGs are not expected to have a significant impact on Minnesota Power operations. Boswell, where these ELGs are applicable, completed conversion to dry bottom ash handling and installed a FGD dewatering system in September 2022. The dry conversion projects eliminated bottom ash transport water and minimized wastewater from the FGD system. Re-use and onsite consumption is planned for the remaining FGD waste stream and for dewatering legacy wastewater from Boswell’s existing impoundments.

The EPA’s reconsideration of legacy wastewater and leachate discharge requirements has the potential to impact dewatering associated with the closed impoundment at Laskin and the closed Taconite Harbor dry ash landfill.

At this time, we estimate no additional material compliance costs for ELG bottom ash water and FGD requirements. Compliance costs we might incur related to other ELG waste streams (e.g., leachate) or other potential future water discharge regulations at Minnesota Power facilities cannot be estimated; however, the costs could be material, including costs associated with wastewater treatment and re-use. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Permitted Water Discharges – Sulfate. In 2017, the MPCA released a draft water quality standard in an attempt to update Minnesota’s existing 10 mg/L sulfate limit for waters used for the production of wild rice with the proposed rulemaking heard before an administrative law judge (ALJ). In 2018, the ALJ rejected significant portions of the proposed rulemaking and the MPCA subsequently withdrew the rulemaking. The existing 10 mg/L limit remains in place, but the MPCA is currently prohibited under state law from listing wild rice waters as impaired or requiring sulfate reduction technology.

In April 2021, the MPCA’s proposed list of impaired waters submitted pursuant to the Clean Water Act was partially rejected by the EPA due to the absence of wild rice waters listed for sulfate impairment. The EPA transmitted a final list of 32 EPA-added wild rice waters to the MPCA in November 2021. This list could subsequently be used to set sulfate limits in discharge permits for power generation facilities and municipal and industrial customers, including paper and pulp facilities, and mining operations. At this time, we are unable to determine the specific impacts these developments may have on Minnesota Power operations, if any. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Solid and Hazardous Waste. The Resource Conservation and Recovery Act of 1976 regulates the management and disposal of solid and hazardous wastes. We are required to notify the EPA of hazardous waste activity and, consequently, routinely submit reports to the EPA.

Coal Ash Management Facilities. Minnesota Power produces the majority of its coal ash at Boswell, with small amounts of ash generated at Hibbard Renewable Energy Center. Ash storage and disposal methods include storing ash in clay-lined onsite impoundments (ash ponds), disposing of dry ash in a lined dry ash landfill, applying ash to land as an approved beneficial use, and trucking ash to state permitted landfills.

Coal Combustion Residuals from Electric Utilities (CCR). In 2015, the EPA published the final rule (2015 Rule) regulating CCR as nonhazardous waste under Subtitle D of the Resource Conservation and Recovery Act (RCRA) in the Federal Register. The rule includes additional requirements for new landfill and impoundment construction as well as closure activities related to certain existing impoundments. Costs of compliance for Boswell and Laskin are expected to be incurred primarily over the next 12 years and be between approximately $65 million and $120 million. Compliance costs for CCR at Taconite Harbor are not expected to be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
24



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)
Environmental Matters (Continued)

Minnesota Power continues to work on minimizing costs through evaluation of beneficial re-use and recycling of CCR and CCR-related waters. In 2017, the EPA announced its intention to formally reconsider the CCR rule under Subtitle D of the RCRA. In March 2018, the EPA published the first phase of the proposed rule revisions in the Federal Register. In 2018, the EPA finalized revisions to elements of the CCR rule, including extending certain deadlines by two years, the establishment of alternative groundwater protection standards for certain constituents and the potential for risk-based management options at facilities based on site characteristics. In 2018, a U.S. District Court for the District of Columbia decision vacated specific provisions of the CCR rule. The court decision resulted in a change to the status of three existing clay-lined impoundments at Boswell that must now be considered unlined. The EPA proposed additional rule revisions in 2019 to address outstanding issues from litigation and closure timelines for unlined impoundments, respectively. The first of these rules, CCR Part A Rule, was finalized in September 2020. The Part A Rule revision requires unlined impoundments to cease disposal of waste as soon as technically feasible but no later than April 11, 2021. Upon completion of dry ash conversion activities, Boswell ceased disposal in both impoundments in September 2022. Both impoundments are now inactive and have initiated closure.

