Executive Summary / Key Takeaways

• Regulated Utility Transformation at Scale: ALLETE is executing a $4.3 billion capital investment program through 2028 to modernize its transmission infrastructure and transition Minnesota Power to 100% carbon-free energy by 2040, creating a potential 14% rate base CAGR that could drive earnings growth if regulators provide timely cost recovery.

• Industrial Concentration Is a Double-Edged Sword: With approximately 49% of regulated utility sales tied to taconite mining customers facing production cuts and contract terminations, ALLETE's earnings power is directly exposed to commodity cycles, creating volatility that diversified peers avoid but also offering upside if steel demand recovers.

• Merger Creates Both Opportunity and Uncertainty: The pending $6.2 billion acquisition by Canada Pension Plan and Global Infrastructure Partners, approved by Minnesota regulators in October 2025, provides access to deep capital markets but introduces execution risk and has already triggered $8.5 million in after-tax transaction costs through Q3 2025.

• Clean Energy Segments Face Growing Pains: ALLETE Clean Energy and New Energy Equity collectively represent the growth engine but generated only $20.4 million in net income through nine months of 2025, down from $33.5 million in 2024, reflecting project timing issues, network outages, and historically low wind conditions that highlight the operational challenges of renewable development.

• Valuation Reflects Execution Discount: Trading at $67.65 with a 23.7x P/E and 4.3% dividend yield, ALLETE trades at a modest premium to some utility peers but offers a unique combination of regulated utility stability and clean energy optionality, with the merger providing a potential catalyst if the new owners can accelerate capital deployment and improve regulatory relationships.

Setting the Scene: A 119-Year-Old Utility at the Crossroads

ALLETE, incorporated in 1906 as Minnesota Power, has spent over a century building a vertically integrated energy business in the Upper Midwest. Headquartered in Duluth, Minnesota, the company operates through three distinct segments: Regulated Operations (primarily Minnesota Power and Superior Water, Light and Power), ALLETE Clean Energy (wind development), and New Energy Equity (solar development). This structure positions ALLETE as both a traditional rate-regulated utility and a renewable energy developer, a dual identity that defines its strategic opportunities and operational challenges.

The company's core business model relies on earning a regulated return on equity through Minnesota Power's electric service to approximately 150,000 retail customers and 14 municipal customers in northeastern Minnesota. This regulated foundation provides predictable cash flows and a built-in cost of capital, but it also ties ALLETE's fortunes to regulatory decisions at the Minnesota Public Utilities Commission (MPUC) and the economic health of its industrial customer base, which consumed 49% of kilowatt-hour sales through the first nine months of 2025.

ALLETE's place in the industry value chain reflects its regional focus and asset-heavy strategy. Unlike national utilities with diversified geographic footprints, ALLETE has concentrated its capital in the Lake Superior region, building a 465-mile HVDC transmission line from Center, North Dakota to Duluth that represents a critical but aging piece of infrastructure. This transmission network, combined with the company's 1,600 MW of wind capacity and growing solar development pipeline, creates a vertically integrated platform that can generate, transmit, and distribute clean energy—if the company can execute its capital plan on time and on budget.

The broader industry context creates both tailwinds and headwinds. Minnesota's 2023 legislation mandating 100% carbon-free electricity by 2040 provides regulatory clarity and a clear investment roadmap, but it also forces ALLETE to retire coal plants and build replacement capacity during a period of high interest rates and supply chain constraints. Meanwhile, the data center boom driving 9% annual electricity demand growth nationally could benefit ALLETE's transmission assets, but only if the company can complete its $800-940 million HVDC modernization project by the 2028-2030 target date.

Technology, Products, and Strategic Differentiation

ALLETE's competitive moat rests on three pillars: its irreplaceable transmission infrastructure, its integrated clean energy development capability, and its deep regulatory relationships in a politically sensitive region. These assets are not easily replicated and provide tangible economic benefits, but they also concentrate risk in ways that matter for investors.

The HVDC transmission system represents ALLETE's most valuable physical asset. This 465-mile line, built decades ago, connects the lignite coal fields of North Dakota with the industrial load centers of Minnesota's Iron Range. The current $800-940 million modernization project will replace aging infrastructure and upgrade terminal stations, effectively doubling the line's capacity and reliability. Why does this matter? Because transmission capacity is the ultimate bottleneck in the clean energy transition. While wind and solar projects can be built relatively quickly, new transmission lines require a decade or more to permit and construct. By modernizing existing rights-of-way, ALLETE can capture the value of renewable energy development in North Dakota without the political and regulatory risks of greenfield transmission projects. The project received $15 million in state funding and a $50 million federal grant (subsequently terminated in October 2025, creating a new risk factor), demonstrating both government support and the fragility of subsidy programs.

