Executive Summary / Key Takeaways

• Strategic Transformation Underway: ALLETE is executing a "Sustainability in Action" strategy, transitioning its generation fleet to carbon-free energy by 2040-2050, backed by a robust $4.3 billion regulated capital expenditure plan focused on renewable energy and critical transmission infrastructure.
• Merger Catalyzing Future: The pending acquisition by CPP Investments and Global Infrastructure Partners, approved by the MPUC in October 2025, is expected to close in late 2025, bringing significant capital and strategic alignment to accelerate ALLETE's clean energy goals and potentially offer immediate customer cost savings.
• Regulated Growth Engine: The Regulated Operations segment, expected to contribute approximately 75% of consolidated net income in 2025, is poised for long-term EPS growth of 5-7% from 2025 onwards, driven by substantial investments in transmission projects eligible for cost recovery riders and new wind/solar generation.
• Diversified Earnings & Liquidity: Complementary earnings from ALLETE Clean Energy and New Energy Equity, coupled with strong liquidity from an arbitration award, renewable tax credit monetization, and strategic debt issuances, provide financial flexibility to fund its ambitious capital plan.
• Key Risks to Monitor: Investors should closely watch regulatory outcomes, particularly regarding environmental compliance costs and rate case approvals, as well as operational challenges like industrial customer volatility and potential impacts from the terminated HVDC grant.

A Century of Powering Progress: ALLETE's Green Evolution

ALLETE, Inc. (NYSE:ALE), a diversified energy company headquartered in Duluth, Minnesota, stands at a pivotal juncture, transforming its century-long legacy as Minnesota Power into a leader in the clean energy transition. Incorporated in 1906, the company's evolution from a regional utility to a multi-faceted energy provider underscores a strategic pivot towards sustainability. This journey, marked by its rebranding to ALLETE in 2001 and its achievement of delivering 50% renewable energy by 2020 (nearly 60% in 2022), positions it firmly within the broader industry trend of decarbonization and grid modernization.

The energy sector is currently experiencing unprecedented shifts, driven by ambitious climate legislation, technological advancements in renewables and storage, and increasing demand for reliable, sustainable power. This includes the burgeoning demand from sectors like AI-driven data centers, which are projected to significantly increase electricity consumption. ALLETE's "Sustainability in Action" strategy directly addresses these trends, aiming to lead the way to a truly sustainable clean energy future by balancing environmental stewardship with economic viability for its customers and shareholders.

Competitive Dynamics and Strategic Positioning

In the competitive landscape of the Midwest and Great Lakes regions, ALLETE operates alongside established players such as Xcel Energy (XEL), Alliant Energy (LNT), WEC Energy Group (WEC), and Otter Tail Corporation (OTTR). ALLETE's core business in regulated electric services and renewable energy generation places it in direct competition with these regional utilities.

ALLETE's competitive strengths are rooted in its robust regulatory licenses, which provide stable revenue streams and foster customer loyalty, contributing to consistent cash flow. Its diverse energy portfolio, encompassing coal-fired, biomass co-fired/natural gas, hydro, wind, and solar sources, offers operational resilience and reliability. This diversification helps ALLETE mitigate risks associated with reliance on a single energy source, a factor that can differentiate it from competitors. For instance, while Xcel Energy boasts a larger scale and aggressive clean energy initiatives, ALLETE's specialized focus and regional expertise, particularly in serving industrial customers like the taconite mining industry, provide a localized advantage.

However, ALLETE's smaller scale compared to larger peers like Xcel Energy and WEC Energy Group could translate to slower innovation cycles and potentially lower overall profitability margins. For the nine months ended September 30, 2025, ALLETE's net income attributable to ALLETE was $115.10 million, compared to $128.70 million in the same period of 2024. While direct comparative financial metrics for all competitors are not available, ALLETE's gross profit margin (TTM) stands at 38.73%, operating profit margin (TTM) at 9.24%, and net profit margin (TTM) at 11.04%. These figures reflect a solid, albeit potentially more concentrated, operational base compared to the broader market influence of larger rivals. ALLETE's strategy to remain predominantly a regulated utility while leveraging complementary non-regulated businesses aims to balance this exposure and drive sustained growth.

Technological Edge and Innovation Roadmap

ALLETE's strategic vision is deeply intertwined with its technological advancements and commitment to innovation. The company's core technological differentiators lie in its balanced approach to energy generation and its sophisticated transmission infrastructure.