On May 17, 2023, the EPA released a proposed rule for CCR legacy surface impoundments. The proposal expands the scope of units regulated under the CCR rule to include legacy ponds (inactive surface impoundments at inactive facilities) and creates a new category of units called CCR management units, which includes inactive and closed impoundments and landfills as well as other non-containerized accumulations of CCR. The proposed rule was published in the Federal Register on May 18, 2023, and the 60-day public comment period ended on July 17, 2023. The EPA is proposing to require that all generating facilities evaluate and identify all past deposits of CCR materials on their sites and close or re-close existing CCR units to meet current closure standards, as well as install groundwater monitoring systems, conduct groundwater monitoring and implement groundwater corrective actions as necessary. This rule has the potential to impact Boswell and Laskin. Compliance costs for Minnesota Power facilities cannot be estimated at this time; however, the costs could be material. Minnesota Power would seek recovery of additional costs through a rate proceeding.

Additionally, the EPA released a proposed CCR Part B rulemaking in February 2020 addressing options for beneficial reuse of CCR materials, alternative liner demonstrations and other CCR regulatory revisions. Portions of the Part B rule addressing alternative liner equivalency standards were finalized in November 2020. According to the EPA’s updated spring 2023 regulatory agenda, finalization of the remainder of the proposed Part B rule has been moved to the agency’s long-term agenda. The final federal permit rule is still expected in late-2023. The final federal permit rule will finalize procedures for implementing a CCR federal permit program.

Other Environmental Matters.

Manufactured Gas Plant Site. SWL&P continues working with the Wisconsin Department of Natural Resources (WDNR) to address and remediate environmental conditions at a former manufactured gas plant site located in Superior, Wisconsin, and formerly operated by SWL&P. As of September 30, 2023, we have recorded a liability of approximately $4 million for remediation costs at this site. SWL&P has also recorded an associated regulatory asset as we expect recovery of these remediation costs to be allowed by the PSCW. Remediation costs are expected to be incurred through 2025.

ALLETE, Inc. Third Quarter 2023 Form 10-Q
25



NOTE 6. COMMITMENTS, GUARANTEES AND CONTINGENCIES (Continued)

Other Matters.

Letters of Credit and Surety Bonds.

We have multiple credit facility agreements in place that provide the ability to issue standby letters of credit to satisfy contractual security requirements across our businesses. As of September 30, 2023, we had $163.6 million of outstanding letters of credit issued, including those issued under our revolving credit facility.

Regulated Operations. As of September 30, 2023, we had $24.2 million outstanding in standby letters of credit at our Regulated Operations which are pledged as security to MISO, the NDPSC and a state agency.

ALLETE Clean Energy. ALLETE Clean Energy’s wind energy facilities have various PSAs in place for some or all of their output that expire in various years between 2024 and 2039. As of September 30, 2023, ALLETE Clean Energy has $105.3 million outstanding in standby letters of credit, the majority of which are pledged as security under these PSAs and PSAs for wind energy facilities developed for others. ALLETE Clean Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.

Corporate and Other.

BNI Energy. As of September 30, 2023, BNI Energy had surety bonds outstanding of $82.4 million related to the reclamation liability for closing costs associated with its mine and mine facilities. Although its coal supply agreements obligate the customers to provide for the closing costs, additional assurance is required by federal and state regulations. BNI Energy’s total reclamation liability is currently estimated at $82.1 million. BNI Energy does not believe it is likely that any of these outstanding surety bonds will be drawn upon.

Investment in Nobles 2. The Nobles 2 wind energy facility requires standby letters of credit as security for certain contractual obligations. As of September 30, 2023, ALLETE South Wind has $10.1 million outstanding in standby letters of credit, related to its portion of the security requirements relative to its ownership in Nobles 2. We do not believe it is likely that any of these outstanding letters of credit will be drawn upon.

South Shore Energy. As of September 30, 2023, South Shore Energy had $23.9 million outstanding in standby letters of credit pledged as security in connection with the development of NTEC. South Shore Energy does not believe it is likely that any of these outstanding letters of credit will be drawn upon.

Legal Proceedings.

We are involved in litigation arising in the normal course of business. Also in the normal course of business, we are involved in tax, regulatory and other governmental audits, inspections, investigations and other proceedings that involve state and federal taxes, safety, and compliance with regulations, rate base and cost of service issues, among other things. We do not expect the outcome of these matters to have a material effect on our financial position, results of operations or cash flows.

In the first quarter of 2023, an ALLETE Clean Energy subsidiary initiated arbitration proceedings seeking damages against a counterparty for non-performance under a contract. Arbitration hearings were held in June and July 2023, and a final arbitration ruling was issued in favor of ALLETE Clean Energy’s subsidiary in September 2023. The final arbitration ruling awarded $68.3 million to ALLETE Clean Energy’s subsidiary, which included prejudgment interest of $5.1 million, recovery of $3.6 million of arbitration-related costs, and resulted in the recognition of a $58.4 million pre-tax gain in the third quarter of 2023. The arbitration ruling also resulted in the receipt of approximately $60 million of cash, net of distribution to non-controlling interest, in the third quarter of 2023.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
26



