Executive Summary

Q4 2015 diluted EPS was $0.37 vs $0.73 in Q4 2014, reflecting a non-cash ALLETE Properties real estate impairment and higher cost of sales; revenue grew 31% year over year to $380.6M driven by Energy Infrastructure and Related Services and sales to other power suppliers .
Management maintained 2016 EPS guidance of $3.10–$3.40, underpinned by regulated cost control, rider recovery, and growth at ALLETE Clean Energy (ACE) and U.S. Water; 2016 effective tax rate guided to ~20% .
Q4 included a $22.3M after-tax ($0.46) non-cash impairment at ALLETE Properties tied to a potential bulk sale below book value; updated depreciated book value for the Florida assets is ~ $50M .
Key 2016 demand swing factor: Minnesota Power’s taconite customers nominated ~80% capacity for the first four months of 2016; guidance midpoint assumes ~35M tons of taconite production vs ~41M capacity; no Essar sales assumed in 2016 .
Dividend increased by $0.06 annually on Jan 22, 2016; cash from operations rose to $340.1M in 2015; year-end debt-to-capital was 47% .

What Went Well and What Went Wrong

What Went Well

Cost containment: Operating and maintenance expense at regulated operations declined $11.2M (5%) vs 2014 despite new Bison wind O&M; management remains committed to further O&M discipline to improve ROE and moderate rate needs .
Tax efficiency: 2015 effective tax rate fell to 15.2% on higher production tax credits from Bison wind additions; 2016 effective tax rate expected at ~20% .
Strategic/operational execution: Thomson Hydro returned to full production (~70 MW) after ~$90M restoration; ACE closed/acquired multiple wind assets and completed the Thunder Spirit build-transfer at year-end; Minnesota Power advanced the Great Northern Transmission Line (GNTL) permitting .

What Went Wrong

Impairment: Recorded a non-cash ALLETE Properties impairment of $22.3M after-tax ($0.46/share) in Q4 2015 due to considering a potential bulk sale below book value; management disclosed no firm sale but plans to redeploy proceeds to core strategy .
Industrial load headwinds: Industrial kWh fell to 1,572M in Q4 from 1,972M a year ago; industrial revenue fell to $103.7M from $118.1M, reflecting reduced taconite production amid steel dumping pressures .
Transmission/ROE items: Minnesota Power recorded ~$1.6M after-tax estimated refunds tied to MISO ROE compliance; ATC equity earnings included a ~$3.0M after-tax charge for the same matter .

Financial Results

Quarterly sequential trend (current year)

Metric	Q2 2015	Q3 2015	Q4 2015
Operating Revenue ($M)	$323.3	$462.5	$380.6
Diluted EPS ($)	$0.46	$1.23	$0.37

Year-over-year (Q4)

Metric	Q4 2014	Q4 2015
Operating Revenue ($M)	$290.7	$380.6
Operating Income ($M)	$51.5	$29.6
Net Income Attributable to ALLETE ($M)	$32.9	$18.3
Diluted EPS ($)	$0.73	$0.37
Income Tax Expense (Benefit) ($M)	$9.6	$(1.7)
Impairment of Real Estate ($M)	—	$36.3

Segment net income (Q4 and FY)

Segment	Q4 2014 ($M)	Q4 2015 ($M)	FY 2014 ($M)	FY 2015 ($M)
Regulated Operations	31.4	23.5	123.0	131.6
ALLETE Clean Energy	2.1	11.2	3.3	29.9
U.S. Water Services	—	(0.6)	—	0.9
Corporate & Other	(0.6)	(15.8)	(1.5)	(21.3)
Net Income Attributable to ALLETE	32.9	18.3	124.8	141.1

Regulated utility KPIs (Q4)

KPI	Q4 2014	Q4 2015
Total kWh Sold (M)	3,699	3,666
Industrial kWh (M)	1,972	1,572
Sales to Other Power Suppliers kWh (M)	822	1,254
Regulated Utility Revenue – Industrial ($M)	118.1	103.7
Regulated Utility Revenue – Other Power Suppliers ($M)	30.6	43.9
Total Regulated Utility Revenue ($M)	253.9	248.2

Notes: 2015 results include $20.4M profit on construction/sale of a wind facility at ACE; 2015 also includes the ALLETE Properties impairment and acquisition fees; 2014 had EPA settlement costs .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
EPS (diluted)	FY 2016	Initiated mid-Dec 2015 at $3.10–$3.40 (as referenced)	$3.10–$3.40	Maintained
Effective Tax Rate	FY 2016	—	~20%	New detail
Regulated O&M	FY 2016	5%–10% below 2014 baseline	5%–10% below 2014; implies ~flat to modest down vs 2015	Maintained (clarified)
Depreciation Life Extension (Boswell)	Filing outcome	—	Expected ~$20M annual depreciation reduction; ~1/3 returned via rider upon approval	New detail
Industrial Load Assumption	FY 2016	—	Midpoint assumes ~35M tons taconite vs ~41M capacity	New detail
Essar Sales	FY 2016	—	No sales assumed in 2016	Clarified
Dividend	2016 annualized	—	+$0.06 annual increase (announced Jan 22, 2016)	Raised

