<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549


                                    FORM 10-Q

(Mark One)

/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

    For the quarterly period ended MARCH 31, 2007

                                       or

/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

    For the transition period from ______________ to ______________


                          Commission File Number 1-3548

                                  ALLETE, INC.
             (Exact name of registrant as specified in its charter)

                MINNESOTA                            41-0418150
    (State or other jurisdiction of                 (IRS Employer
    incorporation or organization)                Identification No.)

                             30 WEST SUPERIOR STREET
                          DULUTH, MINNESOTA 55802-2093
                    (Address of principal executive offices)
                                   (Zip Code)

                                 (218) 279-5000
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. /X/ Yes / / No

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
One):

Large Accelerated Filer /X/   Accelerated Filer/ /   Non-Accelerated Filer / /

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). / / Yes /X/ No

                           Common Stock, no par value,
                          30,526,839 shares outstanding
                              as of April 30, 2007

<PAGE>

                                      INDEX
                                                                            Page

Definitions                                                                   2

Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995                                                            3

Part I.  Financial Information

         Item 1.   Financial Statements

              Consolidated Balance Sheet -
                   March 31, 2007 and December 31, 2006                       4

              Consolidated Statement of Income -
                   Quarter Ended March 31, 2007 and 2006                      5

              Consolidated Statement of Cash Flows -
                   Quarter Ended March 31, 2007 and 2006                      6

              Notes to Consolidated Financial Statements                      7

         Item 2.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       16

         Item 3.   Quantitative and Qualitative Disclosures about
                   Market Risk                                               24

         Item 4.   Controls and Procedures                                   25

Part II. Other Information

         Item 1.   Legal Proceedings                                         26

         Item 1A.  Risk Factors                                              26

         Item 2.   Unregistered Sales of Equity Securities and
                   Use of Proceeds                                           26

         Item 3.   Defaults Upon Senior Securities                           26

         Item 4.   Submission of Matters to a Vote of Security Holders       26

         Item 5.   Other Information                                         26

         Item 6.   Exhibits                                                  28

Signatures                                                                   29

1                     ALLETE First Quarter 2007 Form 10-Q

<PAGE>

                                   DEFINITIONS

The following abbreviations or acronyms are used in the text. References in this
report  to "we,"  "us" and  "our"  are to  ALLETE,  Inc.  and its  subsidiaries,
collectively.

ABBREVIATION OR ACRONYM          TERM
--------------------------------------------------------------------------------

2006 Form 10-K                   ALLETE's Annual Report on Form 10-K for
                                      the Year Ended December 31, 2006
ALLETE                           ALLETE, Inc.
ALLETE Properties                ALLETE Properties, LLC
AREA                             Arrowhead Regional Emission Abatement Plan
ATC                              American Transmission Company LLC
BNI Coal                         BNI Coal, Ltd.
Boswell                          Boswell Energy Center
Company                          ALLETE, Inc. and its subsidiaries
DOC                              Minnesota Department of Commerce
EITF                             Emerging Issues Task Force Issue No.
EPA                              Environmental Protection Agency
ESOP                             Employee Stock Ownership Plan
FASB                             Financial Accounting Standards Board
FERC                             Federal Energy Regulatory Commission
FIN                              FASB Interpretations
FPL                              FPL Energy, LLC
GAAP                             Accounting Principles Generally Accepted in
                                      the United States of America
Heating Degree Days              Measure of the extent to which the average
                                      daily temperature is below 65 degrees
                                      Fahrenheit, increasing demand for heating
Laskin                           Laskin Energy Center
Minnesota Power                  An operating division of ALLETE, Inc.
Minnkota Power                   Minnkota Power Cooperative, Inc.
MISO                             Midwest Independent Transmission System
                                      Operator, Inc.
Moody's                          Moody's Investors Service, Inc.
MPUC                             Minnesota Public Utilities Commission
MW                               Megawatt(s)
Note ___                         Note ___ to the consolidated financial
                                      statements in this Form 10-Q
NOX                              Nitrogen Oxide
Palm Coast Park                  Palm Coast Park development project in
                                      northeast Florida
Palm Coast Park District         Palm Coast Park Community Development District
PSCW                             Public Service Commission of Wisconsin
Rainy River Energy               Rainy River Energy Corporation - Wisconsin
Resource Plan                    Integrated Resource Plan
SEC                              Securities and Exchange Commission
SFAS                             Statement of Financial Accounting Standards No.
SO2                              Sulfur Dioxide
Square Butte                     Square Butte Electric Cooperative
Standard & Poor's                Standard & Poor's Ratings Group, a division of
                                      McGraw-Hill Companies
SWL&P                            Superior Water, Light and Power Company
Taconite Harbor                  Taconite Harbor Energy Center
Town Center                      Town Center at Palm Coast development project
                                      in northeast Florida
Town Center District             Town Center at Palm Coast Community
                                      Development District
WDNR                             Wisconsin Department of Natural Resources


                      ALLETE First Quarter 2007 Form 10-Q                      2

<PAGE>

                              SAFE HARBOR STATEMENT
           UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In  connection  with  the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform  Act of 1995,  we are  hereby  filing  cautionary  statements
identifying  important  factors  that could  cause our actual  results to differ
materially from those projected in  forward-looking  statements (as such term is
defined in the Private  Securities  Litigation Reform Act of 1995) made by or on
behalf of ALLETE in this  Quarterly  Report on Form 10-Q, in  presentations,  in
response to questions or otherwise.  Any  statements  that  express,  or involve
discussions as to expectations,  beliefs,  plans,  objectives,  assumptions,  or
future events or performance (often, but not always, through the use of words or
phrases such as "anticipates,"  "believes,"  "estimates,"  "expects," "intends,"
"plans,"  "projects,"  "will likely  result," "will  continue,"  "could," "may,"
"potential,"  "target," "outlook" or similar  expressions) are not statements of
historical facts and may be forward-looking.

Forward-looking   statements   involve   estimates,   assumptions,   risks   and
uncertainties,  which are beyond our  control  and may cause  actual  results or
outcomes to differ materially from those that may be projected. These statements
are  qualified in their  entirety by reference to, and are  accompanied  by, the
following  important  factors,  in addition to any assumptions and other factors
referred to specifically:

   -  our ability to successfully implement our strategic objectives;
   -  our ability to manage expansion and integrate acquisitions;
   -  prevailing  governmental  policies,  regulatory  actions,  and legislation
      including those of the United States  Congress,  state  legislatures,  the
      FERC,  the MPUC, the PSCW,  and various local and county  regulators,  and
      city administrators,  about allowed rates of return, financings,  industry
      and rate  structure,  acquisition  and disposal of assets and  facilities,
      real estate  development,  operation and construction of plant facilities,
      recovery of purchased power and capitl investments, present or prospective
      wholesale   and  retail   competition   (including   but  not  limited  to
      transmission  costs),  zoning and  permitting  of land held for resale and
      environmental regulation;
   -  effects of restructuring initiatives in the electric industry;
   -  economic and geographic factors, including political and economic risks;
   -  changes in and compliance with laws and policies;
   -  weather conditions;
   -  natural disasters and pandemic diseases;
   -  war and acts of terrorism;
   -  wholesale power market conditions;
   -  population growth rates and demographic patterns;
   -  effects of  competition,  including  competition  for retail and wholesale
      customers;
   -  changes in the real estate market;
   -  pricing and transportation of commodities;
   -  changes in tax rates or policies or in rates of inflation;
   -  unanticipated project delays or changes in project costs;
   -  availability of construction  materials and skilled construction labor for
      capital projects;
   -  unanticipated changes in operating expenses and capital expenditures;
   -  global and domestic economic conditions;
   -  our ability to access capital markets and bank financing;
   -  changes in interest rates and the performance of the financial markets;
   -  our ability to replace a mature workforce,  and retain qualified,  skilled
      and experienced personnel; and
   -  the  outcome of legal and  administrative  proceedings  (whether  civil or
      criminal) and settlements  that affect the business and  profitability  of
      ALLETE.

Additional  disclosures  regarding  factors  that could  cause our  results  and
performance to differ from results or performance anticipated by this report are
discussed in Item 1A under the heading "Risk Factors" in Part I of our 2006 Form
10-K.   Any  forward-looking  statement speaks only as of the date on which such
statement is made, and we undertake no obligation to update any  forward-looking
statement  to  reflect  events or  circumstances  after  the date on which  that
statement is made or to reflect the  occurrence  of  unanticipated  events.  New
factors  emerge from time to time,  and it is not  possible  for  management  to
predict  all of these  factors,  nor can it assess  the  impact of each of these
factors  on the  businesses  of ALLETE or the  extent  to which any  factor,  or
combination of factors, may cause actual results to differ materially from those
contained  in any  forward-looking  statement.  Readers  are urged to  carefully
review and consider the various  disclosures made by us in this Form 10-Q and in
our other reports filed with the SEC that attempt to advise  interested  parties
of the factors that may affect our business.

3                     ALLETE First Quarter 2007 Form 10-Q

<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
                                                         ALLETE
                                               CONSOLIDATED BALANCE SHEET
                                                  MILLIONS - UNAUDITED
<CAPTION>
                                                                                         MARCH 31,        DECEMBER 31,
                                                                                           2007               2006
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>              <C>
ASSETS

Current Assets
      Cash and Cash Equivalents                                                          $   46.4          $   44.8
      Short-Term Investments                                                                 82.1             104.5
      Accounts Receivable (Less Allowance of $1.1 at March 31, 2007 and                      73.4              70.9
                           December 31, 2006)
      Inventories                                                                            44.3              43.4
      Prepayments and Other                                                                  35.6              23.8
      Deferred Income Taxes                                                                     -               0.3
-----------------------------------------------------------------------------------------------------------------------

         Total Current Assets                                                               281.8             287.7

Property, Plant and Equipment - Net                                                         933.0             921.6

Investments                                                                                 206.7             189.1

Other Assets                                                                                138.6             135.0

-----------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                             $1,560.1          $1,533.4
-----------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current Liabilities
      Accounts Payable                                                                   $   39.4          $   53.5
      Accrued Taxes                                                                          39.2              23.3
      Accrued Interest                                                                        6.4               8.6
      Long-Term Debt Due Within One Year                                                     32.3              29.7
      Deferred Profit on Sales of Real Estate                                                 3.2               4.1
      Other                                                                                  24.9              24.3
-----------------------------------------------------------------------------------------------------------------------

         Total Current Liabilities                                                          145.4             143.5

Long-Term Debt                                                                              359.3             359.8

Deferred Income Taxes                                                                       131.0             130.8

Other Liabilities                                                                           229.2             226.1

Minority Interest                                                                             7.5               7.4
-----------------------------------------------------------------------------------------------------------------------

         Total Liabilities                                                                  872.4             867.6
-----------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES
-----------------------------------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Common Stock Without Par Value, 43.3 Shares Authorized,
      30.5 and 30.4 Shares Outstanding                                                      442.9             438.7

Unearned ESOP Shares                                                                        (69.7)            (71.9)

Accumulated Other Comprehensive Loss                                                         (8.6)             (8.8)

Retained Earnings                                                                           323.1             307.8
-----------------------------------------------------------------------------------------------------------------------

         Total Shareholders' Equity                                                         687.7             665.8
-----------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                               $1,560.1          $1,533.4
-----------------------------------------------------------------------------------------------------------------------