NOTE 7. EARNINGS PER SHARE AND COMMON STOCK

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from non-vested restricted stock units and performance share awards granted under our Executive Long-Term Incentive Compensation Plan.
  2023  2022 
Reconciliation of Basic and Diluted Dilutive  Dilutive 
Earnings Per ShareBasicSecuritiesDilutedBasicSecuritiesDiluted
Millions Except Per Share Amounts      
Quarter ended September 30,      
Net Income Attributable to ALLETE$85.9 $85.9 $33.7 $33.7 
Average Common Shares57.4 0.1 57.5 57.1 0.1 57.2 
Earnings Per Share$1.50 $1.49 $0.59 $0.59 
Nine Months Ended September 30,   
Net Income Attributable to ALLETE$195.6 $195.6 $137.6 $137.6 
Average Common Shares57.3 0.1 57.4 55.5 0.1 55.6 
Earnings Per Share$3.41 $3.41 $2.48 $2.48 


NOTE 8. INCOME TAX EXPENSE
Quarter EndedNine Months Ended
September 30,September 30,
 2023202220232022
Millions    
Current Income Tax Expense (a)
    
Federal$4.0$12.6
State1.1$0.26.5$0.3
Total Current Income Tax Expense$5.1$0.2$19.1$0.3
Deferred Income Tax Expense (Benefit)    
Federal (b)
$5.2$(8.4)$(10.9)$(20.7)
State9.11.112.51.4
Investment Tax Credit Amortization(0.1)(0.1)(0.3)(0.4)
Total Deferred Income Tax Expense (Benefit)$14.2$(7.4)$1.3$(19.7)
Total Income Tax Expense (Benefit)$19.3$(7.2)$20.4$(19.4)
(a)For the quarter and nine months ended September 30, 2023, the federal current tax expense was partially offset by production tax credits. For the quarter and nine months ended September 30, 2022, the federal and state current tax expense was minimal due to NOLs which resulted from the bonus depreciation provisions of certain tax legislation.
(b)For the quarter ended September 30, 2023, the federal deferred tax expense was due to higher pre-tax income at ALLETE Clean Energy, partially offset by production tax credits. For the nine months ended September 30, 2023 and 2022, and the quarter ended September 30, 2022, the federal deferred income tax benefit is primarily due to production tax credits.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
27



NOTE 8. INCOME TAX EXPENSE (Continued)

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

Quarter EndedNine Months Ended
Reconciliation of Taxes from Federal StatutorySeptember 30,September 30,
Rate to Total Income Tax Expense2023202220232022
Millions  
Income Before Income Taxes$88.9 $19.6 $168.3 $74.7 
Statutory Federal Income Tax Rate21 %21 %21 %21 %
Income Taxes Computed at Statutory Federal Rate$18.7 $4.1 $35.3 $15.7 
Increase (Decrease) in Income Tax Due to:
State Income Taxes – Net of Federal Income Tax Benefit8.0 1.1 15.0 6.6 
Deferred Revaluation – Net of Federal Income Tax Benefit   (5.2)
Production Tax Credits (a)
(7.7)(9.7)(28.3)(34.4)
Investment Tax Credits (a)
(1.6)(3.2)(5.2)(3.2)
Regulatory Differences – Excess Deferred Tax(2.3)(1.5)(7.5)(6.7)
Non-Controlling Interest in Subsidiaries3.0 1.4 8.9 8.4 
Other1.2 0.6 2.2 (0.6)
Total Income Tax Expense (Benefit)$19.3$(7.2)$20.4 $(19.4)
(a)For the quarter and nine months ended September 30, 2023, the credits are presented net of any estimated discount on the sale of certain credits.

For the nine months ended September 30, 2023, the effective tax rate was an expense of 12.1 percent (benefit of 26.0 percent for the nine months ended September 30, 2022). The effective tax rates for 2023 and 2022 were primarily impacted by production tax credits.

Uncertain Tax Positions. As of September 30, 2023, we had gross unrecognized tax benefits of $1.1 million ($1.3 million as of December 31, 2022). Of the total gross unrecognized tax benefits, $0.6 million represents the amount of unrecognized tax benefits included on the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as an increase to the net deferred tax liability on the Consolidated Balance Sheet.

ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. The examination by the state of Wisconsin for the tax years 2018 through 2020 has been closed with no findings. ALLETE has no open federal or state audits, and is no longer subject to federal examination for years before 2019, or state examination for years before 2018. Additionally, the statute of limitations related to the federal tax credit carryforwards will remain open until those credits are utilized in subsequent returns.


ALLETE, Inc. Third Quarter 2023 Form 10-Q
28



NOTE 9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 PensionOther
Postretirement
Components of Net Periodic Benefit Cost (Credit)2023202220232022
Millions