Executives: Alan R. Hodnik - Chairman, President and CEO Steven Q. DeVinck - SVP and

CFO
Analysts: Chris Ellinghaus - Williams Capital Research Paul T. Ridzon - Keybanc Capital Markets Brian J. Russo - Ladenburg Thalmann Glen Pruitt - Wells Fargo

Securities
Operator: Good day and welcome to ALLETE Second Quarter 2016 Financial Results Call.

Today's call is being recorded. Certain statements contained in this conference call that are not descriptions of historical facts are forward-looking statements, such as terms defined in the Private Securities Litigation Reform Act of 1995. Because such statements can include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially from those expressed or implied by such forward-looking statements include but are not limited to those discussed in the filings made by the Company with the Securities and Exchange Commission. Many of the factors that will determine the Company's future results are beyond the ability of management to control or predict.

Listeners should not place undue reliance on forward-looking statements, which reflect management's views only as of the date hereof. The Company undertakes no obligation to revise or update any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise. For opening remarks and introductions, I'd now like to turn the call over to ALLETE President and Chief Executive Officer, Alan R. Hodnik. Sir, you may begin.

Alan R. Hodnik: Good morning, everyone, and thank you for joining us today. With me is ALLETE's Chief Financial Officer, Steve DeVinck. This morning, we reported second quarter financial results of $0.50 per share on net income of $24.8 million. Last year's results were $0.46 per share, which included approximately $0.03 per share of profit from ALLETE Clean Energy's construction of a wind facility for Montana-Dakota Utilities that was completed late in 2015.

As expected, this quarter's results reflect lower sales to Minnesota Power's taconite customers with some mining operations remaining temporarily idled during the quarter. We are seeing positive trends develop on the foreign steel dumping front that have been negatively impacting taconite production on Minnesota's Iron Range since the beginning of 2015. The United States Department of Commerce has made a number of final determinations and continues to pursue additional cases in its duty and antidumping investigations These efforts appear to be having a constructive impact on the levels of imported steel coming into our country. According to the United States Census Bureau, May 2016 year-to-date imports for consumption of steel products are down approximately 30% compared to May of 2015. Consequently, we are pleased that the import share of the domestic market has fallen from a peak of 34% in March of last year to roughly 25% in June of this year.

Throughout this cycle, we have proactively managed our expenses and sold power into the wholesale power market in an effort to mitigate earnings impact. Taconite production cycles are part of Minnesota Power's history as you know and our team is very adroit in dealing effectively with them. Based on nominations received on August 1, Minnesota Power's Large Power taconite customers are expected to operate at approximately 90% of full demand levels for September through December 2016. This compares to the 80% of full demand nomination levels received for the last period. Although taconite production levels remain below full capacity, we are encouraged by Northshore Mining and United Taconite's recently announced restart dates that point to improved overall production levels by Cliffs Natural Resources' customers.

In June, Cliffs Natural Resources extended contracts of Minnesota Power for its United Taconite and Babbitt mine operations under new 10-year agreement. Cliffs also signed its first ever contract with Minnesota Power, a 15-year agreement, to service Northshore Mining operation. In a second quarter conference call to investors, Cliffs' Chairman, Lourenco Goncalves, reaffirmed his commitment to additional investment in their Minnesota mining operation. Upcoming on August 11, I will be joining Minnesota Governor, Mark Dayton, and Cliffs' Chairman, Lourenco Goncalves, as they break ground on a $65 million expansion at the United Taconite plant. United Taconite will produce a new specialized superflux pellet called Mustang which will replace the flux pellet now made at Cliffs' Empire operation in Michigan.

Cliffs' Empire operation in Michigan is scheduled to shut down at the end of 2016. With respect to Cliffs' Northshore Mining operation at Silver Bay, an operation that has historically self generated its electric power, will now be served by a new Minnesota Power contract that represents significant new retail load for Minnesota Power. These recent developments in the mining sector and other forest products related initiatives support our belief in the long-term sustainability and health of Minnesota Power's service territory. Our emerging and complementary Energy Infrastructure and Related Services companies posted financial results generally in line with our expectation and we expect future growth as they execute their strategies. Last year's additions of new wind generation facilities in Southern Minnesota and Pennsylvania are contributing to solid financial performance at ALLETE Clean Energy.

ACE currently owns and operates about 537 MW of fully contracted generating capability and is actively seeking additional opportunities as it answers our nation's call for more renewable energy. We remain excited about the prospects for U.S. Water Services, our newest member to the ALLETE family of businesses. Similar to ALLETE Clean Energy, U.S. Water will further balance and complement our core Regulated businesses while providing long-term earnings growth.

