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Trouble at Minn. iron ore project prompts downgrade of ALLETE

Financialproblems at a plannediron ore pellet facility in northern Minnesota have prompted an analyst onMarch 29 to downgrade the rating of local utility company to "hold" from "buy,"with a $60.00 target price.

"Weare afraid that the Essar Steel situation continues to stumble into a perpetualmorass," Williams Capital Group analyst Christopher Ellinghaus said in anote.

India-headquarteredEssar Group'sEssar Steel Minnesota LLCis building a $1.8 billion iron ore pellet plant in Nashwauk, Minn., that isdue to begin production later this year, though construction was idled severalmonths ago and vendors have complained about late payments and non-payment. Afinancial restructuring has been hinted at.

Thiscould affect ALLETE subsidiary MinnesotaPower Inc. because the utility was on up to 110 MW the NashwaukPublic Utilities Commission for the Essar facility through June 30, 2026.

"Atthis point, it would be prudent for investors to exclude any expected benefitsto Minnesota Power from the Nashwauk/Essar Steel power supply agreement for theforeseeable future, in our view," Ellinghaus said.

WilliamsCapital left ALLETE's 2016 EPS estimate unchanged at $3.29 but lowered its 2017estimate to $3.60 from $3.85.

Still,the analyst sees ALLETE as "one of the more compelling growth stories inthe sector." Global demand for steel and taconite, while volatile now, isexpected to be strong over the long term. Property owned in North Dakota couldhost 200 MW to 300 MW of new generating capacity through Minnesota Power orALLETE Clean Energy,Ellinghaus said, while Minnesota Power will be investing in the 500-kV GreatNorthern Transmission Line project, due to be completed in 2020. He also seesgrowth in ALLETE's U.S. WaterServices Inc. subsidiary.