Law judge calls for Minnesota PUC to reject $6.2B Allete private equity deal

• The $6.2 billion deal under which the Canada Pension Plan Investment Board and Blackrock’s Global Infrastructure Partners would buy Allete, a Duluth, Minnesota-based utility company, should be rejected, an administrative law judge said Tuesday.
• The deal poses foreseeable risks to Minnesota’s energy transition, Allete’s long-term financial health and ratepayers, ALJ Megan McKenzie said in a recommended decision filed with the Minnesota Public Utilities Commission. “On balance, the risks of the deal, as proposed, outweigh the possible benefits.” McKenzie said.
• Allete — parent to Minnesota Power and Superior Water, Light and Power — strongly disagreed with the non-binding recommendation, saying it failed to fully consider the benefits of a July 11 settlement agreement with the Minnesota Department of Commerce. “The ALJ report mischaracterizes the parties, their agreements and plans, and the benefits and risks of the acquisition,” Allete said Tuesday.

The proposed Allete transaction, announced in May 2024, has cleared all required regulatory hurdles, except for approval by the Minnesota PUC.

However, ALJ McKenzie agreed with entities opposing the deal — the Minnesota Office of the Attorney General, a consortium of Minnesota Power’s large industrial customers, the Citizens Utility Board of Minnesota, the Sierra Club and CURE, an advocacy group — that it doesn’t meet Minnesota’s public interest standard.

Allete and its buyers failed to adequately support key arguments for completing the deal, such as improving the utility company’s access to capital and expertise, according to McKenzie.

“Petitioners have not shown that the acquisition will improve Allete’s access to capital or even whether Allete needs improved access,” McKenzie said. Also, access to CPP Investments’ and GIP’s expertise appears to have limited value because of assurances that they intend to keep Allete’s existing management, staff and business plan, she said.

Further, the private equity model offered by CPP Investments and GIP isn’t in the public interest, McKenzie said, pointing to the experience of Upper Peninsula Power Co., a utility in Michigan with similarities to Minnesota Power that was bought by private equity firms in 2014 and 2021. After a series of post-transaction rate increases, UPPCO’s rates were 9 cents/kWh higher than the average rate for other investor-owned utilities in Michigan at the end of last year, according to McKenzie.

In her recommended decision, McKenzie cited Federal Energy Regulatory Commission Chairman Mark Christie’s warnings that asset managers such as Blackrock could hurt ratepayers by trying to maximize profits from the utilities they buy.

“Consistent with the strategies of private equity investors generally, the partners plan to become deeply involved in Allete’s governance,” McKenzie said.

CPP Investments and GIP expect to earn a return by buying Allete that “significantly exceeds” the returns produced by publicly traded utilities, according to McKenzie. “Petitioners are most likely to make up the difference between a plausible regulated return and the targeted return through financial engineering,” she said.

After the deal was announced, S&P Global Ratings lowered Allete’s outlook to “negative” from “stable” over concerns the transaction could lead to higher leverage and weaker financial measures at the company, McKenzie noted.

Under private owners, Allete will no longer be required to make financial filings at the U.S. Securities and Exchange Commission, which could significantly reduce information available to the Minnesota PUC and ratepayers about the company, according to McKenzie.

Despite the ALJ recommended decision, Allete expects the Minnesota PUC will approve the transaction this year, noting it is supported by the Minnesota Chamber of Commerce, the International Brotherhood of Electrical Workers Local 31, the Laborers' International Union of Minnesota & North Dakota and other organizations.

Under the agreement with the Minnesota Department of Commerce, Minnesota Power would freeze its base rates for a year and reduce its return on equity from 9.78% to 9.65% until a future rate case, providing immediate ratepayer benefits, according to Allete.

Also, CPP Investments and GIP agreed to fund Allete’s five-year capital plan, ensuring that the company will have access to the capital needed to advance its transmission and renewable energy goals, Allete said.

Besides its utility subsidiaries, Allete owns Allete Clean Energy, a renewable energy company, BNI Energy, a coal company, and New Energy Equity, a solar developer. It has an 8% stake in American Transmission Co.