On July 21, our region experienced a broad and devastating storm that included large hail, flooding and straight-line winds reaching 100 miles per hour. These storms left up to 46,000 Minnesota Power customers without electric service. I am proud of our utility teams in Minnesota Power and Superior Water, Light & Power as well as industry mutual-aid partners who braved the aftermath of this storm, an aftermath which included extremely high temperatures and humidity making work on power restoration for our customers and employees even more difficult. I would like to especially thank the outstanding mutual-aid assistance our teams received from Ameren, Interen, MP Technologies and M.J. Electric, along with a multitude of tree removal crews for their help in getting power back up for our customers.

Thoughtful positioning efforts for our Regulated Operations through the EnergyForward initiative in tandem with our Energy Infrastructure and Related Services businesses move ALLETE forward and keep our strategy intact to deliver shareholder value through earnings and dividend growth. I will make some additional comments after Steve takes you through the quarterly financial results. Steve?
Steven Q. DeVinck: Thanks, Al, and good morning everyone. Before I begin, I encourage you to refer to the 10-Q we filed earlier today for more details on the quarter.

For the second quarter of 2016, ALLETE reported earnings of $0.50 per share on net income of $24.8 million and operating revenue of $314.8 million. This compares with $0.46 per share on net income of $22.5 million and operating revenue of $323.3 million in 2015. Net income in 2015 included $1.5 million or $0.03 per share for ALLETE Clean Energy's profit on the wind energy facility sold to Montana-Dakota Utilities in the fourth quarter of 2015. Net income in 2015 also included acquisition cost of $900,000 or $0.02 per share. Earnings from ALLETE's Regulated Operations segment, which includes Minnesota Power, Superior Water, Light & Power, and our investment in the American Transmission Company, were $22.6 million compared with $23.3 million in 2015.

This quarter's results reflect lower industrial sales and higher depreciation and property tax expense, partially offset by increased sales to other power suppliers and lower operating and maintenance expense. In addition, our equity earnings in ATC decreased $400,000 after-tax due to period over period changes in ATC's estimate of a refund liability related to MISO return on equity complaints. Operating revenue from Regulated Operations increased $4.9 million or 2% from 2015, primarily due to higher transmission revenue, pricing under wholesale power sales agreements and FERC formula-based rates, partially offset by lower industrial sales, fuel adjustment clause recoveries and conservation improvement program recoveries. Transmission revenue increased $6 million, primarily due to period over period changes in our estimate of refund liabilities related to MISO return on equity complaints. Despite relatively flat overall kilowatt hour sales, revenue increased $3.8 million from 2015, due mostly to higher pricing on our wholesale power sales agreements compared to last year.

For example, our long-term power sales agreement with Basin provides for increased prices as we invest in environmental upgrades. Kilowatt hour sales to our industrial customers were down as expected due to reduced taconite production. In addition, demand revenue from our industrial customers was down in 2016 as a result of lower demand nominations during the quarter. Revenue from our wholesale FERC customers increased $1.1 million, primarily due to additional environmental upgrades and other investments. Fuel clause recoveries decreased $3.5 million due to lower fuel and purchased power costs attributable to our retail and municipal customers.

On the expense side, fuel and purchased power expense decreased $2 million or 2% from last year, primarily due to lower purchased power prices. Transmission services expense increased $4.8 million for the quarter or 42% from last year, primarily due to period over period changes in our estimate of a refund for MISO transmission expense related to MISO return on equity complaints. Operating and maintenance expense decreased $4.3 million or 7% from 2015, primarily due to lower benefit expenses. In addition, conservation improvement program expenses were $1.7 million less than in 2015 and conservation improvement program expenses are recovered from certain retail customers resulting in a corresponding reduction in revenue. We remain committed to cost containment at Minnesota Power to reduce rate increases for our customers, improve our return on equity over time and mitigate some of the impacts of cyclicality facing our customers in taconite mining.

Depreciation and amortization expense increased $4.6 million or 14% from 2015, primarily due to additional property, plant and equipment in service. Equity earnings in ATC decreased $600,000 or 13% from 2015, due mostly to period over period changes in ATC's estimate of a refund liability related to MISO return on equity complaints. Net income at ALLETE Clean Energy decreased $400,000 and revenue decreased $15.2 million for the second quarter of 2016, primarily due to the construction sale of a wind energy facility to MDU last year. Results for 2015 included $1.5 million of net income and $20.5 million of revenue related to that transaction. 2016 results at ALLETE Clean Energy also included higher earnings attributable to the July 2015 Armenia Mountain acquisition in Pennsylvania.