ALLETE Clean Energy's 1,600 MW wind portfolio provides a second layer of differentiation. Unlike pure-play renewable developers who must sell power at merchant prices or negotiate power purchase agreements from scratch, ALLETE can develop wind projects specifically to serve its regulated utility customers, capturing development margins at both the project level and the rate base level. The five-year PPA with Seattle City Light for the 50 MW Condon wind site in Oregon, signed in July 2023, demonstrates the segment's ability to attract municipal customers and diversify revenue streams beyond Minnesota. However, the segment's performance has been volatile, with net income falling to $4.7 million in the first nine months of 2025 from $10.1 million in 2024, reflecting both the timing of project sales and operational issues like the network outage near the Caddo facility that management expects will continue impacting earnings.

New Energy Equity, acquired in April 2022, provides the solar development capability that rounds out ALLETE's clean energy platform. With over 2,000 MW of projects in development across more than 20 states, New Energy has quickly become a top-tier solar developer in Virginia, Illinois, and Minnesota. The segment's business model—developing projects for both external sale and internal ownership—creates optionality that pure developers lack. However, the segment's net income declined to $15.2 million in the first nine months of 2025 from $23.4 million in 2024, primarily due to the timing of project closings, highlighting the lumpy nature of development revenue and the challenge of scaling a business that depends on regulatory approvals and interconnection queue positions.

Financial Performance & Segment Dynamics: The Numbers Tell a Story of Transition

ALLETE's consolidated financial results for the nine months ended September 30, 2025, reveal a company in transition. Net income attributable to ALLETE fell to $115.1 million ($1.98 per diluted share) from $128.7 million ($2.23 per share) in the comparable 2024 period, a 10.6% decline that reflects both merger-related costs and fundamental pressures in the core regulated business. The $8.5 million in after-tax merger expenses, while significant, only partially explains the earnings shortfall. The real story lies in the segment dynamics and the erosion of industrial sales.

Regulated Operations, which management expects to contribute approximately 75% of consolidated net income in 2025, generated $93.9 million through nine months, down from $111.9 million in 2024. This 16% decline stems from multiple factors that matter for the investment thesis. First, margins from industrial customers compressed as taconite production fell and USS Corporation (X) provided four-year notice of contract termination effective January 2029. Second, transmission margins declined despite increased MISO-related revenue, suggesting pricing pressure or cost inflation in grid services. Third, operating and maintenance expenses rose while depreciation increased, reflecting both inflationary pressures and the capital investment cycle. These headwinds were partially offset by higher margins from residential and municipal customers, who benefited from colder winter weather in Q1 2025, and by new rates at Superior Water, Light and Power that boosted that subsidiary's earnings.

The revenue composition shift is telling. Utility operating revenue increased $29.5 million year-over-year to $958.1 million, driven by a $20.5 million increase in kilowatt-hour sales revenue from residential, commercial, and municipal customers, plus $20 million in higher cost recovery rider revenue. However, fuel adjustment clause revenue decreased, and industrial sales declined. This mix shift matters because residential and small commercial customers generate higher margins and more stable cash flows than large industrial customers, but they also require more infrastructure investment per dollar of revenue. The net effect is a business that is becoming more stable but less profitable in the near term.

ALLETE Clean Energy's performance illustrates the challenges of renewable operations. The segment's $39.7 million in operating revenue through nine months 2025, down from $65.1 million in 2024, included a $22.9 million headwind from the 2024 sale of the Whitetail wind project. Absent that sale, revenue would have been roughly flat, reflecting less favorable pricing at Diamond Spring offset by higher production at tax equity-financed facilities. Net income fell to $4.7 million from $10.1 million, with the $3.5 million after-tax gain on Whitetail in 2024 explaining about half the decline. The remainder reflects higher operating expenses and the lingering impact of the Caddo network outage, which management has warned will continue affecting earnings.

New Energy Equity's $51.9 million in revenue, down from $77.2 million in 2024, demonstrates the timing risk inherent in project development. The $25.3 million decline reflects lower project sales, partially offset by higher earnings from tax equity-financed facilities and increased investment tax credits. Net income fell to $15.2 million from $23.4 million, a 35% decline that underscores the challenge of scaling a development business while maintaining profitability. The segment's $36.1 million in capital expenditures, up from $13.3 million in 2024, shows management is investing in growth, but the payoff timing remains uncertain.

Corporate and Other swung from a $16.7 million net loss in 2024 to $1.3 million in net income in 2025, entirely due to lower merger-related expenses ($8.5 million after-tax in 2025 versus $19.5 million in 2024). This segment includes BNI Energy's coal mining operations, which face their own headwinds from lower production and environmental compliance costs, and ALLETE Properties' legacy Florida real estate, which generates minimal earnings.