                            The accompanying notes are an integral part of these statements.
</TABLE>

                      ALLETE First Quarter 2007 Form 10-Q                      4
<PAGE>

<TABLE>
                                                         ALLETE
                                            CONSOLIDATED STATEMENT OF INCOME
                                      MILLIONS EXCEPT PER SHARE AMOUNTS - UNAUDITED
<CAPTION>
                                                                                                QUARTER ENDED
                                                                                                  MARCH 31,
                                                                                            2007              2006
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>
OPERATING REVENUE                                                                          $205.3            $192.5
-----------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES
   Fuel and Purchased Power                                                                  77.7              69.4
   Operating and Maintenance                                                                 74.6              74.5
   Depreciation                                                                              11.7              12.2
-----------------------------------------------------------------------------------------------------------------------

         Total Operating Expenses                                                           164.0              156.1
-----------------------------------------------------------------------------------------------------------------------

OPERATING INCOME FROM CONTINUING OPERATIONS                                                  41.3              36.4
-----------------------------------------------------------------------------------------------------------------------

OTHER INCOME (EXPENSE)
   Interest Expense                                                                          (6.3)             (6.4)
   Other                                                                                      7.5               1.7
-----------------------------------------------------------------------------------------------------------------------

         Total Other Income (Expense)                                                         1.2              (4.7)
-----------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS
   BEFORE MINORITY INTEREST AND INCOME TAXES                                                 42.5              31.7

MINORITY INTEREST                                                                             0.1               1.3
-----------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES                                                                       42.4              30.4

INCOME TAX EXPENSE                                                                           16.1              11.6
-----------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS                                                            26.3              18.8

LOSS FROM DISCONTINUED OPERATIONS                                                               -                 -
-----------------------------------------------------------------------------------------------------------------------

NET INCOME                                                                                 $ 26.3           $  18.8
-----------------------------------------------------------------------------------------------------------------------

AVERAGE SHARES OF COMMON STOCK
   Basic                                                                                     28.1              27.6
   Diluted                                                                                   28.1              27.7
-----------------------------------------------------------------------------------------------------------------------

BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK
   Continuing Operations                                                                    $0.93             $0.68
   Discontinued Operations                                                                      -                 -
-----------------------------------------------------------------------------------------------------------------------

                                                                                            $0.93             $0.68
-----------------------------------------------------------------------------------------------------------------------

DIVIDENDS PER SHARE OF COMMON STOCK                                                       $0.4100           $0.3625
-----------------------------------------------------------------------------------------------------------------------

                            The accompanying notes are an integral part of these statements.
</TABLE>

5                     ALLETE First Quarter 2007 Form 10-Q

<PAGE>

<TABLE>
                                                         ALLETE
                                          CONSOLIDATED STATEMENT OF CASH FLOWS
                                                  MILLIONS - UNAUDITED
<CAPTION>
                                                                                                QUARTER ENDED
                                                                                                  MARCH 31,
                                                                                            2007              2006
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>               <C>
OPERATING ACTIVITIES
   Net Income                                                                               $26.3             $18.8
   Income from Equity Investments                                                            (0.8)                -
   Gain on Sale of Assets                                                                    (1.9)                -
   Depreciation                                                                              11.7              12.2
   Deferred Income Taxes                                                                      0.3              (1.7)
   Minority Interest                                                                          0.1               1.3
   Stock Compensation Expense                                                                 0.5               0.4
   Bad Debt Expense                                                                           0.1               0.2
   Changes in Operating Assets and Liabilities
      Accounts Receivable                                                                     0.4              12.9
      Inventories                                                                            (0.9)              1.2
      Prepayments and Other                                                                 (11.8)              6.8
      Accounts Payable                                                                      (10.5)            (11.2)
      Other Current Liabilities                                                              10.7              14.6
   Other Assets                                                                              (0.1)             (1.3)
   Other Liabilities                                                                          2.1               2.6
   Net Operating Activities for Discontinued Operations                                         -             (12.6)
-----------------------------------------------------------------------------------------------------------------------

         Cash from Operating Activities                                                      26.2              44.2
-----------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
   Proceeds from Sale of Available-For-Sale Securities                                       32.9             126.3
   Payments for Purchase of Available-For-Sale Securities                                   (10.5)           (170.9)
   Changes to Investments                                                                   (15.9)              2.4
   Additions to Property, Plant and Equipment                                               (25.5)            (13.6)
   Proceeds from Sale of Assets                                                               1.3                 -
   Other                                                                                     (2.5)              4.4
   Net Investing Activities from Discontinued Operations                                        -               2.2
-----------------------------------------------------------------------------------------------------------------------

         Cash for Investing Activities                                                      (20.2)            (49.2)
-----------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
   Issuance of Common Stock                                                                   3.8               5.1
   Issuance of Long-Term Debt                                                                62.7              50.0
   Payments of Debt                                                                         (60.6)            (51.4)
   Dividends on Common Stock and Distributions to Minority Shareholders                     (10.3)             (9.9)
   Net Decrease in Book Overdrafts                                                              -              (3.4)
   Net Financing Activities for Discontinued Operations                                         -                 -
-----------------------------------------------------------------------------------------------------------------------
      Cash for Financing Activities                                                          (4.4)             (9.6)
-----------------------------------------------------------------------------------------------------------------------

CHANGE IN CASH AND CASH EQUIVALENTS                                                           1.6             (14.6)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                             44.8              89.6
-----------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                  $46.4             $75.0
-----------------------------------------------------------------------------------------------------------------------

                            The accompanying notes are an integral part of these statements.
</TABLE>
                      ALLETE First Quarter 2007 Form 10-Q                      6

<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements and notes should be
read in  conjunction  with our 2006 Form 10-K. In our opinion,  all  adjustments
necessary for a fair statement of the results for the interim  periods have been
made and have  occurred  in the  normal  course  of  business.  The  results  of
operations for an interim period are not  necessarily  indicative of the results
to be expected for the full year.

NOTE 1.   OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

INVENTORIES.  Inventories  are  stated at the lower of cost or  market.  Cost is
determined by the average cost method.

<TABLE>
<CAPTION>
                                                     MARCH 31,     DECEMBER 31,
INVENTORIES                                            2007            2006
--------------------------------------------------------------------------------
MILLIONS
<S>                                                  <C>           <C>
Fuel                                                  $20.2           $18.9
Materials and Supplies                                 24.1            24.5
--------------------------------------------------------------------------------

Total Inventories                                     $44.3           $43.4
--------------------------------------------------------------------------------
</TABLE>

SUPPLEMENTAL  STATEMENT OF CASH FLOWS  INFORMATION.  Amounts  presented for 2006
have been revised to eliminate  intercompany  interest  payments  from cash paid
during the period for Interest - Net of Amounts Capitalized.

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
SUPPLEMENTAL DISCLOSURE
FOR THE QUARTER ENDED MARCH 31                         2007            2006
--------------------------------------------------------------------------------
MILLIONS
<S>                                                    <C>             <C>
Cash Paid During the Period for
     Interest - Net of Amounts Capitalized             $9.2            $8.8
     Income Taxes                                      $1.9            $3.7

Noncash Investing Activities
     Accounts Payable for Capital Additions to
         Property Plant and Equipment                  $3.6               -
--------------------------------------------------------------------------------
</TABLE>

NEW ACCOUNTING STANDARDS. SFAS 157. In September 2006, the FASB issued SFAS 157,
"Fair Value  Measurements,"  to increase  consistency and  comparability in fair
value  measurements  by  defining  fair  value,  establishing  a  framework  for
measuring fair value in generally accepted accounting principles,  and expanding
disclosures about fair value  measurements.  SFAS 157 emphasizes that fair value
is a market-based measurement,  not an entity-specific measurement. It clarifies
the  extent  to  which  fair  value is used to  measure  recognized  assets  and
liabilities,  the inputs  used to develop  the  measurements,  and the effect of
certain  measurements  on earnings  for the period.  SFAS 157 is  effective  for
financial  statements issued for fiscal years beginning after November 15, 2007,
and is applied on a prospective  basis.  We are currently  evaluating the impact
that the adoption of SFAS 157 would have on our consolidated financial position,
results of operations and cash flows.

SFAS 159. In February 2007, the FASB issued SFAS 159, "The Fair Value Option for
Financial Assets and Financial  Liabilities," which is an elective,  irrevocable
election to measure eligible financial  instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis. The election may
only be applied at specified election dates and to instruments in their entirety
rather  than to portions  of  instruments.  Upon  initial  election,  the entity
reports the difference  between the  instruments'  carrying value and their fair
value as a  cumulative-effect  adjustment  to the  opening  balance of  retained
earnings. At each subsequent reporting date, an entity shall report in earnings,
unrealized  gains and losses on items for which the fair  value  option has been
elected.  SFAS 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and is applied on a prospective  basis. Early
adoption of SFAS 159 is  permitted  provided the entity also elects to adopt the
provisions  of SFAS 157 as of the early  adoption date selected for SFAS 159. We
are currently evaluating  the impact that the adoption of SFAS 159 would have on
our consolidated financial position, results of operations and cash flows.

7                     ALLETE First Quarter 2007 Form 10-Q

<PAGE>

NOTE 2.   BUSINESS SEGMENTS

<TABLE>
<CAPTION>

                                                                     ENERGY
                                                     ----------------------------------------
                                                                  NONREGULATED
                                                       REGULATED     ENERGY      INVESTMENT      REAL
                                      CONSOLIDATED      UTILITY    OPERATIONS      IN ATC       ESTATE       OTHER
------------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                   <C>            <C>          <C>            <C>            <C>         <C>
FOR THE QUARTER ENDED MARCH 31, 2007

Operating Revenue                        $205.3         $180.2        $16.8            -          $8.2       $ 0.1
Fuel and Purchased Power                   77.7           77.7            -            -             -           -
Operating and Maintenance                  74.6           56.9         14.4            -           2.9         0.4
Depreciation Expense                       11.7           10.6          1.1            -             -           -
------------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
    Continuing Operations                  41.3           35.0          1.3            -           5.3        (0.3)
Interest Expense                           (6.3)          (5.2)        (0.6)           -             -        (0.5)
Other Income                                7.5            0.5          2.3         $2.9             -         1.8
------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations
    Before Minority Interest
    and Income Taxes                       42.5           30.3          3.0          2.9           5.3         1.0
Minority Interest                           0.1              -            -            -           0.1           -
------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations
    Before Income Taxes                    42.4           30.3          3.0          2.9           5.2         1.0
Income Tax Expense                         16.1           11.5          0.8          1.1           2.1         0.6
------------------------------------------------------------------------------------------------------------------------

Income from Continuing Operations          26.3         $ 18.8        $ 2.2         $1.8          $3.1       $ 0.4
                                                     -------------------------------------------------------------------

Loss from
    Discontinued Operations - Net
    of Tax                                    -
----------------------------------------------------

Net Income                               $ 26.3
----------------------------------------------------


AT MARCH 31, 2007

Total Assets                           $1,560.1       $1,182.8        $79.5        $63.7         $90.6      $143.5
Property, Plant and Equipment - Net      $933.0         $880.5        $49.0            -             -        $3.5
Accumulated Depreciation                 $817.5         $775.7        $40.1            -             -        $1.7
Capital Expenditures                      $21.9          $21.9            -            -             -           -