A key technological focus is the HVDC (High-Voltage Direct-Current) transmission system modernization project. This initiative aims to replace aging critical infrastructure and modernize the terminal stations of its 465-mile, 250-kV HVDC transmission line, which runs from Center, North Dakota, to Duluth, Minnesota. This line is crucial for transporting wind energy from North Dakota and will enhance the reliability and resiliency of the grid across the Upper Midwest. The project, estimated to cost between $800 million and $940 million, is expected to be in service between 2028 and 2030. The tangible benefits include improved system reliability, enhanced resiliency, and expanded operating capacity of the HVDC terminals. For investors, this represents a significant regulated asset base investment that will provide long-term, stable returns through cost recovery mechanisms.

In its generation portfolio, ALLETE utilizes a mix of technologies, including cost-effective emission control technology at its thermal generating facilities, which primarily burn low-sulfur western sub-bituminous coal, natural gas, and biomass. All coal-fired facilities are equipped with pollution control equipment such as scrubbers, baghouses, and low NOX technologies, ensuring compliance with environmental regulations. This commitment to existing asset optimization, alongside the transition to cleaner sources, demonstrates a pragmatic approach to environmental compliance and operational efficiency.

ALLETE's R&D and new technological developments are primarily channeled through its Integrated Resource Plans (IRPs) and its New Energy Equity segment. The 2025 IRP, filed in March 2025, outlines plans to add 400 MW of new wind energy resources by 2035, expand energy storage resources by 100 MW by 2035, and add approximately 1000 MW of natural gas capacity, including the refuel of Boswell Unit 3 to run solely on natural gas by 2030. These initiatives are critical for meeting Minnesota's carbon-free standard and ensuring grid stability during the transition. New Energy Equity, ALLETE's solar and energy storage development arm, focuses on developing and acquiring mid-stage and late-stage renewable energy projects, with a robust pipeline exceeding 2,000 MW across over 20 states. This segment's expertise in solar and energy storage technologies provides a growth avenue and a strategic hedge against volatility in traditional utility operations.

The "so what" for investors is clear: ALLETE's technological roadmap, particularly its investments in HVDC modernization and diversified renewable generation, underpins its competitive moat. These investments enhance grid reliability, facilitate the integration of cost-effective clean energy, and position the company for sustained growth in a decarbonizing economy. The ability to leverage advanced transmission and diverse generation technologies directly contributes to predictable financial performance through regulated returns and expanded market opportunities.

Financial Performance and Operational Momentum

ALLETE's financial performance in recent periods reflects both strategic investments and market dynamics. For the nine months ended September 30, 2025, net income attributable to ALLETE was $115.10 million, or $1.98 per diluted share, a decrease from $128.70 million, or $2.23 per diluted share, in the same period of 2024. This decline was influenced by $8.50 million ($0.15 per share) in merger-related expenses in 2025, compared to $19.50 million ($0.34 per share) in 2024.

The Regulated Operations segment, the cornerstone of ALLETE's business, saw its net income attributable to ALLETE decrease to $93.90 million for the nine months ended September 30, 2025, from $111.90 million in 2024. This was primarily due to lower margins from industrial customers, reduced transmission margins, higher operating and maintenance (O&M) expenses, and increased depreciation expense at Minnesota Power. Partially offsetting these declines were higher margins from residential and municipal customers and increased net income at SWLP due to new rates and higher sales. Utility operating revenue, however, increased by $9.70 million from 2024, driven by higher cost recovery rider revenue and increased kWh sales. Industrial sales, particularly to taconite customers, saw a decrease in 2025, with full-year industrial sales expected to be approximately 6.30 million MWh.

ALLETE Clean Energy reported net income attributable to ALLETE of $4.70 million for the nine months ended September 30, 2025, a significant drop from $10.10 million in 2024. The prior year included a $3.50 million after-tax gain from the sale of the Whitetail wind project. The segment also faced higher operating expenses in 2025 and was negatively impacted in 2024 by a network outage near the Caddo wind energy facility, which increased congestion and reduced sales.

New Energy Equity contributed $15.20 million in net income attributable to ALLETE for the nine months ended September 30, 2025, down from $23.40 million in 2024. This was mainly attributed to the timing of renewable energy project closings, though partially offset by higher earnings from tax equity financed solar facilities and increased investment tax credits.

From a liquidity standpoint, ALLETE maintains a strong position with $78.70 million in cash and cash equivalents and $250.80 million in available consolidated lines of credit as of September 30, 2025. The company's debt-to-capital ratio was approximately 0.41 to 1, well within its covenant of less than or equal to 0.65 to 1.