2016 earnings were also negatively impacted by slightly less than normal late spring wind conditions. U.S. Water, acquired in February of last year, is a leader in integrated water management to a growing number of industrial and commercial customers throughout the United States. Total revenue at U.S. Water Services was similar to the second quarter of last year.

Revenue from chemical sales and related services increased 5% to $27.2 million compared to $25.9 million last year. Revenue from equipment sales and related services was $7 million versus $8.5 million in last year's second quarter. Equipment sales can have more period to period variability than chemical sales. Net income at U.S. Water increased $400,000 this year, due primarily to lower expense related to purchase accounting adjustments.

2016 also reflects increased investments in back-office systems and support at U.S. Water Services as we create a platform for future growth. The Corporate and Other segment, which includes results from BNI Energy, ALLETE Properties and other miscellaneous corporate income and expenses, reported a $1.4 million net loss this quarter compared to a net loss of $4.4 million for the same quarter in 2015. The decreased loss was primarily the result of lower income tax expense. ALLETE's effective tax rate for the quarter ended June 30, 2016 was 15.9%, compared to 22.3% in 2015.

We anticipate the effective tax rate for 2016 will be approximately 16%. In April, we indicated that our full year earnings will likely be in the lower half of our earnings guidance range of $3.10 per share to $3.40 per share. As a result of the potential for higher storm related operating and maintenance expense, slightly higher refund reserves at ATC, and assuming normal weather for the rest of the year, we believe our full-year earnings will likely be at the low end of our earnings guidance range of $3.10 to $3.40 per share. We continue to assess the impact from the recent July storm damage, but estimate restoration could be in the $4 million to $6 million range, some of which will be capitalized. We have filed for regulatory approval to defer the expense portion of the restoration cost, but we cannot predict ultimate approval or timing.

Our estimate of full-year earnings assumes normal weather patterns for the remainder of the year. Warmer than normal winter weather at Minnesota Power and slightly less than normal late spring wind conditions at ACE have negatively impacted earnings by approximately $0.05 per share in the first half of 2016. Beneficial weather conditions in the second half of the year could slightly improve our full year outlook. Minnesota Power will be filing in the fourth quarter a request with the Minnesota Public Utilities Commission to increase base retail electric rates. The request will focus on seeking recovery of investments that have enhanced and added resiliency to the region's electric system.

These investments have included upgrading thermal generating units, repairing and strengthening our hydroelectric generating resources, investments in new and existing transmission assets to improve reliability, and modernizing distribution and customer systems. It has been almost seven years since Minnesota Power last sought a general rate increase. Minnesota Power plans on requesting interim rates from the MPUC that if approved would be implemented in early 2017. Details about the size and other attributes of the case will be disclosed when the case is filed. ALLETE's financial position continues to be solid.

Cash from operating activities was $146.2 million and our debt to capital ratio was 46% as of June 30, 2016. We are an organization committed to financial discipline as we execute on delivering value to our shareholders. Al?
Alan R. Hodnik: Thank you for the financial update, Steve. I have a few more comments and updates to make before Steve and I take your questions.

ALLETE is a growing energy company that provides sustainable energy solutions through our initiatives at our Regulated utility businesses and at our complementary Energy Infrastructure and Related Services businesses. First, regarding Minnesota Power's EnergyForward initiative, Minnesota Power is moving forward with significant progress on its EnergyForward strategy and the balancing of its energy supply. We are focused on making strategic investments to reduce emissions, add renewable energy and build transmission, which will answer the nation's call for cleaner energy forms. Minnesota Power's proposed Great Northern Transmission Line continues to attract national attention and support. Recently, during a North American Clean Energy and Environmental Partnership Summit supported by Canadian Prime Minister Justin Trudeau, Mexican President Enrique Pena Nieto, and President Barack Obama, the Great Northern Transmission Line was called out as a cross-border initiative in support of a common North American commitment to the advancement of clean and secure power.

We anticipate a final decision on the Presidential permit for the project by the United States Department of Energy very soon. Minnesota Power expects to begin construction on the transmission line in 2017. This project will provide investment and growth opportunities through the end of the decade as it positions Minnesota Power to move carbon-free hydroelectric generation from Canada into Minnesota and the Upper Midwest. With respect to natural gas generation, Minnesota Power continues to pursue this option as part of its Integrated Resource Plan recently approved by the Minnesota Public Utilities Commission. Secondly, regarding new industrial load in our region, our natural resource based economy and proximity to energy-rich Canada and North Dakota provide ALLETE with a unique mix of business opportunities to fuel earnings growth and investment for the future.