FOR THE QUARTER ENDED MARCH 31, 2006

Operating Revenue                        $192.5         $162.4       $ 16.3            -         $13.7       $ 0.1
Fuel and Purchased Power                   69.4           69.4            -            -             -           -
Operating and Maintenance                  74.5           55.8         14.1            -           3.4         1.2
Depreciation Expense                       12.2           11.1          1.1            -             -           -
------------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
    Continuing Operations                  36.4           26.1          1.1            -          10.3        (1.1)
Interest Expense                           (6.4)          (5.1)        (0.5)           -             -        (0.8)
Other Income                                1.7              -          0.3            -             -         1.4
------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing
 Operations
    Before Minority Interest
    and Income Taxes                       31.7           21.0          0.9            -          10.3        (0.5)
Minority Interest                           1.3              -            -            -           1.3           -
------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing
  Operations
    Before Income Taxes                    30.4           21.0          0.9            -           9.0        (0.5)
Income Tax Expense (Benefit)               11.6            8.0            -            -           4.0        (0.4)
------------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing
  Operations                               18.8         $ 13.0       $  0.9            -         $ 5.0       $(0.1)
                                                     -------------------------------------------------------------------
Loss from
    Discontinued Operations - Net
    of Tax                                    -
----------------------------------------------------

Net Income                               $ 18.8
----------------------------------------------------


AT MARCH 31, 2006

Total Assets                           $1,404.0         $974.3       $105.2            -         $70.4      $254.1
Property, Plant and Equipment - Net      $862.3         $803.2        $54.3            -             -        $4.8
Accumulated Depreciation                 $797.5         $760.8        $35.1            -             -        $1.6
Capital Expenditures                      $13.6          $13.3         $0.3            -             -           -

</TABLE>

                      ALLETE First Quarter 2007 Form 10-Q                      8

<PAGE>

NOTE 3.    INVESTMENTS

SHORT-TERM  INVESTMENTS.  At March 31, 2007 and December 31, 2006, we held $82.1
million and $104.5 million, respectively, of Short-Term investments,  consisting
of  auction  rate  bonds  and  variable   rate  demand   notes   classified   as
available-for-sale  securities. Our investments in these securities are recorded
at cost;  however,  their cost  approximates  fair value  because  the  variable
interest rates for these securities  typically reset every 7 to 35 days. Despite
the long-term nature of their stated contractual maturities, we have the ability
to quickly liquidate these  securities.  As a result, we had no cumulative gross
unrealized  holding gains  (losses) or gross  realized  gains  (losses) from our
short-term  investments.  All income generated from these short-term investments
was recorded as interest income.

LONG-TERM  INVESTMENTS.  At March 31, 2007, Investments included the real estate
assets of ALLETE  Properties,  our investment in ATC, debt and equity securities
consisting  primarily  of  securities  held to fund  employee  benefits  and our
emerging technology investments.

We account  for our  investment  in ATC under the equity  method of  accounting,
pursuant  to EITF  03-16,  "Accounting  for  Investments  in  Limited  Liability
Companies,"  which  requires  the use of the  equity  method of  accounting  for
investments in limited liability companies.

<TABLE>
<CAPTION>
                                                                           MARCH 31,                 DECEMBER 31,
INVESTMENTS                                                                   2007                       2006
---------------------------------------------------------------------------------------------------------------------
MILLIONS
<S>                                                                        <C>                       <C>
Real Estate Assets                                                           $ 90.6                     $ 89.8
Debt and Equity Securities                                                     43.4                       36.4
Investment in ATC                                                              63.7                       53.7
Emerging Technology Investments                                                 9.0                        9.2
---------------------------------------------------------------------------------------------------------------------

Total Investments                                                            $206.7                     $189.1
---------------------------------------------------------------------------------------------------------------------


                                                                           MARCH 31,                 DECEMBER 31,
REAL ESTATE ASSETS                                                            2007                       2006
---------------------------------------------------------------------------------------------------------------------
MILLIONS

Land Held for Sale Beginning Balance                                          $58.0                      $48.0
    Additions during period:Capitalized Improvements                            2.8                       18.8
                            Purchases                                             -                        1.4
    Deductions during period: Cost of Real Estate Sold                         (0.9)                     (10.2)
---------------------------------------------------------------------------------------------------------------------

Land Held for Sale Ending Balance                                              59.9                       58.0
Long-Term Finance Receivables                                                  17.1                       18.3
Other <F1>                                                                     13.6                       13.5
---------------------------------------------------------------------------------------------------------------------

Total Real Estate Assets                                                      $90.6                      $89.8
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Consisted primarily of a shopping center.
</FN>
</TABLE>

Finance  receivables have maturities  ranging up to 7 years,  accrue interest at
market-based  rates and are net of an allowance  for  doubtful  accounts of $0.2
million at March 31, 2007 ($0.2 million at December 31, 2006).

INVESTMENT IN ATC. In December 2005, we entered into an agreement with Wisconsin
Public  Service  Corporation  and WPS  Investments,  LLC that  provides  for our
Wisconsin subsidiary,  Rainy River Energy Corporation - Wisconsin, to invest $60
million in ATC. In May 2006,  the PSCW  reviewed  and  approved the request that
allowed  Rainy River Energy to invest in ATC. In 2007, we invested an additional
$8.7 million ($51.4 million invested through December 31, 2006) in ATC, reaching
our approximate  $60 million  investment  commitment.  As of March 31, 2007, our
equity  investment  balance in ATC was $63.7 million  ($53.7 million at December
31, 2006), representing an 8.5 percent ownership interest.

9                     ALLETE First Quarter 2007 Form 10-Q

<PAGE>

NOTE 4.    SHORT-TERM AND LONG-TERM DEBT

On February 1, 2007, we issued $60 million in principal amount of First Mortgage
Bonds,  5.99%  Series due  February 1, 2027,  in the private  placement  market.
Proceeds were used to retire $60 million in principal  amount of First  Mortgage
Bonds, 7% Series due on February 15, 2007.


NOTE 5.     OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
                                                                                         QUARTER ENDED
                                                                                           MARCH 31,
                                                                                  2007                  2006
------------------------------------------------------------------------------------------------------------------
MILLIONS

<S>                                                                              <C>                    <C>
Loss on Emerging Technology Investments                                          $(0.9)                 $(1.2)
Income from Investment in ATC (See Note 3)                                         2.9                      -
Investment and Other Income                                                        5.5                    2.9
------------------------------------------------------------------------------------------------------------------

Total Other Income                                                               $ 7.5                  $ 1.7
------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 6.    INCOME TAX EXPENSE
<TABLE>
<CAPTION>
                                                                                         QUARTER ENDED
                                                                                           MARCH 31,
                                                                                  2007                  2006
------------------------------------------------------------------------------------------------------------------
MILLIONS

<S>                                                                              <C>                   <C>
Current Tax Expense
     Federal                                                                     $11.9                 $10.8
     State                                                                         3.9                   2.5
------------------------------------------------------------------------------------------------------------------

                                                                                  15.8                  13.3
------------------------------------------------------------------------------------------------------------------

Deferred Tax Expense (Benefit)
     Federal                                                                       0.2                  (1.6)
     State                                                                         0.4                   0.2
------------------------------------------------------------------------------------------------------------------

                                                                                   0.6                  (1.4)
------------------------------------------------------------------------------------------------------------------

Deferred Tax Credits                                                              (0.3)                 (0.3)
------------------------------------------------------------------------------------------------------------------

Income Tax Expense from Continuing Operations                                     16.1                  11.6
Income Tax Benefit from Discontinued Operations                                      -                     -
------------------------------------------------------------------------------------------------------------------

Total Income Tax Expense                                                         $16.1                 $11.6
------------------------------------------------------------------------------------------------------------------
</TABLE>

For the quarter  ended March 31,  2007,  the  effective  tax rate on income from
continuing  operations  before minority  interest was 37.9 percent (36.6 percent
for the quarter  ended March 31,  2006).  The effective tax rate of 37.9 percent
for the  quarter  ended  March  31,  2007,  deviated  from the  statutory  rate,
primarily   due  to  deductions   for  Medicare   health   subsidies,   domestic
manufacturing  deduction,  allowance  for funds  used  during  construction  and
depletion.

UNCERTAIN TAX POSITIONS. Effective January 1, 2007, we adopted the provisions of
FIN 48,  "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB
Statement No. 109." As a result of the implementation of FIN 48, we recognized a
$1.0 million  increase in the  liability  for  unrecognized  tax  benefits.  The
adoption of FIN 48 also  resulted in a  reduction  in retained  earnings of $0.7
million, a reduction of deferred tax liabilities of $0.8 million and an increase
in accrued interest of $0.5 million. Subsequent to the implementation of FIN 48,
ALLETE's gross unrecognized tax benefits were $10.4 million. Of this total, $6.8
million (net of federal tax benefit on state  issues)  represents  the amount of
unrecognized  tax benefits  that,  if  recognized,  would  favorably  affect the
effective income tax rate.

                      ALLETE First Quarter 2007 Form 10-Q                     10

<PAGE>

NOTE 6.     INCOME TAX EXPENSE (CONTINUED)

Included in the liability for unrecognized tax benefits balance as of January 1,
2007,  are $0.8  million  (net of federal  tax  benefit on state  issues) of tax
positions for which the ultimate  deductibility is highly certain, but for which
there is  uncertainty  about the timing of  deductibility.  Due to the impact of
deferred tax  accounting,  other than the accounting for interest and penalties,
the disallowance of the shorter deductibility period would not affect the annual
effective tax rate. The disallowance would,  however,  accelerate the payment of
cash to the taxing authority to an earlier period.

We recognize  interest  related to unrecognized tax benefits in interest expense
and penalties in operating expenses in the Consolidated  Statement of Income. As
of January 1, 2007,  the Company had $1.3 million of accrued  interest and $0 of
accrued   penalties  related  to  unrecognized  tax  benefits  included  in  the
Consolidated  Balance  Sheet.  The  liability  for the payment of  interest  and
penalties did not materially change as of March 31, 2007.

We, along with our subsidiaries, file income tax returns in the U.S. federal and
various state jurisdictions. With few exceptions, ALLETE is no longer subject to
federal examination for years before 2003 or state examinations for years before
2001.

We expect that the amount of  unrecognized  tax  benefits as of January 1, 2007,
will change in the next 12 months;  however, we do not expect the change to have
a significant  impact on our financial  position,  results of operations or cash
flows.


NOTE 7.    COMPREHENSIVE INCOME (LOSS)

For the quarter ended March 31, 2007, total comprehensive  income (loss), net of
tax, was $26.5  million  ($19.1  million for the quarter  ended March 31, 2006).
Total comprehensive  income (loss) includes net income (loss),  unrealized gains
and losses on  securities  classified  as  available-for-sale,  and our unfunded
pension liabilities.