The balance sheet reflects the capital intensity of the transformation. As of September 30, 2025, ALLETE held $78.7 million in cash and $250.8 million in available credit lines, against $537.8 million in year-to-date capital expenditures. The debt-to-capital ratio stood at 40%, below the 65% covenant limit but elevated compared to the 35% level at year-end 2023. The company issued $150 million in senior unsecured notes in March 2025 and $250 million in first mortgage bonds in July 2025, demonstrating access to capital but also the need to fund growing investment.

Outlook, Management Guidance, and Execution Risk

Management's long-term objective of 5-7% consolidated EPS growth, using 2023's $3.60 base (excluding the $0.71 arbitration award), anchors the investment thesis. This guidance implies earnings of $4.00-$4.30 per share by 2027, a trajectory that requires successful execution across multiple fronts. The company's $4.3 billion five-year capital investment plan, increased by $1 billion in late 2023, is the engine of this growth, with spending weighted toward 2025 and beyond as renewable and transmission projects move from development to construction.

The 2025 outlook assumes industrial sales of approximately 6.30 million MWh, reflecting lower taconite customer demand. This assumption is critical because every 1 million MWh of industrial sales represents approximately $15-20 million in revenue and potentially $5-8 million in net income, given the higher margins on large customer contracts. If Cleveland-Cliffs (CLF)' March 2025 announcement to idle its Minorca Mine and partially idle Hibbing Taconite, combined with USS Corporation's January 2025 notice of contract termination effective 2029, leads to permanent load loss, the earnings growth trajectory would require even greater contributions from regulated rate base additions or clean energy development to compensate.

Regulatory outcomes will determine whether the capital plan translates to earnings. The MPUC's October 2025 approval of the merger included commitments that likely involve continued investment in clean energy and grid modernization, but the specific terms remain confidential. More importantly, Minnesota Power's pending rate case, which seeks to incorporate cost recovery riders into base rates, will establish the regulatory framework for earning on the HVDC project and renewable investments. Management has signaled a preference for "more frequent, smaller, simpler rate cases" and rider mechanisms that allow cost recovery outside base rate proceedings, a strategy that could reduce regulatory lag but requires ongoing MPUC approval.

The clean energy segments' outlook depends on execution rather than market opportunity. ALLETE Clean Energy targets acquisitions or development of operating portfolios with long-term power sales agreements, focusing on repowering and recontracting opportunities. New Energy Equity's 2,000 MW development pipeline provides a visible growth path, but the segment's 2024 guidance of $19-21 million in net income (a 14% increase over 2023) appears optimistic given the 2025 year-to-date performance of $15.2 million. The key variable is project closing timing, which can shift dramatically based on interconnection approvals, tax credit monetization, and buyer financing.

The merger's impact on execution remains the largest unknown. CPP and GIP's expertise in infrastructure could accelerate project development and improve capital efficiency, but the transition to private ownership may alter strategic priorities. The $6.2 billion valuation, representing a premium to the pre-announcement trading price, suggests the buyers see value in the asset base and development pipeline that public markets have undervalued. However, the merger also imposes operating restrictions during the pendency period and could result in commitments that affect future rate recovery or environmental compliance strategies.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis faces four material risks that could fundamentally alter ALLETE's earnings power and valuation. Each risk directly impacts the central narrative of regulated utility transformation supplemented by clean energy growth.

Industrial Customer Concentration and Demand Destruction: Approximately 49% of regulated utility sales depend on taconite mining customers operating in a cyclical, commodity-driven industry. Cleveland-Cliffs' March 2025 announcement to idle its Minorca Mine and partially idle Hibbing Taconite, combined with USS Corporation's January 2025 notice of contract termination effective 2029, creates a structural headwind. If steel demand weakens further due to macroeconomic slowdown or trade policy changes, ALLETE could lose 2-3 million MWh of annual sales, representing $30-50 million in revenue and $10-15 million in net income that would be difficult to replace quickly through rate base growth alone. The asymmetry works both ways: a steel industry recovery would provide upside, but the risk of permanent demand destruction is higher than for diversified utilities.

Regulatory Lag and Cost Recovery Uncertainty: The HVDC transmission project's $800-940 million price tag and the broader $4.3 billion capital plan require timely regulatory approval of cost recovery mechanisms. The October 2025 termination of the $50 million Department of Energy grant for the HVDC project illustrates how external factors can increase project costs and reduce returns. If the MPUC denies full cost recovery, delays rate case decisions, or imposes rate caps that prevent earning the authorized return on equity, the 14% rate base CAGR will not translate to 5-7% EPS growth. The June 2025 MPUC hearing to reopen the record on Minnesota Power's prepaid pension asset demonstrates how regulatory decisions can retroactively affect cost recovery, creating earnings volatility.

