Executive Summary / Key Takeaways

• ALLETE, Inc. is executing a significant clean energy transformation strategy, centered on its regulated utility operations and complemented by growth in non-regulated renewables, targeting 5-7% EPS growth from 2025.
• A substantial $4.3 billion regulated capital expenditure plan over five years, focused on renewable generation and critical transmission infrastructure, is the primary driver for future earnings growth.
• The pending acquisition by CPP Investments and GIP at $67 per share, while introducing transaction-related risks and costs, is progressing through regulatory approvals and offers a defined exit value for shareholders.
• Recent financial performance in Q1 2025 reflects the impact of the new Minnesota Power rate case, higher non-regulated renewable project sales, and ongoing merger transaction expenses, alongside operational variances.
• Key risks include the outcome and costs associated with evolving environmental regulations, volatility in industrial customer demand, and the successful execution and regulatory approval of major capital projects.

A Utility's Evolution: Powering the Future Through Strategic Investment

ALLETE, Inc. (ALE) stands at a pivotal juncture, rooted in its long history as a regulated utility primarily serving customers in Minnesota and Wisconsin, while actively reshaping its portfolio to embrace the clean energy future. With a track record of over 74 consecutive years of dividend payments, the company has demonstrated resilience and a commitment to shareholder returns. Its core business, dominated by Minnesota Power and Superior Water, Light and Power (SWLP), provides essential electric, natural gas, and water services under state and federal regulatory frameworks. This foundation is strategically complemented by investments in transmission assets, including an 8% stake in ATC, and a growing presence in the non-regulated renewable energy sector through ALLETE Clean Energy (ACE) and New Energy Equity (NEE).

ALLETE's overarching strategy, "Sustainability in Action," is a deliberate pivot towards decarbonization, grid modernization, and diversified clean energy solutions. This strategy is not merely reactive but aims to position ALLETE as a leader in the energy transition, aligning with ambitious state mandates like Minnesota's requirement for 100% carbon-free energy by 2040. The company's historical journey, marked by a gradual reduction in reliance on coal and early investments in renewables, provides a credible backdrop for its current aggressive capital investment program.

Central to ALLETE's strategic execution is a robust capital expenditure plan, now totaling $4.3 billion in regulated investments over the next five years through 2028 – a significant $1 billion increase from prior plans. This substantial investment is heavily weighted towards regulated assets, particularly in renewable generation and transmission infrastructure. Management explicitly links this CapEx plan to its long-term objective of achieving 5-7% consolidated earnings per share growth starting in 2025, following a transitional 2024 outlook impacted by non-recurring items and project timing.

The company's technological approach is embedded within this investment strategy, focusing on deploying proven and emerging technologies to enhance grid reliability, integrate renewables, and transition its generation fleet. Key initiatives include:

• HVDC Modernization: A critical project ($800-$940 million) to replace aging infrastructure and modernize terminal stations for the 465-mile DC transmission line. This enhances reliability, resiliency, and expands operating capacity, leveraging existing assets for future clean energy delivery. The project has secured significant federal ($50 million DOE grant) and state ($15 million MN funding, $10 million DOC reservation) support, reducing costs for customers. Construction is underway on the Minnesota end, with the North Dakota portion pending approvals.
• Renewable Generation Expansion: Plans to add up to 700 MW of new wind and solar resources identified in the 2021 IRP, with RFPs issued in late 2023/early 2024 for up to 300 MW of solar and 400 MW of wind. These projects, expected to be rider-eligible, emphasize community investment and local labor, aiming for cost-effective integration into the system. The 2025 IRP further outlines adding 400 MW of wind and 100 MW of energy storage by 2035.
• Energy Storage and Natural Gas: The 2025 IRP includes plans to expand energy storage by 100 MW by 2035 and add approximately 1000 MW of natural gas capacity, including converting Boswell Unit 3 to run solely on natural gas by 2030. This reflects a pragmatic approach to maintaining reliability and flexibility as coal generation is phased out.
• Transmission Grid Modernization: Participation in MISO's Long Range Transmission Plan (LRTP) Tranche 1 projects like the Northland Reliability Project (jointly owned, $970-$1300 million total) and the Big Stone South Project (jointly owned, $20 million share) underscores the commitment to strengthening the regional grid. Development of the North Plains Connector, a planned inter-regional HVDC line, aims to connect three major energy markets, enhancing transfer capacity and reliability across a vast area.