<TABLE>
<CAPTION>

ACCUMULATED OTHER COMPREHENSIVE                                                          MARCH 31,
INCOME (LOSS) - NET OF TAX                                                    2007                       2006
---------------------------------------------------------------------------------------------------------------------
MILLIONS

<S>                                                                         <C>                         <C>
Unrealized Gain on Securities                                               $  4.2                      $  2.4
Defined Benefit Pension and Other Postretirement Plans                       (12.8)                          -
Additional Pension Liability                                                     -                       (14.9)
---------------------------------------------------------------------------------------------------------------------

Total Accumulated Other Comprehensive Loss                                  $ (8.6)                     $(12.5)
---------------------------------------------------------------------------------------------------------------------
</TABLE>

11                     ALLETE First Quarter 2007 Form 10-Q

<PAGE>

NOTE 8.     EARNINGS PER SHARE

The  difference  between  basic  and  diluted  earnings  per share  arises  from
outstanding  stock  options  and  performance  share  awards  granted  under our
Executive and Director  Long-Term  Incentive  Compensation  Plans. In accordance
with SFAS 128,  "Earnings Per Share," for the quarter ended March 31, 2007,  0.1
million  options  to  purchase  shares of common  stock were  excluded  from the
computation  of diluted  earnings per share because the option  exercise  prices
were greater than the average market prices,  and therefore,  their effect would
be  anti-dilutive.  For the quarter ended March 31, 2006, no options to purchase
shares of common stock were excluded from the  computation  of diluted  earnings
per share.

<TABLE>
<CAPTION>
                                                            2007                                2006
                                                ---------------------------------------------------------------------
RECONCILIATION OF BASIC AND DILUTED                       DILUTIVE                            DILUTIVE
EARNINGS PER SHARE                               BASIC   SECURITIES    DILUTED       BASIC   SECURITIES    DILUTED
---------------------------------------------------------------------------------------------------------------------
MILLIONS EXCEPT PER SHARE AMOUNTS

<S>                                             <C>      <C>           <C>           <C>     <C>           <C>
FOR THE QUARTER ENDED MARCH 31,

Income from Continuing Operations                $26.3         -        $26.3        $18.8         -        $18.8
Common Shares                                     28.1         -         28.1         27.6       0.1         27.7
Per Share from Continuing Operations             $0.93         -        $0.93        $0.68         -        $0.68
---------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 9.    PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

<TABLE>
<CAPTION>
                                                                                               POSTRETIREMENT
                                                                  PENSION                      HEALTH AND LIFE
                                                        -------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT EXPENSE                 2007            2006             2007            2006
---------------------------------------------------------------------------------------------------------------------
MILLIONS

<S>                                                     <C>                <C>             <C>              <C>
FOR THE QUARTER ENDED MARCH 31,

Service Cost                                              $ 1.3            $ 2.3           $ 1.0            $ 1.1
Interest Cost                                               5.7              5.5             1.9              1.9
Expected Return on Plan Assets                             (7.7)            (7.1)           (1.6)            (1.4)
Amortization of Prior Service Costs                         0.2              0.2               -                -
Amortization of Net Loss                                    0.8              1.2             0.2              0.4
Amortization of Transition Obligation                         -                -             0.6              0.6
---------------------------------------------------------------------------------------------------------------------

Net Periodic Benefit Expense                              $ 0.3            $ 2.1           $ 2.1            $ 2.6
---------------------------------------------------------------------------------------------------------------------
</TABLE>

In 2005,  we  determined  that our  postretirement  health  care  plans meet the
requirements   of  the  Centers  for  Medicare  and  Medicaid   Services'  (CMS)
regulations and enrolled with the CMS to begin recovering the subsidy. We expect
to receive the first subsidy payment in 2007 for 2006 credits.

EMPLOYER  CONTRIBUTIONS.  For the quarter ended March 31, 2007,  $2.8 million of
contributions were made to our  postretirement  health and life plans. We do not
expect to make any additional  contributions to fund our  postretirement  health
and life  plans in  2007.  We do not  expect  to make any  contributions  to our
defined benefit pension plans in 2007.

                      ALLETE First Quarter 2007 Form 10-Q                     12

<PAGE>

NOTE 10.     COMMITMENTS, GUARANTEES AND CONTINGENCIES

OFF-BALANCE SHEET ARRANGEMENTS. SQUARE BUTTE POWER PURCHASE AGREEMENT. Minnesota
Power has a power purchase agreement with Square Butte that extends through 2026
(Agreement).  It provides a long-term  supply of low-cost energy to customers in
our electric  service  territory and enables  Minnesota Power to meet power pool
reserve requirements. Square Butte, a North Dakota cooperative corporation, owns
a 455-MW coal-fired  generating unit (Unit) near Center,  North Dakota. The Unit
is  adjacent  to a  generating  unit owned by  Minnkota  Power,  a North  Dakota
cooperative  corporation whose Class A members are also members of Square Butte.
Minnkota Power serves as the operator of the Unit and also purchases  power from
Square Butte.

Minnesota  Power was entitled to  approximately  71 percent of the Unit's output
under the Agreement prior to 2006.  Beginning in 2006,  Minnkota Power exercised
its option to reduce  Minnesota  Power's  entitlement by approximately 5 percent
annually.   We  received   notices  from  Minnkota  Power  reducing  our  output
entitlement by  approximately 5 percent  annually to 60 percent as of January 1,
2007,  55 percent on  January  1, 2008,  and 50 percent on January 1, 2009,  and
thereafter.  Minnkota  Power has no further option to reduce  Minnesota  Power's
entitlement  below 50 percent.  Minnesota Power is obligated to pay its pro-rata
share of Square  Butte's costs based on Minnesota  Power's  entitlement  to Unit
output.  Minnesota Power's payment  obligation will be suspended if Square Butte
fails to deliver any power,  whether produced or purchased,  for a period of one
year. Square Butte's fixed costs consist primarily of debt service. At March 31,
2007,  Square Butte had total debt  outstanding of $297.6 million.  Total annual
debt  service for Square  Butte is expected to be  approximately  $26 million in
each of the years 2007 through 2011.  Variable operating costs include the price
of coal purchased from BNI Coal, our subsidiary, under a long-term contract.

LEASING AGREEMENTS.  BNI Coal is obligated to make lease payments for a dragline
totaling  $2.8 million  annually for the lease term which  expires in 2027.  BNI
Coal has the  option at the end of the  lease  term to renew the lease at a fair
market  rental,  to purchase the dragline at fair market value,  or to surrender
the dragline and pay a $3.0 million  termination  fee. We lease other properties
and equipment under operating lease agreements with terms expiring through 2013.
The aggregate  amount of minimum lease payments for all operating leases is $8.2
million in 2007,  $7.6 million in 2008,  $7.0  million in 2009,  $6.5 million in
2010, $6.0 million in 2011 and $51.2 million thereafter.

COAL,  RAIL AND SHIPPING  CONTRACTS.  We have three coal supply  agreements with
various  expiration  dates ranging from December 2008 to December  2009. We also
have rail and shipping  agreements  for the  transportation  of all of our coal,
with various  expiration  dates ranging from December 2007 to December 2011. Our
minimum  annual  payment   obligations  under  these  coal,  rail  and  shipping
agreements  are currently  $42.0 million in 2007,  $16.4 million in 2008,  $11.1
million in 2009 and no specific  commitments  beyond  2009.  Our minimum  annual
payment  obligations  will  increase when annual  nominations  are made for coal
deliveries in future years.

EMERGING  TECHNOLOGY  PORTFOLIO.  We have  investments in emerging  technologies
through  minority  investments  in venture  capital funds  structured as limited
liability  companies,   and  direct  investments  in  privately-held,   start-up
companies.  We have committed to make additional investments in certain emerging
technology  venture capital funds. The total future  commitment was $2.0 million
at March 31, 2007 ($2.5 million at December 31,  2006),  and will be invested in
2007.  We do not have  plans  to make any  additional  investments  beyond  this
commitment.

13                    ALLETE First Quarter 2007 Form 10-Q

<PAGE>

NOTE 10.   COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

ENVIRONMENTAL MATTERS. Our businesses are subject to regulation of environmental
matters  by  various  federal,  state and  local  authorities.  Due to  stricter
environmental  requirements through legislation and/or rulemaking in the future,
we anticipate  that potential  expenditures  for  environmental  matters will be
material  and  will  require   significant   capital   investments.   We  review
environmental  matters on a quarterly basis.  Accruals for environmental matters
are  recorded  when it is probable  that a liability  has been  incurred and the
amount of the liability can be  reasonably  estimated,  based on current law and
existing  technologies.  These accruals are adjusted  periodically as assessment
and remediation efforts progress or as additional technical or legal information
becomes  available.  Accruals for environmental  liabilities are included in the
balance sheet at  undiscounted  amounts and exclude claims for  recoveries  from
insurance or other third parties.  Costs related to environmental  contamination
treatment and cleanup are charged to expense  unless  recoverable  in rates from
customers.

SWL&P  MANUFACTURED  GAS PLANT. In May 2001, SWL&P received notice from the WDNR
that the City of Superior had found soil  contamination on property  adjoining a
former  Manufactured  Gas Plant (MGP) site owned and operated by SWL&P from 1889
to 1904. A report submitted in 2003 identified some MGP-like chemicals that were
found  in the  soil  near the  former  plant  site.  The  on-site  investigation
continued through the fall of 2006. The final Phase II report is expected in May
2007.  Although it is not possible to quantify the potential clean-up cost until
the  investigation  is  completed,  a $0.5  million  liability  was  recorded in
December  2003 to address  the known  areas of  contamination.  The  Company has
recorded a  corresponding  dollar  amount as a  regulatory  asset to offset this
liability.  In May 2005,  the PSCW  approved  the  collection  through  rates of
$150,000 of site  investigation  costs that had been  incurred at the time SWL&P
filed their 2005 rate request.  In December 2006, the PSCW approved the recovery
of an additional $186,000 of site investigation costs that were incurred through
2005.  ALLETE maintains  pollution  liability  insurance  coverage that includes
coverage  for SWL&P.  A claim has been filed with  respect to this  matter.  The
insurance  carrier  has issued a  reservation  of rights  letter and the Company
continues to work with the insurer to determine  the  availability  of insurance
coverage.

EPA CLEAN AIR INTERSTATE RULE AND CLEAN AIR MERCURY RULE. In March 2005, the EPA
announced  the  final  Clean  Air  Interstate   Rule  (CAIR)  that  reduces  and
permanently caps emissions of SO2 and NOX in the eastern United States. The CAIR
includes  Minnesota  as one of the 28  states  it  considers  as  "significantly
contributing" to air quality standards  non-attainment in other states.  The EPA
also  announced  the final  Clean Air  Mercury  Rule  (CAMR)  that  reduces  and
permanently caps electric utility mercury emissions nationwide. The CAIR and the
CAMR  regulations  have been  challenged in the federal court system,  which may
delay implementation or modify provisions. Minnesota Power is participating in a
legal  challenge  to the CAIR,  but is not  participating  in a challenge to the
CAMR.  However,  if the  CAMR and the CAIR do go into  effect,  Minnesota  Power
expects to be required to: (1) make emissions reductions;  (2) purchase mercury,
SO2 and NOX  allowances  through the EPA's  cap-and-trade  system;  or (3) use a
combination of both.

Minnesota Power petitioned the EPA to review their CAIR determinations affecting
Minnesota.  In July 2005,  Minnesota Power also filed a Petition for Review with
the U.S.  Court of  Appeals  for the  District  of  Columbia  Circuit  (Court of
Appeals).  In November 2005, the EPA agreed to reconsider certain aspects of the
CAIR, including the Minnesota Power petition addressing emissions applied to air
quality modeling used to determine  Minnesota's inclusion in the CAIR region and
our claims about inequities in the SO2 allowance methodology. In March 2006, the
EPA announced  that it would not make any changes to the CAIR as a result of the
petitions  for  reconsideration.   Petitions  for  Review,  including  Minnesota
Power's,  remain  pending at the Court of Appeals.  If the  Petitions for Review
filed with the Court of Appeals are successful, we expect to incur significantly
lower  compliance  costs,  consistent with the rules  applicable to those states
determined to not be "significant contributors" to air quality non-attainment as
addressed  under the CAIR.  Resolution  of the CAIR Petition for Review with the
Court of Appeals is anticipated in 2008.