PolyMet's proposed copper, nickel and precious metal mining operation in Northeast Minnesota is making significant progress as it moves along in the permitting process. Since receiving a determination of adequacy on its final Environmental Impact Statement from the Minnesota Department of Natural Resources in March, PolyMet has started to file permit applications required prior to construction and operation of the mine. Critical water related permits were filed in early June with the permit to mine submittal to be forthcoming. Minnesota Power would begin to supply between 45 MW and 50 MW of new load to a 10-year power supply contract that would begin upon startup of the mining operations. As you may have read in the press, the Essar project has filed for bankruptcy protection.

Although this development is certainly a bump in the road in the near-term, we believe that engagement from Governor Dayton and State of Minnesota officials will set the stage for more clarity on direction from this point forward. Cliffs Natural Resources has publicly shared a view that the Essar site is favorable for a direct reduced iron facility and enhanced product suitable for use in electric arc furnaces. We have and continue to support this project regardless of ownership status. We continue to believe that it is not a matter of 'if', only a matter of when the Essar facility begins producing next-generation iron ore products. The project as currently designed would bring up to 110 MW of new load in Minnesota Power's wholesale municipal segment once it reaches full production levels and by taking service from the City of Nashwauk.

The quality of the ore body is one of the best in the region and there has been over $1 billion worth of investment made at the Essar site to date. We are very excited about a new development which supports the strength of our resource based service territory. This excitement resulted in a recent announcement by Louisiana Pacific, a Fortune 500 company that is considering the construction of a $440 million home siding manufacturing plant in Minnesota Power's service territory. As proposed, the plant would employ 250 people utilizing Northeastern Minnesota's vast timber resources to produce home siding that is long-lasting due to it being more resistant to insects and weather than other siding options. The Louisiana Pacific plant will be a nice fit at Minnesota Power's Laskin Energy Park.

We expect to hear more about this project and what it means for new electric load as Louisiana Pacific finalizes the details of the planned facility. Regarding our complementary Energy Infrastructure and Related Services businesses, ALLETE Clean Energy and U.S. Water Services strategies are positioned to serve our country with cleaner energy sources and conservation, cleaner energy sources and conservation which we believe are already or will be driven by rising societal expectations, enhanced regulation and natural resource scarcity. ALLETE Clean Energy's wind facilities are running as expected in their respective regions, but naturally have some variability depending on wind patterns. ACE's portfolio of generation is positioned for earnings growth in 2016 with the wind energy facilities it acquired during 2015.

Additional facilities will be considered for ACE's portfolio supported by financial discipline and long-term power sales agreements. We expect U.S. Water Services to further complement our core Regulated Operations and balance our exposure to business cycles. Financial performance is generally what we expected at this stage and we continue to invest in back office systems and support to ensure a sound platform for future growth. The Company continues to look for strategic tuck-in acquisitions which expand its geographic reach, bring in new customers and diversify its customer base.

Thank you for your time and for your investment with us. At ALLETE, we are confident in our ability to deliver sustainable shareholder value through earnings and dividend growth. At this time, I will ask the operator to open up the line for your questions.

Operator: [Operator Instructions] Our first question comes from Chris Ellinghaus of Williams Capital. Your line is now open.

Chris Ellinghaus: Steve, I think you picked this up correctly, I think you mentioned that the CIP was down $1.7 million for the quarter, is that correct?
Steven Q. DeVinck: Both expense and revenue.

Chris Ellinghaus: Okay. Should we be expecting recognition in the third quarter to be down, as we sort of have seen in recent memory?
Steven Q. DeVinck: There's two components to the CIP program.

One is a flow-through, which means that as expense goes up or down, revenue goes up or down correspondingly, and that's what I referred to today. There's also a financial incentive that is approved annually, and you've probably heard us talk about that or disclose that, and that likely will be – it has been recently approved, the financial incentive for 2016, it will likely be recorded in the third quarter.

Chris Ellinghaus: Okay, great. As far as the nominations go, was the change primarily UTAC and was there any change in Keetac at all?
Steven Q. DeVinck: That's correct, the change was primarily United Taconite.

Keetac remains idled at this time.

Chris Ellinghaus: Okay. Can you give us a little color on your expectations with the RFP?
Alan R. Hodnik: The Public Utilities Commission recently approved our Integrated Resource Plan as you know, and in response to the MPUC's July 18 order approving that plan, we are issuing RFPs for potential additional renewable supply options as well as potential demand response or customer co-generation resources before we advanced any new long-term generation resources that would be intended to meet MP's needs over the next decade. So it's a response to an MPUC request and it's too early to say where that's going to go at the moment, but the RFPs are out there.