Environmental Compliance and Remediation Costs: The August 2024 Boswell Ash Wastewater Spill has already cost $2.4 million in remediation through Q3 2025, with total costs and potential penalties unknown. More significantly, compliance with the Coal Combustion Residuals rule is estimated to cost $50-85 million over the next decade for Boswell and Laskin facilities. While Minnesota Power would seek recovery through rate proceedings, the timing mismatch between spending and recovery could pressure cash flows and credit metrics. New environmental regulations for air quality, water discharge, and greenhouse gas emissions could impose additional material costs that regulators may be reluctant to fully approve in rates, particularly given the political sensitivity of utility bills in a state with ambitious clean energy mandates.

Merger Execution and Strategic Drift: The pending acquisition by CPP and GIP, while providing capital, introduces execution risk during a critical investment period. Operating restrictions during the pendency period may limit management's ability to pursue opportunistic acquisitions or adjust strategy. Post-closing, the new owners may prioritize financial returns over the current management's balanced approach to clean energy transformation, potentially slowing investment in the HVDC project or renewable development if returns appear inadequate. The May 2024 S&P Global Ratings outlook revision to negative, citing potential for higher leverage and weaker financial measures due to the merger, signals that credit markets view the transaction as potentially credit-negative, which could increase future borrowing costs.

Valuation Context: Pricing the Transformation

At $67.65 per share, ALLETE trades at a 23.7x price-to-earnings ratio on trailing earnings of $2.85 per share, a modest premium to the utility peer group average of 20-22x. The 4.32% dividend yield exceeds most peers, with Alliant Energy (LNT) yielding 3.05%, Black Hills (BKH) 3.80%, IDACORP (IDA) 2.74%, and Evergy (EVRG) 3.74%. This yield premium reflects both ALLETE's higher payout ratio (101.6% versus peer averages of 60-75%) and market skepticism about earnings sustainability.

Enterprise value of $6.09 billion represents 4.06x trailing revenue, slightly below the peer average of 4.5-5.5x, suggesting the market assigns a discount to ALLETE's business mix. The EV/EBITDA multiple of 14.08x is in line with peers, indicating the market views the company's cash generation as adequate but not exceptional. The price-to-operating cash flow ratio of 11.47x compares favorably to LNT's 14.79x and IDA's 11.53x, suggesting the market may be undervaluing ALLETE's cash generation capacity.

The balance sheet metrics support a reasonable valuation but highlight capital constraints. Debt-to-equity of 0.67x is moderate compared to LNT's 1.63x and EVRG's 1.42x, providing headroom for additional borrowing to fund the capital plan. However, the 40% debt-to-capital ratio is approaching the upper end of management's target range, and the 1.32% return on assets and 2.58% return on equity significantly trail peer averages of 2.5-3.5% and 8-12% respectively. This underperformance reflects both the industrial sales decline and the capital investment phase, where projects under construction generate costs but no earnings.

The pending merger at $67.65 per share sets a floor on valuation but also a ceiling, as the market is unlikely to price in significant upside beyond the deal price unless the transaction collapses. The 101.6% payout ratio raises questions about dividend sustainability, particularly if industrial sales continue declining and clean energy segments don't scale as projected. However, the company's $78.7 million cash position and $250.8 million in available credit lines provide near-term liquidity to fund the capital plan without immediate equity issuance.

Conclusion: A Transformation Story with Execution Risk and Regulated Upside

ALLETE stands at the intersection of two powerful trends: the mandated clean energy transition in Minnesota and the industrial decline of the Iron Range. The company's $4.3 billion capital investment plan, anchored by the HVDC transmission modernization and renewable energy development, creates a credible path to 5-7% EPS growth if execution aligns with regulatory approvals. The pending merger with CPP and GIP provides the capital and expertise to accelerate this transformation, but also introduces uncertainty during a critical implementation phase.

The investment thesis hinges on three variables: the stability of industrial demand from taconite customers, the MPUC's willingness to provide timely cost recovery for massive capital investments, and the clean energy segments' ability to scale from lumpy project developers into consistent earnings contributors. Current valuation at $67.65 appears reasonable, offering a 4.3% dividend yield while pricing in execution risk that peers with more diversified customer bases don't face.

For long-term investors, ALLETE represents a regulated utility with a clean energy call option. The regulated operations provide downside protection through rate base growth and cost recovery mechanisms, while the clean energy segments offer upside if project development accelerates and tax credit monetization improves. However, the concentration risk in industrial customers and the regulatory complexity of the transformation create a narrower margin of safety than diversified utilities. The merger provides a catalyst, but the ultimate success depends on whether new ownership can navigate the delicate balance between earning regulatory returns and meeting Minnesota's ambitious clean energy timeline.