                      ALLETE First Quarter 2007 Form 10-Q                     14

<PAGE>

NOTE 10.  COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

COMMUNITY DEVELOPMENT DISTRICT OBLIGATIONS. TOWN CENTER. In March 2005, the Town
Center  District  issued $26.4  million of  tax-exempt,  6% Capital  Improvement
Revenue  Bonds,  Series 2005,  which are payable over 31 years (by May 1, 2036).
The bond proceeds (less  capitalized  interest,  a debt service reserve fund and
cost of  issuance)  were used to pay for the  construction  of a portion  of the
major infrastructure improvements at Town Center. The bonds are payable from and
secured by the revenue derived from assessments imposed, levied and collected by
the Town Center District.  The assessments  represent an allocation of the costs
of the  improvements,  including bond financing  costs,  to the lands within the
Town Center District  benefiting  from the  improvements.  The assessments  were
billed to Town Center landowners  beginning in November 2006. To the extent that
we still own land at the time of the assessment,  in accordance with EITF 91-10,
we  recognize  the cost of our  portion  of these  assessments,  based  upon our
ownership of benefited  property.  At March 31, 2007, we owned 73 percent of the
assessable land in the Town Center District.

PALM COAST PARK. In May 2006, the Palm Coast Park District  issued $31.8 million
of tax-exempt,  5.7% Special  Assessment  Bonds,  Series 2006, which are payable
over 31 years (by May 1, 2037). The bond proceeds (less capitalized  interest, a
debt service  reserve  fund and cost of issuance)  are being used to pay for the
construction of the major infrastructure  improvements at Palm Coast Park and to
mitigate  traffic and  environmental  impacts.  The bonds are  payable  from and
secured by the revenue derived from assessments imposed, levied and collected by
the Palm Coast Park  District.  The  assessments  represent an allocation of the
costs of the  improvements,  including bond financing costs, to the lands within
the Palm Coast Park District  benefiting from the improvements.  The assessments
will be billed to Palm Coast Park landowners  beginning in November 2007. To the
extent that we still own land at the time of the assessment,  in accordance with
EITF 91-10,  we will  recognize  the cost of our  portion of these  assessments,
based upon our ownership of benefited  property.  At March 31, 2007, we owned 97
percent of the assessable land in the Palm Coast Park District.

OTHER.  We are involved in litigation  arising in the normal course of business.
Also in the normal course of business,  we are involved in tax,  regulatory  and
other  governmental  audits,  inspections,  investigations and other proceedings
that involve state and federal taxes, safety, compliance with regulations,  rate
base and cost of service  issues,  among other things.  While the  resolution of
such matters could have a material effect on earnings and cash flows in the year
of  resolution,  none of these  matters are  expected to  materially  change our
present  liquidity  position or have a material  adverse effect on our financial
condition.

15                    ALLETE First Quarter 2007 Form 10-Q

<PAGE>

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

The following  discussion  should be read in conjunction  with our  consolidated
financial  statements,  notes to those  statements,  management  discussion  and
analysis from the 2006 Form 10-K and the other financial  information  appearing
elsewhere in this report. In addition to historical  information,  the following
discussion and other parts of this Form 10-Q contain forward-looking information
that   involves   risks  and   uncertainties.   Readers   are   cautioned   that
forward-looking statements should be read in conjunction with our disclosures in
this Form 10-Q under the  headings:  "Safe  Harbor  Statement  Under the Private
Securities  Litigation  Reform Act of 1995" located on page 3 and "Risk Factors"
located  in Part I,  Item 1A,  page 24 of our 2006  Form  10-K.  The  risks  and
uncertainties  described  in this  Form  10-Q and our 2006 Form 10-K are not the
only risks facing our Company.  Additional risks and  uncertainties  that we are
not  presently  aware of, or that we  currently  consider  immaterial,  may also
affect our business operations. Our business,  financial condition or results of
operations could suffer if the concerns set forth are realized.

EXECUTIVE SUMMARY

ALLETE is a  diversified  company  providing  fundamental  products and services
since 1906. This includes our two core  businesses--ENERGY  and REAL ESTATE,  as
well as our  former  operations  in the  water,  paper,  telecommunications  and
automotive industries.

ENERGY is comprised of Regulated  Utility,  Nonregulated  Energy  Operations and
Investment in ATC.

   -  REGULATED  UTILITY includes retail and wholesale rate regulated  electric,
      natural gas and water services in northeastern  Minnesota and northwestern
      Wisconsin  under  the   jurisdiction  of  state  and  federal   regulatory
      authorities.
   -  NONREGULATED  ENERGY  OPERATIONS  includes our coal mining  activities  in
      North Dakota, approximately 50 MW of nonregulated generation and Minnesota
      land sales.
   -  INVESTMENT IN ATC includes our equity ownership interest in ATC.

REAL ESTATE includes our Florida real estate operations.

OTHER includes our  investments in emerging  technologies,  and earnings on cash
and short-term investments.

                     ALLETE First Quarter 2007 Form 10-Q                      16

<PAGE>

EXECUTIVE SUMMARY (CONTINUED)

<TABLE>
<CAPTION>

                                                          QUARTER ENDED
                                                             MARCH 31,
KILOWATTHOURS SOLD                                  2007                  2006
--------------------------------------------------------------------------------
MILLIONS
<S>                                               <C>                   <C>

     Regulated Utility
         Retail and Municipals
              Residential                           341.6                 308.0
              Commercial                            352.2                 328.7
              Municipals                            266.4                 219.3
              Industrial                          1,705.4               1,822.3
              Other                                  22.2                  20.0
--------------------------------------------------------------------------------

                  Total Retail and Municipals     2,687.8               2,698.3
         Other Power Suppliers                      524.0                 505.1
--------------------------------------------------------------------------------

                  Total Regulated Utility         3,211.8               3,203.4
     Nonregulated Energy Operations                  63.7                  65.6
--------------------------------------------------------------------------------

                                                  3,275.5               3,269.0
--------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                                 QUARTER ENDED
                                                   MARCH 31,
REAL ESTATE                            2007                          2006
REVENUE AND SALES ACTIVITY     QUANTITY    AMOUNT             QUANTITY    AMOUNT
--------------------------------------------------------------------------------
DOLLARS IN MILLIONS
<S>                            <C>       <C>                  <C>        <C>

Town Center Sales
    Commercial Sq. Ft.             -         -                80,000     $  1.5

Other Land Sales
    Acres <F1>                   367     $ 6.0                   456       10.3
--------------------------------------------------------------------------------

Contract Sales Price <F2>                  6.0                             11.8

Revenue Recognized from
    Previously Deferred Sales              1.3                              1.5

Deferred Revenue                             -                             (0.7)

Adjustments <F3>                             -                             (0.1)
--------------------------------------------------------------------------------

Revenue from Land Sales                    7.3                             12.5

Other Revenue                              0.9                              1.2
--------------------------------------------------------------------------------

                                         $ 8.2                           $ 13.7
--------------------------------------------------------------------------------
<FN>
<F1> Acreage amounts are shown on a gross basis, including wetlands and minority
     interest.
<F2> Reflected total contract sales price on closed land transactions.
<F3> Contributed development dollars, which are  credited to cost of real estate
     sold.
</FN>
</TABLE>

17                    ALLETE First Quarter 2007 Form 10-Q

<PAGE>

NET INCOME

The following  income  discussion  summarizes,  by segment,  a comparison of the
quarter ended March 31, 2007, to the quarter ended March 31, 2006.

REGULATED UTILITY  contributed income of $18.8 million in 2007 ($13.0 million in
2006). The increase in earnings for 2007 reflect:

    -  increased  electric  sales  to  Residential,   Commercial  and  Municipal
       customers, as well as increased gas sales at SWL&P due to colder  weather
       in the first quarter of 2007;
    -  rate increases effective January 1, 2007, at SWL&P; and
    -  increased sales to other power suppliers under long-term contract.

NONREGULATED  ENERGY  OPERATIONS  reported  income of $2.2 million in 2007 ($0.9
million  income in 2006),  reflecting a $1.2 million after tax gain on land sold
that was part of the land received when we purchased Taconite Harbor.

INVESTMENT  IN ATC  contributed  income of $1.8  million  in 2007.  Our  initial
investment in ATC was in May 2006.

REAL ESTATE  contributed  income of $3.1 million in 2007 ($5.0 million in 2006).
Income was  higher in 2006 due to the  timing  and mix of land sale  transaction
closings.  The timing of the closing of real estate  sales varies from period to
period and impacts comparisons between years.

OTHER  reflected net income of $0.4 million in 2007 ($0.1 million loss in 2006),
primarily due to additional investment income.


COMPARISON OF THE QUARTERS ENDED MARCH 31, 2007 AND 2006

(SEE NOTE 2. BUSINESS SEGMENTS FOR FINANCIAL RESULTS BY SEGMENT.)

REGULATED UTILITY

     OPERATING  REVENUE  increased  $17.8  million,  or 11  percent,  from  2006
     primarily due to increased fuel clause recoveries,  increased  kilowatthour
     sales to  Retail,  Commercial  and  Municipal  customers,  increased  power
     marketing sales, and increased gas revenue at SWL&P.

     Fuel  clause  recoveries  increased  $7.3  million  in 2007 as a result  of
     increased  purchased  power expenses (See Fuel and Purchased  Power Expense
     discussion on the next page).

     Residential,  Commercial and Municipal  kilowatthour  sales increased 104.2
     million,  or 12  percent,  from 2006  reflecting  a 10 percent  increase in
     heating  degree days in our service  territory  and two existing  municipal
     customers converting to full-energy requirements.  The converting customers
     contributed an additional 34.4 million in kilowatthour sales.

     Revenue from other power  suppliers  increased $2.1 million,  or 9 percent,
     from 2006 primarily due to an increase in kilowatthour sales to an existing
     customer under a long-term  contract expiring in 2010. (See Part 1, Item 3.
     - Quantitative  and  Qualitative  Disclosures  about   Market  Risk - Power
     Marketing.)

     Natural gas revenue  increased  $0.9  million  from 2006  primarily  due to
     higher sales as a result of colder weather and rate increases at SWL&P. New
     rates became effective  January 1, 2007, at SWL&P and reflect a 2.8 percent
     increase in electric rates, a 1.4 percent  increase in gas rates and an 8.6
     percent increase in water rates.

     Revenue from electric sales to taconite customers  accounted for 23 percent
     of  consolidated  operating  revenue in 2007 (24 percent in 2006).  Revenue
     from  electric  sales to paper and pulp  mills  accounted  for 9 percent of
     consolidated  operating  revenue in 2007 and 2006.  Revenue  from  electric
     sales to  pipelines  accounted  for 6  percent  of  consolidated  operating
     revenue in 2007 (6 percent in 2006).

                     ALLETE First Quarter 2007 Form 10-Q                      18

<PAGE>

COMPARISON OF THE QUARTERS ENDED MARCH 31, 2007 AND 2006 (CONTINUED)

REGULATED UTILITY (CONTINUED)

     OPERATING EXPENSES increased $8.9 million, or 7 percent, from 2006.