While specific, quantifiable performance metrics for every technology type relative to alternatives are not extensively detailed, the strategic intent is clear: leverage these investments to build a more reliable, resilient, and lower-carbon energy system. The focus on HVDC, utility-scale renewables, storage, and flexible gas generation represents a standard utility approach to the energy transition, albeit with a significant scale of investment relative to ALLETE's size. The success of these technological deployments will be measured by their ability to meet reliability standards, integrate seamlessly into the grid, and contribute to achieving carbon reduction targets while managing costs for customers.

Competitive Landscape and Positioning

ALLETE operates within a competitive energy landscape, facing larger, more geographically diverse utilities and specialized renewable energy developers. Key competitors include major investor-owned utilities in the Midwest and neighboring regions such as Xcel Energy (XEL), Ameren Corporation (AEE), Southern Company (SO), Duke Energy Corporation (DUK), and American Electric Power Company, Inc. (AEP).

Compared to these larger peers, ALLETE holds a smaller market share (estimated 1-2% nationally) and generally exhibits lower financial metrics such as Gross Profit Margin (28.84% TTM vs. peers often above 45-50%), Operating Profit Margin (10.86% TTM vs. peers often above 15-20%), and Net Profit Margin (12.10% TTM vs. peers often above 15%). Its Debt/Equity ratio (0.67 TTM) is relatively lower than some peers (XEL 1.55, AEE 1.55, SO 2.00, DUK 1.70, AEP 1.70), suggesting a potentially stronger balance sheet foundation, though its debt-to-capitalization ratio is comparable to peers.

ALLETE's competitive positioning is defined by several factors:

• Regulated Core: Its stable, regulated utility operations provide a predictable revenue base, a key advantage in volatile energy markets. Regulatory licenses act as a significant barrier to entry for direct utility competition in its service territories.
• Regional Expertise: Deep understanding of the specific needs and dynamics of its service region, including significant industrial customers like taconite mines and paper mills, allows for tailored service offerings. However, this concentration also presents a risk due to volatility in these industries.
• Clean Energy Transition Leadership (Regional): ALLETE has been recognized for its renewable energy investments relative to its size and was the first in Minnesota to exceed 50% renewable energy for retail customers. This positions it favorably in a state with aggressive clean energy goals.
• Diversified Portfolio: The inclusion of non-regulated businesses like ACE (wind operations) and NEE (solar development) provides complementary earnings streams and exposure to growth markets beyond its regulated footprint. NEE's focus on community, C&I, and small utility-scale solar offers a distinct niche compared to peers primarily focused on large-scale projects.
• Transmission Focus: Strategic investments in transmission, including participation in MISO LRTP and the ambitious North Plains Connector, leverage its geographic position and aim to enhance grid connectivity and reliability across multiple markets, potentially creating a competitive edge in energy transfer.

While larger peers may have greater scale, financial resources, and potentially more advanced R&D capabilities, ALLETE's strategy focuses on leveraging its regulated base, regional strengths, and targeted investments in clean energy and transmission to drive growth. The success of NEE in the distributed solar market and ACE's ability to optimize its wind fleet and secure new contracts are critical for providing the complementary earnings needed to support the overall growth objective.