Chris Ellinghaus: Okay. And one last thing, can you give us a little color on Northshore and how we should anticipate that contract affecting Minnesota Power going forward sort of vis-a-vis the two units there at Northshore and how that might get phased out and how you might phase in that load?
Steven Q. DeVinck: Sure. So there is approximately just under 100 megawatts of generation on that site and it's comprised of two units. Initially one unit will be shut down and we will serve Northshore mine that load for the one unit that's shut down.

In two or three years, the other unit will be shut down and we will provide their full requirements. That unit is a critical element to the transmission grid in Northern Minnesota, so it can't all be taken down at once until some of the required improvements to the transmission grid are made so that both units can be taken out.

Chris Ellinghaus: Okay, great. Thanks for the details.

Operator: Our next question comes from Paul Ridzon of Keybanc.

Your line is now open. Paul T. Ridzon: What's the statutory timeline in Minnesota, is it 11 months to adjudicate a case?
Alan R. Hodnik: I believe it's 10 months but the Commission has the ability to extend that. Paul T.

Ridzon: And the storm cost, I think you said $2 million to $4 million or $4 million to $6 million, what did you say?
Steven Q. DeVinck: We estimate it currently at $4 million to $6 million, some portion of which will be capitalized. Paul T. Ridzon: And is that pre-tax or after tax?
Steven Q. DeVinck: That is pre-tax.

Paul T. Ridzon: And no word yet as to whether you'll be able to defer the O&M piece of that?
Steven Q. DeVinck: Not yet. We just filed that request this week. Paul T.

Ridzon: How long should that take to get an answer?
Steven Q. DeVinck: I'm not totally sure on that. Hopefully, we'd get an answer before the end of the year. Paul T. Ridzon: Okay, thank you very much.

Operator: Our next question comes from Brian Russo of Ladenburg Thalmann. Your line is now open. Brian J. Russo: Is there a scenario in which ALLETE Clean Energy could submit a proposal in this 300 MW RFP process, considering their expertise in constructing wind farms and operating them, et cetera?
Steven Q. DeVinck: Sure, that is possible.

We'd have to pass affiliated interests requirements and things like that, but ALLETE Clean Energy certainly has the expertise and does have some land options in North Dakota. So, yes, that is possible. Brian J. Russo: Okay, so it's something you guys are considering?
Steven Q. DeVinck: Yes.

Brian J. Russo: And when will the RFP be concluded?
Alan R. Hodnik: We're expecting that process to sort of wrap-up in area of sometime in late October or early November, and then we would move into an assessment period during the month of November as we get these RFPs back, so kind of that end of the year timeframe. Brian J. Russo: Okay, great.

And then could you just comment on the existing ACE PPAs and kind of a rough timeline of when those PPAs expire?
Steven Q. DeVinck: Sure. We disclosed that. So those expiration dates are in our 10-Q. So, Brian, if I could refer you to that, that would probably be best.

Brian J. Russo: Yes, that's okay. Would you say the peak-time PPAs are above market, given where we've seen wholesale power prices in the region?
Steven Q. DeVinck: They are a mixture of both above and below market. Brian J.

Russo: Okay, great. Thank you.

Operator: Our next question comes from Glen Pruitt of Wells Fargo. Your line is now open.

Glen Pruitt: I was wondering if you could comment on repowering opportunities at ALLETE Clean Energy related to wind projects, given the IRS clarification on PTCs.

Alan R. Hodnik: Sure. This is Al. There are opportunities to repower the wind facilities that we have. Some of the facilities that we picked up in the Midwest for example are of a slightly older vintage, and so certainly that's a consideration for ALLETE Clean Energy at those sites.

And frankly, if we were to look at other sites to acquire and there was potential to do some upgrading with those as well, that would certainly be in ACE's thinking.

Glen Pruitt: Okay, great. So no specific projects right now that you're looking at but there are opportunities?
Alan R. Hodnik: There's opportunities but nothing specific at this point, Glen.

Glen Pruitt: Okay, great.

Thank you.

Operator: At this time, I'm showing there are no further participants in the queue. I would like to turn the call over to ALLETE President and Chief Executive Officer, Alan R. Hodnik, for any closing remarks. Alan R.

Hodnik: Steve and I thank you again for being with us this morning and also for your investment and continued interest in ALLETE. We'll see you sometime up the road here as Steve and I get out to site visits. Thank you very much.

Operator: Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program.

You may now disconnect. Everyone have a great day.