     FUEL AND PURCHASED POWER EXPENSE increased $8.3 million from 2006 primarily
     due to a $26.3  million  increase in purchased  power,  which was partially
     offset by lower fuel expense.  The increase in purchased power was due to a
     79 percent  increase in  kilowatthours  purchased and higher energy prices.
     Low  hydro  generation,  outages  at  Boswell  Units 3 & 4,  Laskin  Unit 1
     (relating  to the AREA Plan  environmental  retrofits),  and  Square  Butte
     contributed  to  lower  fuel  and  higher  purchased  power  expenses.  The
     replacement power costs are recovered  through the  regulated  utility fuel
     adjustment clause in Minnesota.

     From  mid-March  to  mid-April,  output  from  Boswell  Unit 4 was  reduced
     approximately  20 percent,  due to a malfunction  of one or more  generator
     stator coils. Boswell Unit 4 was removed from service in mid-April,  and is
     expected  to be back in  service  at full  capacity  in  mid-May  after the
     affected coils are replaced. The cost of the replacement coils are  covered
     under the original manufacturer's warranty.

     OPERATING AND  MAINTENANCE  EXPENSE  increased $1.1 million,  or 2 percent,
     from  2006 due to a $0.7  million  increase  in  expenses  associated  with
     outages  at  Boswell  Units  3 & 4 and a $0.5  million  increase  at  SWL&P
     primarily due to increased natural gas purchases.

     INTEREST EXPENSE increased $0.1 million, or 2 percent, from 2006.

NONREGULATED ENERGY OPERATIONS

     OPERATING REVENUE increased $0.5 million, or 3 percent, from 2006 primarily
     due to increased coal sales at BNI.

     OPERATING EXPENSES increased $0.3 million, or 2 percent, from 2006 due to a
     $0.7 million increase in fuel and tire expense at BNI,  partially offset by
     lower natural gas prices at Rapids Energy Center.

     OTHER INCOME  increased  $2.0  million from 2006  reflecting a $1.9 million
     gain on land sold  which was part of the land  received  when we  purchased
     Taconite Harbor.

INVESTMENT IN ATC

     OTHER INCOME  reflected  $2.9 million of income in 2007  resulting from our
     pro-rata share of ATC's earnings as discussed in Note 3.

REAL ESTATE

     OPERATING REVENUE decreased $5.5 million,  or 40 percent,  from 2006 due to
     the timing and mix of land sale  transaction  closings.  Revenue  from land
     sales in 2007 was $7.3 million  which  included  $1.3 million in previously
     deferred revenue.  In 2006, revenue from land sales was $12.5 million which
     included $1.5 million in previously deferred revenue. In 2007, 367 acres of
     other land was sold (456 acres in 2006).  For the  quarter  ended March 31,
     2007, there were no commercial square feet sold.  (80,000 commercial square
     feet sold at Town Center in 2006).

     OPERATING  EXPENSES  decreased  $0.5  million,  or 15  percent,  from  2006
     reflecting  a decrease  in the cost of real  estate  sold ($0.9  million in
     2007; $1.9 million in 2006).

19                   ALLETE First Quarter 2007 Form 10-Q

<PAGE>

COMPARISON OF THE QUARTERS ENDED MARCH 31, 2007 AND 2006 (CONTINUED)

OTHER

     OPERATING  EXPENSES  decreased  $0.8  million  from 2006  reflecting  lower
     general and administrative expenses.

     INTEREST EXPENSE decreased $0.3 million from 2006.

     OTHER INCOME  increased  $0.4 million from 2006 primarily due to additional
     investment income.

INCOME TAXES

For the quarter  ended March 31,  2007,  the  effective  tax rate on income from
continuing  operations  before minority  interest was 37.9 percent (36.6 percent
for the quarter  ended March 31, 2006).  The effective  rate of 37.9 percent for
the  quarter  ended  March  31,  2007,   deviated   from  the   statutory   rate
(approximately  40 percent)  primarily  due to  deductions  for Medicare  health
subsidies,  domestic  manufacturing  deduction,  allowance for funds used during
construction and depletion.

CRITICAL ACCOUNTING ESTIMATES

Certain  accounting  measurements  under  applicable  GAAP involve  management's
judgment  about  subjective  factors  and  estimates,  the  effects of which are
inherently uncertain.  Accounting measurements that we believe are most critical
to  our  reported  results  of  operations  and  financial   condition  include:
impairment  of long-lived  assets,  pension and  postretirement  health and life
actuarial  assumptions,  regulatory  accounting,  valuation of  investments  and
provisions for environmental  remediation.  These policies are reviewed with the
Audit  Committee of our Board of Directors on a regular basis and  summarized in
Part II, Item 7 of our 2006 Form 10-K.

OUTLOOK

EARNINGS GUIDANCE. We expect ALLETE's diluted earnings per share from continuing
operations  to be in the  range  previously  indicated  in the  2006  10-K.  The
guidance stated that the Company's earnings are expected to be between  $2.95 to
$3.05.  This earnings  projection does not include an impact from any investment
we may make in new growth opportunities.

ENERGY.

LARGE POWER CUSTOMERS. Electric power is a key component in the mining, taconite
and paper production industries. Sales to our Large Power Customers within these
industries  represent  more than half of  Minnesota  Power's  regulated  utility
electric  sales.  On April 25, 2007,  the MPUC  approved  our  electric  service
agreement  with  PolyMet  Mining,  Inc.  (PolyMet).  In  2006,  a  contract  for
approximately 70 MW was successfully  negotiated with PolyMet,  a new industrial
customer  planning to start a copper,  nickel and precious metals  (non-ferrous)
mining operation in late 2008. If PolyMet's  environmental  permits are received
and  start-up is achieved,  the contract  with PolyMet will run through at least
2018.

AREA AND BOSWELL 3 EMISSION REDUCTION PLAN. To date, we have spent $17.7 million
of the expected $60 million on the AREA project.  On April 15, 2007, Laskin Unit
1 was  placed  back in service  and  cost-recovery  will  begin May 1,  2007.  A
cost-recovery filing was made for Taconite Harbor Unit 2 on March 27, 2007, with
expected  cost-recovery  beginning July 1, 2007, pending MPUC approval. On April
26, 2007,  the DOC filed  comments  recommending  approval of the  cost-recovery
filing for Taconite  Harbor Unit 2. To date,  we have spent $18.3 million of the
expected  $200 million on the Boswell Unit 3 emission  reduction  plan.  In late
March 2007,  the Boswell  Unit 3 project  received  the  necessary  construction
permits. On April 25, 2007, the MPCA issued its assessment of the Boswell Unit 3
Emission  Reduction Plan under the Mercury Emissions  Reduction Act of 2006. The
MPCA found that  Minnesota  Power's plan meets the  statutory  requirements  and
found it appropriate. We expect to begin construction in May 2007.

                     ALLETE First Quarter 2007 Form 10-Q                      20

<PAGE>

OUTLOOK (CONTINUED)

MINNESOTA  FUEL  CLAUSE  INVESTIGATION.  In June  2003,  the MPUC  initiated  an
investigation into the continuing  usefulness of the fuel clause as a regulatory
tool for electric utilities.  Minnesota Power's initial comments on the proposed
scope and  procedure of the  investigation  were filed in July 2003. In November
2003,  the MPUC approved the initial  scope and procedure of the  investigation.
The investigation's purpose was to focus on whether the fuel clause continues to
be an appropriate  regulatory tool.  Subsequent comments were filed during 2004.
The Docket then became dormant while the MISO Day 2 Docket, which held many fuel
clause  considerations,  became very active.  In March 2007,  the MPUC solicited
comments on whether the original fuel clause  investigation should continue and,
if so, what issues should be pursued.  Minnesota  Power filed  comments in April
2007,  suggesting  that if the  investigation  continued,  it  should  focus  on
remaining  key  elements  of  the  fuel  clause,   beyond  the  purchased  power
transactions  examined in the MISO Day 2 proceeding,  such as fuel purchases and
outages.   Additionally,   Minnesota   Power's  comments   suggested  that  more
specialized  fuel clause issues be addressed in separate dockets on an as needed
basis.

RENEWABLE  ENERGY.  In February  2007, the Minnesota  Legislature  enacted a law
requiring most electric utilities to generate 25 percent of their energy through
renewable energy sources by 2025. Minnesota Power worked with other stakeholders
to ensure the legislation included provisions for allowing regulatory assessment
of the cost and  feasibility  on individual  utilities of meeting the 25 percent
standard on individual  utilities.  Minnesota  Power was  developing  and making
renewable supply additions as part of its generation  planning strategy prior to
this legislation and this activity will continue.

In December  2006,  we began  purchasing  the output from a 50-MW wind  facility
located in North Dakota, Oliver Wind I, under a 25-year power purchase agreement
with an affiliate of FPL Energy.

In January  2007,  we filed with the MPUC a second  25-year wind power  purchase
agreement and related  renewable  resource rider to purchase an additional 48-MW
of wind energy from  Oliver  Wind II, an  expansion  of Oliver Wind I located in
North  Dakota.  The project is expected  to be  operational  by the end of 2007,
pending  MPUC  approval.  The MPUC hearing  on the  Oliver  Wind II  project was
scheduled for May 3, 2007.

In April 2007,  we filed with the MPUC for  approval  of two 20-year  Community-
Based Energy Development (C-BED) Project power purchase  agreements.  The 2.5-MW
Wing River Wind C-BED  Project,  with  Wing River  Wind,  LLC is  expected to be
operational by the end of June 2007, pending MPUC approval. The 30-MW Bear Creek
Wind  Partners  project,  with Bear Creek Wind  Partners,  LLC is expected to be
operational by the end of 2008,  pending MPUC approval.  Per Minnesota  Statute,
the power  purchase  agreements  will be deemed  approved  unless  objection  is
received within 30 days of the filing, which would be on May 29, 2007.

In the fall of 2007,  pending MPUC approval of a wind  facility site permit,  we
intend to begin  construction  of the 25-MW Taconite Ridge Wind Facility,  to be
located in Northeastern Minnesota.  The Taconite Ridge Wind Facility is expected
to become operational in mid-2008.

Minnesota Power continues to investigate  additional  renewable energy resources
including biomass,  hydroelectric and wind generation that will help it meet the
Minnesota 25 percent  renewable energy  standard.  The Company will submit plans
regarding the additional  renewable  energy options  currently  under study as a
part of its  Resource  Plan  filing with the State of  Minnesota  by November 1,
2007.  We will also make  specific  renewable  project  filings  for  regulatory
approval as needed.

INVESTMENT IN ATC. In February 2007, we completed our $60 million  investment in
ATC. As of March 31, 2007 our equity investment was $63.7 million,  representing
an 8.5  percent  ownership  interest.  As opportunities  arise, we plan  to make
additional  investments  in ATC  through  general  capital  calls based upon our
pro-rata ownership interest in ATC. (See Note 3.)

REAL  ESTATE.  In June 2005,  we began  selling  property  from our Town  Center
development  project.  In August 2006, we began  selling  property from our Palm
Coast Park development  project.  Since land is being sold before  completion of
the project  infrastructure,  revenue and cost of real estate sold are  recorded
using a  percentage-of-completion  method.  As of March  31,  2007,  we had $3.2
million  ($4.3  million  revenue;  $0.9 million  cost of real estate sold;  $0.2
million  selling  expense) of deferred  profit on sales of real  estate,  before
taxes and minority interest,  on our consolidated balance sheet. The majority of
deferred profit relates to sales at Town Center.