Recent Performance and Operational Insights

ALLETE's first quarter 2025 results provided a snapshot of the company's current state amidst its strategic transformation and the ongoing merger process. Net income attributable to ALLETE increased to $56.1 million ($0.97 per diluted share) from $50.7 million ($0.88 per diluted share) in Q1 2024. This increase occurred despite higher merger-related transaction expenses ($2.1 million after-tax in Q1 2025 vs. $1.2 million in Q1 2024).

Segment performance showed varied trends:

• Regulated Operations: Net income decreased to $38.4 million in Q1 2025 from $44.2 million in Q1 2024. This was primarily driven by lower margins from industrial customers (taconite sales accounted for 28% of regulated revenue, down from 32%), higher O&M (including costs related to the Boswell ash wastewater spill), and increased depreciation (partially due to estimated CCR Legacy Impoundment Rule compliance costs). These headwinds were partially offset by higher margins from residential, commercial, and municipal customers (benefiting from colder weather and new SWLP rates) and increased equity earnings from ATC. Operating expenses decreased overall, notably in fuel/purchased power (more company-owned generation) and transmission services (lower MISO costs).
• ALLETE Clean Energy: Net income saw a significant increase to $7.4 million in Q1 2025 from $3.8 million in Q1 2024. This improvement reflects higher production from tax equity financed wind facilities, overcoming challenges faced in Q1 2024, which was negatively impacted by a network outage near the Caddo facility. Operating revenue decreased slightly, influenced by less favorable pricing at Diamond Spring.
• New Energy: Continued its strong performance, with net income more than doubling to $9.2 million in Q1 2025 from $4.0 million in Q1 2024. This growth was fueled by higher sales of renewable energy projects and investment tax credits. Operating revenue increased by 26%.
• Corporate and Other: Shifted from a net loss of $1.3 million in Q1 2024 to net income of $1.1 million in Q1 2025, primarily due to lower income tax expense, partially offset by the higher merger transaction costs.

The Q1 2025 results highlight the mixed operational environment in the regulated segment, influenced by industrial customer dynamics and cost pressures, while demonstrating strong growth momentum in the non-regulated New Energy business and a recovery in ACE performance. The implementation of final rates from the 2024 Minnesota Power rate case in Q1 2025, following the MPUC-approved settlement, is a significant development, though it resulted in a $27.9 million pre-tax reserve for interim rate refunds expected in Q2 2025.

Liquidity and Capital Resources

ALLETE maintains a solid liquidity position to support its operations and ambitious capital plan. As of March 31, 2025, the company held $92.0 million in cash and cash equivalents and had $341.8 million available under consolidated lines of credit. The debt-to-capital ratio stood at 36%, well within the most restrictive financial covenant of 0.65 to 1.00.

Cash flow from operating activities was higher in Q1 2025 compared to Q1 2024, benefiting from the sale of renewable tax credits and favorable working capital timing. However, cash used in investing activities increased significantly due to higher payments for property, plant, and equipment additions, reflecting the ramp-up in capital spending. Financing activities provided cash, driven by proceeds from the issuance of $150 million in senior unsecured notes in March 2025, used for refinancing and general corporate purposes.

The company's capital requirements are substantial, with expected capital expenditures of approximately $900 million in 2025, heavily weighted towards the Regulated Operations segment, particularly the HVDC transmission project. The Merger Agreement includes a provision allowing ALLETE to notify the acquiring parent of its intent to raise up to $300 million in equity capital in the second half of 2025, providing a potential source of funding if needed.

Outlook and Growth Drivers

ALLETE's outlook is firmly focused on executing its strategic plan and achieving its long-term 5-7% EPS growth objective starting in 2025. The 2024 earnings guidance, initiated at $3.60 to $3.90 per share (from the Q4 2023 call), reflects a transitional year impacted by the absence of the 2023 arbitration gain and the timing of capital investments.