Cash provided by operating activities was lower in 2025 compared to 2024, primarily due to interim rate refunds and higher inventory payments. However, cash provided by financing activities increased due to higher proceeds from long-term debt issuances, including $150 million of senior unsecured notes in March 2025 and $250 million of first mortgage bonds in July 2025, with the latter earmarked for utility capital expenditures.

Outlook and Growth Trajectory

ALLETE's outlook is anchored by its long-term objective of achieving consolidated earnings per share growth within a range of 5% to 7% starting in 2025, using a 2023 base of $3.60 per share (excluding an arbitration award). This growth is expected to be predominantly driven by its regulated capital expenditure plan, which is projected to reach approximately $850 million in 2025, primarily for Minnesota Power's solar and transmission projects.

For 2024, ALLETE initiated earnings guidance of $3.60 to $3.90 per share. This guidance assumes $64 million for interim rates at Minnesota Power, anticipated taconite production of approximately 35 million tons, and a 6% increase in operating and maintenance expenses over 2023 due to increased staffing and inflationary pressures. ALLETE Clean Energy expects total wind generation of approximately 3.7 million MWh in 2024, assuming normal wind resources, and anticipates continued negative earnings impact from the Caddo wind energy facility's network outage. New Energy Equity is projected to achieve net income of $19 million to $21 million in 2024, representing a 14% increase over 2023, fueled by its robust project pipeline.

The company's 2025 Integrated Resource Plan (IRP) is a key driver for future growth, outlining significant investments in 400 MW of new wind, 100 MW of energy storage by 2035, and 1000 MW of natural gas capacity, including the conversion of Boswell Unit 3 to natural gas by 2030. A 200 MW wind project in North Dakota is also planned for service in late 2027. These projects, many eligible for cost recovery riders, are expected to provide a consistent earnings stream. The North Plains Connector project, a 400-mile HVDC transmission line in partnership with Grid United, represents a significant inter-regional opportunity to enhance reliability and transfer capacity across three U.S. electric energy markets.

Risks and Critical Considerations

While ALLETE's strategic direction is clear, several risks warrant investor attention. The most immediate is the Merger Agreement itself. Although the Minnesota Public Utilities Commission approved the acquisition in October 2025, the transaction's consummation remains subject to the issuance of a final written order, and the pendency of the merger imposes certain operating restrictions on ALLETE. There is also a risk that commitments agreed to with counterparties in Minnesota could impact ALLETE's future results of operations or cash flows.

Regulatory risks are inherent in the utility sector. The outcome of the MPUC proceeding regarding Minnesota Power's prepaid pension asset remains uncertain. Furthermore, the EPA's ongoing reevaluation of numerous environmental regulations, including National Ambient Air Quality Standards (NAAQS), the Good Neighbor Plan, Mercury and Air Toxics Standards (MATS), and Effluent Limitations Guidelines (ELG), introduces uncertainty regarding future compliance costs, which could be material. The estimated compliance costs for the Coal Combustion Residuals (CCR) Legacy Rule at Boswell and Laskin facilities are between $50 million and $85 million over the next 10 years.

Operational challenges also pose risks. The company has experienced volatility in industrial sales, particularly to taconite customers, which can impact regulated margins. ALLETE Clean Energy has faced issues such as historically low wind resources and a forced network outage at its Caddo wind energy facility, affecting earnings. An ash wastewater spill at Boswell in August 2024 has led to remediation costs and potential financial penalties, the total amount of which is currently unpredictable but could be material. Finally, the U.S. Department of Energy's termination of a $50 million grant for the HVDC transmission system project, which ALLETE is contesting, could impact project financing.

Conclusion

ALLETE stands on the cusp of a transformative era, driven by a clear "Sustainability in Action" strategy and a pending acquisition that promises to inject significant capital and strategic alignment. The company's core investment thesis rests on its robust regulated asset base, its commitment to a carbon-free energy future, and the complementary growth from its non-regulated clean energy businesses. The substantial capital expenditure plan, particularly in advanced transmission and renewable generation technologies, positions ALLETE for sustained earnings growth from 2025 onwards, supported by predictable regulatory recovery mechanisms.

While the path forward is not without its challenges, including regulatory uncertainties, operational volatilities, and the complexities of environmental compliance, ALLETE's proactive approach to these risks and its strong liquidity profile provide a degree of resilience. The company's technological leadership in areas like HVDC transmission and its diversified renewable energy portfolio are critical competitive advantages, enabling it to meet evolving energy demands efficiently and reliably. For discerning investors, ALLETE represents an opportunity to participate in the essential transition to a clean energy economy, backed by a century of operational experience and a clear vision for future growth.