21                   ALLETE First Quarter 2007 Form 10-Q

<PAGE>

OUTLOOK (CONTINUED)

<TABLE>
<CAPTION>

REAL ESTATE
PENDING CONTRACTS                                                    CONTRACT
AT MARCH 31, 2007                           QUANTITY <F1>          SALES PRICE
--------------------------------------------------------------------------------
DOLLARS IN MILLIONS
<S>                                         <C>                    <C>

Town Center
     Commercial Sq. Ft.                     827,200                  $  26.1
     Residential Units                        1,040                     16.2

Palm Coast Park
     Commercial Sq. Ft.                      50,000                      2.5
     Residential Units                        2,387                     60.1

Other Land
     Acres                                      207                      6.2
--------------------------------------------------------------------------------

                                                                     $ 111.1
--------------------------------------------------------------------------------
<FN>
<F1> Acreage  amounts  are  approximate  and  shown on a gross basis,  including
     wetlands and minority interest. Acreage amounts may vary due to platting or
     surveying  activity.  Wetland  amounts  vary by property  and are often not
     formally  determined prior to sale.  Commercial square feet and residential
     units are  estimated and include  minority  interest.  The actual  property
     allocation at full build-out may be different than these estimates.
</FN>
</TABLE>

At March 31, 2007,  total pending land sales under  contract were $111.1 million
and are  anticipated to close at various times through 2012.  Pending land sales
under  contract for  properties at Town Center and Palm Coast Park totaled $42.3
million and $62.6 million,  respectively.  Prices on these  contracts range from
$20 to $60 per commercial  square foot,  $8,000 to $34,000 per residential  unit
and $11,000 to $127,000 per acre for all other  properties.  Prices per acre are
stated on a gross  acreage  basis and are  dependent on the type and location of
the  properties  sold. The majority of the other  properties  under contract are
zoned  commercial  or mixed use. In addition to  minimum-base  price  contracts,
certain contracts allow us to receive  participation  revenue from land sales to
third parties if various formula-based criteria are achieved.

If a  purchaser  defaults  under  terms of a contract,  our  remedies  generally
include  retention  of the  purchaser's  deposit and the ability to remarket the
property to other  prospective  buyers.  In many cases,  the  purchaser has also
incurred significant costs in planning,  designing and marketing of the property
under contract before the contract closes.

<TABLE>
<CAPTION>

SUMMARY OF DEVELOPMENT PROJECTS
FOR THE QUARTER ENDED                                        TOTAL              RESIDENTIAL         COMMERCIAL
MARCH 31, 2007                          OWNERSHIP            ACRES <F1>           UNITS <F2>         SQ. FT. <F2><F3>
---------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                 <C>                  <C>

Town Center                                 80%
     At December 31, 2006                                    1,356                2,222              2,705,310
     Change in Estimate <F1>                                    17                   97                 23,537
---------------------------------------------------------------------------------------------------------------------

                                                             1,373                2,319              2,728,847
---------------------------------------------------------------------------------------------------------------------

Palm Coast Park                            100%
     At December 31, 2006                                    4,337                3,760              3,156,800
     Change in Estimate <F1>                                   112                    -                      -
---------------------------------------------------------------------------------------------------------------------

                                                             4,449                3,760              3,156,800
---------------------------------------------------------------------------------------------------------------------

Ormond Crossings                           100%
     At December 31, 2006                                    5,960                 <F4>                   <F4>
     Change in Estimate <F1>                                     8
---------------------------------------------------------------------------------------------------------------------

                                                             5,968
---------------------------------------------------------------------------------------------------------------------

                                                            11,790                6,079              5,885,647
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Acreage  amounts  are  approximate and shown on a gross basis, including wetlands and minority interest. Acreage
     amounts  may vary due  to platting or  surveying activity. Wetland  amounts vary  by property  and are often not
     formally determined prior to sale.
<F2> Estimated and includes minority interest. The actual property breakdown at full  build-out may be different than
     these estimates.
<F3> Includes industrial, office and retail square footage.
<F4> A development order approval from  the city of  Ormond Crossings was received in December 2006, for  up to 3,700
     residential units and 5 million  commercial  square  feet. A development order  from Flagler County is currently
     under review, and if approved, Ormond Crossings  will receive entitlements  for up to 700 additional residential
     units. Actual build-out, however, will consider market demand as well as infrastructure and mitigation costs.
</FN>
</TABLE>

                     ALLETE First Quarter 2007 Form 10-Q                      22

<PAGE>

OUTLOOK (CONTINUED)

<TABLE>
<CAPTION>

SUMMARY OF OTHER LAND INVENTORIES
FOR THE QUARTER ENDED
MARCH 31, 2007                        OWNERSHIP     TOTAL     MIXED USE    RESIDENTIAL   COMMERCIAL   AGRICULTURAL
---------------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>       <C>          <C>           <C>          <C>

ACRES <F1>

Palm Coast Holdings                      80%
     At December 31, 2006                            2,136       1,404          346           247          139
     Change in Estimate                               (666)       (474)        (244)          101          (49)
---------------------------------------------------------------------------------------------------------------------

                                                     1,470         930          102           348           90
---------------------------------------------------------------------------------------------------------------------

Lehigh                                   80%
     At December 31, 2006                              223           -          140            74            9
     Change in Estimate                                  -           -            -             -            -
---------------------------------------------------------------------------------------------------------------------

                                                       223           -          140            74            9
---------------------------------------------------------------------------------------------------------------------

Cape Coral                              100%
     At December 31, 2006                               30           -            1            29            -
     Property Sold                                      (3)          -            -            (3)           -
---------------------------------------------------------------------------------------------------------------------

                                                        27           -            1            26            -
---------------------------------------------------------------------------------------------------------------------

Other <F2>                              100%
     At December 31, 2006                              934           -            -             -          934
     Property Sold                                    (364)          -            -             -         (364)
     Change in Estimate                               (113)          -            -             -         (113)
---------------------------------------------------------------------------------------------------------------------

                                                       457           -            -             -          457
---------------------------------------------------------------------------------------------------------------------

                                                     2,177         930          243           448          556
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Acreage amounts  are approximate and  shown on a gross basis, including wetlands  and minority interest. Acreage
     amounts  may vary  due  to platting  or surveying  activity. Wetland amounts vary by  property and are often not
     formally determined prior to sale.  The actual property allocation at full build-out may be different than these
     estimates.
<F2> Includes  land  located in Ormond Beach, Florida and other land located in Palm Coast, Florida  not  included in
     development projects.
</FN>
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW ACTIVITIES

We believe our  financial  condition  is strong,  as  evidenced by cash and cash
equivalents and short-term  investments of $128.5  million,  and a debt to total
capital ratio of 36 percent at March 31, 2007.

OPERATING  ACTIVITIES.  Cash flows from operating  activities were $26.2 million
for the quarter ended March 31, 2007 ($44.2  million for the quarter ended March
31, 2006). Cash from operating activities was lower in 2007, primarily due to an
$18.3  million  change  in cash flow  from  deferred  fuel  costs  (included  in
Prepayments  and Other) yet to be recovered  through future  billings.  Deferred
fuel costs  increased  due to generation  outages,  lower hydro  generation  and
cooler  weather in the first  quarter of 2007  resulting in increased  purchased
power. Cash flow from accounts receivable  collections in 2006 was higher due to
the  collection of deferred fuel cost billings  related to outages in late 2005.
Cash used for discontinued operations was higher in 2006 due to payment of $12.6
million of accrued liabilities from 2005.

INVESTING  ACTIVITIES.  Cash flow used in investing activities was $20.2 million
for the quarter ended March 31, 2007 ($49.2  million for the quarter ended March
31,  2006).  Cash used for  investing  activities  was lower in 2007 than  2006,
primarily due to decreased activity within our short-term  investment portfolio.
In 2007, net proceeds of $22.4 million were received from the sale of short-term
investments,  while 2006 included $44.6 million of net purchases.  Cash used for
investing activities in 2007 reflected $8.7 million invested in ATC and an $11.9
million  increase in  additions to property,  plant and  equipment  due to major
environmental construction projects.

23                   ALLETE First Quarter 2007 Form 10-Q

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

FINANCING  ACTIVITIES.  Cash flow used in financing  activities was $4.4 million
for the quarter  ended March 31, 2007 ($9.6  million for the quarter ended March
31, 2006). The decrease in cash used for financing  activities  reflected a $2.7
million increase in borrowings under the line of credit at ALLETE  Properties in
2007 and dividends paid of $0.4 million.

WORKING CAPITAL.  Additional working capital,  if and when needed,  generally is
provided by the sale of commercial  paper.  We have 0.5 million  original  issue
shares of our common stock  available for issuance  through INVEST  DIRECT,  our
direct  stock  purchase and dividend  reinvestment  plan.  We have bank lines of
credit aggregating $170.0 million, the majority of which expire in January 2012.
The amount and timing of future sales of our securities  will depend upon market
conditions  and our  specific  needs.  We may sell  securities  to meet  capital
requirements,  to provide for the  retirement  or early  redemption of issues of
long-term debt, to reduce short-term debt and for other corporate purposes.

SECURITIES

There have been no material  changes  from the  securities  disclosed  under the
heading "Securities" in Part II, Item 7 of our 2006 Form 10-K.

OFF-BALANCE SHEET ARRANGEMENTS

Off-balance  sheet  arrangements  are  summarized  in our 2006 Form  10-K,  with
additional disclosure discussed in Note 10 of this Form 10-Q.

CAPITAL REQUIREMENTS

For the quarter  ended  March 31,  2007,  capital  expenditures  for  continuing
operations  totaled $21.9 million ($13.6  million in 2006),  which were spent in
the Regulated  Utility  segment.  Internally  generated funds were the source of
funding for these expenditures.

Real  estate  development  expenditures  are and will be funded with a revolving
development loan and tax-exempt bonds issued by community development districts.
Additional  disclosure  regarding  the Town Center and Palm Coast Park  district
tax-exempt bonds is included in Note 10 of this Form 10-Q.

ENVIRONMENTAL MATTERS AND OTHER

As  previously  discussed  in our  Critical  Accounting  Policies  section,  our
businesses  are  subject  to  regulation  of  environmental  matters  by various
federal,  state  and  local  authorities.   Due  to  restrictive   environmental
requirements  through legislation and/or rulemaking in the future, we anticipate
that potential  expenditures for environmental matters will be material and will
require significant capital investments. We are unable to predict the outcome of
the matters discussed in Note 10 of this Form 10-Q.

NEW ACCOUNTING STANDARDS

New accounting standards are discussed in Note 1.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SECURITIES INVESTMENTS

AVAILABLE-FOR-SALE  SECURITIES.  As of March 31,  2007,  our  available-for-sale
securities  portfolio  consisted of securities in a grantor trust established to
fund certain employee benefits included in Investments, and various auction rate
bonds and variable  rate demand notes  included in Short-Term  Investments.  Our
available-for-sale  securities  portfolio had a fair value of $109.9  million at
March 31, 2007  ($130.1  million at December  31,  2006) and a total  unrealized
after-tax  gain of $4.2 million at March 31, 2007 ($4.0  million at December 31,
2006).