The path to the 5-7% growth rate from 2025 is primarily paved by the $4.3 billion regulated CapEx plan. Management anticipates that a significant portion of these investments, particularly in transmission and renewable projects stemming from the RFPs, will be eligible for cost recovery riders. This mechanism allows for faster recovery of capital costs outside of general rate cases, minimizing regulatory lag and enabling more predictable earnings growth. The shift in the timeline for capital deployment related to the RFP outcomes from 2024 to 2025 is the key factor driving the growth acceleration starting in 2025.

Key assumptions underpinning the growth outlook include constructive outcomes in regulatory proceedings (like the recently settled Minnesota Power rate case and future SWLP filings), successful execution of major capital projects (HVDC, LRTP, renewables), continued strong performance and pipeline growth at New Energy, and optimization of the ACE fleet. The 2025 IRP outlines the next phase of resource planning, including further renewable additions, storage, and natural gas capacity, providing visibility into potential future investment opportunities beyond the current 5-year plan.

Risks and Challenges

While ALLETE's strategic direction is clear, several risks and challenges could impact its execution and financial performance:

• Environmental Regulations: The evolving landscape of federal and state environmental regulations (air, water, waste), including potential revisions to NAAQS, the outcome of the Good Neighbor Plan litigation, MATS rule revisions, GHG emission standards under CAA Section 111, and ELG rules, could require material, unbudgeted capital investments and operational changes. The costs associated with CCR compliance, particularly under the new Legacy Impoundment Rule, are significant and subject to regulatory recovery approval. The Boswell ash wastewater spill introduces potential remediation costs that are currently uncertain.
• Regulatory Outcomes: Achieving constructive regulatory outcomes in rate cases and securing approval for cost recovery riders are critical for earning a fair return on investments and recovering necessary expenses. Unfavorable decisions could impact profitability and the ability to fund capital projects.
• Industrial Customer Volatility: The significant concentration of regulated load from industrial customers, particularly taconite mines, exposes ALLETE to fluctuations in commodity prices and production levels. The notice of termination from USS Corporation (X), while not immediate, highlights this long-term risk. The proposed Rate Stabilization Mechanism aims to mitigate this, but its effectiveness depends on regulatory approval and design.
• Project Execution Risk: The successful and timely completion of large, complex capital projects (HVDC, LRTP, renewables) is subject to construction risks, supply chain issues, permitting delays, and cost overruns, which could impact in-service dates and cost recovery.
• Merger Consummation Risk: The pending acquisition is subject to remaining regulatory approvals (primarily MPUC) and other closing conditions. Failure to consummate the merger, or the imposition of burdensome conditions, could negatively impact the company's strategic plans, financial condition, and stock price. The pendency of the merger also imposes certain operating restrictions.
• Credit Ratings: A negative revision to credit ratings, as seen with S&P's outlook change related to the merger, could increase borrowing costs and impact access to capital markets, potentially affecting the funding of the CapEx plan.
• Operational Performance: Factors like weather conditions (wind resources for ACE, heating/cooling demand for Regulated), forced outages (like the one impacting Caddo), and operational efficiency across all segments can impact financial results.

Conclusion

ALLETE is actively navigating a transformative period, leveraging its regulated utility foundation and strategic investments in clean energy and transmission to pursue a clear growth trajectory. The $4.3 billion CapEx plan is the engine for future earnings expansion, supported by a strategy that integrates technological advancements, seeks favorable regulatory treatment, and diversifies revenue streams through non-regulated renewables. While the pending merger introduces a layer of complexity and near-term transaction costs, it also provides a potential catalyst for strategic realignment and access to capital. The company's ability to successfully execute its large-scale projects, manage the financial and operational impacts of evolving environmental regulations, and secure supportive regulatory outcomes will be paramount. For investors, the story centers on the transition from a traditional utility to a cleaner, more modern energy provider, with the potential for regulated asset growth and complementary non-regulated contributions driving the targeted 5-7% EPS growth from 2025, balanced against the inherent risks of large-scale infrastructure development and regulatory uncertainty.