Earnings Call Themes & Trends

Topic	Q2 2015 (Prev-2)	Q3 2015 (Prev-1)	Q4 2015 (Current)	Trend
Industrial load/steel dumping	Noted temporary taconite idlings, 80% (Sep) and 90% (Oct–Dec) nominations; emphasis that impacts are temporary	Continued headwinds; 90% nominations for Q4 incorporated in guidance; reiterated temporary nature	First four months of 2016 at ~80% capacity; cautious on Essar; guidance assumes ~35M tons; signs of progress on trade actions	Stabilizing at reduced levels; monitoring trade relief
Cost control at Minnesota Power	O&M trending down despite new wind O&M; broad efficiency push; more impact in 2016–2017	Ongoing cost containment to improve ROE; Boswell depreciation filing contemplated	2015 O&M down $11.2M; 2016 O&M targeted 5–10% below 2014; ~0–5% lower vs 2015	Execution progressing; incremental 2016 benefits
ACE growth and wind build-transfer	Thunder Spirit build-transfer on track; Armenia Mountain acquired	Stronger MDU project performance increased 2015 guidance; pipeline healthy	ACE positioned for earnings growth from 2015 acquisitions; ongoing disciplined M&A across wind/solar/hydro	Portfolio scaling; build-transfer capability validated
U.S. Water integration	Profitable; customer count +20% YTD; organic growth 10–15% targeted	Segment reporting evolving; tuck-in M&A expected; purchase accounting drag to be exhausted by Q1’16	Modest FY 2015 profit ($0.9M); purchase accounting impacts to roll off by Q1’16	Integration on track; clearer earnings in 2016
Regulatory (CPP/EITE/Depreciation)	EnergyForward/CPP positioning; GNTL timeline	Boswell environmental retrofit near completion; depreciation life extension filing planned	CPP stay noted; pursuing Boswell life extension (~$20M benefit); EITE petition rejected without prejudice; further stakeholder work	Active docket work; timelines extended
Projects (Hydro/Solar/GNTL)	EnergyForward updates; GNTL capex and schedule	FEIS issued; route decision expected early 2016	Thomson Hydro restored (~70 MW); Camp Ripley 10 MW solar approved; GNTL construction expected 2017–2020	Execution milestones achieved

Management Commentary

“Our earnings guidance for 2016 remains at a range of between $3.10 to $3.40 per share…reflects strong cost control efforts and increased cost recovery rider revenue…as well as growth at both ALLETE Clean Energy and U.S. Water.” — CEO Al Hodnik .
“Operating and maintenance expense decreased $11.2 million or 5% from 2014, due to cost reduction efforts…” — CFO Steve DeVinck .
“We are pleased that the Thomson Hydro Generating Station came back to full production in the fourth quarter of 2015…approximately 70 megawatts of carbon-free generation.” — CEO Al Hodnik .
“The midpoint of our guidance range…assumes about 35 million tons of taconite production…capacity is about 41 million tons.” — CFO Steve DeVinck .
“The impairment was…in response to market conditions…revised strategy incorporates the possibility of a bulk sale…likely below book value…At this time we do not have a firm sale.” — CEO Al Hodnik .

Q&A Highlights

Industrial demand outlook: Management sees signs of improvement as trade actions progress; expects domestic steel production to recover as dumping abates .
O&M trajectory: 2016 regulated O&M projected 5–10% below 2014 with further discipline; relative to 2015, ~0–5% lower is a fair assumption .
Depreciation life extension: Boswell filing could reduce annual depreciation by ~$20M, ~1/3 passed back via rider; initial comment deadline extended six months due to workflow at regulators .
ALLETE Properties: Post-impairment depreciated book value ~ $50M; impairment reflects considering a bulk sale; objective is to unlock capital for core growth .
Tax/credits: 2015 effective tax rate 15.2% on higher PTCs; 2016 guided ~20% with comparable PTCs as all Bison wind is in service .

Estimates Context

Wall Street consensus (S&P Global) for Q4 2015 EPS and revenue was unavailable due to access limits during this session; as a result, we cannot categorize a beat/miss at this time. We will update beat/miss and variance analysis once S&P Global consensus data is accessible (S&P Global consensus unavailable).

Key Takeaways for Investors

The quarter’s headline EPS decline was driven by the non-cash real estate impairment; core regulated O&M execution and ACE growth offset industrial load headwinds, supporting maintained 2016 guidance .
2016 earnings sensitivity centers on taconite volumes; guidance midpoint implies ~35M tons vs ~41M capacity, with no Essar contribution assumed—a conservative stance given ongoing trade actions .
Regulatory levers (Boswell depreciation life extension, EITE) could improve ROE and customer affordability; timelines have extended, but potential ~$20M depreciation benefit remains meaningful .
ACE build-transfer and contracted renewables provide diversified, lower-risk growth; U.S. Water’s purchase accounting headwind rolls off by Q1 2016, clarifying earnings contribution into 2016 .
Balance sheet and cash flow are constructive (CFO: $340.1M CFO in 2015; 47% debt-to-capital), supporting dividend growth and capex execution on GNTL and renewables .
Monitor industrial nominations (March/August updates), CPP/EPA regulatory developments, and Minnesota PUC outcomes on depreciation/EITE as near-term catalysts for sentiment and valuation .

Appendix: Additional Data Points

2015 EPS: $2.92; includes $0.42/share ACE wind project profit, $(0.46)/share ALLETE Properties impairment, $(0.10)/share acquisition fees; 2014 EPS: $2.90 .
Regulated operations FY net income increased to $131.6M (+$8.6M), driven by rider revenue, PTCs, power marketing, and lower O&M, partially offset by lower industrial sales and higher D&A/interest/property taxes .
Dividend increased by $0.06 annually on Jan 22, 2016; uninterrupted since 1948 .

ALLETE INC (ALE)·Q4 2015 Earnings Summary