We use the specific  identification method as the basis for determining the cost
of  securities   sold.  Our  policy  is  to  review,   on  a  quarterly   basis,
available-for-sale  securities for other than temporary  impairment by assessing
such factors as share price trends and the impact of overall market  conditions.
As a result of our periodic  assessments,  we did not record any  impairments on
our available-for-sale securities for the quarter ended March 31, 2007.

                     ALLETE First Quarter 2007 Form 10-Q                      24

<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)

EMERGING TECHNOLOGY PORTFOLIO.  As part of our emerging technology portfolio, we
have  several   minority   investments  in  venture  capital  funds  and  direct
investments  in  privately-held,   start-up   companies.   We  account  for  our
investments in venture capital funds under the equity method and account for our
direct  investments  in  privately-held  companies  under the cost method  based
primarily on our ownership percentages. The total carrying value of our emerging
technology  portfolio  was $9.0  million  at March 31,  2007  ($9.2  million  at
December 31,  2006).  Our policy is to review these  investments  quarterly  for
impairment  by  assessing  such  factors as  continued  commercial  viability of
products, cash flow and earnings. Any impairment would reduce the carrying value
of the investment.  Our basis in direct investments in privately-held  companies
included in the emerging  technology  portfolio was zero at March 31, 2007,  and
December 31, 2006.

COMMODITY PRICE RISK

Our regulated utility operations in Minnesota and Wisconsin incur costs for fuel
(primarily  coal),  power and natural gas  purchased for resale in our regulated
service  territories,  and  related  transportation.  Our  regulated  utilities'
exposure to price risk for these  commodities is significantly  mitigated by the
current ratemaking process and regulatory environment,  which generally allows a
fuel clause  surcharge  if costs are in excess of those in our last rate filing.
Conversely, costs below those in our last rate filing resulted in a rate credit.
We seek to prudently  manage our  customers'  exposure to price risk by entering
into contracts of various durations and terms for the purchase of coal and power
(in Minnesota), power and natural gas (in Wisconsin), and related transportation
costs.

POWER MARKETING

Our power marketing activities consist of (1) purchasing energy in the wholesale
market  for resale in our  regulated  service  territories  when  retail  energy
requirements   exceed   generation  output  and  (2)  selling  excess  available
generation and purchased power.

From time to time,  our utility  operations may have excess  generation  that is
temporarily  not required by retail and  municipal  customers  in our  regulated
service  territory.  We actively sell this generation to the wholesale market to
optimize the value of our generating  facilities.  This  generation is typically
sold in the MISO market at market prices.

Approximately 200 MW of generation from our Taconite Harbor facility in northern
Minnesota has been sold through various long-term capacity and energy contracts.
Long-term, we have entered into two capacity and energy sales contracts totaling
175 MW (201 MW  including a 15 percent  reserve),  which were  effective  May 1,
2005,  and  expire on April 30,  2010.  Both  contracts  contain  fixed  monthly
capacity charges and fixed minimum energy charges.  One contract provides for an
annual  escalator  to the energy  charge based on increases in our cost of coal,
subject to a small minimum annual  escalation.  The other contract provides that
the energy  charge  will be the greater of a fixed  minimum  charge or an amount
based on the variable production cost of a combined-cycle, natural gas unit. Our
exposure  in the  event  of a full or  partial  outage  at our  Taconite  Harbor
facility  is  significantly  limited  under  both  contracts.  When the buyer is
notified at least two months prior to an outage,  there is no exposure.  Outages
with less than two months  notice are subject to an annual  duration  limitation
typical of this type of contract. We also have a 50-MW capacity and energy sales
contract that extends through April 2008, with formula pricing based on variable
production cost of a combustion-turbine, natural gas unit.


ITEM 4.    CONTROLS AND PROCEDURES

We maintain a system of controls and procedures  designed to provide  reasonable
assurance  as  to  the  reliability  of  the  financial   statements  and  other
disclosures  included  in  this  report,  as well as to  safeguard  assets  from
unauthorized  use or disposition.  We evaluated the  effectiveness of the design
and operation of our disclosure  controls and procedures  under the  supervision
and with the participation of management,  including our chief executive officer
and chief  financial  officer,  as of the end of the period covered by this Form
10-Q.  Based  upon  that  evaluation,  our  chief  executive  officer  and chief
financial  officer  concluded  that our  disclosure  controls and procedures are
effective.  While we continue to enhance our  internal  control  over  financial
reporting,  there has been no  change in our  internal  control  over  financial
reporting  that  occurred  during  our  most  recent  fiscal  quarter  that  has
materially affected,  or is reasonably likely to materially affect, our internal
control over financial reporting.

25                   ALLETE First Quarter 2007 Form 10-Q

<PAGE>

PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Material  legal and  regulatory  proceedings  are included in the  discussion of
Other  Information  in Part II, Item 5 and/or Note 10 of this Form 10-Q, and are
incorporated by reference herein.

ITEM 1A.   RISK FACTORS

There have been no material  changes from the risk factors  disclosed  under the
heading "Risk Factors" in Part I, Item 1A of our 2006 Form 10-K.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.    OTHER INFORMATION

Reference  is made to our 2006  Form  10-K  for  background  information  on the
following updates. Unless otherwise indicated,  cited references are to our 2006
Form 10-K.

Ref. Page 8 - Energy - Regulated Utility, Large Power Customer Contracts,  First
Full Paragraph

On December 12, 2006,  Minnesota  Power  announced it reached an agreement  with
PolyMet  to  provide  all of its  electric  service  needs  through  2018 at its
proposed  copper,  nickel  and  precious  metals  mining  operation  located  in
northeastern Minnesota. PolyMet plans to begin commercial operations at its mine
and process  plant  complex near Hoyt Lakes,  Minnesota,  by late 2008,  pending
completion of financing  arrangements and receipt of regulatory approvals.  Once
fully operational,  it is anticipated that PolyMet will require approximately 70
MW of  electric  power,  becoming  one of  Minnesota  Power's  large  industrial
customers.  The PolyMet electric  service  agreement was approved by the MPUC on
April 25, 2007.

Ref. Page 8 - Energy - Regulated Utility, Large Power Customer Contracts - Fifth
Paragraph

<TABLE>
<CAPTION>

MINIMUM REVENUE AND DEMAND UNDER CONTRACT                               MINIMUM                        MONTHLY
AS OF MARCH 31, 2007                                                 ANNUAL REVENUE <F1><F2>          MEGAWATTS
---------------------------------------------------------------------------------------------------------------------
                                                                       MILLIONS
<S>                                                                  <C>                              <C>

     2007                                                               $96.9                            625
     2008                                                               $31.4                            180
     2009                                                               $25.9                            148
     2010                                                               $25.8                            148
     2011                                                               $19.0                            106
---------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Based on past experience, we  believe revenue from our large  power customers will be substantially in excess of
     the minimum contract amounts.
<F2> Although several contracts have a feature that allows demand to go to zero after a two-year advance  notice of a
     permanent  closure, this minimum  revenue  summary does not reflect this occurrence  happening in the forecasted
     period because we believe it is unlikely.
</FN>
</TABLE>

                     ALLETE First Quarter 2007 Form 10-Q                      26

<PAGE>

ITEM 5.    OTHER INFORMATION (CONTINUED)

Ref. Page 16 - Real Estate, Fifth Full Paragraph

In April 2007,  Palm Coast  Center,  LLC, (a joint  venture  between  Developers
Realty Corporation "DRC" and Weingarten Realty Investors) and Target Corporation
closed on the entire  50-acre power center site.  The aggregate  sales price was
$12.6  million  plus a $1.0  million  contribution  to pay a portion of the site
preparation costs.

Ref. Page 49 - Credit Ratings, Fifth Full Paragraph

CREDIT RATINGS

As of April 20, 2007 our securities  have been rated by Standard & Poor's and by
Moody's.  Rating  agencies use both  quantitative  and  qualitative  measures in
determining a company's credit rating. According to the rating agencies, some of
these factors  include  business risk,  liquidity  risk,  competitive  position,
capital  mix,  financial  condition,  predictability  of cash flows,  management
strength and future direction. Some of the quantitative measures can be analyzed
through  a few key  financial  ratios,  while  the  qualitative  ones  are  more
subjective.  The disclosure of these credit ratings is not a  recommendation  to
buy, sell or hold our securities.  Ratings are subject to revision or withdrawal
at any  time  by the  assigning  rating  organization.  Each  rating  should  be
evaluated independently of any other rating.

<TABLE>
<CAPTION>

CREDIT RATINGS                                                                STANDARD & POOR'S            MOODY'S
---------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                          <C>

Issuer Credit Rating                                                                BBB+                    Baa2
Commercial Paper                                                                     A-2                     P-2
Senior Secured
     First Mortgage Bonds                                                             A-                    Baa1
     Pollution Control Bonds                                                          A                     Baa1
Unsecured Debt
     Collier County Industrial Development Revenue Bonds - Fixed Rate                BBB                      -
---------------------------------------------------------------------------------------------------------------------
</TABLE>

Ref. Page 75 - Fuel Clause Recovery of MISO Day 2 Costs, Seventh Full Paragraph

On January 8, 2007,  the Minnesota  Office of Attorney  General  petitioned  for
reconsideration of the MPUC's December 20, 2006, order.  Accordingly,  Minnesota
Power  delayed  implementation  of the order and continued to recover MISO Day 2
costs  consistent with previously  issued interim orders.  On February 15, 2007,
the MPUC declined to address the Minnesota Office of Attorney  General's request
for reconsideration. On April 10, 2007, the Minnesota Office of Attorney General
filed an appeal with the Minnesota  Court of Appeals.  The appeal does not alter
current  cost  recovery of MISO  charges in  accordance  with the MPUC's  order.
Minnesota Power timely responded to the Minnesota  Office of Attorney  General's
notice of filing,  and awaits  the  court's  scheduling  order  setting  forth a
briefing schedule.

27                    ALLETE First Quarter 2007 Form 10-Q

<PAGE>

ITEM 6.    EXHIBITS

EXHIBIT
NUMBER

    31(a)    Rule  13a-14(a)/15d-14(a)  Certification  by  the  Chief  Executive
             Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.

    31(b)    Rule  13a-14(a)/15d-14(a)  Certification  by  the  Chief  Financial
             Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.

       32    Section  1350  Certification  of  Periodic  Report   by  the  Chief
             Executive  Officer  and Chief Financial Officer Pursuant to Section
             906 of the Sarbanes-Oxley Act of 2002.

       99    ALLETE  News  Release  dated  May 4, 2007,  announcing  2007  first
             quarter earnings. (THIS EXHIBIT HAS BEEN FURNISHED AND SHALL NOT BE
             DEEMED  "FILED"  FOR  PURPOSES  OF  SECTION  18  OF  THE SECURITIES
             EXCHANGE  ACT  OF 1934, NOR  SHALL  IT BE  DEEMED  INCORPORATED  BY
             REFERENCE IN ANY FILING UNDER THE SECURITIES ACT OF 1933, EXCEPT AS
             SHALL BE EXPRESSLY SET FORTH BY SPECIFIC REFERENCE IN SUCH FILING.)

                      ALLETE First Quarter 2007 Form 10-Q                     28

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                                  ALLETE, INC.





May 4, 2007                                     Mark A. Schober
                               -------------------------------------------------
                                                Mark A. Schober
                               Senior Vice President and Chief Financial Officer





May 4, 2007                                     Steven Q. DeVinck
                               -------------------------------------------------
                                                Steven Q. DeVinck
                                                    Controller

29                    ALLETE First Quarter 2007 Form 10-Q